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1

he principles and computations used to revalue cash paoffs at different times so they are stated in dollars of the same time period; used to convert dollars from one time period to those of another time period.

Time Value of Money (TVM)

2

Time Value of Money (TVM)

The principles and computations used to revalue cash paoffs at different times so they are stated in dollars of the same time period; used to convert dollars from one time period to those of another time period.

3

Cash Flow Timeline

An important tool used in time value of money analysis; a graphical representation used to show the timing of cash flows.

4

Opportunity Cost Rate

The rate of return on the best available alternative investments of equal risk.

5

Lump-Sum Amount

A single payment (received or made) that is made either today or at some date in the future.

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Annuity

A series of payments of equal amounts at fixed, equal intervals for a specified number of periods.

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Ordinary Annuity

An annuity with payments that occur at the end of each period.

8

Annuity Due

An annuity with payments that occur at the beginning of each period.

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Uneven Cash Flows

Multiple payments of different amounts over a period of time.

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Future Value (FV)

The amount to which a cash flows will grow over a given period of time when compounded at a given interest rate.

11

Compound Interest

When interest is left in an investment to earn additional interest.

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Cash Outflow

A payment, or disbursement, of cash for expenses, investments, and so forth.

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Cash Inflow

A receipt of cash from an investment, an employer, or other sources.

14

Lump-Sum Equation

FVn= PV (1+r)^n

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Ordinary Annuity Equation

FVAn= PMT [(((1+r)^n) -1))/r]

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Anuity Due Equation

FVA(due)n=PMT{[(1+r)^(n-1)/4] x (1+r)}

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Payment (PMT)

This term designates constant cash flows-- that is, the amount of an annuity payment.

18

Cash Flow (CF)

This term designates constant cash flows in general, including uneven cash flows.

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Terminal Value

The future value of a cash flow stream.

20

Futre Value Cash Flow Equation

CF1(1+r)^(n-1) + CF2 (1+r)^(n-2)_

21

Present Value (PV)

The value todeay-- that is, the current value-- of a future cash flow or series of cash flows.

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Discounting

The process of determining the present value of a cash flow or a series of cash flows received (paid)in the future; the reverse of compounding.

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Perpetuity

A stream of equal payments expected to continue forever.

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Consols

Perpetual bonds issued by the British government to consolidate past debts; in general, any perpituital bond.

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Annual Compounding

The process of determining the future (of present) value of a cash flow or series of cash flows when interest is paid once per year.

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Semiannual Compounding

The process of determining the future (or present) value of a cash flow or series of cash flows when interest is paid twice per year.

27

Simple (Quoted) Interest Rate

The rate quoted by borrowers and lenders that is used to determine the rate earned per compounding period (periodic rate, rper)

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Annual Percentage Rate (APR)

Another name for the simple interest rate, rsimple; does not consider the effect of interest compounding.

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Effective (Equivalent) Annual Rate (R-ear)

The annual rate of interest actually being earned, as opposed to the quoted rate, considering the compounding of interest.

30

Amortized Loans

A loan that requires equal payments over its life; the payments include both interest and repayment of the debt.