Econ Ch 14

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Econ Ch 14
2010-12-11 03:48:19

key terms
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  1. Principal
    The original amount of money invested
  2. Invesment
    The use of money to make more money in the future
  3. Interest payment
    Amount of money repaid to the lender in excess of principle
  4. Interest Rate r
    Interest payment (usually per year) divided by the principle
  5. Future Value
    The total value that the principal will produce at a defined future time when invested at rate r
  6. 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
  7. Compounding
    • The process of interest payments increasing exponetially
    • (1+r)^t
  8. Discounting
    Describes how much money a person must invest now to achieve a specific value in the future (the reverse of compounding)
  9. Net Present Value (NPV)
    • The present value of the benefits less the present value of the costs.
    • NPV=PV(Benefits)-PV(Costs)
  10. 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)^t-1/r(1+r)^t] x AV
  11. Perpetuity
    An investment that pays a fixed annual amount forever