The Time Value of Money Flashcards
The rate at which money is discounted or compounded
Discount rate
How much spending power money has today
Present Value
The process of valuing money at specific points in time
Time Value of Money
How much it costs the firm (in percentage terms) to finance its operations through debt and/or equity
Cost of Capital
r =
Discount rate
Discount Rate equation is
r = Real Risk-Free Rate + Inflation + Risk Premium
The rate earned on riskless investments with 0% inflation
Real risk-free rate
The annul decay in the purchasing power of money
Inflation
Compensation for bearing the risk of a particular investment
Risk Premium
The time value of money brings together what three variables
Amount of the cash flows
Timing of the cash flows
Rate at which the value of the cash flows changes due to the passage of time
Refers to a single cash flow at one point in time refers to a
single sum
A present value calculation takes a sum in the future and finds this at a closer point in time
a time adjusted equivalent value
A series of payments or receipts
Annuities
An equally spaced series of cash flows all of the same magnitude
Annuity
An annuity that pays at the end of each period
Ordinary Annuity
