Future value - Financial definition
Financial acronyms
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Concise definition of the term future value
The value of a cash amount or that of a series of cash flows at a specific date in the future, after application of agreed upon interest calculations.
Comprehensive definition of the term future value
The actual future value of a given cash amount or a series of cash flows is influenced by:
- The interest rate applied
The higher the interest rate, the higher the future value of the amount or cashflows will be - The compounding frequency
The higher the compounding frequency, the higher the future value of the amount or cashflows will be
Examples:
No compounding:
A sum of 10 000 €, placed for 5 years at a simple annual interest rate of 3% would have a future value of 11 500 € ( = 10 000€ x (1 + 5 x 3% ) )
Annual compounding:
A sum of 10 000 €, placed for 5 years at an interest rate of 3% compounded annually would have a future value of 11 592.74 € ( = 10 000€ x (1 + 3%)^5 )
Monthly compounding:
A sum of 10 000 €, placed for 5 years at an interest rate of 3% compounded monthly would have a future value of 11 616.17 € ( = 10 000€ x (1 + 3%/12)^(5x12) )
The future value calculation is the opposite of the present value calculation, where the current value of cash amounts or series of cash flows due in the future are determined.