FINN 3120 Exam 2

annuity

A series of constant, or level cash flows that occur at the end of each period for some fixed number of periods.

Present Value (PV)

Instead of compounding the money forward into the future we discount it back to the present.

simple interest

Interest earned only on the original principal amount invested

Compounding Interest

Process of leaving your money and any accumulated interest in an investment for more than one period, thereby reinvesting the interest. (Interest on Interest)

Effective Annual Rate (EAR)

the actual rate that you will earn.

Future Value (FV)

the amount of money an investment will grow to over some period of time at some given interest rate

pure discount loan

the borrower receives money today and repays a single lump sum at some time in the future

discounted cash flow (DCF) valuation

the process of valuing an investment by discounting its future cash flows

perpetuity(also called consols)

When the level stream of cash flow continues forever

annuity due

an annuity for which the cash flows occur at the beginning of the period