FIN 313 - Ch. 5 Vocab
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17 Terms
Compound interest
the situation in which interest paid on an investment during the first period is added to the principal. During the second period, interest is earned on the original principal plus the interest earned during the first period.
future value
the amount to which your investment will grow, or a future dollar amount.
future value factor
the value of (1 + r)n used as a multiple to calculate an amount’s future value.
simple interest
the product of the principal amount of a loan (P) multiplied the annual rate of interest (R) times a time variable (T) which equals the ratio of the loan period in days, divided by 365 days.
present value
the value in today’s dollars of a future payment.
present value factor
the value of 1/(1 + r)n used as a multiplier to calculate an amount’s present value is said to be selling at a premium.
annuity
a series of equal dollar payments made for a specified number of years.
ordinary annuities
an annuity in which the cash flows occur at the end of each period.
compound annuity
depositing an equal sum of money at the end of each year for a certain number of years and allowing it to grow.
annuity future value factor
the value of [{(1 + r)n − 1}/r] used as a multiplier to calculate the future value of an annuity.
annuity present value factor
the value of [{1 − (1 + r)−n}/r] used as a multiplier to calculate the present value of an annuity.
Annuities due
an annuity in which the payments occur at the beginning of each period.
amortized loans
a loan that is paid off in equal periodic payments.
annual percentage rate (APR)
The interest rate that indicates the amount of interest paid or earned in one year without compounding.
nominal or stated interest rate
the interest rate that the lender or credit card company states you are paying.
effective annual rate (EAR)
the annual compound rate that produces the same return as the nominal, or quoted, rate when money is compounded on a nonannual basis. In effect, the EAR provides the true rate of return.
perpetuity
an annuity with an infinite life.