II - Time Value of Money

Capital

Refers to wealth in the form of money or other assets owned by a person or organization that can be used for a particular purpose.

Equity Capital

Capital that is owned by individuals who have invested their money in a business project or venture.

Borrowed Capital

Obtained from lenders for investment with a promise to repay the principal amount.

Human Capital

Capital that is knowledge, skills, educations, experiences, and abilities of people.

Social Capital

Capital that is relationships, trust, networks, and cooperation among individuals or groups.

Natural Capital

Capital that are natural resources and environmental assets.

Cash Flow Diagram

A graphical representation of cash flows drawn on a time scale.

Single Cash Flow

Simples case involves the equivalence of a single present amount and its future worth.

Equal Uniform Series

Transactions arranged as a series of equal cash flows at regular intervals.

Linear Gradient Series

Cash flow that increase or decrease by uniform amount each period.

Geometric Gradient Series

Cash flows that increase or decrease by a fixed percentage.

Interest

The amount of money paid for the use of borrowed capital or income produced by money which has been loaned.

Simple Interest

The interest on a loan that is based only on the principal.

Ordinary Simple Interest

Interest that is computed on the basis of 12 months of 30 days each. Which is equivalent to 360 days a year.

Exact Simple Interest

Interest that is computed on the exact number of days in a given year which is 365 for a normal year and 366 days during the leap year.

Discount

The difference between the amount a borrower receives in cash and the amount he pays in the future.

Compound Interest

Interest which is based on the principal plus the precious accumulated interest.

Rate of Interest

The cost of borrowing money or the amount earned by a unit principal per unit time.

Nominal Rate of Interest

The basic annual rate of interest.

Effective Rate of Interest

The actual rate of interest earned on the principal during a one year period.

Continuous Compounding

Based on the assumption that cash payments occur once per year but compounding is continuous throughout the year.

Annuties

A serial of equal payments occurring at equal interval of time.

Ordinary Annuity

Type of annuity is one where the payment are made at the end of each period beginning from the first period.

Deferred Annuity

Annuity is one where the first payment is made several periods after the beginning of the annuity.

Annuity Due

The annuity due is when payments are made at the beginning of the payment period.

Perpetuity

Annuity where the payment extends forever.

Gradient Series

Series of cash flows where amounts change every period.

Arithmetic Gradient Series

One wherein the cash flows changes by the same amount in each cash flow period.

Capitalized Cost

The sum of its first cost and the present worth of all costs for replacement, operation, and maintenance for a long period or forever.

Amortization

Any mode of paying debt, the principal and the interest included, usually by a series of uniform amount every period.