QQuestionFinance
QuestionFinance
Future value is a discount of the present value
companies go bankrupt because they run out of cash/liquidity to pay maturing obligations
compounding makes savings grow faster
the current 10 -year Treasury is around 9%
the value of $1 today is more than $1 in 5 years assuming positive interest rates
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Answer
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Step 1: Understanding the concept of present value and future value
The present value (PV) of a sum of money is the amount that would need to be invested today, at a given interest rate, to achieve that sum in the future. The future value (FV) is the opposite: it's the value of a sum of money at a certain point in time in the future, given a specific interest rate.
Step 2: Understanding compounding and its impact on savings
where $r$ is the interest rate and $n$ is the number of compounding periods.
Compounding is the process of earning interest on both the initial principal and the accumulated interest. This makes savings grow faster over time. The formula for compound interest is:
Final Answer
- The present value of a sum of money is the amount that would need to be invested today, at a given interest rate, to achieve that sum in the future. - Compounding makes savings grow faster over time. - The current 10 -year Treasury rate is around 9%, which means that if you invest $1 today at this rate, you would receive approximately $1.09 in 10 years. - Given positive interest rates, the value of $1 today is more than $1 in the future. - Companies can go bankrupt because they run out of cash or liquidity to pay maturing obligations.
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