Time Value of Money Concepts

These flashcards cover important vocabulary and definitions related to the Time Value of Money concepts.

Time Value of Money

The idea that money available now is worth more than the same amount in the future due to its potential earning capacity.

Present Value (PV)

The current worth of a future sum of money given a specified rate of return.

Future Value (FV)

The amount of money that an investment will grow to over a period of time at a given interest rate.

Interest Rate

The percentage at which interest is calculated on an amount of money over a period of time.

Compounding

The process in which interest earned on an investment is reinvested to earn additional interest.

Discount Rate

The interest rate used to determine the present value of future cash flows.

Annuity

A series of equal payments made at regular intervals over time.

Perpetuity

An annuity that lasts indefinitely, providing constant cash flows.

Risk-free Rate

The return on an investment with zero risk, often represented by government bonds.

Risk Premium

The additional return an investor requires for taking on additional risk.

Time Preference for Money

The preference of individuals to receive money sooner rather than later.

Future Value Interest Factor

The process or formula used to calculate the future value of an investment.

Simple Interest

Interest calculated on the principal amount only.

Compound Interest

Interest calculated on the principal amount and also on the accumulated interest from previous periods.

PV Formula

Present Value = Future Value / (1 + r)^t.

FV Formula

Future Value = Present Value * (1 + r)^t.

Required Rate of Return

The minimum return an investor expects to earn from an investment.

Time Period

The duration over which investments are measured or analyzed.

Implied Interest Rate

The rate of interest implied by the cash flows of an investment.