Chapter 4 Flashcards
Future value
The value of a sum after receiving interest on it over one or more periods. Also called compound value when interest is compounded
Interest
The rate paid for borrowing or lending money
Liability
Debts of an individual or company that represent obligations for repayment
Mortgage
A form of financial asset where the lender (mortgagee) has the right to recover their money by selling the property if the borrower (mortgagor) defaults on payment
Term loan
A loan from a bank with a specific maturity
Simple interest
Interest calculated on the original amount
Principal
The outstanding balance owing on a loan
Present value
The value of a future amount discounted at the appropriate market interest rate; that is, the current dollar value of a future amount
Discounts
This means to find the present values of future amounts. This is the inverse of compounding interest
Compound interest
Interest is calculated each period on the principal plus any interest. It is then added to the principal
Compounding
The process of finding future amounts where interest is paid on interest already earned
Opportunity cost
The next best rate of return that would be achieved through an alternative course of action: the rate of return (market yields) in the financial markets is often used as a benchmark for opportunity costs
Discounting
The process of finding current amounts by the process of present value
Coupon
The interest paid to the holder of a bond, based on a percentage of a bond’s face value
Zero-coupon bond
A bond that makes no interest payments during its lifetime. The interest is included with the repayment of principal at maturity
