Cost of Money vocab
Interest
In the context of credit, Interest is the amount of money you will pay over the life of a loan as the price of borrowing the principal. In this sense, interest is also known as the "cost of capital". In the context of investment and savings, Interest is the amount of money you earn as a return on your savings or investment.
Compound Interest
Interest that is added back to the principal amount of an investment or loan. The original principal plus the added interest amount becomes the new principal amount for the next compounding period.
Simple Interest
Interest that is paid only on the original principal amount of a loan or investment. Simple interest can be calculated using the formula I = P x R x T.
Interest Rate
The amount of Interest that a bank or other lender charges as the cost of borrowing. The Interest Rate is usually expressed as a percentage of the loan amount.
Rule of 72
The formula used to calculate how long it will take for a sum of money that you have saved or invested to double at a given rate of interest.
Inflation
The gradual increase in overall prices over time.
Federal Reserve
The independent federal agency that regulates banks and controls interest rates and the money supply.
Fed Funds Rate
The interest rate that the Federal Reserve charges commercial banks to borrow money from the Fed.
Principal
The original sum of money that you borrow, in the case of a loan, or that you invest or save. In the case of consumer loans (car loans, mortgages, etc.), the principal usually equals the purchase price of the good or service.
Time Value of Money
The principle that the value of a dollar today is greater than the value of a dollar in the future.
Buying Power
The quantity of goods and services you can buy with your money.
Annual Percentage Rate
The yearly cost of a loan or revolving credit vehicle (such as a line of credit or credit card). The APR includes all interest, charges, and fees that apply to the loan or credit arrangement.
