ACCT EXAM LAST one before final

The present value of an investment is affected by which of the following?

- The number of time periods (length of the investment) - The type of investment (annuity versus lump sum) - The interest rate

An annuity is best described as which of the following statements?

A stream of equal installments made at equal time intervals

Bonds payable minus the Discount on bonds payable yields the:

Carrying Amount

TF) One dollar to be received in the future is worth more than one dollar today.

False

The time value of money is explained by which of the following?

Invested money earns income over time

What is the purpose of a bond discount?

It raises the bond interest rate to the market interest rate at the time the bond was issued.

Your wealthy neighbor has promised to give you $1000 a year at the end of each of the next four years to help with college. Using a discount rate of 4%, the present value of the gift can be stated as

PV = $1000 (Annuity PV factor, i = 4%, n = 4)

Your grandfather has promised to give you $1300 a year at the end of each of the next four years if you earn Cs or better in all of your courses each year. Using a discount rate of 3%, which of the following is correct for determining the present value of the gift?

PV = $1300 × (Annuity PV factor, i = 3%, n = 4)

You have been awarded a scholarship that will pay you $300 per semester at the end of each of the next 8 semesters that you earn a GPA of 3.5 or better. You are a very serious student and you anticipate receiving the scholarship every semester. Using a discount rate of 5% per semester, which of the following is the correct calculation for determining the present value of the scholarship?

PV = $300 × (Annuity PV factor, i = 5%, n = 8)

Your hard work in college paid off, quite literally, and you received a graduate assistantship for your MBA program. The assistantship pays a stipend of $7000 at the end of each of the next 2 years. Using an average discount rate of 4%, the future value of your assistantship can be calculated by

PV = $7000 (Annuity PV factor, i = 4%, n = 2).

Bonds that are backed by collateral are:

Secured Bonds

Bonds from the same bond issue that mature at different times are called

Serial Bonds

The rate of interest that is printed on the bond is called the ________ rate of interest.

Stated

When a company issues bonds, what are they doing?

The company is borrowing money from third parties.

The present value of an investment is affected by all of the following except?

The value of a past investment

TF) Calculating interest on the principal and on all the interest earned to date is called compound interest

True

TF) The Future Value of $1 table is used to calculate how much $100 in hand today would be worth in 5 years.

True

TF) The principal amount, the interest rate, and the number of periods are all factors needed to calculate the time value of money.

True

TF) The three factors that affect the time value of money are principal, number of periods, and the interest rate.

True

When interest payments are made on a discounted bond, a portion of the discount is:

amortized

The term ________ is best described as "a stream of equal installments made at equal time intervals.

annuity

Bonds that may be retired at a prearranged price are called:

callable bonds

discount on bonds payable is a

contra liability account

Bonds that can be exchanged for stock are called:

convertible bonds

Bond Interest Payable is reported as a:

current liability on the balance sheet

Bonds that are backed only by the credit of the issuing company are:

debenture bonds

The carrying value for bonds sold at a premium:

decreases as time passes until it matures at face value.

If the market rate of interest is greater than the bond's stated rate of interest, the bond will be issued at:

discount

The process of computing a present value is called ___________ because the present value is less than the future value

discounting

The real or actual rate of interest to the borrowing corporation is called the:

effective rate of interest.

If a bond is issued at a discount, the effective interest rate is most likely ________ the contract interest rate.

higher than

The rate of interest that investors are willing to receive for similar bonds of equal risk at the current time is the ________ rate of interest

market

If a bond's stated rate of interest is equal to the market rate of interest, the bond will be issued at

par

If the market rate of interest is less than the bond's stated rate of interest, the bond will be issued at:

premium

Interest expense will be less than the interest payment when bonds are issued at:

premium

Compound interest means that interest is calculated on

principal AND all interest earned to date

the amount that a borrower must pay back to the bondholders on the maturity date is the:

principle

Simple interest means that interest is calculated on

principle only.

The carrying value of bonds is calculated by:

subtracting the Discount on Bonds Payable account balance from the Bonds Payable account balance.

Bonds that mature all at the same time are:

term bonds

The term ________ is best described as a relationship among principal, interest rate, and time.

time value of money

Debenture bonds are the same as:

unsecured. bonds