Finance

Appendix A

Time Value of Money

Suppose that you currently have 100 euros (Year 0). Your bank offers you a deposit rate of 4.3% per annum. What would be the future value of your deposit if you decide to put your capital into the account?

Its value at year 1 (1 year into the future) will be:

$100+100\times 4.3\%=100+4.3=104.3\text{.}$

Suppose that in year 1 the bank offered you a rate of 5% per annum. What will be the value after 2 years? This would depend on your strategy because after year 1, you already have 100 euros of your original capital and 4.3 euros of your capital gain, that is, interest received, so you might reinvest only the capital, only the interest, ...