Understanding Cash Flows and Interest Rates

These flashcards encompass key vocabulary and concepts related to cash flow analysis, interest rates, and financial decision-making.

Compounding

The process of restating a cash flow to the future, allowing decision-makers to calculate future values based on interest accumulation.

Discounting

The process of restating a cash flow to the present, reflecting the value of future cash flows in today’s terms.

Future Value

The value of a cash flow at a future date, considering compound interest over time.

Present Value

The current worth of a cash flow that will occur in the future, calculated by discounting future amounts.

Simple Interest

Interest earned only on the original principal, with no compounding effect.

Compound Interest

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

Perpetuity

A series of regular cash flows that continue indefinitely.

Annuity

A series of regular payments made at equal intervals over a specified period.

Level Annuity

An annuity with the same cash flow amount for each payment period.

Growing Annuity

An annuity where payments increase at a steady rate over time.

Stated Annual Interest Rate

The nominal interest rate stated on an annual basis, commonly used in borrowing contracts.

Periodic Interest Rate

The interest rate applicable for a specific time period, such as semiannual or quarterly.

Effective Annual Interest Rate

The annual interest rate that considers compounding within the year, providing a more accurate measure of interest.

Compounding Period

The length of time before interest is calculated and added to the principal.

Annual Percentage Rate (APR)

The interest rate charged per period multiplied by the number of periods in a year.