Time Value of Money

One hundred dollars today is not necessarily $100 in the future when one invests in an interest-bearing account that grows in value over time. This is because of a very important financial concept called the time value of money. To determine what your investment is worth at a particular time in the future, you can use the future value formula. 1. Your grandmother put $2000 in an account that pays 5% interest rate on the day when you were born. You are now 18 years old. a) How much money do you have in your account now? b) How much money do you have in your account if you have left the money there for 25 years? c) What if you left the money until your 65th birthday? d) What happens if she has put the money into an account that earns 6% interest rate. How much money do you have in your account after 18, 25 and 65 years? Use the information above to explain how even a slight change in the interest rate can make a significant difference in accumulating savings over the long run. (use vocabulary: compound interest, time period)