Introduction Investors use rate of return to understand the earnings or losses on an investment in a specified period of time. This key metric helps individuals and businesses make informed decisions about their financial investments. One aspect of rate of return is the future value of an investment, which can be calculated using a formula. In this article, we will delve into the correct mathematical formula for calculating the future value of $100 invested today for 3 years at a 10% annual interest rate.
The Time Value of Money Main Street investors may not realize it, but there is a time value to money that pegs a financial asset value to cash that you have in your possession. The concept of time value of money (TVM) recognizes that a sum of money has greater value now than it will in the future due to its earnings potential. This is because money has the potential to earn interest or returns over time.
Compound Interest vs. Simple Interest To calculate the future value, it is important to understand the difference between compound interest and simple interest. Simple interest is only based on the principal amount of a loan, while compound interest takes into account both the principal and accumulated interest. Compound interest is the more common method used by financial institutions, as it reflects the real-world scenario of reinvesting the interest earned.