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3.6 Glossary of Terms
Glossary of Terms
Annuity (A): An equal payment made every period.
Cash flow diagram: A diagram showing the timing and value of cash inflows and outflows, as viewed from one party’s perspective.
Discount rate: The rate used to “move” cash flows to other time periods to account for the time value of money.
Discounting: The process of “moving” cash flows to other time periods while retaining economic equivalence.
End-of-period convention: all cash flows that occur within an interest period are added together and treated as if they occurred on the last day of the interest period. This simplifies calculations, but may introduce some error.
Future value (F): The nominal value of a cash flow at some future date.
Geometric gradient (g): A percentage amount by which each consecutive cash flow increases (or decreases) in a geometric gradient series.
Geometric gradient series: A series of cash flows in which each consecutive cash flow is larger or smaller than the previous by a percentage.
Inflation: An increase in the price level of goods and services in an economy over time. Negative inflation (i.e. decrease in the price level over time) is called deflation.
Interest: the cost of borrowing money. It is the amount of money that is paid in addition to the amount borrowed, loaned or invested.
Interest rate: a percentage rate applied on the principal, which is used to calculate the amount of interest generated in an interest period (the frequency that interest is calculated, e.g. monthly, bi-weekly, yearly).
Linear gradient(G): A constant amount by which each consecutive cash flow increases (or decreases) in a linear gradient series.
Linear gradient series: A series of cash flows in which each consecutive cash flow is larger or smaller than the previous by a constant dollar amount.
Nominal value: The numerical value of a piece of currency (e.g. $20.00 for a twenty-dollar bill).
Period (N): Length of time a series of cash flows covers.
Present value (P): The nominal value of a cash flow at a set “present” date. The present date can be specified as needed.
Principal: The amount of money lent/borrowed.
Purchasing power: A measure of the quantity of goods and services that can be purchased with a unit of currency.
Time value of money (TVM): The concept of a dollar today being worth more than a dollar tomorrow.
Uniform series: is a cash flow series in which the same amount of money (annuity) is paid or received in two or more sequential periods. Also called an annuity or equal-payment series.