Chapter 2 - Time Value of Money Flashcards
Interest
Is the rent charged for the use of money
Simple interest
interest on a loan or investment computed as a percentage of the loan or investment computed as a percentage of the loan or investment, or the principal.
Interest formula
I = Principal x annual interest rate x time
I = P X R x T
compound interest
the process of earning interest on interest
annuity
The payment of a series of equal cash flow payments at equal intervals of time
future value formula
FV = PV (1 + i/n) n*t
Future value = Present value (1 + Annual interest rate/ number of compouds in a year) # of compounds * Time (in years)
future value interest factor (FVIV)
A factor multiplied by today’s savings to determine how the savings will accumulate over time.
discounting
The process of obtaining present values
present value interest factor (PVIF)
A factor multiplied by the future value to determine the present value of that amount
ordinary annuity
a stream of equal payments that are received or paid at equal intervals in time at the end of a period.
Annuity due
a series of equal cash flow payments that occur at the beginning of each period.
timelines
Diagrams tat show payments received or paid over time.
nominal interest rate
the stated, or quoted, rate of interest
effective interest rate
the actual rate of interest that you earn, or pay, over a period of time.
