13.1 Compound Interest and Future Value. Find the future value and compound interest by compounding manually. Find the future value and compound interest by using a $1.00 future value table. Find the future value and compound interest using a formula (optional).
Period interest rate =
Annual interest rate
Number of interest periods per year
Using the simple interest formula method:
Find the future value of a loan of $800 at 13% for three years.
future value – original principal
FV = where FV is the future value, P is the principal, R is the period interest rate, and N is the number of periods.
Annual effective interest rate = $61.50$600
Multiplied by 100%
= 0.1025 x 100%
Using the table method (Table 13-1):
The table value is 1.10250. Subtract 1.00 and multiply by 100%. The effective rate is 10.25%
1 + annual interest rate*
* denotes decimal equivalent
3. Select the periods row corresponding to the number of interest periods.
4. Select the rate per period column corresponding to the period interest rate.
5. Locate the value in the cell where the periods row intersects the rate-per-period column.
6. Multiply the future value by value from step 5.
where PV is the present value, FV is the future value, R is the period interest rate, and N is the number of periods.