Section 6
Additional Detail on Present and Future Values
By Boundless
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Present value (PV) and future value (FV) measure how much the value of money has changed over time.
The present value of a perpetuity is simply the payment size divided by the interest rate and there is no future value.
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Finding the Effective Annual Rate (EAR) accounts for compounding during the year, and is easily adjusted to different period durations.
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Variables, such as compounding, inflation, and the cost of capital must be considered before comparing interest rates.
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The value of money and the balance of the account may be different when considering fractional time periods.
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When borrowing money to be paid back via a number of installments over time, it is important to understand the time value of money and how to build an amortization schedule.