Finance 4.2

• The concept of time value of money - a peso today, all things being equal, has greater value that a peso in the future because of the opportunity to invest and earn interest.
• Money is a limited resource. You cannot spend money and save it at the same time.
• Opportunity cost - anything given up after choosing an option.
• Opportunity cost - it is the possible income from one option or investment opportunity given up.
• Good money management - is a decision to invest either in money market, securities, stocks, bonds, real estate, or business venture.
• Annual interest - is the additional money earned from money in an account.
• Future value of money - is the amount your original funds will be worth in the future based on interest rate.
• Compouding - future value is also known as?
• Compouding - the new amount will also earn interest, which will again be added to the new principal which will again earn interest the following year.
• Present value - is today's worth of future money.
• Investor - puts his money in stocks, bond, or any other investments with an objective of earning income.
• Future value of money - investment + earned income
• Present value - determining today's worth of this future value.
• Discounting - present value is also known as?
• Compouding - makes money increase over time, given an interest rate.
• Investment options have different required capital and expected rate of return. You need to consider the initial capital required.
• Present value - will tell the initial amount of money required to achieve your target return at a given interest rate at a certain number of periods.
• ROI - will be received in the future and you want to buy that investment now.
• Factors that determine the PV of an investment:

  1. Rate the market gives
  2. Cash flows
  3. Number of periods these cash flows will continue
• Nominal interest rate - also called annual percentage rate or quoted rate.
• Nominal interest rate - indicates the interest rate paid or earned in one year without compounding
• Nominal interest rate - also known as simple interest rate.
• Effective annual rate - also known as effective interest rate.
• Effective annual rate - indicates the compound interest rate paid or earned in one year.
• Effective annual rate - is the true amount of interest you pay or earn in one year.
• Simple interest - interest earned or incured is based on the original principal.
• Compound interest - interest earned based on the original principal and interest earned from previous periods.
• Future value of money - the value of an investment (cash flow) at the end of n years earning after or incurring interest.