Anyway, I am going to explain to you what every adult child should know... Finding the future value of there investment.
An investment is an asset or item that is purchased with the hope that it will generate income or appreciate in the future. This investment could be monetary, like the amount of money you put in a certain account to eventually grow via interest rates. the amount of time you invest studying for a test and the grade you get on the final, or the amount of money you invest at an expensive institution and your salary when you get you first job.
The future value of money is how much it will be worth at some time in the future. The future value formula shows how much an investment will be worth after compounding for so many years.
F = P*(1 + r)n
The future value of the investment (F) is equal to the present value (P) multiplied by 1 plus the rate times the time. The present value is also known as the principal, or the money you are investing in the beginning. I promise you this isn't as complicated as it seems... here is an example.
Kendrick Lamar invests $1000 today (P) and an interest rate of 5% (r). After 10 years (n), his investment will be worth:
F = 1000*(1+.05)10 = 1,628.89
***Convert the interest rate from a percentage (like 5%) to a decimal (like .05).***
How about if this was vice-versa? You know the future value, however you want to know the worth of that money now, or much you would invest now to get it. Calculate the Present value/principal. Present value
is the value of future transactions in current dollars. The Formulas is:
P= F/(1 + r)n
Investments often have continuously compounded interest, instead of having interest added each year. Basically, instead of having one giant payment every month or every year, the interest is applied constantly, but at an incredibly low rate each time.
The formula for continuously compounded interest is:
F = Pe(rt)
The future value (F) equals the present value (P) times e(Euler's Number) raised to the (rate * time) exponential.
For example: Kendrick Lamar again invests $1000 today at an interest rate of 5%. After 10 years, his investment will be worth:
F=1000*e(.05*10) =1,648.72
***Once again, you'll want to convert the percentage (5%) to a decimal (.05), but you do not need to add 1.***
The future value is slightly more than before, because each small piece of interest earns interest on itself during the year.
I hope this explanation helped!
Professor Uche! Great lesson, I thought that you explained the concept of future value time of money very simply and easy to understand by the class! I also enjoyed your easy to follow examples using the one and only Kendrick Lamar;) This is probably the most interesting topic I think that we covered in class.
ReplyDeleteI loved this! It was really easy to understand and it flowed well. You made a seemingly dull math concept interesting. I loved the Kendrick Lamar reference! Great job
ReplyDeleteHey Professor Uche!
ReplyDeleteI really liked your explanation on this topic. Your explanation was clear, and I liked how you used your examples to make sure your students understand this topic very well. I think this is a really interesting topic, because we can relate to it in our everyday lives, such as making bank deposits.
Thank you!
hi, uche,
ReplyDeletereally nice lesson! and i like the photo of you on the swing. your step by step examples are really good. the only thing missing in both is to make sure to note that when you introduce your examples, in your first example, the investment has a rate that is compounded annually, and in the second example specify that the investment is being compounded continuously.
nice job!
professor little