Time value of money
Time value of money is the principle that money available now is worth more than the same amount later because it can earn a return over time.
Present value: The current worth of a future payment or stream of payments, discounted at a specified rate. It translates a later cash flow into an equivalent amount today.
Capital budgeting: The process of evaluating and selecting long-term investments in projects or assets. Discounted cash flows help determine whether a project’s future returns justify its cost.
Interest rate: The price of borrowing money or the return earned on lending or investing it, expressed over a period. It sets the rate at which present sums grow or future sums are discounted.
Simple interest: Interest calculated only on the original principal, without adding earlier interest to the base. Unlike compounding, it does not earn interest on accumulated interest.
Compound interest in medieval Europe: The historical practice and debate surrounding interest charged on accumulated debt in medieval European societies. Its lending practices raised questions about how money changes value with time.
Future value: The value a current sum or investment will reach after earning returns over a specified period. It measures how money available now can grow through time.
Bond valuation: The process of estimating a bond’s value from its expected coupon payments and principal repayment. Bond prices reflect the present value of payments arriving on different dates.
Cash flow: The movement of money into or out of a person, business, or project over time. Valuation starts by identifying the amounts and dates of payments.
Nominal interest rate: An interest rate stated without adjustment for inflation or, in some contexts, compounding within the year. It differs from a real rate, which accounts for changes in purchasing power.
Leonardo of Pisa: A thirteenth-century Italian mathematician, also known as Fibonacci, who wrote on commercial arithmetic. His arithmetic works helped transmit methods useful for merchants calculating interest.