   Chapter A3, Problem 3DQ ### Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

#### Solutions

Chapter
Section ### Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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# How is compound interest computed? What is a future value? What is a present value?

To determine

Concept introduction:

Time value of money:

Time value of money is the concept that differentiates the value of money received today and the value of same money received in future. According to this concept, the same amount of money to be received in future shall have lower present value (value of the money today) due to the interest that could be earned on that money.

Compound Interest:

Compound interest is interest on principal as well interest. It can be understood as interest on interest. The formula to calculate the compound interest is as follows:

Compound interest = P(1+rn)^(nt)P

Where, P = Principal amount

r = annual rate of interest

n = number of compounding periods in a year

t = time period in years

To indicate:

The Calculate of Compounded interest and discuss Present value and future.

Explanation

Time value of money is the concept that differentiates the value of money received today and the value of same money received in future. According to this concept, the same amount of money to be received in future shall have lower present value (value of the money today) due to the interest that could be earned on that money.

Present value of the value of a future money today.

Future value is the value of the present money in future.

Compound Interest:

Compound interest is interest on principal as well interest. It can be understood as interest on interest...

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