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Chapter nine

time value of money

QuestionAnswer
Amoritized loan A loan hat requires equal payments over its life; the payments include both interest and repayment of the debt.
Amoritization schedule A schedule showing precisely how a loan wil be repaid. It gives the required payment on each payment date and a breakdown of the payment, showing how much is interseted and how much is repayment of principal.
Annual compounding The arithmetic process of determining the final value of a cash flow or a series of cash flows when interest is paid once a year.
Annual percentage rate,APR The rate reported to borrowers - the periodic rate times the number of periods in the year; thus, interest compounding is not considered.
Annuity A series of payments of an equal amount at fixed, equal interval for a specific number of periods.
Annuity due An annuity whose payments occur at the beginning of each period.
Cash flow time line An important tool used in time value of money annalysis; it is a graphical representation used to show tthe timing of cash flows.
Compound interest Interest earned on interest that is reinvested.
Compounding The process of determining the value of a cash flow or series of cash flows some time in the future when compound interest is applied.
Consol A perpetual bond issued by the British government to consolidate past debts; in general, any perpetual bond.
Discounting The process of finding the present value of a cash flow or a series of cash flows received(paid) in the future; the reverse of compounding.
Effective annual rate,EAR( annual percentage yield,APY) The annual rate earned or paid considering interest compounding during the year - that is, the annual rate that equates to a given periodic rate compounded for periods during the year.
Future Value(FV) The amount to which a cash flow or series of cash flows will grow over a given period of time when compounded at a given rate of interest.
Inflow A receipt of cash from an investment, an emplyer, or other sources.
Opportunity cost rate The rate of return on the best available aleternative investment of equal risk.
Ordinary(deferred) annuity An annuity whose payments occur at the end of each period.
Outflow A payment, or disbusement, of cash for expenses, investments and so forth.
Payment(PMT) This term designates constant cash flows - that is , the amount of an innuity payment.
Periodic rate, kPER The rate charged by a lender or paid by a borrower paid each interest period.
Perpituity A stream of equal payments expected to continue forever.
Present Value(PV) The value today - that is, current value- of a future cash floe or series of cash flows.
Semiannual compounding The arithmetic process of determining the final value of a cash flow or a series of cash flows when interest is paid twice a year.
Simpple, or qouted rate,kSIMPLE The rate qouted by borrowers and lenders that is used to determine the rate earned per compounding period( periodic rate ).
Terminal value The future vlue of a cash flow stream.
Time value of money The principles and computations used to revalue cash payoffs at different times so they are stated in dollars of the same period; used to convert dollars from one time period to those of another period.
Created by: $amoney on 2006-11-08



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