Future Value - FV

Loading the player...

What is 'Future Value - FV'

The future value (FV) is the value of a current asset at a specified date in the future based on an assumed rate of growth over time.

If, based on a guaranteed growth rate, a $10,000 investment made today will be worth $100,000 in 20 years, then the FV of the $10,000 investment is $100,000. The FV equation assumes a constant rate of growth and a single upfront payment left untouched for the duration of the investment.

BREAKING DOWN 'Future Value - FV'

The FV calculation allows investors to predict, with varying degrees of accuracy, the amount of profit that can be generated by different investments. The amount of growth generated by holding a given amount in cash will likely be different than if that same amount were invested in stocks, so the FV equation is used to compare multiple options.

Determining the FV of an asset can become complicated, depending on the type of asset. In addition, the FV calculation is based on the assumption of a stable growth rate. If money is placed in a savings account with a guaranteed interest rate, then the FV is easy to determine accurately. However, investments in the stock market or other securities with a more volatile rate of return can present greater difficulty. For the purposes of understanding the core concept, however, simple and compound interest rates are the simplest examples of the FV calculation.

Simple Annual Interest

The FV calculation can be done one of two ways depending on the type of interest being earned. If an investment earns simple interest, then the formula is as follows:

FV = I * (1 + (R * T))

where I is the initial investment amount, R is the interest rate and T is the number of years the investment will be held.

For example, assume a $1,000 investment is held for five years in a savings account with 10% simple interest paid annually. In this case, the FV of the $1,000 initial investment is $1,000 * (1 + (0.10 * 5)), or $1,500.

Compounded Annual Interest

With simple interest, it is assumed that the interest rate is earned only on the initial investment. With compounded interest, the rate is applied to each year's cumulative account balance. In the example above, the first year of investment earns 10% * $1,000, or $100, in interest. The following year, however, the account total is $1,100 rather than $1,000, so the 10% interest rate is applied to the full balance for second-year interest earnings of 10% * $1,100, or $110.

The formula for the FV of an investment earning compounding interest is:

FV = I * ((1 + R) ^ T)

Using the above example, the same $1,000 invested for five years in a savings account with a 10% compounding interest rate would have a FV of $1,000 * ((1 + 0.10) ^ 5), or $1,610.51.

RELATED TERMS
  1. Continuous Compounding

    The process of earning interest on top of interest. The interest ...
  2. Effective Annual Interest Rate

    Effective Annual Interest Rate is an investment's annual rate ...
  3. Annual Equivalent Rate - AER

    Interest that is calculated under the assumption that any interest ...
  4. Compound Interest

    Compound Interest is interest calculated on the initial principal ...
  5. Time Value of Money - TVM

    The idea that money available at the present time is worth more ...
  6. Stated Annual Interest Rate

    The return on an investment that is expressed as a per-year percentage, ...
Related Articles
  1. Markets

    Calculating Future Value

    Future value is the value of an asset or cash at a specified date in the future that is equivalent in value to a specified sum today.
  2. Managing Wealth

    Learn Simple And Compound Interest

    Interest is defined as the cost of borrowing money, and depending on how it is calculated, can be classified as simple interest or compound interest.
  3. Markets

    The Effective Annual Interest Rate

    The effective annual interest rate is a way of restating the annual interest rate so that it takes into account the effects of compounding.
  4. Markets

    How does Compound Interest Work?

    A quick way to understand the impact of compound interest is to ask yourself if you’d rather receive $100,000 a day for a month, or start with a penny on day one and double it every day for those ...
  5. Markets

    How Interest Rates Work on Savings Accounts

    Here's what you need to know to grow your rainy-day fund.
  6. Personal Finance

    The Difference Between Compounding Interest and Simple Interest

    Interest is the cost a borrower pays to use someone else’s money. Interest can be either simple or compounded.
  7. Managing Wealth

    4 Ways Simple Interest Is Used In Real Life

    Simple interest works in your favor when you're a borrower, but against you when you're an investor.
  8. Markets

    Simple Interest Loans: Do They Exist?

    Yes, they do. Here is what they are – and how to use them to your advantage.
  9. Markets

    Explaining Interest

    Interest is the price charged to borrow money, and is typically expressed as a percentage of the principal, or the amount loaned.
  10. Investing

    Understanding The Time Value Of Money

    Find out why time really is money by learning to calculate present and future value.
RELATED FAQS
  1. What formula can I use to calculate interest on interest?

    Find out more about compounding interest, what it measures and how to calculate the amount of compound interest accrued using ... Read Answer >>
  2. How do I use the rule of 72 to calculate continuous compounding?

    Find out why the rule of 72 does not accurately reflect the growth caused by continuous compounding, and which number can ... Read Answer >>
  3. Other than my savings account, what other types of holdings compound my interest?

    Understand the benefits of compounding interest, and learn the types of investments that offer compounding in addition to ... Read Answer >>
  4. What is the difference between compounding interest and simple interest?

    Learn about simple interest and compound interest, how to calculate the two types of interest and the main difference between ... Read Answer >>
  5. How do I use the rule of 72 to estimate compounding periods?

    Find out how and why you can use the rule of 72 to approximate the amount of time it will take for an investment to double ... Read Answer >>
  6. Where can I find a good compound interest calculator free on the Internet?

    Understand compound interest calculations and learn where you can find a good, free online compound interest calculator to ... Read Answer >>
Hot Definitions
  1. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  2. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  3. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  4. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
  5. Russell 3000 Index

    A market capitalization weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of ...
  6. Enterprise Value (EV)

    A measure of a company's value, often used as an alternative to straightforward market capitalization. Enterprise value is ...
Trading Center