Time Value of Money
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Flashcards covering key concepts and terminology from the Time Value of Money chapter.
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62 Terms
Future Value (FV)
The amount to which a cash flow or series of cash flows will grow over time when compounding at a given interest rate.
Present Value (PV)
The value today of a future cash flow.
Compounding
How often interest is applied.
Annuity
A series of equal cash payments at fixed intervals for a specific number of periods.
Ordinary Annuity
An annuity whose payments occur at the end of each period.
Annuity Due
An annuity whose payments occur at the beginning of each period.
Perpetuity
A stream of equal payments at fixed intervals expected to continue forever.
Discounting
The process of finding the present value of a cash flow or a series of cash flows.
Opportunity Cost
The rate of return you could have earned on an alternative investment of similar risk.
Nominal Interest Rate
The quoted interest rate that is annualized using simple interest.
Effective (Equivalent) Annual Rate (EAR)
The interest rate that reflects annualized compound interest; the actual annual rate earned or charged.
Real Interest Rate
Rate at which purchasing power is earned or paid.
Discount Rate
Interest rate used to compute the present value of future cash flows.
Cash Flow Stream
A collection of cash inflows and outflows over a set period.
Cash Payment (C)
The fixed amount of money paid in an annuity.
Interest Rate (r)
The percentage charged on borrowed funds or earned on invested funds.
Number of Years (t)
The duration over which cash payments are made or received.
Yield to Maturity (YTM)
The annual rate of return earned on a bond held until maturity.
Risk
The possibility of losing or earning less than expected on an investment.
Default Risk Premium (DRP)
The extra return demanded by investors for taking on the risk of default.
Liquidity Premium (LP)
The extra return required for taking on the risk of holding a security that may be difficult to sell.
Maturity Risk Premium (MRP)
The extra return demanded by investors for holding longer-term securities.
Bond
A long-term debt instrument in which a borrower agrees to make payments of principal and interest.
Nominal (contract) Rate (r)
The stated interest rate on a debt or security.
Convertible Bond
A bond that may be exchanged for a specified number of shares of common stock.
Callable Bond
A bond that allows the issuer to redeem it under specified terms prior to the maturity date.
Sinking Fund
A provision to pay off a loan over its life rather than all at maturity.
Future Value (FV)
The amount to which a cash flow or series of cash flows will grow over time when compounding at a given interest rate.
Present Value (PV)
The value today of a future cash flow.
Compounding
How often interest is applied.
Annuity
A series of equal cash payments at fixed intervals for a specific number of periods.
Ordinary Annuity
An annuity whose payments occur at the end of each period.
Annuity Due
An annuity whose payments occur at the beginning of each period.
Perpetuity
A stream of equal payments at fixed intervals expected to continue forever.
Discounting
The process of finding the present value of a cash flow or a series of cash flows.
Opportunity Cost
The rate of return you could have earned on an alternative investment of similar risk.
Nominal Interest Rate
The quoted interest rate that is annualized using simple interest.
Effective (Equivalent) Annual Rate (EAR)
The interest rate that reflects annualized compound interest; the actual annual rate earned or charged.
Real Interest Rate
Rate at which purchasing power is earned or paid.
Discount Rate
Interest rate used to compute the present value of future cash flows.
Cash Flow Stream
A collection of cash inflows and outflows over a set period.
Cash Payment (C)
The fixed amount of money paid in an annuity.
Interest Rate (r)
The percentage charged on borrowed funds or earned on invested funds.
Number of Years (t)
The duration over which cash payments are made or received.
Yield to Maturity (YTM)
The annual rate of return earned on a bond held until maturity.
Risk
The possibility of losing or earning less than expected on an investment.
Default Risk Premium (DRP)
The extra return demanded by investors for taking on the risk of default.
Liquidity Premium (LP)
The extra return required for taking on the risk of holding a security that may be difficult to sell.
Maturity Risk Premium (MRP)
The extra return demanded by investors for holding longer-term securities.
Bond
A long-term debt instrument in which a borrower agrees to make payments of principal and interest.
Nominal (contract) Rate (r)
The stated interest rate on a debt or security.
Convertible Bond
A bond that may be exchanged for a specified number of shares of common stock.
Callable Bond
A bond that allows the issuer to redeem it under specified terms prior to the maturity date.
Sinking Fund
A provision to pay off a loan over its life rather than all at maturity.
FV = PV(1 + r)^t
The future value of a single cash flow.
PV = FV(1 + r)^{-t}
The present value of a single future cash flow.
FVA_t = C * \frac{(1 + r)^t - 1}{r}
The future value of an ordinary annuity (payments at the end of each period).
PVA_t = C * \frac{1 - (1 + r)^{-t}}{r}
The present value of an ordinary annuity (payments at the end of each period).
FVA_{Due,t} = C * \left( \frac{(1 + r)^t - 1}{r} \right) * (1 + r)
The future value of an annuity due (payments at the beginning of each period).
PVA_{Due,t} = C * \left( \frac{1 - (1 + r)^{-t}}{r} \right) * (1 + r)
The present value of an annuity due (payments at the beginning of each period).
PV_{Perpetuity} = \frac{C}{r}
The present value of an infinite stream of equal cash payments.
EAR = \left(1 + \frac{r_{NOM}}{m}\right)^m - 1
The effective annual rate when compounding occurs m times per year for a nominal rate r_{NOM}.
Note 
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