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Time Value of Money Equations definitions Flashcards

Time Value of Money Equations definitions
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  • Time Value of Money
    Financial principle stating that money available now is more valuable than the same amount in the future due to its earning potential.
  • Compounding
    Process where interest is earned on both the initial principal and previously accumulated interest, increasing value over time.
  • Discounting
    Method of determining the present worth of a future sum by removing the interest that would accrue over time.
  • Future Value
    Amount an investment will grow to at a specified date in the future, factoring in interest earned over time.
  • Present Value
    Current worth of a future sum of money, calculated by removing the interest that would be earned over time.
  • Interest Rate
    Percentage used to calculate how much interest is earned or paid over a period, often expressed as a decimal in formulas.
  • Number of Periods
    Total count of time intervals, usually years, over which money is invested or borrowed in time value calculations.
  • Market Interest Rate
    Prevailing rate in the financial market used for discounting or compounding in time value of money equations.
  • Lump Sum
    Single payment or receipt of money, as opposed to a series of payments, often used in basic time value calculations.
  • Annuity
    Series of equal payments made at regular, equal intervals, such as annually or semi-annually.
  • Ordinary Annuity
    Type of annuity where equal payments begin one period after the present, typically starting one year from now.
  • Timeline
    Visual representation used to map out cash flows, interest rates, and periods for time value of money problems.
  • Cash Flow
    Movement of money into or out of an account, often represented on a timeline to track payments or receipts.
  • Present Value Table
    Reference chart providing factors to simplify calculation of present values for annuities or lump sums.
  • Payment
    Fixed amount in each period of an annuity, denoted as PMT in time value of money equations.