Chapter 5
Future Values General Formula
FV = PV(1 + r)^t
Compounding Interest
Interest earned on both the initial principal and the interest reinvested from prior periods
Simple Interest
Interest earned only on the original principal amount invested
Basic Present Value Equation
PV = FV/(1+r)^t
Rule of 72
The number of years it takes for a certain amount to double in value is equal to 72 divided by its annual rate of interest.
the discount rate is called
rate of return on the investment
Future Value
the amount of money an investment will grow to over some period of time
Present Value
the current value of future cash flows discounted at the appropriate discount rate
the longer the time period,
the lower the present value
Time Value of Money
the principle that a dollar received today is worth more than a dollar received in the future
Compounding
the process of leaving money and any accumulated interest in an investment for more than one period, thereby reinvesting the interest
the higher the interest rate,
the smaller the present value
Future Value Factor
(1 + r)^t
Present Value Factor
1/(1+r)^t
Discounted Cash Flow
calculating the present value of a future cash flow to determine its value today
Interest on Interest
interest earned on the reinvestment of previous interest payments