Multiple Choice
If you invest \$100 at an annual interest rate of 5\% compounded once per year, how much will it be worth after 75 years?
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10. Time Value of Money
Time Value of Money Equations
Multiple Choice
Other things being equal, which of the following will produce the greatest future value for a single sum invested today?
A
More frequent withdrawals
B
A higher interest rate
C
A lower interest rate
D
A shorter investment period
Verified step by step guidance1
Understand the concept of future value: Future value refers to the amount of money an investment will grow to over a specified period of time at a given interest rate. It is influenced by factors such as the interest rate, investment period, and frequency of withdrawals.
Recognize the impact of interest rate: A higher interest rate increases the growth of the investment because the principal amount earns more interest over time. This is a key factor in maximizing future value.
Analyze the effect of investment period: A longer investment period allows the interest to compound over more time, leading to a greater future value. A shorter investment period reduces the compounding effect.
Consider the role of withdrawals: More frequent withdrawals reduce the principal amount available for earning interest, which decreases the future value. Less frequent or no withdrawals allow the principal to grow uninterrupted.
Conclude that the greatest future value is achieved by combining a higher interest rate, a longer investment period, and minimal or no withdrawals. Among the options provided, a higher interest rate is the most significant factor in producing the greatest future value.
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