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inflation

disinflation

reflation

hyperinflation

A general and progressive increase in prices

a reduction in the rate of inflation

restoration of economic activity, consumer prices, etc., to h…

inflation that is out of control

inflation

A general and progressive increase in prices

disinflation

a reduction in the rate of inflation

bank

cash

compound Interest

compounding

a financial institution that provides various products and se…

money in the form of paper currency or coins (as distinct fro…

earning interest on interest through reinvesting. The result…

the process of leaving an initial investment plus accumulated…

bank

a financial institution that provides various products and se…

cash

money in the form of paper currency or coins (as distinct fro…

Present Value formula?

Future value: find n when interest is…

Future value: find i when compounded?

Ordinary annuity

PV=FV/(1+r)^n

n=number of compounding periods... ex: an amount over 5 years t…

i=yearly interest per period... ex: i=6% for amount that compou…

Series of equal payment to be received at the end of the period

Present Value formula?

PV=FV/(1+r)^n

Future value: find n when interest is…

n=number of compounding periods... ex: an amount over 5 years t…

future value

The only feasible purpose of financial…

The objective of wealth maximization t…

Financial management mainly focuses on

the amount of money in the future that an amount of money tod…

Wealth Maximization

Amount of returns expected... Timing of anticipated returns... Risk…

All elements of acquiring and using means of financial resour…

future value

the amount of money in the future that an amount of money tod…

The only feasible purpose of financial…

Wealth Maximization

Principal

Fixed Interest Rate

Risk

Inflation

The original amount of money invested or saved.

The rate will not change for the lifetime of the investment.

The uncertainty of the outcome of an investment.

The steady rise in the general level of prices.

Principal

The original amount of money invested or saved.

Fixed Interest Rate

The rate will not change for the lifetime of the investment.

Amortized Loan

Annuity

Compound annuity

Compounding

a loan paid off in equal installments composed of both princi…

a series of equal payments; these payments are made at the en…

an investment that involves depositing the same amount of mon…

the number of periods during the year where interest is calcu…

Amortized Loan

a loan paid off in equal installments composed of both princi…

Annuity

a series of equal payments; these payments are made at the en…

Nominal Risk-Free Rate

Real Risk-Free Rate

Required Interest Rate on a Security

Effective Annual Rate

Real Risk-Free Rate + Expected Inflation Rate

A theoretical rate on a single-period loan when there is no e…

= Nominal Risk-Free Rate... + Default Risk Premium... + Liquidity P…

= (1 + periodic rate)ᵐ-1

Nominal Risk-Free Rate

Real Risk-Free Rate + Expected Inflation Rate

Real Risk-Free Rate

A theoretical rate on a single-period loan when there is no e…

Present Value

Future Value

Interest Rate

Symbol for Time

earlier money on a time line ... -Cash Outflow ... PV

later money on a time line ... Cash inflow ... FV

exchange rate between earlier money and later money ... I/Y

N

Present Value

earlier money on a time line ... -Cash Outflow ... PV

Future Value

later money on a time line ... Cash inflow ... FV

Present value (PV)

Future value (FV)

Cash flows

Time value of money

Moving money backward in time to calculate a value today

Moving money forward in time to calculate a value at a specif…

A series of cash payments received or paid out

Money today is worth more than the same money in the future

Present value (PV)

Moving money backward in time to calculate a value today

Future value (FV)

Moving money forward in time to calculate a value at a specif…

Rational decision

Self-interest

Net Benefit

Marginal Benefit

benefits the decision maker as much as possible

an individual makes decisions for his or her own benefit

benefits (measured in dollars) minus the cost of the choice

the additional benefit of doing something one more time

Rational decision

benefits the decision maker as much as possible

Self-interest

an individual makes decisions for his or her own benefit

Future Value

compounding

interest on interest

compound interest

The amount an investment is worth after one or more periods.

