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16 Cards in this Set
- Front
- Back
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Future Value
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the amount an investment is worth after one or more periods.
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Single period Investments
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investments for 1 period are equal to (1+r) per dollars invested
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Compounding
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The process of accumulating interest on an investment over time to earn more interest.
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Interest on Interest
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Interest earned on the reinvestment of previous interest payments.
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Compound Interest
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Interest earned on both the initial principal and the interest reinvested from prior periods.
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Simple Interest
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Interest only on the original principal amount invested.
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Future Value Formula
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FV = $1 X (1+r)^t
r= interest rate t= periods |
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Compounding interest has a greater affect when____.
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Investments are longer.
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Present Value definition
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the current value of future cash flows discounted at the appropriate discount rate.
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Present Value Formula
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Present Value = $1/(1+r)^t
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Discount Rate
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rate used to calculate the present value of future cash flows.
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Discounting Cash flow Valuation
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Calculating the present value of future cash flow to determine its value today.
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As the length of time until payment grows, the present value ____.
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Decreases.
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The higher the discount rate, the ____ the discount rate.
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Lower
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FV to PV relationship formula
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FV = PV (1+r)^t
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PV to FV relationship formula
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PV= FV
------------------- ( 1 + r )^t |
