Review Vocabulary

Annual percentage yield (APY) The effective interest rate per year. (p. 878)

Annual rate of inflation The additional proportionate cost of goods one year later. (p. 888)

Annuity A sequence of periodic payments. (pp. p. 884 p. 885)

Arithmetic growth Growth by a constant amount in each time period. (p. 872)

Bond A loan with repayment at the end of a fixed term and usually simple interest paid annually or semiannually. (p. 871)

Compound interest Interest that is paid on both the original principal and the accumulated interest. (p. 872)

Compound interest formula The formula for the amount in an account that pays compound interest periodically. For an initial principal and an effective rate per compounding period, the amount after compounding periods is . (p. 875)

Compounding period The fundamental interval on which compounding is based, within which no compounding is done. Also called simply period. (p. 872)

Constant dollars Costs are expressed in constant dollars if inflation or deflation has been taken into account by converting the costs to their equivalent in dollars of a particular year. (p. 890)

Continuous compounding Payment of interest in an amount toward which compound interest tends with more and more frequent compounding. (p. 881)

Current dollars The actual cost of an item at a point in time; inflation or deflation before or since then has not been taken into account. (p. 890)

Derivative A financial instrument whose value “derives” from the value of an underlying asset. (p. 893)

The base for continuous compounding, geometric (exponential) growth, and natural logarithms; (p. 880)

Effective rate The rate of simple interest that would realize exactly as much interest over the same period of time. (p. 878)

Exponential decay Geometric “growth” at a negative rate. (p. 889)

Exponential growth Geometric growth. (p. 875)

Geometric growth Growth proportional to the amount present. (p. 875)

Geometric series A sum of terms, each of which is the same constant times the previous term; that is, the terms undergo geometric growth. (p. 883)

Inflation A rise in prices from a set base year. (p. 888)

Interest Money earned on a savings account or other fund. (p. 870)

Linear growth Arithmetic growth. (p. 872)

Nominal rate A stated rate of interest for a specified length of time; a nominal rate does not take into account any compounding. (p. 874)

Payment formula The formula for the amount of a regular payment to pay off an amount in compounding periods, with interest rate per compounding period and compounding periods per year.

Present value The value today of an amount to be paid or received at a specific time in the future, as determined from a given interest rate and compounding period. (p. 887)

Principal Initial balance. (p. 870)

Purchasing power The purchasing power of a dollar a year from now, relative to today, with annual inflation rate is

Savings formula The formula for the amount accumulated after periods, with a uniform deposit of at the end of each compounding period and interest rate per period:

Simple interest Interest that is paid on the original principal only, not on any accumulated interest. (p. 871)

Sinking fund A savings plan to accumulate a fixed sum by a particular date, usually through equal periodic deposits. (pp. p. 884 p. 885)

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