Glossary of Introduction to Finance

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Simple Interest
Method of calculating interest in which, during the entire term of the loan, interest is computed on the original sum borrowed.
principal (or principal sum)
Amount borrowed at the outset of a debt contract.
Future Sum.
Amount to which a present sum, such as a principal, will grow (accumulate) at a future date,
Present Value.
Amount that corresponds to today's vlaue of a promised future sum.
Compound Interest.
Interest calculated each period on the principal amount and on any interest earned on the investment up to that point.
Process by which, through the operation of interest, a present sum becomes a greater sum in the future.
Process by which, through the operation of interest, a future sum is converted to its equivalent present value.
Interest-only loan.
Loan in which the borrower is the required to make regular payments to cover interest accrued but is not required to make payments to reduce the principal.

On Maturity Date of the loan, the principal is repaid in a lump sum.
Nominal Interest Rate (finance def.)
Quoted interest rate where interest is charged more frequently than the basis on which the interest rates is quoted.

The interest rate actually used to calculate the interest charge is taken as a proportion of the quoted nominal rate.
Effective Interest Rate (finance def.)
Interest rate where interest is charged at the same frequency as the interest rate is quoted.
nominal interest rate (economics)
Interest rate before taking
real interest rate (economics)
Interest rate after taking out the effects of inflation.
Continuous interest.
Method of calculating interest in which interest is charged so frequently that the time period between each change approaches zero.

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