2. What is compounding? Give an example. What is FUTURE VALUE and how is it related to this concept? This is one example: Effect of Compounding Problem: Year 1 2 3 If you invest $1,000 in the bank bearing a 10% compound interest, what is the future value of the investment at the end of three years? Beginning amount $1,000 $1,100 $1,210 F =P (1+i)n F = $1,000 (1.10) F = $1,000 X 1.331 F = $1,331 Interest rate .10 .10 .10 LO 3 Amount of Beginning interest amount $100 $1,000 $110 $1,100 $121 $1,210 Ending amount $1,100 $1,210 $1,331 FEFuture amount P = Principal or initial amount i = Interest rate n = Number of years Layout Optic In Line with Te With Text Wra |C||||| Move with te Fix position c page See

Effect of Compounding Problem: If you invest $1,000 in the bank bearing a 10% compound interest, what is the future value of the investment at the end of three years? F=P(1+i)nF=$1,000(1.10)3 F-Future amount P= Principal or initial amount