Time Value of Money

Question 1

Earning Power

Answer 1

the ability of money to earn more money over time (1 reason money has a time value)

Question 2

Inflation

Answer 2

the ability for money’s purchasing power to change with time (2nd reason money has time value)

Question 3

Time Value of Money

Answer 3

the economic value of a sum depends on when the sum is recieved

Question 4

Principal (P)

Answer 4

the initial amount of money borrowed or invested

Question 5

Interest Rate (i)

Answer 5

measure of the cost or price of money, expressed as a percent per period of time
-measure of money’s time value

Question 6

Interest Period (n)

Answer 6

determines how frequently interest is calcualted

Question 7

Number of Interest Periods (N)

Answer 7

a specified length of time that marks the duration of the transaction

Question 8

Future Amount of Money (F)

Answer 8

results from the cumulative effect of interest over a number of interest periods

Question 9

Plan for Receipts of Disbursements (An)

Answer 9

yields a particular cash flow pattern over a specified length of time

Question 10

Simple Interst

Answer 10

the practice of charging an interest rate only to the initial sum (principal amount)

Question 11

Compound Interest

Answer 11

practice of charging an interest rate to the principal and to any previously accumulated interest that hasn’t been withdrawn (paid)