# ChFC - HS300, Chap 06

## 28 terms

### Opportunity Cost

The loss of the use of an asset for a period of time deprives the owner of the benefits of having that asset.

### Time Value of Money

Money loses its value over time. A certain amount of money today is therefore equivalent to a greater amount of money in the future.

### Interest

Quantifies opportunity cost and risk.

### Risk-Free Rate

The interest rate at which money retains its value with respect to opportunity cost.

The interest rate on top of the risk-free rate required to induce investment due to the possibility of loss.
The greater the risk of loss, the greater the interest rate.

### Simple Interest

Is periodically applied to the original investment.

### Compount Interest

Is periodically applied to the pricipal plus all previously accrued interest.

### Compounding

The process by which a dollar today, a present value, grows over time to a larger amount.

### Discounting

The process by which a dollar due in the future, a future value, is reduced over time to a smaller amount today.

### Nominal Rate of Return

Yield on an investment expressed in current dollars, without factoring-in compounding or discounting or the effect of inflation.
An interest rate is called nominal if the frequency of compounding (e.g. a month) is not identical to the basic time unit (normally a year).

### Future Value of a Single Sum (FVSS)

The amount of money that will result from the investment of a lump sum of money today at a specific interest rate for a specific number of years.

(1 + i)^n

### Rule of 72

A shortcut for estimating how long it will take for an investment to double in value:

72 / i = n

### Present Value of a Single Sum

The amount of money that would need to be invested today to grow to a specific future value given a specific interest rate for a specific number of years.

1 / (1 + i)^n

### Annuity

A finite stream of equal periodic payments.

### Perpetuity

An infinite stream of equal periodic payment.

### Future Value of an Annuity (FVA)

The amount of money that will result from the investment of a series of equal payments, due at the END of the each peiod, at a specific interest rate for a specific number of years.

### Future Value of an Annuity Due (FVAD)

The amount of money that will result from the investment of a series of equal payments, due at the BEGINNING of the each peiod, at a specific interest rate for a specific number of years.

### FVA Formula

PMT * ((1 + i)^n - 1) / i

PMT FVA Formula (1 + i)

PMT * ((1 + i)^n - 1) / i ))(1 + i)

### Sinking Fund

In modern finance, a sinking fund is a method by which an organization sets aside money over time to retire its indebtedness.

### Present Value of an Annuity (PVA)

The amount of money required to fund a future series of equal, periodic payments at a specific interest rate.

### PVA Formula

PMT * (1 - (1/(1 + i)^n)) / i

PVA Formula * (1 + i)

PMT * ((1 - (1/(1 + i)^n)) / i)(1 + i)

### Deferred Annuity

Regular payments that will begin in the future, not during the current period.

### Debt Service Problem

Determining the size of periodic payments when repaying a debt, such as a car loan.

### Amortization Schedule

Displays the size of a debt service payment with the amounts towards interest and principal broken down.