The process of accumulating interest in an investment over ti…

Interest earned on the reinvestment of previous interest paym…

Interest earned on both the initial principal and the interes…

Future Value

The amount an investment is worth after one or more periods.

compounding

The process of accumulating interest in an investment over ti…

Time value of money

Discount

Interest rate

Opportunity cost

As a topic in investment mathematics deals with equivalence r…

Cut the value of a payment based on how much time passes befo…

A rate of return that reflects the relationship between diffe…

The value that investors forego by choosing a particular cour…

Time value of money

As a topic in investment mathematics deals with equivalence r…

Discount

Cut the value of a payment based on how much time passes befo…

Time value of money

Interest Rate

Risk

Inflation

States that a dollar has a greater value at the present time…

Amount of money that will be paid to an investor for allowing…

The amount of uncertainty in the investment and its future gr…

The rise of the price of goods and services in our economy.

Time value of money

States that a dollar has a greater value at the present time…

Interest Rate

Amount of money that will be paid to an investor for allowing…

Time value of money

Rule of 72

Annual Percentage Rate (APR)

Usury laws

Money is worth more today than the same amount of money in th…

Tool that helps you figure out how long it will take to doubl…

The true cost of credit that must disclosed on the loan agree…

Laws against charging unfair interest rates for loans

Time value of money

Money is worth more today than the same amount of money in th…

Rule of 72

Tool that helps you figure out how long it will take to doubl…

What is an Interest Rate?

real risk-free rate

inflation premium

default risk

1) The price of money or required rate of return... 2) An opport…

delaying consumption

the loss of purchasing power

the risk of getting stiffed

What is an Interest Rate?

1) The price of money or required rate of return... 2) An opport…

real risk-free rate

delaying consumption

Time Value of Money

Compounding

Discounting

Perpetuity

The idea that it is only possible to compare cash flows occur…

The process of moving cash forward in time over more than one…

The process of moving cash backwards in time. When interest r…

A stream of cash flows that is received over equal, periodic…

Time Value of Money

The idea that it is only possible to compare cash flows occur…

Compounding

The process of moving cash forward in time over more than one…

Principal

Compound Interest

Economics

Time Value of Money

Finance. a capital sum, as distinguished from interest or pro…

interest paid on both the principal and on accrued interest.

(used with a singular verb) the science that deals with the p…

what the money is worth at that time

Principal

Finance. a capital sum, as distinguished from interest or pro…

Compound Interest

interest paid on both the principal and on accrued interest.

Present Value

Future Value

Rate of Return

Compounding

PV: what the investment is worth today. pv should be less tha…

FV: what the investment is worth in the future

ROR: the growth rate of an investment over the years

the idea of earning interest on interest

Present Value

PV: what the investment is worth today. pv should be less tha…

Future Value

FV: what the investment is worth in the future

time value of money

compounded interest

necessary adjustments to i and n

future value of a lump sum

compounded interest

earns interest on both principal invested as well as all prev…

i % number of compounds per year... n * number of compounds per…

pv * future value factor (i, n)

time value of money

compounded interest

compounded interest

earns interest on both principal invested as well as all prev…

would you want money now or later

Comparing cash flows of different proj…

timeline

Interest

now because of interest

- time : sure dollar today is worth more than a dollar tomorr…

-cash outflows (negative values) ... -cash inflows (positive val…

-the cost of borrowing money to use for certain period of tim…

would you want money now or later

now because of interest

Comparing cash flows of different proj…

- time : sure dollar today is worth more than a dollar tomorr…

Interest Rate

Time Factor

Simple Interest

Reinvesting

the percentage that is used to calculate interest expressed a…

length of time for which interest will be changed.

interest on an investment if not reinvested.

leaving principal and adding interest to accumulate interest.

Interest Rate

the percentage that is used to calculate interest expressed a…

Time Factor

length of time for which interest will be changed.

Measurement and recording of liabiliti…

Time Value of Money

Simple Interest

Simple Interest Equation

Time Value of Money

= Compound Interest

Earns interest on the principal invested only... _ amount earned…

Principal X Rate X Time

Measurement and recording of liabiliti…

Time Value of Money

Time Value of Money

= Compound Interest

bank

cash

compound interest

compounding

a financial establishment that invests money deposited by cus…

money in the form of coins or banknotes, especially that issu…

interest paid on both the principal and on accrued interest.

