Time Value of Money and Using Timelines
Time Value of Money Equation:Future Value
The formula FV = PV * (1 + r)n is best used for:
You invest $4,545 in Clutch Bank today earning a juicy 10% annual interest. What is the value of your investment in one year? What is the value of the investment after two years?
The formula PV = FV (1 + r)n is best used for:
You are saving up $12,000 for a luxurious European vacation two years from now. How much money would you need to invest today at Clutch Bank, earning their juicy 10% annual interest, to have enough for your vacation? How much would you need to invest today, if instead you could only earn 6% interest?
Time Value of Money
Today, you purchased a $1,000 bond that matures in 5 years. The bond pays annual interest of 10%. Visualize these cash flows on a timeline.