# Chapter 9: Glossary of Terms

# Glossary of Terms

A system for calculating interest that primarily applies to long-term financial transactions with a time frame of one year or more; interest is periodically converted to principal throughout a transaction, with the result that the interest itself also accumulates interest.

The amount of time that elapses between the dates of successive conversions of interest to principal.

An interest rate used to remove interest from a future value.

The true annually compounded interest rate that is equivalent to an interest rate compounded at some other (non-annual) frequency.

Equating two or more alternative financial streams such that neither party receives financial gain or harm by choosing either stream.

Interest rates with different compounding that produce the same effective rate and therefore are equal to each other.

A point in time to which all monies involved in all payment streams will be moved using time value of money calculations.

Two or more payment streams are equal to each other if they have the same economic value on the same focal date.

A nominal number for the annual interest rate, which is commonly followed by words that state the compounding frequency.

The percentage of interest earned or charged at the end of each compounding period.

The present value of all payments on a loan is equal to the principal that was borrowed.