Financial Background Definitions Flashcards
Credit:
Money coming into an account
- Always a positive value
- Source is immaterial
Debit
Money leaving an account
- Always a negative value
- Destination is immaterial
Annuity
An account which has a constant interest rate and into which periodic, equal payments are made toward a goal:
Savings
- Retirement
- Special Purchase
Payback a loan
-Mortgage, Auto loan, etc.
Interest
APR (Annual Percentage Rate)
ERI (Effective Rate of Interest)
-Simple vs. Compound
Simple vs. Compound Interest
$10,000 Savings Account @ 12% a year
Simple $10,000 x .12 -$1200.00 Total at years end: -$11,200
Compounded Monthly 12%/12 = 1% per month $10,000 x .01 -$100.00 $10,100 x .01 -$101.00 $10,201 x .01 -$102.01 $10,303.01 x .01 …etc. Total at year’s end -$11,268.25
Interest for Payment Period
i (in Excel “Rate”)
APR/number of payments per year
e. g., 12% APR; monthly payments
- =12%/12
- —i = 1%
Present Value of Money (Pv)
What a future amount of money is worth now…
- No time interval
- No lost opportunity
- No risk
- No inflation
Future Value of Money
The value of money at some point in the future based upon periodic, constant payments and a constant interest rate
Future Value of Money
THERE IS NO COMPONENT OF INFLATION CONSIDERED IN FUTURE VALUE!
Fv Example
Savings Account
- $100 Initial Deposit (Pv)
- $100 Credit Per month (Payment)
- —Beginning of period
- 3% APR
- 30 years
Fv=$58,665.06
Payments over Time (Annuity)
Payment
- Principal reduction
- Interest
Value of Payment Depends upon: -Term of annuity -Percent of interest -Frequency of compounding -Timing of payment
Term of Annuity
Usually expressed in years
- Number of payments depends upon schedule
- Monthly payments (12 per year)
- Total number of payments = 12 times term in years
- n (In Excel “Nper”)
- Quarterly payments (4 per year)
- n = 4 X term in years
Period of an Annuity
Interval of payments
- Monthly
- Quarterly
- Weekly
- Semi-annually
- Annually
- Bi-annually
- Etc.
Timing of payments
Beginning of period
LOAN:
-Reduces principle before interest for period is computed
SAVINGS:
-Increases principle before interest is computed
End of period
LOAN:
-Computes interest before principle is reduced by payment
SAVINGS:
-Computes interest before increase in principle
Payment Timing:
Beginning vs. End
Loan values
- $30,000
- 5 Year Term
- 5% APR
Loan repayment
See graph
Wholesale Cost
The amount a retailer pays the supplier for an item to be sold .
-This Cost is less than the Retail Price
Markup
The amount a retailer adds to the Wholesale Cost of an item.
This amount is calculated to cover the retailer’s cost of doing business such as:
Rent Utilities Supplies Wages Transportation Maintenance Insurance Loan Payments and...
-Markup may very by item
Profit
The amount, part of Markup, that is over and above the amount required to cover the costs of doing business.
Retail Price
The price for which an item sells in a retail store.
This amount includes:
- The Wholesale cost of the item
- The Markup on the item
- an item costs $1 Wholesale
- Markup is 25%
- Retail Price equals $1.25
