Basics and Time Value of Money
Quiz yourself by thinking what should be in
each of the black spaces below before clicking
on it to display the answer.
Help!
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Simple Interest | interest earned only on principal (p = money you start with)
[PV*r*n]
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Compound/true interest | Interest earned on principal + interest [FV-PV]
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To calculate interest on interest | Compound Interest - Simple interest
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Annuity | same cashflow every period, FINITE # of periods. (series of equal deposits)
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Perpetuity | Same cashflow each period, INFINITE # of periods
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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)
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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
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Opportunity Cost | what you give up when a choice is made (cost/trade-off)
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Inflation Risk | rising prices reduce the purchasing power of your money
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Interest Rate Risk | Changing rates affect your cost (when you borrow), and your benefits (when you save/invest)
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Income Risk | Changes to investment income
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Liquidity Risk | The ability to convert an asset into cash. Most stocks have low liquidity risk (high liquidity item)
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Recent inflation trend | Increased 2-4% each year
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3 amounts needed to calculate the Time Value o fmoney | Principal, interest rate, time
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Interest Rate graph | J-curve, faster incline over time
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Future Value/Compounding | earning interest on previously earned interest
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Rule of 72 | Divide 72 by the interest rate to find TIME for money to DOUBLE.
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To find interest | subtract FV-PV
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Created by:
Agardengirl
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