Time Value of Money - Video Notes

A set of vocabulary-style flashcards covering the key concepts and formulas related to the Time Value of Money as presented in the video notes.

Time Value of Money (TVM)

The concept that money available today is worth more than the same amount in the future due to its potential to earn returns.

Time Preference Rate

The rate reflecting a preference for current consumption over future consumption, influencing TVM.

Required Rate of Return

The minimum return expected on an investment; equals Risk-Free Rate plus Risk Premium.

Risk-Free Rate

Theoretical return on an investment with no risk (baseline for TVM calculations).

Risk Premium

Additional return required to compensate for investment risk beyond the risk-free rate.

Opportunity Cost of Capital

The next best alternative foregone when choosing an investment; related to the required rate of return.

Present Value (PV)

Current value of a future cash flow when discounted at a given rate.

Future Value (FV)

Value at a future date of an amount invested now at a given rate.

Rate of Interest (r)

Annual percentage return used in TVM calculations.

Number of Years (n)

Time period (in years) over which money grows or is discounted.

Future Value Interest Factor (FVIF)

Factor (1+r)^n used to convert PV to FV in TVM calculations.

Compound Value / Compound Interest

Interest earned on both the initial principal and on accumulated interest, causing growth to accelerate.

Simple Interest

Interest calculated only on the initial principal, not on accumulated interest.

Compound Value of an Ordinary Annuity

FV of a series of equal payments made at the end of each period; formula involves ((1+r)^n − 1)/r.

Ordinary Annuity

A series of fixed payments made at the end of each period for a fixed term.

Annuity Due

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

Future Value of an Annuity (FV of Annuity)

Future value of a series of equal payments; FV = A [((1+r)^n − 1)/r] for ordinary annuity.

Sinking Fund

A pool of money set aside by a firm to repay a bond issue at maturity.

Sinking Fund Factor (CVAF)

A factor used to determine periodic payments needed to reach a target future value in a sinking fund.

Present Value Concept (PV)

Discounting future cash flows to determine their equivalent value today.

Discount Rate

Rate used to discount future cash flows to present value.

Discounting

Process of determining the present value of a series of future cash flows.

Net Present Value (NPV)

The difference between the present value of cash inflows and the present value of cash outflows; used in capital budgeting to assess profitability.