Question | Answer |
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 |