Economics Time Value Of Money Questions Medium
The time period of an annuity has a significant impact on its future value. The future value of an annuity refers to the total value of all the cash flows received or paid out over a specific time period, considering the time value of money.
When the time period of an annuity increases, the future value also increases. This is because the longer the time period, the more compounding periods there are, allowing for more interest to be earned or more payments to be made. As a result, the future value of the annuity grows.
Conversely, if the time period of an annuity decreases, the future value decreases. With a shorter time period, there are fewer compounding periods, resulting in less interest earned or fewer payments made. Therefore, the future value of the annuity decreases.
It is important to note that the relationship between the time period and future value of an annuity is not linear. The future value increases at an increasing rate as the time period increases. This is due to the compounding effect, where the interest earned on previous interest payments further contributes to the growth of the annuity's future value.
In summary, the time period of an annuity directly affects its future value. A longer time period leads to a higher future value, while a shorter time period results in a lower future value.