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Finance Ch.1

Basics and Time Value of Money

Simple Interest interest earned only on principal (p = money you start with) [PV*r*n]
Compound/true interest Interest earned on principal + interest [FV-PV]
To calculate interest on interest Compound Interest - Simple interest
Annuity same cashflow every period, FINITE # of periods. (series of equal deposits)
Perpetuity Same cashflow each period, INFINITE # of periods
Compounding Frequency a factor in calculating future value when rate is NOT annual. (m = periods in a year, ex: m = 12 when r is compounded monthly)
Financial Planning Process 1 Determine current sit. 2 Develop goal 3 Identify alternatives 4 Evaluate alternatives 5 create and implement financial plan 6 Review and revise
Opportunity Cost what you give up when a choice is made (cost/trade-off)
Inflation Risk rising prices reduce the purchasing power of your money
Interest Rate Risk Changing rates affect your cost (when you borrow), and your benefits (when you save/invest)
Income Risk Changes to investment income
Liquidity Risk The ability to convert an asset into cash. Most stocks have low liquidity risk (high liquidity item)
Recent inflation trend Increased 2-4% each year
3 amounts needed to calculate the Time Value o fmoney Principal, interest rate, time
Interest Rate graph J-curve, faster incline over time
Future Value/Compounding earning interest on previously earned interest
Rule of 72 Divide 72 by the interest rate to find TIME for money to DOUBLE.
To find interest subtract FV-PV
Created by: Agardengirl