Time Value of Money Flashcards

Flashcards on Time Value of Money, Simple and Compound Interest, Future and Present Values, Multiple Cash Flows, Perpetuities and Annuities, Nominal Versus Real Cash Flows, Effective Annual Rate and Annual Percentage Rate

Simple Interest

Interest earned only on the original investment.

Compound Interest

Interest earned on interest plus the original investment.

Future Value (FV)

Amount to which an investment will grow after earning interest.

Present Value (PV)

Value today of a future cash flow.

Basic Financial Principle

A dollar today is worth more than a dollar tomorrow.

Perpetuity

Equally spaced, level stream of cash flows that never ends.

Annuity

Equally spaced, level stream of cash flows for a limited period of time.

Inflation

Rate at which prices as a whole are increasing.

Nominal Interest Rate

Rate at which money invested grows.

Real Interest Rate

Rate at which the purchasing power of an investment increases.

Effective Annual Rate (EAR)

Interest rate that is annualized using compound interest.

Annual Percentage Rate (APR)

Interest rate that is annualized using simple interest.