The amount of time between the present and future is called the number of periods. A period is a general block of time. Usually, a period is one year. The number of periods can be represented as either t or n.
Suppose you're making an investment, such as depositing your money in a bank. If you plan on leaving the money there for one year, you're making a single-period investment. Any investment for more than one year is called a multi-period investment.
Let's go through an example of a single-period investment. As you know, if you know three of the following four values, you can solve for the fourth:
- Present Value (PV)
- Future Value (FV)
- Interest Rate (i or r) [Note: for all formulas, express interest in it's decimal form, not as a whole number. 7% is .07, 12% is .12, and so on. ]
- Number of Periods (t or n)
In a single-period, there is only one formula you need to know: FV=PV(1+i). The full formulas, which we will be addressing later, are as follows:
Compound interest:
Simple interest:
We will address these later, but note that when
For example, suppose you deposit $100 into a bank account that pays 3% interest. What is the balance in your account after one year?
In this case, your PV is $100 and your interest is 3%. You want to know the value of your investment in the future, so you're solving for FV. Since this is a single-period investment, t (or n) is 1. Plugging the numbers into the formula, you get FV=100(1+.03) so FV=100(1.03) so FV=103. Your balance will be $103 in one year.