BF-M5 Flashcards
BASIC LONG-TERM FINANCIAL CONCEPT
In general business terms, _____ is defined as the cost of using
money over time.
interest
This definition is in close agreement with the
definition used by _____, who prefer to say that interest
represents the time value of _____
- economists
- money
_____ is the excess of
resources (usually cash) received or paid over the amount of
resources loaned or borrowed which is called the _____.
- Interest
- principal
The cost of
the excess resources to the borrower for the use of the money is called
______.
interest expense
The benefit of the excess resources to the lender
of the money is called ______.
interest revenue
Beyond straightforward borrowing or lending situations, _____ and the _____ are key considerations also in
negotiating transactions that call for payment over one or more
future time periods.
- interest calculations
- time value of money
Time value of money involves two major concepts: _____
and _____.
Both concepts consider three factors
(1)
(2)
(3)
future value
present value
(1)principal, (2) interest rate, and (3) time period.
Business transactions subject to interest state whether _____ is to be calculated
simple or compound interest
THE CONCEPT OF INTEREST
The most basic finance-related formula is the computation of
interest. It is computed as follows: (Equation 1) _______
where:
I= _____
P = _____
R = _____
T = _____
I = P x R x T
I= Interest
P = Principal
R = Interest Rate
T = Time Period
If the interest earned or incurred is always based on the original
principal, then _____ is assumed.
simple interest
The usual assumption in most business transactions is to use ______.
compound
interest
______ is simply earning interest on interest. This means that the basis for the computation of the applicable interest for a certain period is not only the _____ but also any
interest earned in the previous period assuming all cash flows
would be paid or received in lump sum upon maturity.
- Compound interest
- original principal
the general formula to determine the future
value: (Equation 2) _____
Where:
R = _____
T= ______
Future Value = Initial Value x (1 + R)^T
Where:
R = Interest Rate
T= Time Period
To get the future value, we _____ the initial value by (1 + R)^T which is referred to as the _____ (FVIF). A _____ can be developed using the above formula. Simply find the intersection of the relevant time period (T) presented in the rows of the table and the relevant interest rate (R) presented in the columns of the table.
- multiply
- future value interest factor
- future value table
To make cash flows comparable, we either determine their future value at a common future date or compute their present value
today. Most decision makers choose to get the present values since the decisions are made today. To get the present value of a lump-sum amount, we go back to Equation 2:
Future Value = ____________
The _______ in the formula is the expected lump-sum amount while the initial value is actually the ______.
Rearranging Equation 2 gives us the formula for the present value of money:
(Equation 3) ________
(1) Equation 2:
Future Value = Initial Value x (1 + R)^T
(2) future value
(3) present value
(4) Present Value = Future Value x 1 / (1 +R)^T
