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FA - Chapter 5
Time Value of Money
25
Business
Undergraduate 2
03/28/2011

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Term
Time Line
Definition
An important tool used in time value analysis; it is a graphical representation used to show the timing of cash flows.
Term
Future Value (FV)
Definition
The amount to which a cash flow or series of cash flows will grow over a period of time when compounded at a given interest rate.
Term
Present Value (PV)
Definition
The value today of a future cash flow or series of cash flows.
Term
Compounding
Definition
The arithmetic process of determining the final value of a cash flow or series of cash flows when compound interest is applied.
Term
Compound Interest
Definition
Occurs when interest is earned on prior periods' interest.
Term
Simple Interest
Definition
Occurs when interest is not earned on interest.
Term
Opportunity Cost
Definition
The rate of return you could earn on an alternative investment of similar risk.
Term
Discounting
Definition
The process of finding the present value of a cash flow or a series of cash flows; discounting is the reverse of compounding.
Term
Annuity
Definition
A series of equal payments at fixed intervals for a specified number of periods.
Term
Ordinary (Deferred) Annuity
Definition
An annuity whose payments occur at the end of each period.
Term
Annuity Due
Definition
An annuity whose payments occur at the beginning of each period.
Term
FVAn
Definition
The future value of an annuity over N periods.
Term
PVAn
Definition
The present value of an annuity of N periods.
Term
Consol
Definition
A perpetual bond issued by the British government to consolidate past debts; in general, any perpetual bond.
Term
Perpetuity
Definition
A stream of equal payments at fixed intervals expected to continue forever.
Term
Uneven (Nonconstant) Cash Flows
Definition
A series of cash flows where the amount varies from one period to the next.
Term
Payment (PMT)
Definition
The term designates equal cash flows coming at regular intervals.
Term
Cash Flow (CFt)
Definition
The term designates a cash flow that's not part of an annuity.
Term
Annual Compounding
Definition
The arithmetic process of determining the final value of a cash flow or series of cash flows when interest is added once a year.
Term
Semiannual Compounding
Definition
The arithmetic process of determining the final value of a cash flow or series of cash flows when interest is added twice a year.
Term
Nominal (Quoted, or Stated) Interest Rate, Inom
Definition
The contracted (or quoted or stated) interest rate.
Term
Annual Percentage Rate (APR)
Definition
The periodic rate times the number of periods per year.
Term
Effective (Equivalent) Annual Rate (EFF% or EAR)
Definition
The annual rate of interest actually being earned, as opposed to the quoted rate. Also called the "equivalent annual rate."
Term
Amortized Loan
Definition
A loan that is repaid in equal payments over its life.
Term
Amortization Schedule
Definition
A table showing precisely how a loan will be repaid. It gives the required payment date and a breakdown of the payment, showing how much interest and how much is repayment of principal.
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