Basic Tools of Finance

Vocabulary flashcards from a finance lecture on basic financial tools.

Present Value

The amount that would be needed today to yield that future sum at prevailing market interest rates.

Future Value

The amount a sum will be worth at a given future date when allowed to earn interest at the prevailing market interest rate.

Compounding

The accumulation of a sum of money where the interest earned on the sum earns additional interest.

Rule of 70

If a variable grows at a rate of x percent per year, that variable will double in about 70 divided by x years.

Risk Averse

Dislike of uncertainty.

Utility

A subjective measure of well-being that depends on wealth.

Diminishing Marginal Utility

The more wealthy a person is, the less extra utility he or she would get from an extra dollar.

Insurance

A person facing a risk pays a fee to the insurance company, which in return accepts the risk.

Adverse Selection

A high-risk person benefits more from insurance, so is more likely to purchase it.

Moral Hazard

People with insurance have less incentive to avoid risky behavior.