Next video:
Loading the player...

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. Future value is calculated in one of two ways depending on whether or not the calculation uses simple or compound interest.

For simple interest the formula is:

Future Value = Current Value x (1 + (interest rate x number of years)

With an investment worth $100 and a 7% interest rate, what will the future value be in 10 years?  Using the formula, the answer is:

100 * (1+ (.07 x 10) = $170

The compounding future interest formula is:

Future Value = Current Value x ((1 + interest rate) ^ number of years))

Using the same $100 and 7% interest rate, but compounding annually this time, the future value is:

100 * ((1+.07)^10)) = $196.72

The compounding formula always generates a higher amount than the simple interest calculation.  This is because with compounding, each year’s earned interest is added to the original amount, and thus increases the amount against which interest is calculated in subsequent years.

 

 

Related Articles
  1. Investing

    Accelerating Returns With Continuous Compounding

    Investopedia explains the natural log and exponential functions used to calculate this value.
  2. Investing

    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.
  3. Personal Finance

    How Interest Rates Work on Savings Accounts

    Here's what you need to know to grow your rainy-day fund.
  4. Investing

    Time Value Of Money: Determining Your Future Worth

    Determining monthly contributions to college funds, retirement plans or savings is easy with this calculation.
  5. Investing

    The Difference Between Enterprise Value and Equity Value

    Enterprise value calculates a business’s current value, while equity value offers a snapshot of that business’s current and potential future value.
  6. Investing

    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.
  7. Investing

    What is Present Value?

    Present value tells us how much a future sum of money is worth today, given a specified rate of return. This is an important financial concept based on the principle that money received in the ...
  8. Personal Finance

    Simple Interest Loans: Do They Exist?

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

    Overcoming Compounding's Dark Side

    Understanding how money is made and lost over time can help you improve your returns.
  10. Retirement

    How to Calculate the Value of Annuities

    Here's everything you need to account for when calculating the present and future value of annuities.
Hot Definitions
  1. North American Free Trade Agreement - NAFTA

    A regulation implemented on Jan. 1, 1994, that eventually eliminated tariffs to encourage economic activity between the United ...
  2. Agency Theory

    A supposition that explains the relationship between principals and agents in business. Agency theory is concerned with resolving ...
  3. Treasury Bill - T-Bill

    A short-term debt obligation backed by the U.S. government with a maturity of less than one year. T-bills are sold in denominations ...
  4. Index

    A statistical measure of change in an economy or a securities market. In the case of financial markets, an index is a hypothetical ...
  5. Return on Market Value of Equity - ROME

    Return on market value of equity (ROME) is a comparative measure typically used by analysts to identify companies that generate ...
  6. Majority Shareholder

    A person or entity that owns more than 50% of a company's outstanding shares. The majority shareholder is often the founder ...
Trading Center