Chapter 1 - Time Value of Money

Question 1

Compound interest

Answer 1

Interest earned on interest, “8th wonder of the world.”

Question 2

Compounding (N)

Answer 2

How frequently the interest is applied to investment (the more frequent, the more money you get back!)

Question 3

Future value (FV)

Answer 3

The monetary value of an investment at some point in the future

Question 4

Inflation

Answer 4

A decrease in purchasing power of currency

Question 5

Interest rate (I)

Answer 5

The rate you will receive for investing at a specified compounding period for a specified period of time for the rate at which you pay for borrowing

Question 6

Investment

Answer 6

A current commitment of your money in the expectation of reaping future returns

Question 7

Lump sum

Answer 7

One payment at a specific time

Question 8

Nominal return

Answer 8

The return on an investment before the impact of inflation and taxes are taken into account

Question 9

Opportunity cost

Answer 9

The potential loss or gain that occurs when one financial option is chosen over another

Question 10

Present value (PV)

Answer 10

The current value of a future sum of money

Question 11

Principal

Answer 11

The original amount of money borrowed or invested, excluding interest

Question 12

Purchasing power

Answer 12

The value of money based on goods that one unit of money can buy

Question 13

Real return

Answer 13

The rate of return on an investment after the impact of inflation is taken into account

Question 14

Tax-adjusted return

Answer 14

The return on an investment after the impact of federal and state taxes has been taken into account

Question 15

Time value of money (TVM)

Answer 15

The value of money changes over time due to inflation and interest.

Question 16

Annuity (PMT)

Answer 16

A series of equal payments which are made at a specific time (can be positive (bi-weekly paycheck) or negative (monthly loan payment)).