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Question #2: There are important relationships between Interest Rates and Time as it relates to Future...

Question #2: There are important relationships between Interest Rates and Time as it relates to Future Value

Required: Answer the following questions:

a) For a given Interest Rate, what is the impact on Future Value if the Time Period is longer?

b) For a given Time Period, what is the impact on Future Value if the Interest Rate is higher?

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Homework Answers

Answer #1

1. Future Value will be Higher

The Future value is the Sum that will be accumulated in a future period of time, The Amount of future value depends on the time period and the interest rate. It is calculated by Multiplying the present value by the interest rate for the Number of years.

If the Time Period is Longer, Then the Interest rate will be compounded for the longer period of time leading to larger amount of the Future Value.

Future Value = Present Value * ( 1 + Rate)^Number of year

2. Future Value will be Higher

When the Interest rate will be higher, else everything constant then the future value will be higher because it will lead to greater compounding resulting in higher future value.

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