Econ Ch 14
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Principal
The original amount of money invested

Invesment
The use of money to make more money in the future

Interest payment
Amount of money repaid to the lender in excess of principle

Interest Rate r
Interest payment (usually per year) divided by the principle

Future Value
The total value that the principal will produce at a defined future time when invested at rate r

Present Value
 The amount that, if invested at rate r, will produce the future value after the defined rate of time
 PV=FV/(1+r)^t

Compounding
 The process of interest payments increasing exponetially
 (1+r)^t

Discounting
Describes how much money a person must invest now to achieve a specific value in the future (the reverse of compounding)

Net Present Value (NPV)
 The present value of the benefits less the present value of the costs.
 NPV=PV(Benefits)PV(Costs)

Annuity/ Annual Value (AV)
 A payment that is made every year for a specified period
 Formula for present value of t payments starting next year is PV=[(1+r)^t1/r(1+r)^t] x AV

Perpetuity
An investment that pays a fixed annual amount forever