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Time Value of Money
Time Value of Money Concepts
| Question | Answer |
|---|---|
| time value of money | money can be invested today to earn interest and grow to a larger dollar amount in the future |
| compound interest | includes interest not only on the initial investment but also on the accumulated interest in previous periods |
| effective interest rate | rate at which money actually will grow during a full year |
| monetary assets | include money and claims to receive money, the amount of which is fixed or determinable |
| monetary liabilities | obligations to pay amounts of cash, the amount of which is fixed or determinable |
| credit-adjusted risk-free rate of interest | used when applying the expected cash flow approach to the calculation of present value |
| annuity | series of equal cash flows to be received or paid each period |
| ordinary annuity | cash flows occur at the end of each period |
| annuity due | cash flows occur at the beginning of each period |
| deferred annuity | first CF occurs more than one period after the date the agreement begins |