![]() ![]() Note that both the methods produce same results. Note that we could also calculate the effective annual yield and then calculate future value as shown below: Step 2: Calculate number of compounding periodsĬompounding periods = 3 years * 4 = 12 periodsĪs you can see, the future value based quarterly compounding is more than future value based on annual compounding. In our first example, if the compounding frequency was quarterly, then how much will our investment grow to? Let’s look at how our future value and present value will change if we use a different frequency of compounding. The frequency of compounding could be anything, most commonly being, monthly, quarterly, semi-annually, or annually. That is, the interest is compounded only annually. This means that if you invest 46805.83 now for 5 years at 8% interest rate per annum, you will receive $10,000 at the end of 5 years.Ī common assumption in both the above problems was that the frequency of compounding was annual. We are calculating the present value of a future cash flow. ![]() How much money should you invest now to reach your target in 5 years when your investment account earns you 8% per annum? Your target is to have $10,000 saved in your account in 5 years. We are calculating the future value of an investment after 3 years. ![]() How much will your investment grow to in 3 years? You decide to invest it for 3 years in an account that pays you an interest of 6% per annum. Let’s first review the time value money concept using a very simple example. ![]()
0 Comments
Leave a Reply.AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |