Chapter 1 - Time Value of Money Flashcards
Compound interest
Interest earned on interest, “8th wonder of the world.”
Compounding (N)
How frequently the interest is applied to investment (the more frequent, the more money you get back!)
Future value (FV)
The monetary value of an investment at some point in the future
Inflation
A decrease in purchasing power of currency
Interest rate (I)
The rate you will receive for investing at a specified compounding period for a specified period of time for the rate at which you pay for borrowing
Investment
A current commitment of your money in the expectation of reaping future returns
Lump sum
One payment at a specific time
Nominal return
The return on an investment before the impact of inflation and taxes are taken into account
Opportunity cost
The potential loss or gain that occurs when one financial option is chosen over another
Present value (PV)
The current value of a future sum of money
Principal
The original amount of money borrowed or invested, excluding interest
Purchasing power
The value of money based on goods that one unit of money can buy
Real return
The rate of return on an investment after the impact of inflation is taken into account
Tax-adjusted return
The return on an investment after the impact of federal and state taxes has been taken into account
Time value of money (TVM)
The value of money changes over time due to inflation and interest.
