Time Value for Money Flashcards
What is present value?
The value right now of some amount of money in the future
What is future value?
The value of a current asset at a future date based on an assumed rate of growth
What is discounting?
The process of determining the present value of a payment or a stream of payments that is to be received in the future
What is net present value?
The difference between the present value of cash inflows and the present value of cash outflows over a period of time
What is compounding?
The process in which an asset’s earnings, from either capital gains or interest, are reinvested to generate additional earnings over time
What is the stated annual interest rate?
The annual interest rate without consideration of compounding
What is the effective annual interest rate?
The interest rate that is actually earned or paid on an investment, loan or other financial product due to the result of compounding over a given time period
What is APR?
It expresses the total cost of borrowing or investing as a percentage interest rate
What is the reason for an APR?
A credit agreement may not just include interest payments, but also management fees, arrangement fees and other sundry costs that will affect the total charge for credit
What is continuous compounding?
The mathematical limit that compound interest can reach if it’s calculated and reinvested into an account’s balance over a theoretically infinite number of periods
What is perpetuity?
A constant stream of cash flows without end
What is growing perpetuity?
A series of periodic payments that grow at a proportionate rate and are received for an infinite amount of time
What are the important points about the perpetuity formula?
The numerator, the discount rate and the growth rate, and the timing assumption
What is annuity?
A level stream of regular payments that lasts for a fixed number of periods
What is delayed annuity?
An annuity in which the first payment is not paid immediately, as in an immediate annuity
