Chap 4: Time Value of Money Flashcards
What is simple interest?
interest earned on the initial investment
What is compounded interest?
Interest earned on the initial investment and also known as interest earned on interest
What is compounding?
The process of determining the final value of a cash flow when compound interest is applied
What is discounting?
The process of finding the present value of a cash flow
Compounding vs Discounting diagram
diagram
What is present value?
The value today of a future cash flow or series of cash flows
What is future value?
The amount to which a cash flow or a series of cash flows will grow over a given period of time (n) when compounded at a given interest rate (i)
What is ordinary annuity?
Payments occur at the end of each period
What is annuity due?
Payments occur at the beginning of each period
What is annuities?
A series of equal payments at fixed intervals for a specified number of periods
What is Effective Annual Rate (EFF)/(EAR)?
The annual rate of interest actually being earned as opposed to the quoted rate
What are the applications of TVM?
- planning for retirement/education fund
- valuing stocks and bonds
- setting up loan payment schedules
- making corporate decisions regarding investing in new plant and equipment
