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Lecture Notes

As you can see from just calculating the three years in the previous example, doing this for, say, 30 years, like the life of a mortgage, would be quite time consuming and cumbersome. Instead of doing this on a year-by-year basis, it would be simple to see the value of an investment using a formula. This is expressed commonly two different ways. The first formula is P_n=P_0 ?(1+I)?^n. P_n is the value at the end of n^ periods. P_0 is the beginning value, or the principle. I is equal to the interest, and n is equal to the number of years. Sometimes this is expressed as the future value, FV, is equal to the present value, PV, times 1+R, R being the interest rate, to the T. T is equal to time. Use the values given in the previous question of $100 and 5% for five years, to see what you would come up with using this formula.