Chapter 3 Flashcards
Compounds interest
Interest paid on interest, or the reinvestment of interest paid on an investment principal
Principal
Is the face value of the deposit or debt instrument
Future value (FV) Equation
Present value (PV) x Amount of PV has increased by the end of 1 year (1 + i)
(FV=PV(1+i))
Future Value (FV)
The value of an investment at some point in the future
Present Value
The current value in today’s dollars of a future sum of money
Annual compounding
Reinvesting interest at end of each year for more than 1 year
Annual compounding equation
FV= PV x Amount present value has increased by the end of n years (n # of years during which compounding occurs)
FV(n)= PV(1+i)^n)
The value of (1+i)^n used a multiplier to calculate an amount’s __________ value
(FV=PV x future interest factor (FVIF)) 9FV= PV x FVIF)
Future
What is the rule of 72 used for?
To determine how long it will take to double your money
What is the rule of 72?
The numbers of years for a given sum to double is found by dividing the investment’s annual growth or interest rate into 72
Compounding may be _________, monthly, daily, or even a continuous basis
Quarterly
Money grows faster as the compounding period becomes _________
Shorter
Interest is earned on interest more frequently grows money _______
Faster
__________ plays a critical role in how much an investment grows
The interest rate
Higher interest rate ____________
Daily double
Compound interest is the ______ wonder of the world
Eighth
Present value is the ______ of compounding
Inverse
The ________ is the interest rate used to bring futures money back to present
discount rate
The present value of a future sum of money is _________ related to both the number of years until payment will be received & the discount rate
(PV=FVn (at the end of n years) x [1/(1+i)^n] (amount FV has decreased in n years)
Inversely
Equation for Present value
PV=FV x Present-Valued interest factor
An ________ is a series of equal dollar payment coming at the end of each time period for a specific number of periods
Annuity
A _______ annuity involves depositing an equal sum of money at the end of each year for a certain number of years, allowing it to grow
Compound
To know how much your savings will have grown by some point in the future, add up the __________–
Future values
Future value of annunity equation
Annual payment (PMT x Future - value interest factor of annuity)
To compare _______ value of annuities, you need to know the present value of each
relative
To calculate the present value of $500 recieved at the end of the next 5 years is worth given discount rate of 6%, add up the ________
present value
Present value of annuity equation
Annuity payment (PMT) x Present - Value interest factor of an annuity
Amortized loans
Loans paid off in equal installments
A __________ is an annuity that continues to pay forever
Perpetuity
Present value of a perpetuity
Annual dollar amount provided by the perpetuity divided by the annual interest or discount rate
The cornerstone of time value of money is _____________
Compound interest
The interest rate or the number of years that your money is compound will increase____________
future values
Can use the _______________ to find the present value of future value
Present value interest
