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Unformatted text preview: Finance Test 2 Study guide Chapter 5: Time Value of Money Terms Time linehorizontal line on which time zero appears on the left side and future value periods are marked from left to right; can be used to depict investment cash flows. Compound interest Interest earned on a given deposit that has become part of the principal at the end of a specified period. Principal The amount of money on which interest is paid Future value The value of a present amount at a future date, found by applying compound interest over a specified amount of time. Future value interest factor The multiplier used to calculate, at a specified interest rate, the future value of a present amount as of a given time. Present value The current dollar value of a future amount; the amount of money that would have to be invested today at a given interest rate over a specified period to equal the future amount. Discounting cash flows The process of finding present value; the inverse of compounding interest. Present value interest factor The multiplier used to calculate, at a specified discount rate, the present value of an amount to be received in a future period. Annuity A stream of equal periodic cash flows, over a specified time period. These cash flows can be inflows of returns earned on investments or outflows of funds invested to earn future values. Ordinary annuity An annuity for which the cash flow occurs at the end of each period Annuity due An annuity for which the cash flow occurs at the beginning of each period Future value interest factor for a annuity The multiplier used to calculate the future value of an ordinary annuity at a specified interest rate over a given period of time. Present value interest factor for an annuity The multiplier used to calculate the present value of an ordinary annuity at a specified discount rate over a given period of time. Perpetuity An annuity with an infinite life, providing continual annual cash flow. Mixed stream a stream of unequal periodic cash flows that reflect no particular pattern. Semiannual compounding Compounding of interest over two periods within the year. Quarterly compounded compounding of interest over four periods within the year. Continuous compounding Compounding of interest an infinite number of times per year at intervals of microseconds. Nominal (stated) interest rate Contractual annual rate of interest charged by a lender or promised by a borrower. Effective (true) annual rate (EAR) The annual rate of interest actually paid or earned. Annual percentage rate (APR) The nominal annual rate of interest, found by multiplying the periodic rate by the number of periods in 1 year, that must be disclosed to consumers on credit cards and loans as a result of truthinlending laws Annual percentage yield (APY) The effective annual rate of interest that must be disclosed to consumers by banks on their savings products as a result of truthin...
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This note was uploaded on 05/07/2008 for the course FI 101 taught by Professor Richardson during the Fall '07 term at Fairfield.
 Fall '07
 Richardson
 Finance, Time Value Of Money, Future Value

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