Throughout this textbook, we will use a number of technical and shorthand terms to explain business, economic, and financial concepts. The terms are explained as they are introduced in the textbook chapters, but a number of them will be listed here so that the reader may become familiar with them before plunging into the technical topics or refer to this section for reminders.
- Principal: the amount of money involved in the debt or investment activity
- Interest Rate (i): the cost of borrowing money expressed as a percent over a time period
- Discount rate (i): used in place of an interest rate when calculating future or present values in an economic analysis, used to account for the time value of money
- Interest period: the frequency that interest is calculated (eg. daily, weekly, monthly, annually)
- Duration/Length: the total period of time that the loan/investment applies to. It is normally expressed in the total number of interest periods (N). Also known as the amortization period (for loans) or interest term.
- Receipts & Disbursements: money received and spent that make up a particular cash flow pattern over a specific length of time.
- o Receipts (or income): +ve
- o Disbursements (or expenses): -ve
- Future value of money (F): the result of the cumulative effect of earning interest over a number of interest periods
- Present value (P): the amount that a future sum of money is worth today, given a specific discount rate.
- Total Interest (I): the total amount of money earned (or paid) over a period of time due to the interest rate.
- Uniform Series: a series of equal payments, (A), that occur over a number of consecutive periods. Also called an equal-payment series or an annuity.
- Project: used sometimes to refer to the schedule of cash flows associated with a project or investment.
- When we say interest, we typically mean compound interest. Assume compound interest unless stated otherwise or unless simple interest is explicitly stated.