What does "future value" refer to in finance?

Future value in finance refers to the value of an investment at a specific point in the future when interest is applied to it over time. This concept incorporates the process of compounding, where interest earns additional interest, resulting in a growth of the initial amount invested. As such, future value calculations are essential for understanding how investments will grow and provide returns over time, allowing investors to make informed decisions regarding their financial strategies.

Understanding future value is crucial for long-term financial planning, investment assessments, and calculating the potential worth of savings accounts, bonds, and other financial instruments at a later date. This is particularly applicable in scenarios involving consistent contributions or varying interest rates over the investment period.