1. What is compound interest? How is compound interest related to the time value of money?

The effect of earning interest on interest, resulting from the reinvestment of interest paid on an investments principal. 2. What is future value and why is it important to calculate? Future value is the value of an investment at some future point in time. It is important to calculate because then you know how your investment is going to affect you in the future. 3. Describe how you can use the Rule of 72 to make financial planning decisions. The Rule of 72 will tell you how many years it will take for a given sum to double by dividing the investments annual growth or interest rate into 72. 5. Explain the concept of time value of money. Explain two ways this concept is relevant in financial planning. Were comparing money from different periods. EX: Buying a bond today and receiving interest payment in the future; or borrowing money to buy a house today and paying it back over the next 30 years. 6. What two factors most affect how much people need to save to achieve their financial goals? How much money you will need in the future, and how much interest you will earn on it. 7. Why do you think that Albert Einstein once called compound interest the eighth wonder of the world? Because you earn interest on interest. 10. Why is the interest rate in a time value of money calculation sometimes referred to as the discount rate? Why is it also called inverse compounding? Because youre moving future money back to the present, its also called inverse compounding because youre reversing the compound interest. 14. Define an amortized loan and give two examples. A loan paid off in equal installments. Car loans and mortgages. 16. What is a perpetuity? Name an example of a perpetuity (payments or receipt of income) in personal finance. An annuity that continues forever. An investment pays the same dollar amount and never stops paying.