Ch5 Acct 250 smartbook

Joshua would like to deposit $12,000 in a savings account today. He is interested in knowing what that investment will be worth when he retires at age 62. Joshua is interested in calculating what amount?

future value

The amount of money that a dollar will grow to at some point in the future is known as the

future value.

Jim borrows $1,000 and has to repay $1,100 at the end of the year. The $100 payment is referred to as . (Enter only one word.)

interest

The amount paid for the use of money for some period of time is referred to as . (Enter one word per blank)

interest

To solve for the present value of a single sum, you need to know the future value, the number of compounding periods, and the

interest rate

Which of the following are required to compute the present value of a known future amount? (Select all that apply.)

interest rate number of compounding periods future value

Over a 5-year period, simple interest is Blank______ compound interest on the same note.

less than

Money and claims to receive money in amounts that are fixed or determinable are called

monetary assets.

An obligation to pay amounts of cash, the amount which is fixed or determinable, is called a

monetary liability.

Which of the following are monetary assets? (Select all that apply.)

note receivable cash accounts receivable

Sharon receives $100 at the end of each month for 5 years. The type of annuity she is receiving is called a(n)

ordinary annuity.

Which of the following items require time value of money concepts? (Select all that apply.)

pensions bonds payable capital leases

The formula "future value divided by the quantity (1 + i)n" is the formula for value. (Enter only one word.)

present

Most monetary assets are valued at the value of cash flows. (Enter one word per blank.)

present future

Most monetary liabilities are valued at the value of cash flows. (Enter one word per blank.)

present future

We value most receivables and payables at the value of cash flows, reflecting an appropriate time value of money. (Enter one word per blank.)

present future

Karr Company borrowed $100,000 by signing a 5-year note payable at 8% interest. At the end of year 5, Karr will repay the bank $146,933. At the time the note is signed, the $100,000 is referred to as the Blank______ of the note payable.

present value

The initial investment multiplied by the applicable interest rate and multiplied again by the period of time for which the money is used is referred to as interest. (Enter only one word.)

simple

interest is calculated by multiplying an initial investment times the applicable interest rate and the period of time the money is used, whereas interest involves earning interest on the interest. (Enter one word per blank.)

simple compound

The rate of interest printed on the face of a bond is referred to as the interest rate. (Enter one word per blank)

stated

The Blank______ rate of interest on a bond is the interest rate printed on the bond; the Blank______ rate of interest is the current rate of interest being paid on investments with similar characteristics. (Enter one word per blank)

stated; market

The future value of an ordinary annuity table is used when calculating

the future value of a series of payments.

The of money concept means that money invested today will grow to a larger amount in the future. (Enter one word per blank.)

time value

The difference between $100 invested now and $105 at the end of year 1 represents the

time value of money.

Which of the following is not a monetary liability?

unearned revenue

True or false: Present value calculations are used in calculating pension contributions for defined benefit plans.

True

True or false: The time value of money means that money can be invested today to earn interest and grow to a larger amount in the future.

True

True or false: When pricing a bond, the present value of the annuity of the coupon payments is added to the present value of the maturity value of the bond.

True

A fixed payment at fixed intervals is called a(n)

annuity

A series of payments in the same amount is referred to as

annuity

A(n) is a series of equal payments received or paid at equal intervals. (Enter only one word.)

annuity

Jenson rents equipment by signing a contract to pay $1,000 per month at the beginning of each month. The first payment is due upon signing the contract. The lease is a(n)

annuity due.

Which of the following are monetary liabilities? (Select all that apply.)

bond payable at 4% interest due in 20 years accounts payable note payable at 6% interest due in 6 months

Which of the following accounts uses time value of money concepts to value the account?

capital leases

Interest on the initial investment plus interest calculated on the previously earned interest is called interest. (Enter only one word.)

compound

Sandra borrows $1,000 at an interest rate of 12%. If Sandra pays $133 interest at year-end, the interest rate is Blank______ interest.

compound

The type of interest that includes interest on the initial investment plus interest on the accumulated interest in previous periods is referred to as interest. (Enter only one word.)

compound

A(n) annuity exists when the first cash flow occurs more than one period after the date the agreement begins. (Enter only one word.)

deferred

An annuity due and an ordinary annuity have payments that begin in the first period after the date of the agreement, whereas a(n) annuity has cash flows that begin more than one period after the date of the agreement. (Enter only one word.)

deferred

Valuing defined benefit pension obligation typically requires the calculation of the present value of a(n)

deferred annuity

The interest rate is the amount at which money will actually grow per year with compounding interest. (Enter only one word.)

effective

The rate at which money actually grows during a year is called the

effective

The rate at which money actually grows during a year is called the Blank______ rate.

effective

Alex would like to deposit $1,000 in the bank today and would like to know what that will grow to in 5 years. Alex needs to compute the value of the money. (Enter only one word.)

future

Kevin borrows $8,000 from Second National Bank at 10% interest. Kevin will repay the loan in six equal payments beginning at the end of year 1. What is the annual amount that Kevin will pay the bank each year? Round your answer to the nearest dollar.

