Time Value of Money - Vocabulary Flashcards

Vocabulary terms and definitions related to time value of money concepts including interest types, valuation techniques, and annuity types.

Simple Interest

Interest computed strictly on the initial principal investment using the formula: initial investment times annual interest rate times period of time.

Compound Interest

Interest earned on both the initial principal investment and on accumulated interest earned in previous periods.

Effective Interest Rate

The actual annual rate of interest earned or charged, calculated by dividing total annual interest earned by the initial investment amount when interest compounds multiple times per year.

Future Value of a Single Amount

The amount to which a current sum of money will grow at a specified future date when invested at a given interest rate, calculated as $FV = Investment \times (1 + i)^n$.

Present Value of a Single Amount

The current value of a future sum of money, calculated by discounting the future amount back to the present using an interest rate for a specific number of periods: $PV = \frac{FV}{(1 + i)^n}$.

Annuity

A series of uniform cash flows of equal amounts received or paid in each period over a specified period of time.

Ordinary Annuity

An annuity in which equal cash payments or receipts occur at the end of each compounding period.

Annuity Due

An annuity in which equal cash payments or receipts occur at the beginning of each compounding period.