Finance TVM: Present and Future Values, Annuities

What does the Time Value of Money (TVM) mean?

Money today is worth more than the same amount in the future due to potential investment and interest.

Why is money today worth more than in the future?

It can be invested to earn interest, grow over time, and inflation can decrease its purchasing power.

What is Present Value (PV)?

The worth of money today.

What is Future Value (FV)?

The worth of money at a future date.

What is the definition of Interest?

Money earned or paid for borrowing or investing money.

What does Principal refer to?

The original amount of money invested or borrowed.

What is Discounting?

Finding the value of future money in today's dollars.

What is Compounding?

Growing today's money into a future amount by earning interest.

What is the Interest Rate?

The percentage earned or charged over a period of time.

What does Period refer to in financial terms?

The amount of time money is invested or borrowed.

What is the Future Value of 1 (FV of 1)?

The amount a single sum of money will grow to in the future after earning interest.

What is the Present Value of 1 (PV of 1)?

The value today of a single amount of money expected to be received in the future.

How does Future Value differ from Present Value?

Future Value moves forward in time while Present Value moves backward.

What is an Ordinary Annuity?

A series of equal payments made at the END of each period.

Give an example of an Ordinary Annuity.

Making a car payment at the end of each month.

What is an Annuity Due?

A series of equal payments made at the BEGINNING of each period.

Give an example of an Annuity Due.

Paying rent at the beginning of each month.

How does the timing of payments affect the future value of an annuity?

Annuity Due has a higher future value because payments are made earlier, allowing more time to earn interest.

Why does an Annuity Due have a higher future value than an Ordinary Annuity?

Payments are made earlier, giving each payment more time to earn interest.