Time Value of Money and Interest Calculations

Flashcards covering key concepts related to the time value of money, interest calculations, present and future values, and annuities.

Time Value of Money

The concept that the value of money changes over time, where a sum of money has greater value now than in the future due to its potential earning capacity.

Simple Interest

Interest calculated only on the principal amount, or on that portion of the principal amount which remains unpaid.

Compound Interest

Interest calculated on the initial principal, which also includes all of the accumulated interest from previous periods.

Future Value

The value of an investment or project at a specified date in the future, based on the anticipated growth rate.

Present Value

The current value of a future sum of money or stream of cash flows given a specified rate of return.

Annuity

A series of equal payments made at regular intervals over time.

Ordinary Annuity

An annuity where payments are made at the end of each period.

Annuity Due

An annuity where payments are made at the beginning of each period.

Discount Rate

The interest rate used to discount future cash flows to their present value.

Effective Interest Rate

The actual interest rate on a loan or investment after accounting for compounding.