Chapter 2 - Overview of Future Value and Present Value
After you read this chapter, you should be able to:
• Understand what present value is
• Analyze what is future value and Present Value
• Discuss the difference between Future value and Present Value
Core Values
“For I know the plans I have for you, declares the LORD, plans for welfare and not for evil, to give
you a future and a hope.” - Jeremiah 29:11
Learning Activities and resources
Valuation, Methods and models applied in corporate finance by George Chacko and Carolyn L. Evans
Investment Mathematics by WIN Ballada, CPA, CBE, MBA and Susan Ballada, CPA, 2015 issue 4th Edition
Fundamentals of Financial Management (with industry based perspective) by Ma. Flordeliza Anastacio Ph. D,
Robert Dacanay and Leonardo Aliling, Rex Bookstore, 2014
Financial Management: An Introduction by Scott Smart and William Megginson, Cengage Learning, 2009
Business Finance Second Edition by Roberto G. Medina, Ph. D. Rex Bookstore, 2011
Introduction
Future Value - is the rising value of a today’s sum at a specified future given at a specified rate of
interest.
Present Value – the today’s value of single payment or series of payment to be received at a later
date, given at a specified discount rate.
The present value of an investment gradually increases toward the future amount. In fact, when
the future arrives, what once was a future amount becomes the present value of the investment.
For example, at the end of the first year, the initial deposit of P2,000 would already be P2,160
(interest of P160 included). At this point of time, this P2,160 is no longer a future value, it is the
Present Value.
From another vantage point, if a depositor decides to put P2,000 at an interest rate of 8% per
year) in a bank. It’s because he knows that after a certain period, it will be worth more that it is
now. Hence, the P2,000 he holds now is actually the money’s present value or present amount.
After sometime, the P2,000 investment would have earned interest. At the end of the first year,
the sum of the 2,000 initial investment and the P160 interest is the money’s Future Value or
compound amount.
The basic idea underlying the time value of money can be expressed in different ways:
A present value is always less than a future amount.
A future amount is always greater than a present value.
A peso available today is always worth more than a peso that does not become available
until a future date.
Reference: Investment Mathematics 2015 Issue - 4th Edition by: Win Ballada CPA, CBE, MBA (Author)
Susan Ballada, CPA (Co- Author)
, A peso available at a future date is always worth less than a peso that is available today.
Compound Interest
Compound interest is another common method of computing for the interest. This method, in
contrast to simple interest, computes interest more than once during the term of loan ore
investment. Compound interest yields considerably higher interest than simple interest because
the investor is earning interest in the interest.
Compound amount or Future Value
Compound interest is the difference between the compound amount and the original principal.
The period for computing interest is usually at regular stated intervals such as annually, semi-
annually, quarterly, or monthly is called compounding period. The interest rate per
compounding period is equal to the nominal rate divided by the number of compounding
periods in one year.
The chart below serves as a guide in finding the number of compounding periods per year.
Compounding period per
Interest Compounded Compounding made
year
Annually every year 1
Semi-Annually every 6 months 2
Quarterly every 3 months 4
Monthly every month 12
The chart below is useful tool in determining the interest rate per period.
Interest rate per period
Nominal Interest Interest Compounding
(nominal interest rate/
rate compounded Periods per year
periods per year)
9% Annually 1 9%
12% Semi-Annually 2 6%
16% Quarterly 4 4%
18% Monthly 12 1.5% or 1 ½ %
The interest rate per period is found by dividing the nominal interest rate by the number of
compounding periods per year. For example, if money is invested at a nominal rate of 14%
compounded semi-annually, the interest rate per period is 7%; or 14% nominal rate divided by 2
compounding period per year (semi-annually).
Reference: Investment Mathematics 2015 Issue - 4th Edition by: Win Ballada CPA, CBE, MBA (Author)
Susan Ballada, CPA (Co- Author)
After you read this chapter, you should be able to:
• Understand what present value is
• Analyze what is future value and Present Value
• Discuss the difference between Future value and Present Value
Core Values
“For I know the plans I have for you, declares the LORD, plans for welfare and not for evil, to give
you a future and a hope.” - Jeremiah 29:11
Learning Activities and resources
Valuation, Methods and models applied in corporate finance by George Chacko and Carolyn L. Evans
Investment Mathematics by WIN Ballada, CPA, CBE, MBA and Susan Ballada, CPA, 2015 issue 4th Edition
Fundamentals of Financial Management (with industry based perspective) by Ma. Flordeliza Anastacio Ph. D,
Robert Dacanay and Leonardo Aliling, Rex Bookstore, 2014
Financial Management: An Introduction by Scott Smart and William Megginson, Cengage Learning, 2009
Business Finance Second Edition by Roberto G. Medina, Ph. D. Rex Bookstore, 2011
Introduction
Future Value - is the rising value of a today’s sum at a specified future given at a specified rate of
interest.
Present Value – the today’s value of single payment or series of payment to be received at a later
date, given at a specified discount rate.
The present value of an investment gradually increases toward the future amount. In fact, when
the future arrives, what once was a future amount becomes the present value of the investment.
For example, at the end of the first year, the initial deposit of P2,000 would already be P2,160
(interest of P160 included). At this point of time, this P2,160 is no longer a future value, it is the
Present Value.
From another vantage point, if a depositor decides to put P2,000 at an interest rate of 8% per
year) in a bank. It’s because he knows that after a certain period, it will be worth more that it is
now. Hence, the P2,000 he holds now is actually the money’s present value or present amount.
After sometime, the P2,000 investment would have earned interest. At the end of the first year,
the sum of the 2,000 initial investment and the P160 interest is the money’s Future Value or
compound amount.
The basic idea underlying the time value of money can be expressed in different ways:
A present value is always less than a future amount.
A future amount is always greater than a present value.
A peso available today is always worth more than a peso that does not become available
until a future date.
Reference: Investment Mathematics 2015 Issue - 4th Edition by: Win Ballada CPA, CBE, MBA (Author)
Susan Ballada, CPA (Co- Author)
, A peso available at a future date is always worth less than a peso that is available today.
Compound Interest
Compound interest is another common method of computing for the interest. This method, in
contrast to simple interest, computes interest more than once during the term of loan ore
investment. Compound interest yields considerably higher interest than simple interest because
the investor is earning interest in the interest.
Compound amount or Future Value
Compound interest is the difference between the compound amount and the original principal.
The period for computing interest is usually at regular stated intervals such as annually, semi-
annually, quarterly, or monthly is called compounding period. The interest rate per
compounding period is equal to the nominal rate divided by the number of compounding
periods in one year.
The chart below serves as a guide in finding the number of compounding periods per year.
Compounding period per
Interest Compounded Compounding made
year
Annually every year 1
Semi-Annually every 6 months 2
Quarterly every 3 months 4
Monthly every month 12
The chart below is useful tool in determining the interest rate per period.
Interest rate per period
Nominal Interest Interest Compounding
(nominal interest rate/
rate compounded Periods per year
periods per year)
9% Annually 1 9%
12% Semi-Annually 2 6%
16% Quarterly 4 4%
18% Monthly 12 1.5% or 1 ½ %
The interest rate per period is found by dividing the nominal interest rate by the number of
compounding periods per year. For example, if money is invested at a nominal rate of 14%
compounded semi-annually, the interest rate per period is 7%; or 14% nominal rate divided by 2
compounding period per year (semi-annually).
Reference: Investment Mathematics 2015 Issue - 4th Edition by: Win Ballada CPA, CBE, MBA (Author)
Susan Ballada, CPA (Co- Author)
