Chapter 3 Flashcards
(9 cards)
Explain the mechanics of compounding.
FVn=PV(1+i)^n
future value=present value×future-value interest factor
Rule of 72
determine how long it will take to double your invested money
number of years to double=72/annual compound growth rate
principal
The face value of the deposit or debt instrument.
Compounded Annually
With annual
compounding, the interest is received at the end
of each year and then added to the original investment.
Then, at the end of the second year,
interest is earned on this new sum.
Discount rate
The interest rate used to
bring future dollars back to the present.
Present-Value Interest Factor
The [1/(1+i)^n] value used as a multiplier to calculate
an amount’s present value
Annuity
A series of equal dollar payments
coming at the end of each time period for
a specified number of time periods.
Amortized Loan
A loan paid off in
equal installments.
Perpetuity
An annuity that continues forever.
