Time Value of Money - Vocab

ssary of Key Terms

• Time Value of Money (TVM): The concept that money available at the present time is worth more than the same amount in the future due to its potential earning capacity.

• Future Value (FV): The value of an investment or asset at a specified date in the future, based on an assumed rate of growth.

• Present Value (PV): The current worth of a future sum of money or stream of cash flows, discounted back at a specific rate of return.

• Interest Rate (I/YR or I): The cost of borrowing money or the rate of return on an investment, usually expressed as a percentage per period.

• Compounding: The process by which the value of an investment grows because the earnings on the money itself earn interest as well.

• Discounting: The process of determining the present value of a future sum of money or a stream of cash flows. It is the reverse of compounding.

• Lump Sum: A single payment or receipt of money at a specific point in time.

• Annuity: A series of equal payments or receipts that occur at regular intervals over a specified period.

• Ordinary Annuity: An annuity in which payments occur at the end of each period.

• Annuity Due: An annuity in which payments occur at the beginning of each period.

• Nominal Interest Rate (INOM): The stated annual interest rate that does not take into account the effect of compounding within the year. Also known as the quoted or stated rate.

• Periodic Rate (IPER): The interest rate per compounding period, calculated as the nominal rate divided by the number of compounding periods per year (IPER = INOM / M).

• Effective Annual Rate (EAR or EFF%): The annual rate of interest actually being earned or paid when compounding occurs more frequently than once a year.

• Uneven Cash Flows: A series of cash inflows or outflows where the amounts are not the same in each period.

• Perpetuity: An annuity that continues forever.

• Loan Amortization: The process of paying off a loan over time through regular payments that cover both principal and interest.

• Amortization Schedule: A table showing the breakdown of each loan payment into interest and principal, as well as the remaining loan balance.

• Discount Rate: The interest rate used to calculate the present value of future cash flows, often reflecting the opportunity cost of capital or the risk associated with the cash flows.