Question

what is the relationship between rate of return, PV, and FV? How changing one will affect the other?

Answer 1

Relationship between PV(present

Value) and FV (future value) of an asset.

• Both present value and future depend on rate of return (interest rate (r) and n(period).
• Both present value and future value move in the same direction if r and n remain constant.
• FV =PV(1+r)ⁿ
• If either rate of interest or no. Of periods increase, FV Increases or PV decreases.

Changing in one affect the other variable directly.

If one increases, the other also increases provided that rate of interest and no. Of periods remain the same.

If one decreases, the other also decreases provided that 'r' and 'n' remain constant.