Ch 5 Smartbook

If the future value of an amount is $40,000 at the end of 4 years, the present value today is $27,320, and the interest is compounded annually, what is the annual interest rate?

10%

A bond will be issued at a premium when the market rate of interest is ______ the stated rate.

less than

Tortoise Corp. would like to know how much $1,000 invested today will grow to in four years. Assume the interest on the investment is compounded annually at 10%. What is the future value of this investment in four years?

$1,464

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

In situations when the compounding period is less than a year, the interest rate per compounding period is determined by dividing the annual rate by what?

The number of periods.

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 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: 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

Interest is typically stated as a(n) ______ rate regardless of the compounding period involved.

annual

Unless otherwise specified in a problem, interest rates are always stated as what type of rate?

annual

An annuity in which the first payment is made on the date the contract is signed is called a(n)

annuity due

Tom signs a contract to rent a car for 3 years. The first payment is due the day the agreement is signed. This type of annuity is an

annuity due

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.

On a financial calculator, the PMT key is used to input the

annuity payment.

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

annuity.

The rate at which money will actually grow during a full year is referred to as the

effective rate.

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.

future

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

future value of a single amount.

Jerry Corp. wishes to deposit $10,000 in the bank at the end of each year, and would like to know how much money it will have at the end of year 10. Which table should Jerry use to make this calculation?

future value of an ordinary annuity

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

future value.

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

monetary assets.

The formula FV = $1(1+i)n is used to calculate

the future value of $1.

Pedro invests $1,000 in a savings account earning 3% interest. At the end of the first year, Pedro has $1,030 in the account. The $1,000 Pedro initially put in the savings account is the _____ value.

present

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 ______ of the note payable.

present value

The formula "future value divided by the quantity (1 + i)n" is the formula for

present value

The formula 1(1+i)n1(1+i)n is the formula to calculate a

present value factor

The formula PV = $1(1+i)n$1(1+i)n is the formula used to calculate the

present value of $1.

The amount of money today that is equivalent to a given amount to be received or paid in the future is the

present value of a single amount.

Today, the value of a series of equal-sized cash flows with the first payment taking place at the end of the first compounding period is the

present value of an ordinary annuity.

Harold would like to deposit a sum of money today that will grow to $20,000 in year 8. Which table should Harold use when making this calculation?

present value of single amount

The _______ value is the amount an item is worth today, whereas the _______ value is the amount it is worth at some later date.

present, future

True or false: The formula to calculate future value 2 years in the future is the amount invested times the interest rate.

False

Which of the following is the correct formula to calculate future value?

I(1+i)n

Larry signs a note payable for $40,000. The principal of the note and interest are due in 2 years, and the note bears interest at 12% compounded annually. What is the total interest that must be repaid at the end of year 2?

$10,176

Smithson sells goods to customers in exchange for a note requiring payment of $100,000 in one year plus interest at 10%. At what amount is the note receivable reflected on Smithson's balance sheet?

$100,000

Carter Co. signs a $150,000 noninterest-bearing 5-year note payable for goods purchased from Maury Industries. The appropriate rate of interest for this type of note is 8%. At the time the note is signed, what is the present value of the note on Carter's records?

$102,087

Alex invested $10,000 in a savings account for 4 years at 10% compounded annually. What is the future value of Alex's investment?

$14,641

On January 1, year 1, Coral deposits $10,000 into a savings account earning 9% interest for 5 years. What is the future value of Coral's investment at the end of year 5?

$15,386

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.

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

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

Sperry Corp. signs a 2-year note payable for $100,000. The principal of the note and interest are due in 2 years, and the note bears interest at 10% compounded annually. What is the amount of interest that must be repaid at the end of year 2?

$21,000

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

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.

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

Morgan Co. signs a $50,000 noninterest-bearing 5-year note payable for goods purchased from Xelco Industries. The appropriate rate of interest for this type of note is 10%. At the time the note is signed, what is the present value of the note on Morgan's records?

$31,046

Shadow Corp. would like to invest enough cash to have $500,000 at the end of year 3. Assume the interest on the investment is compounded annually at 8%. How much money should Shadow Corp invest today to have $500,000 at the end of year 3?

$396,915

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

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

Lakeland Corp. calculates that in the current year its employees earned an additional annuity of $10,000 for 20 years commencing with their retirement 12 years from today. Lakeland assumes a future interest rate of 6%. If the value of the annuity is $121,581 on the date the employees retire, what amount should be contributed today to fully fund the pension plan?

