Glossary

Predicting the Future (Future Value, That Is)

#### Knowledge Check

We've talked a lot about future value and seen many examples of it put to
use. Now that you understand it, you should be able to define it. Which
of the following is a definition of future value?

That's incorrect. Future value is not a calculation of present and current
value. The correct response is C. Future value is not the value of money
today. It's the amount of money you will have at a specified time

*in the future*, given a specified amount of money today.That's correct! Future value is just that. It tells you how much money you
need

*in the future*to buy the same amount of stuff that you can with a specified amount of money today.Which of the following is the future value equation?

That's incorrect. The correct response is A. When solving for future value,
you have to know the present value, your interest rate and how long you
plan to save.

That's correct! When solving for future value, you have to know the present
value, your interest rate and how long you plan to save.

Consider the following scenario. You have $100. Your brother would like to
borrow $100 from you for two years and pay you back at 5% interest. If
you were inserting values into the future value equation, what would
you put in place of "PV"?

That's correct! The present value (the amount of money you have now) is 100.

That's incorrect. The number of years you will be earning interest is 2.
The present value (the amount of money you have now) is 100.

That's incorrect. 5 represents the percentage of interest you will be paid.
The present value (the amount of money you have now) is 100.

That's incorrect. This, in fact, does not represent any part of our equation.
The present value (the amount of money you have now) is 100.

Consider the following scenario. You have $250. You are saving for a new
car stereo. You put your money in the bank for three years, earning 2%
interest. If you were inserting values into the future value equation,
what would you put in place of "i"?

That's incorrect. 250 is the amount of money we have now; it represents present
value.

That's incorrect. But we'll admit, somewhat tricky. Remember, when you insert
the interest rate (which is 2 percent) you have to write it as 0.02!
The correct response is C.

That's correct! Very good job. Remember, when you insert the interest rate
(which is 2 percent) you have to write it as 0.02!

That's incorrect. 3 represents the number of years you plan to save.

Consider the following scenario. You have $250. Your little sister wants
to borrow $200. She'll pay you back $200 in one year, plus 10% interest.
If you were inserting values into the future value equation, what would
you put in place of "PV"?

That's incorrect. But it's easy to see why you would have chosen it. $250
is how much money you have now, but it's not the amount of money that
will be earning interest. The amount of money that will be earning interest
is $200, and it's the amount you would insert into the equation.

That's correct! Very good job! While you may have been tempted to choose
$250, you realized that $250 is not the amount of money that would be
earning interest; $200 is.

That's incorrect. 0.10 represents the "i' in our equation; it represents
the interest rate. The correct response is B. $200 is the amount of money
that would be earning interest.

That's incorrect. 1 represents the amount of time you'd be earning interest.
The correct response is B. $200 is the amount of money that will be earning
interest.