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Would you prefer to have $100 now or $100 a year from now? Even though the amounts are the same, most people would prefer to have $100 now because of the interest it can earn. Thus, whenever we talk of money we must state not only the amount, but also the time. This concept—that money today is worth more than the same amount of money in the future—is called the . The of an amount is its worth today, while the is its worth at a later time. These topics are discussed here and in Chap. 2. Another reason that most people would prefer to have $100 now is that its purchasing power in the future may be less than at present due to inflation, which is discussed in Chap. 3.

The difference between simple interest and compound interest—the subject of this chapter—is that compound interest generates interest on interest, whereas simple interest does not.

In this chapter we discuss two topics that usually reduce the annual effective rate (EFF) of an investment—inflation and taxes. The impact of these two items on any profits should not be ignored.

An is a constant amount of money paid at regular intervals, called periods. When the payments are made at the end of the period, the annuity is called an . When payments are made at the beginning of the period, the annuity is called an .

Many students obtain . These loans may be issued by individuals, businesses (as part of an employee’s benefit program), or by the government. A common type of student loan is a Stafford loan, which is guaranteed by the federal government. Typical conditions for a Stafford loan are that the repayment period of the loan is at most 10 years, the minimum monthly payment is $50, and there is no prepayment penalty (this last condition is important because many real estate loans, for example, charge a very high penalty for paying off the loan early). These loans are currently at a fixed rate, and there is a late fee for late payments. An important feature of these loans is that the student does not begin to repay the loan until 6 months after completing the academic program or leaving school.

The largest investment that most people make is buying a house. However, it is unusual to buy a house with cash. Most people borrow the money from a company that issues mortgages. The same process used to repay mortgages is frequently used to repay student loans and car loans. In Chap. 5 we mentioned amortization. In this chapter we study the process in detail.

A credit card account is an unsecured revolving line of credit issued by a financial institution to an entity. Credit cards are often used for purchases of goods and services when payment by cash is not convenient or permissible. Examples of such transactions include on-line or telephone purchases of goods and services, business expenditures, reservations for hotel rooms, and car rentals.

Bonds are loans that an investor makes either to a government agency (US Treasury bonds or notes or Municipal bonds) or to a corporation (Corporate bonds). The borrower promises to pay the lender interest at regular intervals (usually every six months) and to repay the principal at the end of the loan. In investor’s language the previous sentence reads, “The borrower promises to pay the lender the coupons on the coupon payment dates and to pay the face value of the bond at the redemption date.”

Stock represents ownership of a corporation. The stockholders, or shareholders, are the holders of the stock. There are different types of stock, but in this book we study common stock.

Stock market indexes are used to compute an “average” price for groups of stocks. A stock market index attempts to mirror the performance of the group of stocks it represents through the use of one number, the index. Indexes may represent the performance of all stocks in an exchange or a smaller group of stocks, such as an industrial or technological sector of the market. In addition, there are foreign and international indexes.