Future value is the value of an asset at a specific date. It measures the nominal future sum of money that a given sum of money is "worth" at a specified time in the future assuming a certain interest rate, or more generally, rate of return; it is the present value multiplied by the accumulation function.
The value does not include corrections for inflation or other factors that affect the true value of money in the future. This is used in time value of money calculations.
Money value fluctuates over time: 100todayhasadifferentvaluethan100 in five years. This is because one can invest 100todayinaninterest−bearingbankaccountoranyotherinvestment,andthatmoneywillgrow/shrinkduetotherateofreturn.Also,if100 today allows the purchase of an item, it is possible that 100willnotbeenoughtopurchasethesameiteminfiveyears,becauseofinflation(increaseinpurchaseprice).Aninvestorwhohassomemoneyhastwooptions:tospenditrightnowortoinvestit.Thefinancialcompensationforsavingit(andnotspendingit)isthatthemoneyvaluewillaccruethroughtheintereststhathewillreceivefromaborrower(thebankaccountonwhichhehasthemoneydeposited).Therefore,toevaluatetherealworthinessofanamountofmoneytodayafteragivenperiodoftime,economicagentscompoundtheamountofmoneyatagiveninterestrate.Mostactuarialcalculationsusetherisk−freeinterestratewhichcorrespondstheminimumguaranteedrateprovidedthebank′ssavingaccount,forexample.Ifonewantstocomparetheirchangeinpurchasingpower,thentheyshouldusetherealinterestrate(nominalinterestrateminusinflationrate).Theoperationofevaluatingapresentvalueintothefuturevalueiscalledcapitalization(howmuchwill100 today be worth in 5 years?). The reverse operation which consists in evaluating the present value of a future amount of money is called a discounting (how much $100 that will be received in 5 years- at a lottery, for example -are worth today?).