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Finance 330: Chapter 5

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Time Line
A horizontal line on which time zero appears at the leftmost end and future periods are marked from left to right; can be used to depict investment cash flows.
Single Amount
A lump-sum amount either currently held or expected at some future date.
Annuity
A level periodic stream of cash flow.
Mixed Stream
A stream of cash flow that is not an annuity; a stream of unequal periodic cash flows that reflect no particular pattern.
Future Value
The value at a given future date of an amount placed on deposit today and earning interest at specified rate.
Compound Interest
Interest that is earned on a given deposit and has become part of the principal at the end of a specified period.
Principal
The amount of money on which interest is paid.
Present Value
The current dollar value of a future amount, the amount of money that would have to be invested today at a given interest rate over a specified period to equal the future amount.
Discounting Cash Flows
The process of finding present values; the inverse of compounding interest.
Annuity
A stream of equal periodic cash flows over a specified time period. These cash flows can be inflows of returns earned on investments or outflows of funds invested to earn future returns.
Ordinary Annuity
An annuity for which the cash flow occurs at the end of each period.
Annuity Due
An annuity for which the cash flow occurs at the beginning of each period.
Perpetuity
An annuity with an infinite life, providing continual annual cash flow.
Mixed Stream
A stream of unequal periodic cash flows that reflect no particular pattern.
Semiannual Compounding
Compounding of interest over two periods within the year.
Quarterly Compounding
Compounding of interest over four periods within the year.
Continuous Compounding
Compounding of interest an infinite number of times per year at intervals of microseconds.
Nominal (Stated) Annual Rate
Contractual annual rate of interest charged by a lender or promised by a borrower.
Effective (True) Annual Rate (EAR)
The annual rate of interest actually paid or earned.
Annual Percentage Rate (APR)
The nominal annual rate of interest, found by multiplying the periodic rate by the number of periods in one year, that must be disclosed to consumers on credit cards and loans as a result of "truth-in-lending laws."
Annual Percentage Yield (APY)
The effective annual rate of interest that must be disclosed to consumers by banking on their savings products as a result of "truth-in-savings laws."
Loan Amortization
The determination of the equal periodic loan payments necessary to provide a lender with a specified interest return and to repay the loan principal over a specified period.
Loan Amortization Schedule
A schedule of equal payments to repay a loan. It shows the allocation of each loan payment to interest and principal.