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Personal finance > Chapter 3 > Flashcards

Chapter 3 Flashcards

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1
Q

Compounds interest

A

Interest paid on interest, or the reinvestment of interest paid on an investment principal

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2
Q

Principal

A

Is the face value of the deposit or debt instrument

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3
Q

Future value (FV) Equation

A

Present value (PV) x Amount of PV has increased by the end of 1 year (1 + i)

(FV=PV(1+i))

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4
Q

Future Value (FV)

A

The value of an investment at some point in the future

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5
Q

Present Value

A

The current value in today’s dollars of a future sum of money

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6
Q

Annual compounding

A

Reinvesting interest at end of each year for more than 1 year

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7
Q

Annual compounding equation

A

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)

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8
Q

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)

A

Future

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9
Q

What is the rule of 72 used for?

A

To determine how long it will take to double your money

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10
Q

What is the rule of 72?

A

The numbers of years for a given sum to double is found by dividing the investment’s annual growth or interest rate into 72

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11
Q

Compounding may be _________, monthly, daily, or even a continuous basis

A

Quarterly

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12
Q

Money grows faster as the compounding period becomes _________

A

Shorter

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13
Q

Interest is earned on interest more frequently grows money _______

A

Faster

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14
Q

__________ plays a critical role in how much an investment grows

A

The interest rate

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15
Q

Higher interest rate ____________

A

Daily double

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16
Q

Compound interest is the ______ wonder of the world

A

Eighth

17
Q

Present value is the ______ of compounding

A

Inverse

18
Q

The ________ is the interest rate used to bring futures money back to present

A

discount rate

19
Q

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)

A

Inversely

20
Q

Equation for Present value

A

PV=FV x Present-Valued interest factor

21
Q

An ________ is a series of equal dollar payment coming at the end of each time period for a specific number of periods

A

Annuity

22
Q

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

A

Compound

23
Q

To know how much your savings will have grown by some point in the future, add up the __________–

A

Future values

24
Q

Future value of annunity equation

A

Annual payment (PMT x Future - value interest factor of annuity)

25
Q

To compare _______ value of annuities, you need to know the present value of each

A

relative

26
Q

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 ________

A

present value

27
Q

Present value of annuity equation

A

Annuity payment (PMT) x Present - Value interest factor of an annuity

28
Q

Amortized loans

A

Loans paid off in equal installments

29
Q

A __________ is an annuity that continues to pay forever

A

Perpetuity

30
Q

Present value of a perpetuity

A

Annual dollar amount provided by the perpetuity divided by the annual interest or discount rate

31
Q

The cornerstone of time value of money is _____________

A

Compound interest

32
Q

The interest rate or the number of years that your money is compound will increase____________

A

future values

33
Q

Can use the _______________ to find the present value of future value

A

Present value interest

Personal finance (4 decks)

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