How Is Future Value Defined (FV)?

Future value (FV) is the estimated future worth of an asset-based on a projected rate of growth. The future value is important to investors and financial planners since it is used to determine the future value of an investment made today. Investors may make sensible investment selections based on their projected requirements when they know the future worth. External economic forces, on the other hand, such as inflation, might have a detrimental effect on the asset’s future worth by degrading its value.

Recognize Future Value

The FV calculation enables investors to forecast the amount of profit that may be made by various investments with differing degrees of precision. Because the amount of growth achieved by retaining cash is likely to be different from the amount generated by investing in stocks, the FV equation is used to evaluate numerous possibilities.

Calculating an asset’s FV may get tricky depending on the asset’s kind. Additionally, the FV calculation is predicated on the assumption of a constant rate of increase. If funds are deposited in a savings account with a guaranteed interest rate, the FV is easily calculated. Investing in the stock market or other instruments with a more fluctuating rate of return, on the other hand, might be more challenging.

Future Values of Different Types

The future value calculator is based on simple annual interest

The FV formula is based on the assumption of steady growth and the preservation of a single up-front payment over the term of the investment. Calculating the FV is possible in one of two methods, depending on the sort of interest earned. If an investment generates simple interest, the FV formula is as follows:

FV=I×(1+(R×T))

where I denote the investment amount and R denotes the interest rate.

T=Years

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As an example, suppose a 1,000 investment is kept for five years in a savings account paying a basic interest rate of 10% per year. The FV of the 1,000 original investment in this scenario is 1,000 [1 + (0.10 x 5)], or 1,500.

The future value calculator using annual compound interest:

Simple interest is based on the assumption that interest is generated just on the original investment. Compound interest is calculated by applying the rate to the cumulative account amount at the end of each month. In the above example, the first year of investment generates 10%, or 100, in interest. However, the next year, the account amount is 1,100 rather than 1,000; thus, to compute compounded interest, the 10% rate is applied to the whole value for second-year interest earnings of 10% on 1,100, or 110.

The FV of a compounding interest-bearing investment is calculated as follows:

T=FV=I(1+R)

where I denote the amount invested.

R = Rate of interest

T=Years

Using the example above, the same 1,000 saved for five years in a savings account earning 10% compound interest would have an FV of 1,000 [(1 + 0.10)5], or 1,610.51.

After Learning about future value calculators now it’s time to gain knowledge of what are financial markets?

Financial markets refer to any location or system that enables buyers and sellers to exchange financial products such as bonds, stocks, different foreign currencies, and derivatives. Financial markets enable the exchange of money between those in need of capital and those having the capital to invest.

These were some amazing information for future value calculators.