Compounding calculates the Blank______ value of a dollar today.Multiple choice question.futurepastpresent
Question
Compounding calculates the Blank______ value of a dollar today.
Multiple choice question:
- future
- past
- present
Solution
The correct answer is "future."
Compounding refers to the process of earning interest on both the original amount of money (the principal) and any interest that has already been earned. When we discuss the "future value" of a dollar today, we are referring to how much that dollar will grow over time when interest is compounded. Essentially, compounding allows an investment to grow at a faster rate than simple interest, which is calculated only on the principal amount.
The future value takes into account the effects of compounding interest over a certain period of time, making it an important concept in finance and investment. It highlights the potential growth of current capital and helps individuals understand the benefits of investing today for greater returns in the future.
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