Economics Time Value Of Money Study Cards

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Time Value of Money

The concept that money available today is worth more than the same amount in the future due to its potential earning capacity.

Present Value

The current value of a future sum of money, taking into account the time value of money and potential interest or investment returns.

Future Value

The value of an investment or sum of money at a specific point in the future, considering the effects of compounding or interest.

Interest Rates

The percentage charged or earned on an amount of money, representing the cost of borrowing or the potential return on investment.

Compounding

The process of earning interest on both the initial principal and the accumulated interest from previous periods.

Discounting

The process of determining the present value of a future sum of money, taking into account the time value of money and potential interest or investment returns.

Annuities

A series of equal cash flows or payments received or paid at regular intervals over a specified period of time.

Perpetuities

An infinite series of equal cash flows or payments received or paid at regular intervals, continuing indefinitely.

Net Present Value

The difference between the present value of cash inflows and the present value of cash outflows over a specific time period, used to evaluate the profitability of an investment or project.

Internal Rate of Return

The discount rate at which the net present value of an investment or project is equal to zero, indicating the rate of return on the investment.

Time Value of Money Formulas

Mathematical equations and formulas used to calculate present value, future value, interest rates, and other related concepts in time value of money calculations.

Compounding Period

The frequency at which interest is added to the principal amount, such as annually, semi-annually, quarterly, or monthly.

Discount Rate

The rate used to discount future cash flows to their present value, reflecting the time value of money and the risk associated with the investment or project.

Opportunity Cost

The potential benefit or return that is given up or sacrificed when choosing one investment or course of action over another.

Compounding Factor

A multiplier used to calculate the future value of a present sum of money, taking into account the interest rate and compounding period.

Discount Factor

A multiplier used to calculate the present value of a future sum of money, taking into account the interest rate and discounting period.

Annuity Due

An annuity in which the cash flows or payments are made at the beginning of each period, rather than at the end.

Sinking Fund

A fund set up to accumulate money over time, usually through regular contributions, to meet a future financial obligation or goal.

Amortization

The process of gradually reducing or paying off a debt or loan through regular payments, typically consisting of both principal and interest.

Compound Interest

Interest that is calculated on both the initial principal and the accumulated interest from previous periods, resulting in exponential growth over time.

Simple Interest

Interest that is calculated only on the initial principal amount, without taking into account any accumulated interest from previous periods.

Annuity Payment

The fixed amount of money received or paid at regular intervals as part of an annuity.

Annuity Formula

A mathematical equation used to calculate the present value, future value, or payment amount of an annuity, based on the interest rate and number of periods.

Time Horizon

The length of time over which an investment or financial plan is expected to be held or implemented, influencing the time value of money calculations.

Risk-Free Rate

The theoretical rate of return on an investment with no risk, often used as a benchmark for comparing the performance of other investments.

Inflation

The rate at which the general level of prices for goods and services is rising, eroding the purchasing power of money over time.

Opportunity Cost of Capital

The return that could have been earned on an alternative investment of equal risk, used as a discount rate in time value of money calculations.

Risk Premium

The additional return or compensation required by an investor for taking on additional risk compared to a risk-free investment.

Discounted Cash Flow

A valuation method used to determine the present value of expected future cash flows, taking into account the time value of money.

Capital Budgeting

The process of evaluating and selecting long-term investment projects or expenditures, considering their potential cash flows and the time value of money.

Time Value of Money Tables

Pre-calculated tables or charts used to find the present value or future value of a sum of money, based on different interest rates and time periods.

Discounted Payback Period

The length of time required to recover the initial investment in a project or investment, taking into account the time value of money and discounted cash flows.

Capital Asset Pricing Model

A financial model used to determine the expected return on an investment, taking into account the risk-free rate, market risk premium, and beta of the investment.

Risk-Adjusted Discount Rate

A discount rate that incorporates the level of risk associated with an investment or project, reflecting the additional return required by investors for taking on higher risk.

Time Value of Money Applications

The practical use and application of time value of money concepts in various financial decisions, such as investment analysis, loan pricing, and retirement planning.

Compounding Frequency

The number of compounding periods within a given time period, such as annually, semi-annually, quarterly, monthly, or daily.

Discounting Frequency

The number of discounting periods within a given time period, such as annually, semi-annually, quarterly, monthly, or daily.

Time Value of Money Assumptions

The underlying assumptions and principles used in time value of money calculations, including the consistency of cash flows, constant interest rates, and rational decision-making.

Present Value of Annuity

The current value of a series of equal cash flows or payments received or paid at regular intervals over a specified period of time, taking into account the time value of money.

Future Value of Annuity

The value of a series of equal cash flows or payments at a specific point in the future, considering the effects of compounding or interest, taking into account the time value of money.

Loan Amortization

The process of gradually reducing or paying off a loan through regular payments, typically consisting of both principal and interest, over a specified period of time.

Present Value of Perpetuity

The current value of an infinite series of equal cash flows or payments received or paid at regular intervals, continuing indefinitely, taking into account the time value of money.

Future Value of Perpetuity

The value of an infinite series of equal cash flows or payments at a specific point in the future, continuing indefinitely, considering the effects of compounding or interest, taking into account the time value of money.

Time Value of Money Calculator

A tool or software used to perform time value of money calculations, such as present value, future value, interest rates, and annuities, based on user inputs.

Discounted Cash Flow Analysis

A method used to evaluate the financial feasibility of an investment or project by discounting the expected future cash flows to their present value, taking into account the time value of money.

Time Value of Money in Personal Finance

The application of time value of money concepts in personal financial decisions, such as saving for retirement, budgeting, and evaluating loan options.

Time Value of Money in Business Finance

The application of time value of money concepts in business financial decisions, such as capital budgeting, investment analysis, and financial planning.

Time Value of Money in Real Estate

The application of time value of money concepts in real estate investment and financing decisions, such as property valuation, mortgage calculations, and rental cash flow analysis.

Time Value of Money in Investment Analysis

The use of time value of money concepts in evaluating investment opportunities, calculating expected returns, and assessing the risk and profitability of different investment options.

Time Value of Money in Retirement Planning

The consideration of time value of money principles in retirement planning, such as determining the required savings, estimating future expenses, and evaluating investment strategies.

Time Value of Money in Loan Pricing

The incorporation of time value of money concepts in determining the interest rates, loan terms, and repayment schedules for loans, taking into account the risk and profitability of the lending institution.

Time Value of Money in Financial Decision-Making

The use of time value of money principles in making informed financial decisions, considering the potential impact of interest rates, inflation, and the time horizon on the value of money over time.