Intermediate Accounting - Chapter 5

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

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

less than

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

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

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

False Reason: The formula is the amount invested times (1+i)n where i equals the interest rate and n equals the number of periods.

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.

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

True

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

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

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

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

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

future value

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

future value of a single amount.

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

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

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

present

$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

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

present value factor. Reason: This formula provides only the present value factor, which must then be multiplied by the future value to arrive at the PV of a certain amount.

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

We value most receivables and payables at the ___________ value of ___________ cash flows, reflecting an appropriate time value of money.

present; future

To determine the price of bonds, we add the _____ value of the interest payments and the _____ value of the lump-sum payment paid at maturity.

present; present Reason: The present value of both amounts is computed.

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

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

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.

What is the formula to calculate future value of an amount "I"?

FV = I(1+i)n

Which of the following formulas represent the present value?

FV divided by (1 + i)n

The ________ rate of interest on a bond is printed on the bond.

stated

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 Reason: The two components for pricing a bond are the interest payments and the repayment of principal.

Which of the following is not a monetary liability?

unearned revenue

On January 1, 2021, Green Company issued 6% stated rate semi-annual bonds with a face amount of $1,000,000. The bonds mature in 10 years. The market rate of interest on similar bonds was 5%. Interest of $30,000 is paid on June 30 and December 31, beginning on June 30, 2021. Calculate the issue price of the bond, rounding to the nearest dollar.

$1,077,945 Reason: Calculate the present value of the annuity and the lump sum using the semi annual market rate of interest (2.5%) for 20 semi-annual periods. (15.58916 x $30,000) + (0.61027 x $1,000,000) = $1,077,945

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

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

I(1+i)n

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

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 Reason: Amount paid at end of year 2 is calculated as $40,000(1.122) = $50,176. The repayment amount of $50,176 - $40,000 borrowed = $10,176 interest paid.

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 payable reflected on the customer's balance sheet?

$100,000 Reason: The note payable is shown at the face amount and the interest is reported in a separate account once accrued.

Munchen Company prepays $89,000 for inventory to be delivered in two years. The applicable effective interest rate is 6%. Upon delivery, Muchen should recognize the purchase of inventory at:

$100,000 Reason: The prepayment of $89,000 reflects the present value of $100,000 at 6% (the factor is 0.89). The difference between the prepayment and the inventory cost is interest revenue.

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 Reason: $150,000/1.085 = $102,087

Use the tables provided in the text or a financial calculator to compute the present value of the following annuity: Interest rate = 6% Number of periods = 20 Payment at the end of the period = $1,000 Round your answer to the nearest dollar.

$11,470 Reason: The financial calculator should be set to an end-of-the-year payment. Enter: N 20, I 6, PMT $1,000 (end-of-period payment). CPT PV.

The value of Investment A at the end of year 5 is $20,000. Assuming that interest is compounded annually, and the interest rate is 8%, what is the present value of this investment at the beginning of year 1?

$13,612 Reason: $20,000 x 0.68058

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 Reason: Future value = $10,000 x (1.4641) = $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 Reason: $10,000 x 1.5386

Susan signs a lease to rent a building for three years and the first payment is due at lease signing. This is an example of which type of annuity?

Annuity Due

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 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

Ronald signs a lease agreement that requires him to pay $4,000 at the end of each year for 7 years. The interest rate on this type of lease is 8%. Calculate the present value of the lease payments. Round your answer to the nearest dollar.

$20,825 Reason: $4,000 x 5.20637 = $20,825

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 Reason: Amount paid at end of year 2 is calculated as $100,000(1.102) = 121,000. The repayment amount of $121,000 - $100,000 borrowed = $21,000 interest paid.

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?

$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

Jennifer invested $20,000 in a savings account for 3 years at 6% compounded annually. What is the future value of Jennifer's investment?

$23,820 Reason: Future value = $20,000 x (1.06)3 = $23,820

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.

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 Reason: $50,000/1.105 = $31,046

Julie signs a lease agreement that requires her to pay $7,500 at the beginning of each year for 5 years. The interest rate on this type of lease is 6%. Calculate the present value of the lease payments. Round your answer to the nearest dollar.

$33,488 Reason: $7,500 x 4.46511 = $33,488

Use the tables provided in the text or a financial calculator to compute the present value of the following annuity: Interest rate per compounding period = 8% Number of periods = 12 Payment at the end of the period = $500 Round your answer to the nearest dollar.

$3768 Reason: The financial calculator should be set to an end-of-the-year payment. Enter: N 12, I 8, PMT $500 (end-of-period payment). CPT PV.

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.

Beth will deposit $1,000 at the end of each year for 4 years. Assuming an 8% rate of interest, how much will Beth have in the bank at the end of year 4? Round your answer to the nearest dollar.

$4506 Reason: $1,000 times the future value factor of 8% for 4 periods = $1,000(4.5061) = $4,506

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

$4804 Reason: The present value ordinary annuity factor of 12% for 3 periods is 2.40183. $2,000 x 2.40183 = $4,804.

