Finance--Ch. 3 -- Time Value of Money
Amortized Loan
A loan paid off in equal installments
Future Value Interest Factor
A multiplier that is used to calculate the future value of an amount (1+i)^n
Present Value Interest Factor
A multiplier used to calculate the Present value of a sum 1/[(1+i)^n]
Annuity
A series of equal dollar payments coming at the end of each time period for a specified number of time periods
Perpetuity
An annuity that continues forever
Rule of 72
An investment rule stating that the time it takes for a sum of money to double is 72 divided by the annual growth rate
Compound Annuity
An investment that involves deposition and equal amount annually for a certain number of years and allowed to grow
Calculate: Future Value of an Annuity
FV = PMT x Future value interest factor of an annuity
What determines how much you will need to save in order to achieve your goals?
Interest rate and time
Calculate: Present Value of Money
PV = 1/[(1+i)^n]
Calculation - Present Value of an Annuity
PV = PMT x Present value interest factor of an annuity
Time Value of Money
The concept that a dollar received today is worth more than a dollar received in the future, so comparisons b/w amounts made in different time periods cannot be made without adjustments to their values.
Present Value
The current value of a future sum of money
Compound Interest
The effect of earning interest on interest, resulting from the reinvestment of interest paid on an investment's principal
Principal
The face value of a deposit or debt instrument
Discount Rate
The interest rate it would take to bring future dollars back to the present
Annual Interest Rate
The rate charged or paid annually for the use of money
Future Value
The value of an investment at some future point in time
Reinvesting
When money earned on an investment is plowed back into the investment
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
Future Value Interest Factor of an Annuity
a multiplier used to determine the future value of an annuity
Present Value Interest Factor of an Annuity
a multiplier used to determine the present value of an annuity
Present Value of an Annuity
the present value of a future sum of money
