M3: The Time Value of Money

Question 1

Mathematical Concept: A stream of equal payments received or paid out over a period of time at regular intervals.
Product: A life insurance product that is frequently used as a retirement vehicle. The blank distributes funds over the lifetime of the recipient based on pre-established criteria. The blank may pay over the lives of one or more persons, may have a specified ending date, and/or may pay a specified dollar amount.

Answer 1

Annuity

Question 2

An annuity for which disbursements or receipts are made at the beginning of the period, as opposed to the end of the period.

Answer 2

Annuity due

Question 3

The percentage of interest earned, expressed either as an annual rate or a rate per compounding period.

Answer 3

Compound rate

Question 4

The process of interest being earned on both a principal balance and previously earned interest.

Answer 4

Compounding

Question 5

The period of time that passes before interest is compounded once. For example, if the blank is one year, interest is being compounded once a year. If the blank is a month, interest is being compounded each month.

Answer 5

Compounding period

Question 6

The percentage of interest is discounted. It may be expressed as an annual rate or a periodic rate (i.e., a blank per compounding period).

Answer 6

Discount rate

Question 7

The inverse of compounding. Example: Assume an individual is expected to receive an amount in the future (future value) and discount it back to today at a specified rate of return. This essentially values the future dollar amount in present dollars.

Answer 7

Discounting

Question 8

The period of time in which interest is discounted once. For example, if interest is discounted annually, the blank is one year. If it is discounted weekly, the blank is one week.

Answer 8

Discounting period

Question 9

An amount of money to be received in a single payment at some point in the future.

Answer 9

Future sum

Question 10

The value of a single sum or a stream of payments after compounding has taken place.

Answer 10

Future value

Question 11

The value after compounding of a stream of equal payments made at equal intervals.

Answer 11

Future value of an annuity

Question 12

The “real” rate of return after taking into account inflation. For example, if the rate of return was 4%, but inflation was also running at 4%, then the blank return would be 0%.

Answer 12

Inflation-adjusted rate

Question 13

The payment for the use of money.

Answer 13

Interest

Question 14

Pertains by the time value of money. It is the periodic rate, that is, the annual rate divided by the number of compounding periods in a year. If interest is compounded semiannually and the annual rate is 8%, the blank is 4%.

Answer 14

Interest rate per compounding period

Question 15

Pertains to the time value of money. It is the periodic rate, that is, the annual rate divided by the number of discounting periods in a year. For example, if interest is discounted quarterly and the annual interest rate is 8%, the blank is 2%.

Answer 15

Interest rate per discounting period

Question 16

The additional rate of return that could be earned on an alternative investment. For example, if you are holding Investment A earning 1%, and Investment B is earning 3%, the blank of holding Investment A is 2%.

Answer 16

Opportunity cost

Question 17

Pertains to the time value of money. An annuity in which payments are made or received at the end of the period.

Answer 17

Ordinary annuity

Question 18

Pertains to the time value of money. A disbursement or receipt of the same amount of money over regular intervals.

Answer 18

Periodic payment

Question 19

Pertains to the time value of money. It is the value of an investment before any compounding has taken place. It typically refers to a lump sum, that is, a dollar amount invested or available at a single point in time.

Answer 19

Present sum

Question 20

Pertains to the time value of money. It is the current value of a future sum or a stream of payments, given a discount rate, or the value of an investment before any compounding takes place.

Answer 20

Present value

Question 21

The discounted value of a future stream of payments.

Answer 21

Present value of an annuity

Question 22

A payment that is increased each year to take inflation into account. With a blank one would maintain the same amount of buying power over time.

Answer 22

Serial payment

Question 23

The principle that the value of money changes over time, such as the concept that a dollar you receive today is more valuable than a dollar you receive in the future because you can invest the dollar you receive today and earn a return on it.

Answer 23

Time value of money