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.
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