Open Question
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?
13. The Financial System
Time Value of Money Calculations
Multiple Choice
Using a little bit of algebra, we can rearrange the time value of money formula:FV = PV x (1 + r)n
The formula FV = PV x (1 + r)n is best used for:
A
Compounding
B
Discounting
C
Rebounding
D
Converting
Verified step by step guidance1
Understand the formula: The formula FV = PV \times (1 + r)^n is used to calculate the future value (FV) of an investment based on its present value (PV), the interest rate (r), and the number of periods (n).
Identify the concept: The formula is primarily used for compounding, which involves calculating the future value of an investment by applying interest over multiple periods.
Differentiate between compounding and discounting: Compounding refers to the process of determining the future value of a present amount, while discounting is the reverse process, used to find the present value of a future amount.
Recognize the correct application: Since the formula calculates the future value from a present value, it is used for compounding, not discounting.
Clarify the terms: Rebounding and converting are not related to the time value of money in this context, making compounding the correct application of the formula.
Related Videos
Related Practice
