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Chapter 5
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Gravity
Terms in this set (16)
phrase time value of money
a dollar in hand today is worth more than a dollar promised at some time in the future
future value
amount of money an investment will grow to over some period of time at some given interest rate
-cash value of an investment at some time in the future
if you invest $100 at a 10% yearly interest rate, what will your future value be in 1 year?
$110
(1+r)=1+.10=$100x1.10=$110
$100 investment w/ 10% interest rate, what will you have after 10 years? (compound)
1 year= 110
110 x .10=11
110+11=121
compounding or compound interest
process of leaving your money and any accumulated interest in an investment for more than one period (reinvesting the interest)
compounding means ______ on _____
interest on interest
simple interest
interest is not reinvested, so interest is earned each period only on the original principal
FORMULA: future value interest factor FVIF(r,t)
$1 + (1+r)^t
future values depend critically on the ...
assumed interest rate, particularly for long-lived investments
in some cases, doubling the interest rate more than doubles the...
future value
present value
the current value of future cash flows discounted at the appropriate discount rate
instead of compounding the money forward into the future, we ______ it back to the present for present value
discount
FORMULA: present value
$1 + [1/(1+r)^t] = $1/(1+r)^t
$1/(1+r)^t is called the
discount factor
present value interest factor
calculating the present value of future cash flow to determine its worth today is commonly called
discounted cash flow (DCF) valuation
basic present value equation
PV x (1 + r)^t = FV
PV = FV /(1+r)^t = FV x [1/(1+r)^t]
t t
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