A very basic personal finance problem is to make a calculation to figure out how much money you would have to invest today to accumulate a certain amount by a specific date. The question would be “what is the future value of $1,000 in five years if it is invested today at 10% per year compounded annually.
What is the future value of $1,000 in five years if it is invested today at 10% per year compounded semi-annually?
We make this calculation using the “FV” function in Excel.
Open an Excel spread sheet. Begin by typing “=FV() and then type on the fx in the formula bar or go to the help tab and search for “FV Function”. Now study the results and try and solve the above two problems.
Here is the answer:
FV = PV x (1+r)n
r = 10% the periodic interest rate
n = 5 = the number of periods
FV= future value
PV= Present Value
FV = $1,000 x (1+10%)5
When compounding is semiannually then the number of periods is 10 and the interest rate is 5%. 10% per year but 5% per period.
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