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Time Value of Money Calculations definitions

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  • Time Value of Money
    A principle stating that a sum is more valuable today than the same sum in the future due to its earning potential.
  • Compounding
    A process where interest is earned on both the initial amount and previously accumulated interest over time.
  • Discounting
    A method for determining the current worth of a sum to be received in the future by removing interest.
  • Interest
    An amount earned or paid for the use of money, typically expressed as a percentage of the principal.
  • Future Value
    An amount that a present sum will grow to after earning interest over a specified period.
  • Present Value
    The current worth of a future sum, calculated by removing interest that would be earned over time.
  • Interest Rate
    A percentage used to calculate how much interest is earned or paid over a period, often expressed as a decimal.
  • Timeline
    A visual tool used to map out cash flows and periods, aiding in understanding money's movement over time.
  • Cash Flow
    An amount of money invested or received at specific points in time, shown on a timeline.
  • Number of Periods
    A count of time intervals, such as years or months, over which money is invested or discounted.
  • Compound Interest
    Interest calculated on both the original principal and accumulated interest from previous periods.
  • Market Interest Rate
    A rate available in the financial market, used to determine how much interest can be earned or paid.
  • Fundamental Equation
    A formula, FV = PV × (1 + r)^n, used to calculate how much a present sum will be worth in the future.