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24 Cards in this Set

  • Front
  • Back
“Money has a time value”—money can grow or increase over time and money today is worth less than money received in the future
Important Principle of Finance
Math of finance whereby interest is earned over time by saving or investing money
Time Value of Money
Interest earned only on the principal of the initial investment
Simple Interest
Value of an investment or savings amount today or at the present time
Present Value
Value of an investment or savings amount at a specified future time
Future Value
Future value = Present value + (Present value x Interest rate)
Time value of money equation
Arithmetic process whereby an initial value increases at a compound interest rate over time to reach a value in the future
Compounding
Earning interest on interest in addition to interest on the principal or initial investment
Compound Interest
Where: PV = present value amount FVIFr,n = pre-calculated future value interest factor for a specific interest rate (r) and specified time period (n)
Future Value: (FVn) = PV(FVIFr,n)
An arithmetic process whereby a future value decreases at a compound interest rate over time to reach a present value
Discounting
FV = future value
PV = present value
r = interest rate
n = number of periods
Four basic variables
Knowing the values for any three of these variables allows solving for the fourth or unknown variable
Key Concept
A series of equal payments that occur over a number of time periods
Annuity
Exists when the equal payments occur at the end of each time period (also referred to as a deferred annuity)
Ordinary Annuity
FVAn = PMT{[(1 + r)n - 1]/r}
FVA = future value of ordinary annuity
PMT = periodic equal payment
r = compound interest rate, and
n = total number of periods
Future Value of Annuity
A loan repaid in equal payments over a specified time period
Amortized Loan
Solve for the periodic payment amount
Process
FVn = PV(1 + r/m)nxm Where: m = number of compounding periods per year and the other variables are as previously defined
Compounding or discounting more often than once a year
Determined by multiplying the interest rate charged (r) per period by the number of periods in a year (m)
Annual Percentage Rate (APR)
r x m
APR equation
true interest rate when compounding occurs more frequently than annually
Effective Annual Rate (APR)
(1 + r)m - 1
EAR
Exists when the equal periodic payments occur at the beginning of each period
Annuity Due
PMT{[((1 + r)n - 1)/r] x (1 + r)}
FVADn (future value of annuity due)