Pre-Final Review: Simple and Compound Interest

A set of flashcards designed to aid in the understanding and memorization of key concepts related to simple and compound interest, annuities, bonds, stocks, and related financial terms for an exam.

Simple Interest

A quick method for calculating the interest charge on a loan, determined by multiplying the daily interest rate by the principal and the number of days.

Stockholder

a person who has shares in a company

Common Stock

a type of stock that represents ownership on a company and is sometimes accompanied by dividends on a portion of profits. Investors get one vote for every share to elect board members who oversee management.

Preferred Stock

a type of stock that represents ownership in a company but does not usually come with voting rights. Investors are normally guaranteed dividends as long as the investor holds ownership of shares. In the event of liquidation, preferred shareholders are paid off before the common shareholders.

Compound Interest

Interest on a loan or deposit that is calculated based on both the initial principal and the accumulated interest from previous periods.

Principal (P)

The amount borrowed, invested, or loaned.

Annual Rate of Simple Interest (r)

The percentage rate that indicates the amount of interest earned or paid over a year, converted to decimal for calculations.

Accumulated Amount (F)

The total amount of money in an investment account after interest has been applied.

Time (t)

The period of investment or borrowing, expressed in years.

Ordinary Interest (Io)

Simple interest calculated over a 360-day year.

Exact Interest (IE)

Simple interest calculated over a 365-day year.

Number of Compounding Periods (m)

The frequency at which interest is computed or compounded within a year.

Periodic Rate (i)

The interest rate for each compounding period, calculated as i = r/m.

Total Number of Conversion Periods (n)

The total number of compounding periods over the term of the investment, calculated as n = mt.

Annuity

A sum of money paid in regular equal payments over time.

Payment Interval

The period of time between consecutive payments in an annuity.

Term

The duration from the first payment interval to the last payment interval in an annuity.

Annuity Certain

An annuity that is payable for a definite duration.

Perpetuity

An annuity that continues indefinitely with a defined start date.

Contingent Annuity

An annuity payable for an indefinite duration, dependent on a certain event.

Simple Annuity

An annuity certain with the same compounding period as the payment interval.

General Annuity

An annuity certain with a different compounding period than the payment interval.

Ordinary Annuity

An annuity where payments are made at the end of each interval.

Annuity Due

An annuity where payments are made at the beginning of each payment interval.

Fair Market Value (FMV)

The price two parties agree upon for an asset under informed and unpressured conditions.

Deferred Annuity

An annuity with the first payment interval delayed.

Bond

A debt financing instrument that pays interest and promises a specified amount on maturity.

Government Bond

A bond issued by governments to fund programs and operations.

Corporate Bond

A bond issued by businesses to finance expenses, often yielding higher risk and returns.

Zero-Coupon Bond

A bond that does not pay periodic interest but is sold at a discount to its par value.

Stock Market

A marketplace where publicly listed companies issue and trade their shares.

Dividend

A share of a company’s profits distributed to shareholders.

Cash Dividend

Money given to shareholders based on the shares they own.

Stock Dividend

Additional shares given to investors instead of cash dividends.

Stock Appreciation

The increase in the value of a stock from its original purchase price.

Coupon

The interest payment received by a bondholder under a scheduled system.

Tenor

The fixed period after which a bond is redeemable.

Par Value

The amount payable at maturity on a bond.

Required Yield

The return a bond must offer to make it a worthwhile investment.

Stock Yield Ratio

The ratio of annual dividends to the current market value per share.