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time value of money
the rate of return you need to make you indifferent between choosing to keep money today or to use money today to receive more money in the future
investment
using money with the expectation of receiving more money in the future
rate of return
the compensation you require for delaying consumption and for the uncertainty of receiving money back; measured as the percent of money that returned back to you relative to the initial amount of money given; that is, the ending value of an investment less the beginning value of an investment divided by the beginning value of the investment written as a percent
delayed consumption
the time period you have to wait to use your money after giving it up today
uncertainty
the risk or lack of guarantee regarding the amount you will receive back in the future
consumption inclination
the preference for spending today; people with a higher consumption inclination prefer to spend today
risk aversion
the preference for less uncertainty; people with a higher risk aversion prefer to avoid uncertainty; they are less likely to take risk
present value
the current worth of a future sum of money based upon a rate of return which compensates you for your consumption inclination and risk aversion (your delay and uncertainty preferences)
future value
the worth of a current sum of money at some point in the future based upon a rate of return which compensates you for your consumption inclination and risk aversion (your delay and uncertainty preferences)
compounding
the process of determining the future value of a present sum of money by applying an interest rate
discounting
the process of determining the present value of a future sum of money by applying a discount rate
interest rate
a rate of return used to compound present cash flows to their future value; interest rates emphasize the amount of money you expect to earn from an investment (Note: many persons use interest rates and discount rates interchangeably, but technically, these two have drastically different functions; the reason for this confusion is for some investments we use the interest rate as the discount rate to determine the value of the investment)
discount rate
a rate of return used to discount future cash flows to their present value; discount rates emphasize the value of the investment today
cash flow
the amount of cash generated or used by an investment over a period of time
lump sum
a single payment of money (as opposed to a series of payments)
annuity
a series of equal payments made at regular intervals over a period of time
annuity due
an annuity where payments are made at the beginning of each period (as opposed to the end of each period)
perpetuity
an annuity that continues forever
growing annuity
an annuity where payments increase at a constant rate each period
growing perpetuity
a perpetuity where payments grow at a constant rate each period
uneven cash flows
a series of cash flows that vary in amount and are made at irregular intervals (as opposed to being consistent like annuity payments)
annual compounding
money compounds once per year
semiannual compounding
money compounds twice per year (every six months)
Note 
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