$1,837

Jean expects to receive $5,000 at the end of each year for 4 years. The annuity has an interest rate of 7%. The present value of this annuity at Time Zero, the inception of the annuity (rounded to the nearest dollar) is

$16,936. Reason: The present value ordinary annuity factor of 7% for 4 periods is 3.38721. $5,000 x 3.38721 = $16,936.

Shirley borrows $10,000 from Second National Bank at 12% interest. Shirley will repay the loan in five equal payments beginning at the end of year 1. What is the annual amount that Shirley will pay the bank each year? Round your answer to the nearest dollar.

$2,774 Reason: The amount borrowed divided by the present value annuity factor of 12% for 5 periods equals the annual payment. $10,000/3.60478 = $2,774

George will deposit $2,000 in a savings account at the beginning of each year for 8 years. Assuming the interest rate is 5%, how much money will George have in the account at the end of year 8? Round your answer to the nearest dollar.

$20,053

Milo decides to invest $1,500 in a savings account every year at the beginning of the year for 10 years. Assuming an interest rate of 7%, how much will Milo have at the end of the 10th year? (Round your answer to the nearest dollar.)

$22,175 Reason: $1,500 X 14.7836 (i.e., FVAD, the future value of annuity due, factor at 7% for 10 periods) = $22,17575

Carol expects to receive $1,000 at the end of each year for 5 years. The annuity has an interest rate of 10%. The present value of this annuity at Time Zero, the inception of the annuity (rounded to the nearest dollar) is

$3,791. Reason: The present value ordinary annuity factor of 10% for 5 periods is 3.79079. $1,000 x 3.79079 = $3,791

Rhonda expects to receive an annuity that pays $500 at the beginning of each year for 10 years. Assuming the interest rate is 6%, what is the present value of this annuity? Round your answer to the nearest dollar.

$3,901 Reason: Using the PVAD factor of 6% for 10 periods, multiply 7.80169 x $500 = $3,901.

Sam expects to receive $2,000 at the end of each year for 3 years. The annuity has an interest rate of 12%. The present value of this annuity at Time Zero, the inception of the annuity (rounded to the nearest dollar) is

$4,804.

Kate expects to receive an annuity that pays $5,000 at the beginning of each year for 10 years. Assuming the interest rate is 5%, what is the present value of this annuity? Round your answer to the nearest dollar.

$40,539 Reason: Using the PVAD factor of 5% for 10 periods, 8.10782 x $5,000 = $40,539.

James would like to deposit enough money in a savings account to have $8,000 at the end of year 3. Assuming the investment will earn 5% compounded annually, what amount should James deposit in the savings account today? Round your answer to the nearest dollar.

$6,911 Reason: $8,000(1.053)$8,000(1.053) = $6,911

Tortoise Corp. would like to invest enough cash to have $100,000 at the end of year 5. Assume the interest on the investment is compounded annually at 10%. How much does Tortoise need to invest on January 1 of Year 1?

$62,092

First County Bank loans $100,000 to a customer. At the end of the year, the customer is required to repay the $100,000 loan with 8% interest. What is the amount of interest First County Bank earns on this loan?

$8,000 Reason: $100,000 x 8% x (12/12) = $8,000

Cindy would like to deposit enough money in a savings account to have $10,000 at the end of year 4. Assuming the investment will earn 5% compounded annually, what amount should Cindy deposit in the savings account today? Round your answer to the nearest dollar.

$8,227 Reason: (1 + .05) ˆ4 = 1.2155 $10,000/1.2155 = $8,227

Polly sells goods to customers in exchange for a $10,000 noninterest-bearing note due in 3 years. The interest rate on this type of loan is 6%. What is the present value of the note? Round your answer to the nearest dollar.

$8,396 Reason: $10,000/(1.063) = $8,396

Karel sells goods to customers in exchange for a $100,000 noninterest-bearing note due in 2 years. The interest rate on this type of loan is 8%. What is the present value of the note?

