Question

The variables in a future value of an annuity problem include all of the following, except?

1) Principal
2) Interest rate
3) Number of periods
4) Future value

Answer 1

In a future value of an annuity problem, the variables include the principal, the interest rate, and the number of periods, but not the future value itself, as it is the outcome being calculated.

Step-by-step explanation:

The variables in a future value of an annuity problem include the principal, the interest rate, and the number of periods over which the annuity is paid. The future value itself is the outcome or the value being solved for, and thus it is not a variable in the sense that it is not a known quantity at the outset of the problem. Instead, the future value is calculated based on the other three variables.

Here's how you would generally approach this type of calculation:

1. Determine the principal amount, which is the initial sum of money upon which interest is calculated.
2. Identify the interest rate and convert it to a decimal if it is given as a percentage.
3. Decide the number of periods, which could be years, quarters, months, etc., over which the money is being compounded.
4. Apply the future value formula: Future Value = Principal × (1 + interest rate)^time.
5. Compound interest is also calculated as part of this formula: Compound interest = Future Value - Principal after you have found the future value.

In Independent Practice problems, you may be asked to find the missing value in a series of cash flows using the present value for annuities formula. This can involve working with the different components to reach the correct present or future value.