Time Value of Money
The concept that a dollar received today is worth more than a dollar received in the future and, therefore, comparisons between amounts in different time periods cannot be made without adjustments to their values.
Compound Interest
The effect of earning interest on interest, resulting from the reinvestment of interest paid on an investment's principal.
Principal
The face value of the deposit or debt instrument.
Present Value (PV)
The current value, that is, the value in today's dollars of a future sum of money.
Annual Interest Rate (I)
The rate charged or paid for the use of money on an annual basis.
Future Value (FV)
The value of an investment at some future point in time.
Reinvesting
Taking money that you have earned on an investment and plowing it back into that investment.
Future-Value Interest Factor
The value of (1 + i)n used as a multiplier to calculate an amount's future value.
Compounded Annually
With annual compounding, the interest is received at the end of each year and then added to the original investment. Then, at the end of the second year, interest is earned on this new sum.
Rule of 72
A helpful investment rule that states you can determine how many years it will take for a sum to double by dividing the annual growth rate into 72.
Discount Rate
The interest rate used to bring future dollars back to the present.
Present-Value Interest Factor
The value [1(1 + i)n] used as a multiplier to calculate an amount's present value.
Annuity
A series of equal dollar payments coming at the end of each time period for a specified number of time periods.
Compound Annuity
An investment that involves depositing an equal sum of money at the end of each year for a certain number of years and allowing it to grow.
Future-Value Interest Factor of an Annuity
A multiplier used to determine the future value of an annuity.
Present-Value Interest Factor of an Annuity (PVIFAi, n)
A multiplier used to determine the present value of an annuity.
Amortized Loan
A loan paid off in equal installments.
Perpetuity
An annuity that continues forever.