Chapter 5: The Time Value of Money

Question 1

future value (FV)

Answer 1

amount to which an investment will grow after earning interest

Question 2

compound interest

Answer 2

interest earned on interest

Question 3

simple interest

Answer 3

interest earned only on the original investment; no interest is earned on interest

Question 4

future value interest factor (or future value factor)

Answer 4

future value of a current cash flow of $1

Question 5

present value (PV)

Answer 5

value today of a future cash flow

Question 6

discount rate

Answer 6

interest rate used to compute present values of future cash flows

Question 7

discount factor (or present value interest factor)

Answer 7

present value of a $1 future payment; expressed as 1/(1 + r) to the power of t

Question 8

annuity

Answer 8

equally spaced and level stream of cash flows

Question 9

perpetuity

Answer 9

stream of level cash payments that never ends

Question 10

annuity factor

Answer 10

present value of a $1 annuity

Question 11

annuity due

Answer 11

level stream of cash flows starting immediately

Question 12

growing perpetuity

Answer 12

an infinite stream of cash flows growing at a constant rate

Question 13

growing annuity

Answer 13

a finite stream of cash flows growing at a constant rate

Question 14

inflation

Answer 14

rate at which prices as a whole are increasing

Question 15

real value of $1

Answer 15

purchasing-power-adjusted value of a dollar

Question 16

nominal interest rate

Answer 16

rate at which money invested grows

Question 17

real interest rate

Answer 17

rate at which the purchasing power of an investment increases

Question 18

effective annual interest rate (EAR)

Answer 18

interest rate that is annualized using compound interest

Question 19

annual percentage rate (APR)

Answer 19

interest rate that is annualized using simple interest