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FIN 320 Chapter 5
The Time Value of Money
Question | Answer |
---|---|
Simple Interest | Interest is earned on principal. $100 invested at 6% per year: 1st year interest earned: $6.00 2nd year interest earned: $6.00 3rd year interest earned: $6.00 Total interest earned: $18.00 |
Compound Interest | Interest is earned on previously earned interest. |
Compounding | Translating $1 today into its equivalent in the future. |
Discounting | Translating $1 in the future to its equivalent today. |