midterm 1 Flashcards
compounding interest
the continual addition of interest to the original principal sum of a loan or deposit, often referred to as interest on interest
compounding period
the period between points in time when interest is paid or added to the principal
consumer price index (CPI)
a measure that examines the weighted average of prices of a basket of consumer goods and services such as transportation, food, and medical care
discount rate
the interest rate used to determine the present value of future cash inflows, value; may derive from several sources, such as stated contract rates, costs to borrow, or expected rates of return on investments
financial instrument
an asset or bundle of assets, including monetary contracts between parties, that can be bought, sold, or traded for financial gain
financial risk
the possibility of losing money or purchasing power on an investment, business transaction, or venture or simply due to inflation
future value
the value that a current amount will grow to at a given interest rate over a given period of time
growth rate
the percentage increase of a specific variable within a specific time period; synonymous with interest rate in the context of the time value of money
interest
the amount of money that is paid by a borrower to a lender for the use of their money, typically calculated from an annualized rate
investment
an asset or item acquired with the goal of generating financial gain through increased income or appreciation in value
liquid asset
an asset that can be readily converted into cash within a short period of time
present value
the current value of a future amount, calculated by discounting the future value back at a known discount or interest rate for a specified period of time
real interest rate
a rate of interest that has been adjusted to account for the effects of inflation
time value of money (TMV)
the concept that an amount of money is worth more today than the exact same amount of money at some point in the future
underinvested
describes an insufficient amount of investment or an investment that is earning an insufficient rate of interest
annuity
a stream of regular, periodic payments to be received or paid
annuity due
a stream of periodic payments in which the payment or receipt occurs at the beginning of each period
constant perpetuity
a stream of periodic payments that is expected to continue indefinitely with no change in thee amount paid or received
effective interest rate
the interest rate that results when compounding occurs multiple times within a year; the true cost of borrowing
growing perpetuity
a stream of periodic payments that is expected to continue indefinitely with growth of the amount paid or received in the future, usually by a fixed percentage
loan amortization
the scheduling of periodic repayment of a debt, typically involving regular payments or receipts of amounts that include both interest payment and repayment of the principal of the amount owed
ordinary annuity
a stream of periodic payments in which the payment or receipt occurs at the end of each period
preferred stock
shares of ownership in a corporation that typically entitle the holder to a fixed dividend per share, if declared by the corporation, with priority over holders of that corporation’s common stock
required rate of return
the minimum amount of return that an investor will accept on an investment given the level of risk involved