On January 1, year 1, Dennis borrows $20,000 at 6% interest compounded semi-annually. What is the amount of interest Dennis will pay at the end of year 4? Round your answer to the nearest dollar.

$5,335 Reason: [$20,000 x (1.038)] - $20,000 = $5,335

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

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 Reason: The present value of $121,581 represents the amount needed in the pension fund at the end of year 12. Therefore, the present value is calculated as $121,581 x 0.49697 = $60,422, which Lakeland should contribute.

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 Reason: $100,000 x 0.62092

lsa will deposit $1,000 at the end of each year for 6 years. Assuming a 10% rate of interest, how much will Ilsa have in the bank at the end of year 6? Round your answer to the nearest dollar.

$7,716 Reason: $1,000 times the future value factor of 10% for 6 periods = $1,000(7.7156) = $7,716

Ilsa will deposit $1,000 at the end of each year for 6 years. Assuming a 10% rate of interest, how much will Ilsa have in the bank at the end of year 6? Round your answer to the nearest dollar.

$7,716 Reason: $1,000 times the future value factor of 10% for 6 periods = $1,000(7.7156) = $7,716

On January 1, year 1, Mary borrows $30,000 at 8% interest compounded semi-annually. What is the amount of interest Mary will pay at the end of year 3? Round your answer to the nearest dollar.

$7,960 Reason: [$30,000 x (1.046)] - $30,000 = $7,960

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 Reason: The present value of $261,706 represents the amount needed in the pension fund at the end of year 25. Therefore, the present value is calculated as $261,706 x 0.29530 = $77,282, which Newman should contribute.

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

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

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

On January 1, year 1, Klondike issued 10-year bonds with a stated rate of 10% and a face amount of $100,000. The bonds pay interest annually. The market rate of interest was 12%. Calculate the issue price of the bonds. Round your answer to the nearest dollar.

$88,699 Reason: (5.65022 x $10,000) + (0.32197 x $100,000) = $88,699

Which of the following are common annuity examples?

- Bonds - Leases - Loans

Which of the following are monetary assets?

- notes receivable - cash - accounts receivable

Which of the following steps are involved in calculating the present value of a deferred annuity?

-Calculate the PV of the annuity as of the beginning of the annuity period. -Discount the lump sum from the annuity calculation to its present value as of today.

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

Which of the following are required to compute the present value of a known future amount?

-future value -number of compounding periods -interest rate

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

-pensions -capital leases -bonds payable

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

10 Reason: 5 years x 2 compounding periods per year = 10

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.

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%. Reason: Using the formula FV = PV(1+r)n, solve for r. $40,000 = $27,320 (1+r)4. r = 10%

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.

If you want to accumulate $20,000 for a down payment on a condo, and you have $15,400 to invest today at an interest rate of 9% compounded annually, about how many years will it take you to accumulate the desired amount?

3 Reason: $15,400/$20,000 = 0.77. Looking at the 9% column in the PV of $1 table, n=3 is 0.77218. Or

Assuming an interest rate of 12% with quarterly compounding, what is the interest rate per compounding period?

3%

If you invest $5,000 in a savings account with quarterly compounding at 16%, what is the interest rate per compounding period?

4% Reason: 16%/4 compounding periods = 4%

Use the following facts to determine the number of periods used in calculating the time value of money: The present value is $29,650, the future value is $50,000, and the interest rate is 11%. The number of periods is approximately

5 Reason: Using the formula FV = PV(1+r)n, solve for n. $50,000 = 29,650 (1.11)n. n = 5

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.

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% Reason: $5,000/$6,299 = 0.7938. If you look at the PV of $1 chart, that is the factor for 8%.

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.

In a(n) ______________ _________, the payment is received or made at the beginning of the period, whereas in a(n) ____________ ___________, the payment is received at the end of each period.

Annuity Due; Ordinary Annuity

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

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 is a deferred annuity?

First payment begins at the beginning of year 3.

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

The _________ rate of interest is the current rate of interest being paid on investments with similar characteristics.

Market

The first cash flow of an ordinary annuity occurs when?

One compounding period after the agreement begins.

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

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.

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

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

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

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

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.

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

deferred

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

deferred annuity

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

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

The _______________ interest rate is the amount at which money will actually grow per year with compounding interest.

effective

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

effective

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

effective interest rate

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

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

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

The two components for pricing a bond are the _____________ ____________ and the _________ __ ___________.

interest payments; repayment of principal

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

Munchen Company prepays $89,000 for inventory to be delivered in two years. The applicable interest rate is 6%. One year after the prepayment, Muchen should recognize:

interest revenue of $5,340

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

less than

The higher the time value of money, the ______ is the present value of a future amount because it is _______ desirable to wait to get the money.

lower; less

Which of the following topics requires knowledge of time value of money concepts?

notes receivable

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

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

As the number of periods increases, present value factors become ______.

smaller Reason: The farther into the future the amount is to be received, the smaller the present value is today.

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

stated

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

the future value of $1.

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

In a deferred annuity, a two-step process can be used to calculate the present value of the annuity. The first step requires the calculation of the present value of the annuity at the beginning of the annuity period. The second step involves discounting the amount calculated in step 1

to its present value as of today