Chapter 6 Flashcards
Interest
Interest is the payment for the use of money. It is normally stated as a percentage of the amount borrowed (principal), calculated on a yearly basis.
Simple interest
Simple interest is computed on the amount of the principal only. The formula for simple interest can be expressed as p × i × n where p is the principal, i is the rate of interest for one period, and n is the number of periods.
Compound interest
Compound interest is the process of computing interest on the principal plus any interest previously earned.
Rate of Interest
The annual rate that must be adjusted to reflect the length of the compounding period if less than a year.
Number of Time Periods
The number of compounding periods (a period may be equal to or less than a year).
Future Amount
The value at a future date of a given sum or sums invested assuming compound interest.
Present Value
The value now (present time) of a future sum or sums discounted assuming compound interest.
Annuity
An annuity is a series of equal periodic payments or receipts called rents. An annuity requires that the rents be paid or received at equal time intervals, and that compound interest be applied.
Ordinary Annuity
The initial sum of money is invested at the beginning of the first period and withdrawals are made at the end of each subsequent period
Annuity Due
The initial sum of money is invested at the beginning of the first period and withdrawals are made at the beginning of each period
Deferred Annuity
An annuity in which two or more periods have expired before the rents will begin.
Time Value of Money
- A relationship between time and money.
- A dollar received today is worth more than a dollar promised at some time in the future.
- When deciding among investment or borrowing alternatives, it is essential to be able to compare today’s dollar and tomorrow’s dollar on the same footing—to “compare apples to apples.”
