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Chapter 3 - Time Value of Money
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Terms in this set (10)
Time Value of Money
The difference in value between money today and money in the future the time value of money.
Interest Rate (r)
The rate at which money can be borrowed or lent over a given period.
Interest Rate Factor (1 + r)
One plus the interest rate, it is the rate of exchange between dollars today and dollars in the future. It has units of "$ in one year/$ today."
Present Value (PV)
The value of a cost or benefit computed in terms of cash today.
Future Value (FV)
The value of a cash flow that is moved forward in time.
Discount Rate
The appropriate rate to discount a cash flow to determine its value at an earlier time.
Timeline
A linear representation of the timing of (potential) cash flows.
Compounding
Computing the return on an investment over a long horizon by multiplying the return factors associated with each intervening period.
Compound Interest
The effect of earning "interest on interest"
FVn = C x (1 + r) x (1 + r) ... (1 + r)
FV = C x (1 + r) ^n
Present Value
PV = C / (1 + r)^n
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