Question

The process for converting present values into future values is called________________.

Answer 1

Answer:

Compounding.

Explanation:

Compounding is typically an accounting process used for the conversion of present values of an asset, investment or money into future values.

Generally, a compound interest is calculated based on the interest rate on a loan, principal and the accumulated interest gained from previous periods. This interests is compounded for a certain number of times such as daily, weekly, quarterly or annually.

Mathematically, to find the future value from the present value of an asset or investment, we would use the compound interest formula;

$A = P(1 + \frac{r}{n})^{nt}$

Where;

• A is the future value.
• P is the principal or starting amount.
• r is annual interest rate.
• n is the number of times the interest is compounded in a year.
• t is the number of years for the compound interest.