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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)^t-1/r(1+r)^t] x AV
Perpetuity
An investment that pays a fixed annual amount forever
Author
elainewest
ID
54933
Card Set
Econ Ch 14
Description
key terms
Updated
2010-12-11T08:48:19Z
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