The future value of an investment is significantly influenced by interest rates. When interest rates increase, the future value of an investment generally increases as well. This is because a higher interest rate means that the amount of money earned on an investment grows faster over time. Conversely, when interest rates decrease, future values tend to decline, as the growth of the investment slows down.
To illustrate this concept, consider the formula for future value:
Future Value (FV) = Present Value (PV) × (1 + r)^n
In this formula, r represents the interest rate, and n indicates the number of periods (e.g., years) the money is invested. As you can see, if r increases, the value of (1 + r) becomes larger, thus enhancing the future value. On the other hand, if interest rates decrease, (1 + r) shrinks, resulting in a smaller future value.
In summary, changes in interest rates have a direct and powerful effect on future values. Higher rates lead to higher future values, while lower rates result in diminished future values, making it important for investors to consider interest rate trends when planning for their financial future.