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Principles of Finance

Key Terms

Principles of FinanceKey Terms
annuity
a stream of regular, periodic payments to be received or paid
annuity due
a stream of periodic payments in which the payment or receipt occurs at the beginning of each period
constant perpetuity
a stream of periodic payments that is expected to continue indefinitely with no change in the amount paid or received
discount rate
an interest rate used in time value of money calculations to determine present value; may derive from several sources, such as stated contract rates, costs to borrow, or expected rates of return on investments
effective interest rate
the interest rate that results when compounding occurs multiple times within a year; the true cost of borrowing
growing perpetuity
a stream of periodic payments that is expected to continue indefinitely with growth of the amount paid or received in the future, usually by a fixed percentage
loan amortization
the scheduling of periodic repayment of a debt, typically involving regular payments or receipts of amounts that include both interest payment and repayment of the principal of the amount owed
lump sum
a single cash payment made in lieu of a series of future payments, such as a lottery payout or a legal settlement
ordinary annuity
a stream of periodic payments in which the payment or receipt occurs at the end of each period
perpetuity
a stream of periodic payments that is expected to continue indefinitely
preferred stock
shares of ownership in a corporation that typically entitle the holder to a fixed dividend per share, if declared by the corporation, with priority over holders of that corporation’s common stock
required rate of return
the minimum amount of return that an investor will accept on an investment given the level of risk involved
retirement planning
the process of determining one’s objectives for retirement, including one’s finances, and developing strategies and tactics to achieve them
structured settlements
monetary legal settlements that are paid out in installments, such as an annuity, rather than a lump sum cash amount
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