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20 Cards in this Set
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Future value

The value that an amount today will be worth at a certain point in the future.
Apply the interest rate to the principle. FV = PV x (1 + r). r=interest rate FV = PV x FV factor 

Simple interest

Interest earned only on the original amount invested.


Compound interest

Interest earned on the original amount invested plus previously earned interest.
FV = PV x (1 + r)n. n=number of periods. 

Number of interest payment periods is important

FVn = PV x [(1 + (r / m)] n x m


Effective annual interest rate

EAR  The rate of interest that reflects the effect of compounding more than once a year.


Standard interest rate

The quoted annual rate of interest that does not take account of the frequency of compounding.


Present value

The value today of money that will be received in the future.
PV = FVn / (1 + r)n PV = FVn x PV factor 

Discounting

The process of calculating the present value of a future amount.


Discount rate

The interest rate on loans made by Federal Reserve Banks to depository institutions.


Rate of return

PV = FVn / (1 + r)n
To figure ROR (1 + r)n = FVn / PV 

Annuity

A series of fixed payments made on specified dates over a set period.


Ordinary annuity

A series of equal periodic payments made at the end of each period.


Future value of an ordinary annuity

Equal to the total of the future values of each of the payments made or received.


Present value of an ordinary annuity

The value today of a series of equal payments to be made or received in the future at the end of each specified period.
PVA = A x PVAF A = payment period PVAF = table value 

Annuity due

A series of equal periodic payments made at the beginning of each period.


Future values of an ordinary annuity and an annuity due

FV (Annuity due) = FV (Ordinary annuity) x (1 + r)


Present values of an ordinary annuity and an annuity due

PV (Annuity due) = PV (Ordinary annuity) x (1 + r)


Perpetuity

A series of fixed payments made on specified dates over an indefinite period.
PVP = A / r A = payment per period r = discount rate 

Present value of unequal payments

PV = 1 / (1 + r)n


Net present value

NPV  The present value of all future net cash flows (including salvage value) discounted at the cost of capital, minus the cost of the initial investment, also discounted at the cost of capital.
If the value is positive an investment should be made. NPV = C0 + (Ct / (1 + r)t) #FAIL 