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# Chapter nine

### time value of money

Question | Answer |
---|---|

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. |