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28 Cards in this Set

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Later money on a time line:
Future value
The rate used to calculate the present value of future cash flows:
Discount rate
What happens in a cash inflow?
You receive money (+)
Answers the question, "How much do I have to invest today to have some amount in the future?"
Present value
The "exchange rate" between earlier money and later money:
Interest rate
When a deposit or investment earns interest on interest previously received, it is said to be earning _____.
Compound interest
For a given time period, the higher the interest rate, the higher the _____.
Future value
What is the effect of compounding simple interest?
Interest is NOT reinvested
What are the 5 different names for the interest rate?
1) discount rate
2) exchange rate
3) cost of capital
4) opportunity cost of capital
5) required return
For a given interest rate the longer the time period, the _____ the present value.
Lower
What is the effect of compounding compound interest?
Interest IS reinvested
Finding the present value of some future amount:
Discounting
Earlier money on a time line:
Present value
What happens in a cash outflow?
You pay money (-)
For a given time period, the _____ the interest rate, the _____ the future value.
Higher, higher
The effects of _____ is small for a small number of periods, but increases as the number of periods increase.
Compounding
Period interest rate:
r
The period interest rate times the number of periods in the year:
Simple rate (I/YR)
For a given interest rate the longer the time period, the lower the _____.
Present value
Used to solve the implied interest rate for an investment:
Discount rate
Number of payment periods:
N
The simple rate of interest divided by the number of periods in a year:
Period rate (r)
For a given interest rate the longer the time period, the _____ the future value.
Higher
The effects of compounding get larger as:
The number of periods increase
For a given time period, the higher the interest rate, the _____ the present value.
Smaller
Interest rate per payment period:
r
For a given interest rate the longer the time period, the higher the _____.
Future value
What must P/YR equal for I/YR to be the period rate?
P/YR must equal 1