Time Value of Money and Related Concepts

These flashcards cover key concepts related to the time value of money, interest rates, and loan amortization as discussed in the lecture.

Time Value of Money

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

Future Value

The value of an amount of money at a specified future date, calculated by applying compound interest.

Compound Interest

Interest that is earned on the initial principal and also on the accumulated interest from previous periods.

Present Value

The current dollar value of a future amount, determining how much needs to be invested today to equal that future amount.

Discount Rate

The interest rate used to discount future cash flows back to their present value; often considered the opportunity cost.

Continuous Compounding

Interest compounding an infinite number of times per year at the smallest possible time intervals.

Loan Amortization

The process of determining equal periodic payments necessary to repay a loan principal and interest over a specified period.

Amortization Schedule

A table outlining the distribution of each loan payment between interest and principal for a loan.

Interest Rate

The percentage of a loan charged as interest to the borrower, representing the cost of borrowing funds.

Required Return

The minimum return an investor expects to receive from an investment, related to the cost of obtaining funds by issuing equity.

Inflation

The general increase in prices and fall in the purchasing value of money.

Liquidity Preference

The tendency of investors to prefer short-term investments due to the immediacy of returns.

Real Rate of Interest

The interest rate that balances the supply of savings and the demand for investment funds in a hypothetical world without inflation.

Factors That Influence Interest Rate

Inflation, Risk, Liquidity Preference, Production Opportunities, and Time preferences