LO 4.1.2: Calculate the future value (FV) for a situation.

Question 1

Future Value (FV) Concept

Answer 1

• FV is the value of a single amount when compounded over a period of time
• The single amount is the PV lump-sum amount
• The FV of that sum is the value that it grows to over a given period at an assumed or actual rate of return

Question 2

Compounding

Answer 2

The process of interest being earned on increasing sums of principal and interest over time.

Question 3

Annuity (in time value of money language)

Answer 3

• The series of equal and regular savings deposits or payments that are required to meet a future goal
• Implementation of a systematic savings program to meet a future goal
• e.g., retirement or education funding

Question 4

Future value of an annuity

Answer 4

The accumulation of funds to meet a future goal.

Question 5

What are the two types of annuity payments for time value of money

Answer 5

• Annuity due

* Ordinary annuity

Question 6

Annuity due

Answer 6

• The series of payments when made at the beginning of each period
• Annuity comes first in that term “Annuity due” = BEG mode calculation
• e.g., lease payments

Question 7

Ordinary annuity

Answer 7

• The series of payments when made at the end of each period
• Annuity comes at the end of the term “Ordinary annuity” = END mode
• e.g., mortgage payments

Question 8

What would cause the ending values of the two forms of annuity payments for time value of money purposes to be quite substantially different

Answer 8

• The number of periods increases,
• the interest rate increases,
• or both

Question 9

With respect to calculator entry, 2 things to keep in mind when solving for the FV or an annuity

Answer 9

• 1). The payment (PMT) key must be used | when solving for FV of an annuity, use the PMT key.
• 2). Need to determine if payment is made at the beginning or end of each period
  
  • Example: Beginning will be used for retirement or education needs analysis calculations