CHAPTER 4 KEY TERMS Flashcards
FUTURE VALUE (FV)
Refers to the amount of money an investment will grow to over some period of time at some given interest rate. Future value is the cash value of an investment at some time in the future.
COMPOUNDING INTEREST VERSUS SIMPLE INTEREST
Compounding interest means earning interest on interest for more than one period. Simple interest, the interest is not reinvested, so interest is earned each period only on the original principal.
WHAT DOES TIME VALUE OF MONEY REFER TO?
THE FACT THAT A DOLLAR IN HAND TODAY IS WORTH MORE THAN A DOLLAR PROMISED AT TOME TIME IN THE FUTURE.
What is simple interest?
The interest is not reinvested, so interest is earned each period only on the original principal. The interest is the same over every year.
What’s the mathematical formula for compounding interest?
Future Value= PV(1+r)t - this will give you the percentage of growth with r being Rate and t being Time
Present Value?
PV= FV/(1+r)t -
Discount Rate?
It refers to the interest rate used in the Discounted Cash Flow analysis to determine the present value of future cash flows.
Ordinary annuity?
A series of constant, or level, cash flows that occur at the end of each period for some fixed number of periods.
Annuity due?
It is an annuity for which the cash flows occur at the beginning of each period. Almost any type of arrangement in which we have to prepay the same amount each period is an annuity due.
Perpetuity? How to Calculate present value?
An important special case of an annuity arises when the level stream of cash flows continues forever.
Perpetuity PV = C/r
Effective Annual rate?
It is the real return on a savings account or any interest- paying investment when the effects of compounding over time are taken in account. It also reveals the real percentage rate owed in interest on a loan, a credit card or any other debt.
How to calculate an Annuity Due Value?
Annuity due Value = Ordinary Annuity Value X (1+R)
Interest-only loan?
A repayment plan that calls for the borrower to pay interest each period and to repay the entire principal at some point in the future. Principal is paid all at once
Amortized loan?
The lender may require the borrower to repay parts of the loan amount over time. The process of paying off a loan by making principal reductions.
What is a pure discount loan?
The borrower receives money today and repays a single lump sum at some time in the future. Principal is paid all at once
