module 7 Finance – Time Value of Money & Multiple Cash Flows Assessment Preparation

This set of flashcards covers key vocabulary and concepts related to the Time Value of Money and various forms of cash flow streams in finance.

Amortized Loan

A loan that has identical payments throughout the contract. Payments are applied first towards reducing the interest balance, and any remaining sum towards the principal balance. As a consequence, the proportion of each payment that pays interest decreases while the proportion applied to principal increases over the course of the loan.

Annuity Due

A finite stream of identical recurring payments whose payments occur at the beginning of each period. Rent and lease payments are examples

Growing Annuity

An annuity whose payments grow at a constant rate per period for the length of the contract.

Growing Perpetuity

A type of perpetuity where the regularly occurring cash flows grow at a fixed rate per period forever. Every cash flow in the stream is different from every other, but they are related through the constant growth rate.

Loan Amortization Schedule

A breakdown of the interest and principal payments on an amortized loan.

Ordinary Annuity

A finite stream of identical recurring payments whose payments occur at the end of each period. Car loans and mortgages are examples.

Perpetuity

An infinite stream of cash flows that are paid or received with a regular frequency. In general, the word perpetuity is used to refer to a stream where all the cash flows are the same. Level perpetuity or constant perpetuity are other names.

Trial and Error

The process by which we solve for the internal rate of return (IRR). We try various discount rates until one the rate that sets the net present value (NPV) of an investment’s cash flows equal to zero.

Future Value (FV)

The future value of a lump sum, later on the timeline than the present value.

(C)

The payment amount in an annuity or perpetuity stream.

(r)

The periodic rate expressed in decimal form a nominal interest rate, a growth rate in dollars

(t)

The number of periods/payments, must be consistent with the interval of time over which a contract defines the periodic rate.

(PV)

The present value of a lump sum, earlier on the timeline than the future value.

(g)

The growth rate in a growing annuity expressed in decimal form.