Term
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Definition
| One of the five components of interest rates. This assumes no risk or uncertainty, simply reflecting differences in timing: the preference to spend now/pay back later versus lend now/collect later. |
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Term
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Definition
| One of the five components of interest rates. The market expects aggregate prices to rise, and the currency's purchasing power is reduced by a rate known as the inflation rate. Inflation makes real dollars less valuable in the future and is factored into determining the nominal interest rate. |
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Term
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Definition
| One of the five components of interest rates. What is the chance that the borrower won't make payments on time, or will be unable to pay what is owed? This component will be high or low depending on the creditworthiness of the person or entity involved. |
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Term
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Definition
| One of the five components of interest rates. Some investments are highly liquid, meaning they are easily exchanged for cash (U.S. Treasury debt, for example). Other securities are less liquid, and there may be a certain loss expected if it's an issue that trades infrequently. Holding other factors equal, a less liquid secuirty must compensate the holder by offering a higher interest rate. |
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Term
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Definition
| One of the five components of interest rates. All else being equal, a bond obligation will be more sensitive to interest rate fluctuations the longer to maturity it is. |
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Term
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Definition
| An important tool used in time value analysis: it is a graphical representation used to show the timing of cash flows. |
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Term
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Definition
| The amount to which a cash flow or series of cash flows will grow over a given period of time when compounded at a given interest rate. |
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Term
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Definition
| The value today of a future cash flow or series of cash flows. |
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Term
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Definition
| The arithmetic process of determining the final value of a cash flow or series of cash flows when compound interest is applied. |
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Term
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Definition
| Occurs when interest is earned on prior periods' interest. |
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Term
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Definition
| Occurs when interest is not earned on interest. |
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Term
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Definition
| Cash flow. Cash flows can be positive or negative. The cash flow for a particular period is often given as a subscript, CFt, where t is the period. Thus, CF0 = PV = the cash flow at Time 0, whereas CF3 is the cash flow at the end of Period 3. |
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Term
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Definition
| Dollars of interest earned during the year = Beginning amount x interest. |
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Term
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Definition
| Number of periods involved in the analysis. Sometimes the number of periods is designated with a lowercase n, so both N and n indicate a number of periods. |
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Term
| Equation for Finding Future Value on Compounded Interest |
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Definition
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Term
| Equation for Finding Future Value on Simple Interest |
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Definition
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Term
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Definition
| Interest gained on interest. |
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Term
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Definition
| The rate of return you could earn on an alternative investment of similar risk. |
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Term
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Definition
| The process of finding the present cash value of a cash flow or a series of cash flows; discounting is the reverse of compounding. |
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Term
| Equation for finding Present Value |
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Definition
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Term
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Definition
| A series of equal payments at fixed intervals for a specified number of periods. |
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Term
| Ordinary (Deferred) Annuity |
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Definition
| An annuity whose payments occur at the end of each period. |
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Term
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Definition
| An annuity whose payments occur at the beginning of each period. |
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Term
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Definition
| The future value of an annuity over N periods. |
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Term
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Definition
| The present value of an annuity of N periods. |
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Term
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Definition
| A perpetual bond issued by the British government to consolidate past debts; in general, any perpetual bond. |
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Term
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Definition
| A stream of equal payments at fixed intervals expected to continue forever. |
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Term
| Uneven (Nonconstant) Cash Flows |
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Definition
| A series of cash flows where the amount varies from one period to the next. |
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Term
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Definition
| This term designates equal cash flows coming at regular intervals. |
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Term
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Definition
| This term designates a cash flow that's not part of an annuity. |
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Term
| Nominal (Quoted, or Stated) Interest Rate (INOM) |
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Definition
| The contracted (or quoted or stated) interest rate. |
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Term
| Annual Percentage Rate (APR) |
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Definition
| The periodic rate times the number of periods per year. |
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Term
| Effective (Equivalent) Annual Rate (EFF% or EAR) |
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Definition
| The annual rate of interest actually being earned, as opposed to the quoted rate. Also, called the "equivalent annual rate". |
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Term
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Definition
| A loan that is repaid in equal payments over its life. |
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Term
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Definition
| A table showing precisely how a loan will be repaid. It gives the required payments on each payment date and a breakdown of the payment, showing how much is interest and how much is repayment of principal. |
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Term
| Future Value of an Ordinary Annuity |
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Definition
FVAN = PMT [((1+1)N - 1)/I]
This is the simplified version of:
FVAN = PMT(1+I)N-1 + PMT(1+I)N-2 + PMT (1+I)N-3... |
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Term
| Future Value of an Annuity Due Equation |
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Definition
| FVAdue = FVAordinary (1+I) |
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Term
| Present Value of An Ordinary Annuity Equation |
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Definition
PVAN = [1-((1/(1+I)^N))/I]
Simplified From:
PVAN = PMT/((1+I)^1) + PMT/((1+I)^2)...until at number. |
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Term
| Equation for PV of a Perpetuity |
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Definition
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Term
| PV of Uneven Cash Flow Equations |
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Definition
| PV = CF1/(1+I)1 + CF2/(1+I)2... |
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