[FDNBUSF] Unit 3 & 4: Compound Interest & Annuities

Compounding

involves the calculation of interest periodically over the life of the loan or investment

Compound Interest

the interest on the principal plus the interest of prior periods

Future Value

the final amount of the loan or investment at the end of the last period

Present Value

the value of a loan or investment today

Number of periods

number of years multiplied by the number of times the interest is compounded per year

Rate for each period

annual interest rate divided by the number of times the interest is compounded per year

Effective rate

(Truth in Savings law) the percentage rate expressing the total amount of interest that would be received on a $100 deposit based on the annual rate and frequency of compounding for a 365-day period

Nominal Rate

the rate on which the bank calculates interest.

Annuity

a series of payments of equal amounts at equal intervals for a specified number of periods

Term of the annuity

the time from the beginning of the first payment period to the end of the last payment period

Future value of annuity

The future dollar amount of a series of payments plus interest.

Present value of an annuity

the amount of money needed to invest today in order to receive a stream of payments for a given number of years in the future

Ordinary Annuity

an annuity whose payments occur at the end of each period

Annuity Due

an annuity whose payments occur at the beginning of each period

Sinking Fund Payments

a financial arrangement that sets aside regular periodic payment of a particular amount of money

Lump-sum

a single payment

Annuity

a stream of payments over the term of the annuity

Annuities Certain

have a specific stated number of payments

Contingent Annuities

have no fixed number of payments but depend on an uncertain event

Annuities Certain

regular deposits/payments made at the beginning of the period

Contingent Annuities

regular deposits/payments made at the end of the period