Compounding is the process where the value of an investment i…

bank

a financial establishment that invests money deposited by cus…

cash

money in the form of coins or banknotes, especially that issu…

Bank

Cash

Compound Interest

Decision

a financial establishment that invests money deposited by cus…

money in coins or notes, as distinct from checks, money order…

Compound interest is interest calculated on the initial princ…

a conclusion or resolution reached after consideration

Bank

a financial establishment that invests money deposited by cus…

Cash

money in coins or notes, as distinct from checks, money order…

Annual Percentage Rate (APR)

Effective Annual Rate (EFF or EAR)

EFF=

APR=

The rate typically quoted on a loan agreement is equal to the…

is annual rate of interest actually being earned, as opposed…

...

...

Annual Percentage Rate (APR)

The rate typically quoted on a loan agreement is equal to the…

Effective Annual Rate (EFF or EAR)

is annual rate of interest actually being earned, as opposed…

Important to understand the role that…

Time Value

Specified sum today

The present value technique

We operate in the present time, therefore it is crucial to be…

Time value calculations can be made using the future value or…

The amount of cash at a particular date in the future that is…

refers to the current value of one or more future cash paymen…

Important to understand the role that…

We operate in the present time, therefore it is crucial to be…

Time Value

Time value calculations can be made using the future value or…

Bank

Cash

Compound Interest

Compounding

a financial institution licensed to receive deposits and make…

legal tender or coins that can be used to exchange goods, deb…

interest calculated on the initial principal and also on the…

the process where the value of an investment increases becaus…

Bank

a financial institution licensed to receive deposits and make…

Cash

legal tender or coins that can be used to exchange goods, deb…

Future Value at the end of period n

Present Value of Future Amount

Future Value of Ordinary Annuity

Present Value of Ordinary Annuity

FVn = PV x (1+r)ⁿ

PV= FVn/(1+r)ⁿ

FVn = CF x {[(1+r)ⁿ - 1]/r}

PVn= (CF/r) x [1- 1/(1+r)ⁿ]

Future Value at the end of period n

FVn = PV x (1+r)ⁿ

Present Value of Future Amount

PV= FVn/(1+r)ⁿ

bank

cash

compound Interest

compounding

a financial institution that provides various products and se…

money in the form of paper currency or coins (as distinct fro…

earning interest on interest through reinvesting. The result…

the process of leaving an initial investment plus accumulated…

bank

a financial institution that provides various products and se…

cash

money in the form of paper currency or coins (as distinct fro…

bank

cash

compound Interest

compounding

a financial institution that provides various products and se…

money in the form of paper currency or coins (as distinct fro…

earning interest on interest through reinvesting. The result…

the process of leaving an initial investment plus accumulated…

bank

a financial institution that provides various products and se…

cash

money in the form of paper currency or coins (as distinct fro…

Present Value

Discounted

DCF

Amount (problem)

Value of a sum at a future time is the amount that must be de…

This value of a sum is its present value.

Discounted Cash Flow... present value, $95.38 is the discounted…

This type of problem involves a single amount of $ that grows…

Present Value

Value of a sum at a future time is the amount that must be de…

Discounted

This value of a sum is its present value.

Effective Annual Rate

convert an annual stated rate to the E…

annuity

ordinary annuities and annuities due

rate of interest that investors actually realize as a result…

e^r - 1 = EAR... 6% stated rate - enter .06 [2nd] [e^x] - 1 = .…

is a stream of equal cash flows that occurs at equal interval…

ordinary = cash flows that occur at the end of each compoundi…

Effective Annual Rate

rate of interest that investors actually realize as a result…

convert an annual stated rate to the E…

e^r - 1 = EAR... 6% stated rate - enter .06 [2nd] [e^x] - 1 = .…

Discuss the nature of depreciation (FI…

Discuss the nature of risk measurement

interest rate risk, equity risk, commo…

Describe the nature of cash flows (FI:…

...

...

...

A revenue or expense stream that changes a cash account over…

Discuss the nature of depreciation (FI…

...

Discuss the nature of risk measurement

...