Chapter 5 Smartbook

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 Reason: The amount borrowed divided by the present value annuity factor of 10% for 6 periods equals the annual payment. $8,000/4.35526 = $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 Reason: $2,000 x 10.0266 (i.e., FVAD, the future value of annuity due, factor at 5% for 8 periods) = $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) = $22,175

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 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.

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.

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 Reason: $7,000/$950 = 7.368 is the estimated PVA factor at 6%. Look down the 6% column and at 10 years the factor is 7.36009. So it should take approximately 10 years to repay the loan.

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% Reason: $3,605/$1,000 = 3.605. Looking at the present value of an ordinary annuity table in the row for 5 periods, there is a factor of 3.60478 in the 12% column.

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% Reason: $2,540/$500= 5.08. Looking at the present value of an ordinary annuity table in the row for 6 periods, there is a factor of 5.07569 in the 5% column.

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

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.

True or false: At the date of issue, the stated rate of interest on the bond is always equal to the market rate of interest on the bond.

False Reason: The stated rate is not always equal to the market rate of interest.

$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

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

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

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

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

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

True Reason: Fixed payments at fixed intervals is the definition of an annuity.

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

True Reason: Pension contributions require the calculation of the present value of the pension annuity.

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

accounts receivable cash note receivable

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

annuity

A(n) __________ is a series of equal payments received or paid at equal intervals.

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.

Version 2: Which of the following accounts uses time value of money concepts to value the account?

capital leases

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

Alex would like to deposit $1,000 in the bank today and would like to know what that will grow in 5 years. Alex needs to compute the ______ value of the money

future

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

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

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

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 notes payable.

present value

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. (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.