Chapter 5 Flashcards Preview

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Flashcards in Chapter 5 Deck (13):
1

simple interest

interest is earned only on principal

2

compound interest

interest on interest
- when interest paid on the investment during the first period is added to the principal, then during the second period interest is earned on this new sum

3

future value

the amount to which your investment will grow

4

Future value can be increased by (2)

1. increasing the number of years for which money is invested
2. investing at a higher interest rate

5

Present value

current value of a future payment

6

present value is lower if (2)

1. time period is longer
2. interest rate is higher

7

annuities

series of equal dollar payments for a specified number of years

8

order annuity

payments occur at the end of each period

9

compound annuity

depositing an equal sum of money at the end of each year for a certain number of years and allowing it to grow

10

annuities due

each annuity payment occurs at the beginning of the period rather than at the end of the period

11

amortized loans

a loan that is paid off in equal periodic payments

12

effective annual rate

EAR; an investments annual rate of interest when compounding occurs more often than once a year

13

perpetuity

an annuity that continues forever