The Time Value of Money Flashcards
The repayment schedule of loan principal over time. It is structured in such a way that more interest and less principal is being repaid at first, and over time the amount of principal being repaid increases, and the amount of interest being paid decreases.
Amortization.
The recipient of annuity distributions
Annuitant
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. It distributes funds over the lifetime of the recipient based on preestablished criteria. It may pay over the lives of one or more persons, may have a specified ending date, and/or may pay a specified dollar amount.
Annuity
An annuity for which disbursements or receipts are made at the beginning of the period, as opposed to the end of the period
Annuity Due
The percentage of interest earned, expressed either as an annual rate or a rate per compounding period.
Compound Rate
The process of interest being earned on both a principal balance and previously earned interest.
Compounding
The period of time that passes before interest is
compounded once. For example, if the compounding period is one year, interest is being compounded once a year. If the compounding period is a month, interest
is being compounded each month.
Compounding period.
The percentage of interest discounted. It may be expressed as an annual rate or a periodic rate (i.e., a discount rate per compounding period)
Discount Rate
The reverse of compounding. An example would be taking an amount that an individual is going to receive in the future (future value) and discounting it back to today at a rate of return that the individual believes he can
achieve. This would then value the future dollar amount in present dollars
Discounting
The period of time in which interest is discounted once. For example, if interest is discounted annually, the discounting period is one year. If it is discounted weekly, the discounting period is one week.
Discounting period.
An amount of money to be received in a single payment at some point in the future.
Future Sum
The value of a single sum or a stream of payments after
compounding has taken place.
Future Value
The value after compounding of a stream of equal
payments made at equal intervals
Future value of an annuity
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 inflation-adjusted return would be 0%
Inflation-adjusted return.
The payment for the use of money
Interest
Pertains to 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 interest rate per compounding period is 4%
Interest rate per compounding period
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 interest rate per discounting period is 2%
Interest rate per discounting period
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 opportunity cost of holding Investment
A is 2%
Opportunity Cost
Pertains to the time value of money. An annuity in which
payments are made or received at the end of the period.
Ordinary Annuity
Pertains to the time value of money. A periodic payment is a disbursement or receipt of the same amount of money over regular intervals.
Periodic payment
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
Present Sum
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.
Present value
The discounted value of a future stream of
payments
Present Value of an annuity
An approximate guideline for determining how long it will take an investment to double in value or for determining the interest rate required for an
investment to double in value
Rule of 72
A payment that is increased each year to take into account inflation. With a ________ one would maintain the same amount of buying
power over time.
Serial Payment
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 dollaryou receive in the future since you can invest the dollar you receive today and
earn a return on it
Time Value of Money
