future value
Cash you will receive at a given future date
present value
Measure of cash that you have on hand today, measured at "time zero.
discounting
Used to find the present value of each cash flow at time zero.
compounding
Used to find the future value of each cash flow at the end of the investor's life
time zero
A point in time where financial managers make decisions
single amount
A lump sum amount either currently held or expected at some future date
mixed stream
a stream of cash flows that are NOT annuities because they are unequal periodic cash flows.
compound interest
interest that is earned on a given deposit and has become part of the principal at the end of a specified period
principal
the amount of money on which interest is paid
Equation for Future Value
PV x (1+i)^n
discounting cash flows
process of finding present values; the inverse of compounding interest.
present value equation
FV / (1+i)^n
annuity
a stream of equal periodic cash flows over a specified time period. the cash flows can be inflows (meaning you are receiving cash) or outflows (meaning you are paying cash)
ordinary annuity
An annuity for which the cash flow occurs at the END of each period.
annuity due
An annuity for which the flow occurs at the BEGINNING of each period.
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
semi-annual compounding
Compounding of interest over two periods within one year.
quarterly compounding
Compounding of interest over 4 PERIODS within 1 year
continuous compounding
Compounding of interest never stops
nominal annual rate
The annual rate of interest charged by a lender or promised by a borrower. This is the stated rate.
Effective (true) annual rate "EAR
Annual rate of interest actually paid or earned.
Annual Percentage Rate (APR)
Nominal annual rate of interest, found by multiplying the period rate by the number of periods in one year, that must be disclosed to consumers on credit cards and loans.
Annual Percentage Yield (APY)
Effective annual rate of interest that must be disclosed (Told) to consumers by banks on their savings products.
loan amortization
determination of the equal periodic loan payments needed to provide a lender with specified interest return and to repay the loan principal (original) amount over a specified period.
Share price maximization
The overall goal of a company