Time Value of Money - Vocab

Time Value of Money (TVM)

The concept that money available at the present time is worth more than the same amount in the future due to its potential earning capacity.

Future Value (FV)

The value of an investment or asset at a specified date in the future, based on an assumed rate of growth.

Present Value (PV)

The current worth of a future sum of money or stream of cash flows, discounted back at a specific rate of return.

Interest Rate (I/YR or I)

The cost of borrowing money or the rate of return on an investment, usually expressed as a percentage per period.

Compounding

The process by which the value of an investment grows because the earnings on the money itself earn interest as well.

Discounting

The process of determining the present value of a future sum of money or a stream of cash flows. It is the reverse of compounding.

Lump Sum

A single payment or receipt of money at a specific point in time.

Annuity

A series of equal payments or receipts that occur at regular intervals over a specified period.

Ordinary Annuity

An annuity in which payments occur at the end of each period.

Annuity Due

An annuity in which payments occur at the beginning of each period.

Nominal Interest Rate (INOM)

The stated annual interest rate that does not take into account the effect of compounding within the year.

Periodic Rate (IPER)

The interest rate per compounding period, calculated as the nominal rate divided by the number of compounding periods per year.

Effective Annual Rate (EAR or EFF%)

The annual rate of interest actually being earned or paid when compounding occurs more frequently than once a year.

Uneven Cash Flows

A series of cash inflows or outflows where the amounts are not the same in each period.

Perpetuity

An annuity that continues forever.

Loan Amortization

The process of paying off a loan over time through regular payments that cover both principal and interest.

Amortization Schedule

A table showing the breakdown of each loan payment into interest and principal, as well as the remaining loan balance.

Discount Rate

The interest rate used to calculate the present value of future cash flows, often reflecting the opportunity cost of capital or the risk associated with the cash flows.