Chapter 3: Understanding and Appreciating the Time Value of Money

Pataasin ang iyong marka sa homework at exams ngayon gamit ang Quizwiz!

Annual Interest Rate (i)

Rate charged or paid for use of money on an annual basis

Rule of 72

States that you can determine how many years it will take for a sum to double by dividing the annual growth rate into 72 - this is an approximation

Reinvesting

Taking money that you have earned on an investment and plowing it back into that investment

Compounded Annually

The interest received at the end of each year added to the original investment - at the end of the 2nd year, interest is earned on this new sum

Compound Interest with Non-Annual Periods

- quarterly, daily, continuous - you earn money faster - calculated with a financial calculator

Compounding and the Power of Time and Interest Rate in Compounding

- together, time and interest rate determine how large an investment grows - you can increase the future value by increasing the interest rate or the # of periods that your money is compounded

Time Value of Money

A dollar received today is worth more than a dollar received in the future (therefore, you cannot compare amounts in different time periods without adjusting their values)

Annuity

A serious of equal annual dollar payments coming at the end of each year for a specified number of years - because annuities occur frequently in finance, for example, as bond interest payments and mortgage payments, they receive special treatment - a compound annuity involves depositing or investing an equal sum of money at the end of each year for a certain number of. Years and allowing it to grow

Perpetuity

Annuity that continues forever

Present Value (PV)

Current value in today's dollars of a future sum of money

Future-Value Interest Factor of an Annuity

Multiplier used to determine the future value of an annuity

Present Value Interest Factor of an Annuity

Multiplier used to determine the present value of an annuity

Compound Interest

Effect of earning interest on interest, resulting from the reinvestment of interest paid on an investment's principal - if you take the interest you earn on an investment and reinvest it, you start earning interest on the principal and the reinvested interest (the amount of interest you earn compounds [grows])

Time Value of Money Formula

FV = PV (1 + i)^n FV = Future Value PV = Present Value i = Annual Interest Rate N = # periods/years

Future Value of Annuity Formula

FVn = PMT X Future Value Interest Factor of an Annuity FVn = Future Value of an Annuity PMT = Annual Payment

Principal

Face value of deposit or debt instrument

Present Value Formula

PV = FV (1 / [1+i]^n)

Present Value of an Annuity Formula

PV = PMT X Present Value Interest Factor of an Annuity

Discount Rate

Interest rate used to bring future dollars back to present

Compound Annuity

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

Future-Value Interest Factor [(1+i)^n]

Used as a multiplier to calculate an amount's future value

Present-Value Interest Factor (1 / [1+i]^n)

Used as multiplier to calculate an amount's present value

Future Value (FV)

Value of an investment at some future point in time

Amortized Loan

loan paid off in equal installments


Kaugnay na mga set ng pag-aaral

6 - (Questions) Health Insurance Underwriting

View Set

Physiology Exam 2: Name 4 hormones involved in the hormonal control of metabolic fuel and describe what the target cell for these hormones is, the cells that produce the hormones and what function changes in the target cells.

View Set

Chapter 12: Illegal Drugs Questions

View Set