**Enter the present value, interest rate and the number of years. Don't forget to choose the compounding frequency**

Compounded: annually Semi-annually Quarterly Monthly weekly daily

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## Frequently Asked Questions About Lump Sum

### What is a lump sum?

A lump sum payment is simply a payment made all at once rather than multiple smaller payments.

It refers to an amount paid at a single time.

### What is the future value of a lump sum?

The future value of a lump sum refers to the value that a given amount of money will be at a certain point in the future if it earns a rate of interest.

Simply put, the future value of a lump sum is how much a given sum of money will be worth at a later date if it earns a specified rate of interest.

A lump sum may earn a simple interest or compound interest.

### What is interest?

In finance, Interest is the reward paid by the borrower and received by the lender as the cost of receiving the lender's money

In other words, Interest is the price associated with getting or receiving money, calculated as a percentage of the amount borrowed or lent.

### What is simple interest and how do you calculate it?

Simple interest is interest earned solely on the amount invested (principal).

It simply means that interest is only paid on the amount you initially invested (the principal).

Simple interest does not pay interest on interest previously earned.

To determine the future value of a lump sum with simple interest, use the formula below:

$$FV=PV\left(1+r(n)\right)$$

### What is compound interest and how do you calculate it?

Compound interest is an interest earned on the original amount (principal) plus accumulated interest.

Compound interest means interest is paid on the principal plus previously earned interest.

Compound interest pays interest on the previously earned interest.

It is interest paid on both the original principal borrowed (lent) and previous interest earned.

The future value of a lump sum with compound interest can be calculated using:

$$FV=PV\left(1+\frac{r}{m}\right)^{n × m}$$

### What Is PV?

PV stands for present value. The present value of a lump sum is the amount that a lump sum is worth right now.

The original payment (principal) made is usually the present value of a lump sum.

Instead of PV, some authors used P or A. Just keep in mind that they're the same.

In the above calculator, you should insert the principal of the lump sum in the box beside the text "Present value"

### What is n

The n in the lump sum formula represents the number of years. It refers to the number of years that it will take a lump sum to reach a particular amount in the future.

Some authors used t instead of n. Just note that both mean the same things.

### What is m

*m* in the lump sum formula stands for compounding frequency. The compounding frequency is the number of times the interest is compounded every year.

It refers to the number of compounding periods in a year.

An annual compounding frequency means that interest compounds just once a year.

A semi-annual compounding frequency means that interest compounds twice a year.

A quarterly compounding frequency means that interest compounds 4 times a year.

A monthly compounding frequency means that interest compounds 12 times a year.

A weekly compounding frequency means that interest compounds 52 times a year.

A daily compounding frequency means that interest compounds 365 times a year unless otherwise stated as 360 times a year.

In general, the shorter the compounding frequency, the higher the yield.

This means that daily compounding interest will yield a higher future value than monthly compounding interest.

It also means that compounding interest monthly yields a bigger future value than compounding interest yearly or quarterly

### What is r

The annual interest rate (r) is the rate of interest at which a lump sum is compounded annually or simple interest is added to a lump sum.

It refers to the rate of return which apply to a lump sum for a year.

The annual interest rate is the cost of not having money for one year.

Some authors refer to r as i. They mean the same thing.

### What is the main difference between compound interest and a simple interest

The major difference between simple and compound interest is that compound interest pays interest on previously earned interest, but simple interest does not pay interest on previously earned interest.

To put it another way, simple interest is interest gained simply on the principal, whereas compound interest is interest earned on the principal plus previously earned interest.

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