$60,422

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

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

Newman Corp. plans to contribute cash to a pension fund that will accumulate to an amount sufficient to pay its new employee a pension benefit of $20,000 per year for 20 years. Payments will commence on the date of retirement, 25 years from today. Newman calculates that the value of the annuity on the date the employee retires is $261,706. Assuming an interest rate of 5%, how much does Newman have to contribute today to fully fund the plan?

$77,282

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

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

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

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

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.

Given a 5 year investment with semiannual compounding at 10% interest, what is the i value?

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 $

50

If you invest $1,000 in a savings account with semiannual compounding at 12%, what is the interest rate per compounding period?

6%

Suppose you borrow $5,000 from the bank. The loan terms require you to repay $6,299 three years from now. What is the annual interest rate you would be agreeing to?

8%

On January 1, Biggs Corp. borrowed $20,000 with 4% simple interest. What is the amount of interest that must be paid at year-end?

800

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.

Which of the following is an example of an annuity?

Bond interest payments

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 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 represents the present value formula?

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

Chen Corp. wishes to deposit $10,000 in the bank at the beginning of each year, and would like to know how much money it will have at the end of year 10. Which table should Chen use to make this calculation?

Future value of an annuity due

The future value of a series of equal-sized cash flows with the first payment taking place at the beginning of the first period is a

Future value of an annuity due

Simple interest is computed by multiplying which of the following?

Initial investment Applicable interest rate Period of time

Which of the following are common annuity examples?

Leases Loans Bonds

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

Long-term bonds

The first cash flow of an ordinary annuity occurs when?

One compounding period after the agreement begins.

$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

Sally would like to make an annual deposit starting today and continuing every year for 10 years. Sally wants the amount to grow to $20,000 after 10 years. What table will Sally use to compute the annual deposit amount?

Present value of an annuity due

The present value of a series of equal-sized cash flows with the first payment taking place at the beginning of the first period is a

Present value of an annuity due

The i value in present and future value tables refers to what?

The annual interest rate divided by number of compounding periods per year.

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

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

Joe has an annuity due wherein he receives a payment of $8,000 per year for 10 years. The last payment will be received

at the beginning of year 10.

Which of the following items require time value of money concepts?

capital leases bonds payable pensions

Interest on the initial investment plus interest calculated on the previously earned interest is called _____ interest.

compound

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

compound

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

deferred annuity

If the market rate of interest is higher than the stated rate on the bond at the date of issuance, the bond will be issued at a

discount

The future value formula is FV = PV(1 + i)n. To solve for the present value, you would

divide FV by (1 + i)n

In a(n) _____ _____ the series of equal payments occur at the beginning of each period.

due annuity

Lewis Company wishes to deposit $8,000 in the bank at the end of each year, and would like to know how much money it will have at the end of year 10. Which table should Lewis use to make this calculation?

future value of an ordinary annuity

Lewis Company wishes to deposit $8,000 in the bank at the end of each year, and would like to know how much money it will have at the end of year 10. Which table should Lewis use to make this calculation?e

future value of an ordinary annuity

The future value of a series of equal-sized cash flows with the first payment taking place at the end of the first period is a

future value of an ordinary annuity.

A bond will be issued at a discount when the market rate of interest is

greater than the stated rate.

Jim borrows $1,000 and has to repay $1,100 at the end of the year. The $100 payment is referred to as

interest

The amount paid for the use of money for some period of time is referred to as

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?

interest rate number of compounding periods future value

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

less than

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

monetary liability.

In a(n) ______ _____the series of equal payments are made at the end of each period.

ordinary annuity

If the market rate of interest is lower than the stated rate of interest on a bond at the date of issuance, the bond will be issued at a

premium

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.

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.

simple, compound

The rate of interest printed on the face of a bond is referred to as the

stated interest rate

The _____ rate of interest on a bond is the interest rate printed on the bond; the ______ rate of interest is the current rate of interest being paid on investments with similar characteristics.

stated; market

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

the future value of a series of payments.

The price of a bond includes

the present value of the face amount plus the present value of the periodic interest payments

The ______ ______ of money concept means that money invested today will grow to a larger amount in the future.

time value

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

time value of money.

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

true

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

Which of the following is not a monetary liability?

unearned revenue