Calculating Present and Future Values
Some of the primary factors that one must consider when calculating present and future values are annuities (ordinary annuity and annuity due). The other qualitative factors that contribute to making the decisions of both present and future value includes the frequencies (number) of payment, or of payments and the time at which the person makes the payments. In most cases, people make payments either at the start or end of every period payment. These are the variables that one has to consider when making Present and Future Value calculations. In the case of flexible interest rates, he or she should also pay close attention to the ranges that suit his or her plans (Hickman, Byrd & McPherson, 2013).
Application
One of my life aspects where I would use the present and future value is the business investment. Assuming that my monthly salary is $1,000 and I use 5 percent of it in my business, the following figures will present the present and future values in five years (using the ordinary annuity).
Present Value
First Year: (1000/1.051) = $952.38
Second Year: (1000/1.052) = $907.03
Third Year: (1000/1.053) = $863.84
Fourth Year: (1000/1.054) = $822.70
Fifth Year: (1000/1.056) = $783.53
Present Value = ($952.38 + $907.03 + $863.84 +$822.70 + $783.53)
= $4329.48
Future Values
First Year: (1000*1.050) = $1000.00
Second Year: (1000*1.051) = $1050.00
Third Year: (1000*1.052) = $1102.50
Fourth Year: (1000*1.053) = $1157.63
Fifth Year: (1000*1.054) = $1215.51
Present Value = ($1000.00 + $1050.00+ $1102.50 +$1157.63 + $1215.51)
= $5525.64
Bond vs. Interest Rates
Bonds and interest rates have an inverse relationship; that is bond values go down when interest rates go up, and vice versa. When the bond rate falls below the original price of a coupon, the value of the bond rises. The reverse takes place when the rates increase.
Reference
Hickman, K. A., Byrd, J. W., & McPherson, M. (2013). Essentials of Finance. San Diego: Bridgepoint Education Inc.
