❖ The Higher the interest rate, the greater is the future sum

❖ The longer the period of time, the higher is the compound interest factor
❖ An interest rate of zero percent, the compound value interest factor always equals 1. For
that reason, the future amount always equals the initial principal
❖ Comparison of Annual, Semi-annual and quarterly Compounding

Suppose, MD. Saiful Islam places his savings of Tk. 1000 at the rate of interest 6% or 10% or 15%
compounded annually/ semiannually or quarterly. At the end of the year, the amount will become-
Future sum at the rate of interest 6%
At the end of year 1, the compound value interest factor at the rate of interest 6% will be 1.06. At
the end of year 2, it will be 1.124.

End of year Annually Semi-annually Quarterly

1 1060 1060.90 1061.36
2 1123.60 1125.51 1126.49

Future sum at the rate of interest 10%

End of year Annually Semi-annually Quarterly

1 1100 1102.5 1103.81
2

Future value of a series of payments

Suppose, Mr. Shamim deposits each year 500tk, 1000 tk, 1500 tk, 2000 tk, and 2500 tk in his
saving account for years. The interest rate is 5% compounded annually. He wishes to find the
future value of his deposits at the end of the 5th year. Assume deposits are made at the end of the
year.

End of Year Amount Deposited Number of Years Compounded Future Value

compounded interest factor (2 ×4)
from Table A- 1
1 500 tk 4 1.216 608

2 1000 3 1.158 1,158

Compounded Sum of an Annuity (stream of equal annual cash flows)
According to L. J. Gitman, An annuity is a stream of equal cash flow. This cash flows can be
inflows of returns earned on investments or outflows of funds invested to earn future returns.
Types of Annuity
1. Ordinary Annuity ( occurs at the end of each period)
2. Annuity Due ( occurs at the beginning of each period)
3. Deferred Annuity
4. Perpetuity
1. Suppose, Tanzina deposits 2000 tk. at the end of every year for 5 years in her saving account
paying 5 percent interest compounded annually. How much sum of money she will have at the end
of the 5th year.
End of Year Amount Deposited Number of Years Compounded Future Value
compounded interest factor (2 ×4)
from Table A- 1
1 2000 tk 4 1.216 2,432

2 2000tk 3 1.158 2,316

3 2000tk 2 1.103 2,206

Formula: In case of Ordinary annuity

𝐀
FV of Annuity = {(1+i) n -1}
𝐢

𝐀 𝒊
FV of Annuity = 𝒊 {(1+ ) nm -1} [if the number of compounding occurs more than 1 in
𝒎
𝒎
a year]
In case of Annuity Due
𝐀
FV of Annuity = (1+i) {(1+i) n -1}
𝐢
2. Suppose, Nishi wants to deposit tk. 1000 at the end of each year. If bank pays 10% interest
annually, what will be the future value after ten years?

Ans: Tk. 15,934

3. Suppose, Manha wants to open a DPS at Agrani Bank Limited. Her monthly deposits will be
TK. 500. Bank can pay 10% interest. What will be the future value of her deposits after 10 years
if she deposit the money at the end of the month?

Ans: TK. 102,401

4. .Suppose, Tithi wants to deposit tk. 1000 at the beginning of each year. If bank pays 10% interest
on the deposit. What would be the future value of the annuity after ten years?

Ans: TK. 17,527

Present Value or Discounting

Ethika has given an opportunity to receive 5500 tk. one year from now. She knows that she can
earn 10% interest on her investments. To get this opportunity what amount she needs to invest?