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Question

If investors want to know the future value of an investment, they are interested in

discounting.

annuities.

annuities due.

compounding.

Solution

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Question

If investors want to know the future value of an investment, they are interested in

discounting.

annuities.

annuities due.

compounding.

Solution

The answer is compounding.

Future value of an investment can be calculated using the concept of compounding. We know that in compounding interest, amount = principal *(1+r/100)^n where r = the rate and n = number of years.

Similarly when calculating the future value of an investment, we will use the formula: Future value = initial investment*(1+r/100)^n

Suppose you make an investment of $1000 in time period 0 in a fund that offers a rate of 10% per year. The value of this investment, after 10 years, will be:

1000*(1+10/100)^10

= 1000*2.59374

= $2,593.74

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