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Time Value of Money Calculations definitions

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  • Time Value of Money
    Concept emphasizing that funds available now are more valuable than identical sums in the future due to earning potential.
  • Compounding
    Process of calculating how current funds grow over time by accumulating interest, including interest earned on previous interest.
  • Discounting
    Method for determining the current worth of a future sum by removing interest that would have been earned over time.
  • Interest
    Amount earned or paid for the use of money, typically expressed as a percentage of the principal over a period.
  • Future Value
    Amount that an investment will grow to after earning interest over a specified number of periods.
  • Present Value
    Current worth of a sum that will be received or paid in the future, adjusted for interest.
  • Interest Rate
    Percentage used to calculate how much interest is earned or paid on a principal amount over time.
  • Principal
    Initial amount of money invested or loaned, before any interest is added.
  • Timeline
    Visual tool used to map out cash flows and periods, aiding in understanding how money changes value over time.
  • Cash Flow
    Movement of money into or out of an account, often represented on a timeline to track investments or payments.
  • Period
    Unit of time, such as years or months, used in calculations to measure intervals for compounding or discounting.
  • Opportunity Cost
    Value of the next best alternative forgone when a financial decision is made, relevant in time value calculations.
  • Market Interest Rate
    Prevailing rate in the financial market used to determine how much interest is applied in time value calculations.