Time Value Of Money Flashcards
What is a principal?
It is money deposited in an account.
What is simple interest?
They are interests rate with a fixed amount.
What is compound interest?
They are interests that are earned with interest
What is the effective rate of interest?
It represents the “t-period” and is denoted as it. It is based on the beginning of the period.
What is the function of the amount of interest earned?
I(t)=A(t)-A(t-1)
What is the present value (PV)?
It is the amount of the investment right now at time “t”
What is the accumulated value (AV)
It is the accumulated amount after an investment period.
What is another name for present value?
Discounting value.
What is a timing diagram?
It documents cash inflows and outflows with a comparison date.
What is a comparison date?
It is a standard date to discount and accumulates each cash flow.
What is a discount factor?
It is discounting for one year of interest. We use the symbol “v” as a multiplication factor.
What is the formula for the discount factor?
What is an effective rate of discount?
It is when the interest earned is based on the end of the period.
When does (1+i) accumulates?
When “v” discounts.
When do (1-d) discounts?
When 1/(1-d) accumulates.
What are equivalent rates?
They are 2 rates that measure the same growth.
What is interest paid in affairs?
It is interest paid at the end of the period.
What is interest paid in advance?
They are interest paid at the beginning of the period.
What are nominal rates?
They are annual rates, but “in name only” because they are not effective rates.
What is another name for compound interest?
Convertible interest.
What does the accumulation function represent?
It is the amount a 1$ investment changes over time.
What is the force of interest?
It is “i(infinity)” which represents the nominal rate as “m” approaches infinity.
What is simple interest?
It creates a linear amount function.
What is a linear amount function?
It produces a constant growth amount each period.