$85,734 Reason: $100,000/(1.082) = $85,734

Simon borrows $7,000 from the bank and wants to repay the amount in equal installments of $950. Payments will be made at the end of each year. The bank wishes to earn interest on this loan at 6%. Approximately how many years will it take Simon to repay the loan?

10 years

Shirley borrows $3,605 from Second National Bank. Shirley will repay the loan in five equal payments of $1,000 each beginning at the end of year 1. What is the annual interest rate implicit in this agreement?

12%

The value of Investment B at the end of year 6 is $50,000. Assuming that interest is compounded semi-annually, and the interest rate is 8%, the present value of Investment B can be calculated by multiplying $50,000 times the present value factor of

4% for 12 periods.

On January 1, McLean Corp. borrowed $50,000 with 8% simple interest. What is the amount of interest that must be repaid at year-end?

4000 Reason: $50,000 x 8% x (12/12) = $4,000

Jean borrows $2,540 from her friend, Sam. Jean will repay the loan in six equal payments of $500 each beginning at the end of year 1. What is the annual interest rate implicit in this agreement?

5%

On January 1, Susan signs a 1-year note payable for $1000 with 5% simple interest. The simple interest paid on this loan at year-end is $. (Input only the whole amount of interest.)

50

Paul borrows $5,000 from the bank and wishes to repay the amount in equal installments of $800 per year over a period of years. The payments will be made at the end of each year. The bank wishes to earn interest on this loan at 8%. Approximately how many years will it take for Paul to repay the loan?

9 years Reason: $5,000/$800 = 6.250 is the estimated PVA factor at 8%. Look down the 8% column, and at 9 years, the factor is 6.24689. Therefore, it should take approximately 9 years to repay the loan.

Which of the following is an example of a monetary asset?

Accounts receivable

How are most monetary assets and liabilities valued?

At the present value of future cash flows.

Lenny borrowed $10,000 on a 5-year interest bearing note with an interest rate of 10%. At the end of 5 years, Lenny must repay the bank $16,105. Based on the amount that must be repaid, interest was calculated with what type of interest rate?

Compound interest

Which of the following results in increasingly larger amounts of interest for each period of the investment?

Compound interest

Which of the following situations would involve the calculation of the future value of an ordinary annuity?

Depositing an amount to a savings account each month that will grow to purchase a car in 5 years.

The interest rate at which money will actually grow during a full year is called what?

Effective interest rate

Which of the following formulas represent the present value?

FV divided by (1 + i)n

Which of the following is a deferred annuity?

First payment begins at the beginning of year 3.

$1,000 invested today at 10% compounded annually will grow to $1,210 at the end of two years. What is the $1,210 value referred to as?

Future value

The amount of money paid or received in excess of the amount of money borrowed or lent is referred to as what?

Interest

What does the ".05" represent in the Excel function =−FV(.05,6,100,0,0)

Interest rate

What does the ".05" represent in the Excel function =−FV(.05,6,100,0,0)=-��.05,6,100,0,0 Multiple choice question.

Interest rate

Which of the following accounts uses time value of money concepts to value the account?

Long-term bonds

What does the "3" represent in the Excel function =−FV(.08,3,0,1000,0)

Number of periods

What does the "3" represent in the Excel function =−FV(.08,3,0,1000,0)=-��.08,3,0,1000,0 Multiple

Number of periods

The first cash flow of an ordinary annuity occurs when?

One compounding period after the agreement begins.

What does the "100" represent in the Excel function =−PV(.05, 4, 100,0,0)

Payment amount each period

Simple interest is computed by multiplying which of the following? (Select all that apply.)

Period of time Initial investment Applicable interest rate

$1,000 invested today at 10% compounded annually will grow to $1,100 at the end of one year or $1,210 at the end of two years. What is the initial $1,000 referred to as?

Present value

Multiplying an initial investment times both the applicable interest rate and the period of time for which the money is used is referred to as what?

Simple interest

Assume you borrow $10,000 from the bank and promise to repay the amount in 5 equal installments beginning one year from today. The stated interest rate on the loan is 5%. What is the unknown variable in this problem?

The payment amount

Which of the following are the four variables in present value annuity problems?

The present value The number of periods The interest rate The payment amount

Which concept means that money can be invested today to earn interest and grow to a larger amount in the future?

Time value of money concept

True or false: A lease is an annuity when it requires equal payments at the same interval.

True