CFA Most Important Formulas
- Steve
- Aug 14, 2023
- 1 min read
Present and Future Value
Present and Future Value problems are the first problems you encounter in the CFA curriculum.
(1+r)^N is the factor used in translating between present and future value.
to find the Future Value of a sum of money, we multiply the present value by this factor
r = interest rate per period
n = number of periods
That is, we multiply the present value of the sum of money by the interest rate, taking that interest rate to the power of the number of periods it will compound over.
example; if your savings account earns interest at a 5% rate and you have $1000 deposited, what will it be worth in 10 years?
FV = 1000(1+0.05)^10 = $1628.89
When finding the present value of a future sum, we do the reverse,
Instead of multiplying the factor by the sum of money, we divide the sum of money by the factor
Using the previous example, If I'm owed $1628.89 in 10 years, what would it be worth today if interest rates were 5%?
PV = 1628.89/(1.05)^10 = $1000
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