ch 5

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

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 present value market value

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. present value of an ordinary annuity. future value of an annuity due. future value of an ordinary annuity.

future value of a single amount.

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

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 _____.

interest

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

interest

Which of the following are required to compute the present value of a known future amount? date market value interest rate future value number of compounding periods

interest rate future value number of compounding periods

Over a 5-year period, simple interest is ______ compound interest on the same note. more than equal to less than

less than

Money and claims to receive money in amounts that are fixed or determinable are called net realizable assets. monetary assets. quick assets. current assets.

monetary assets.

An obligation to pay amounts of cash, the amount which is fixed or determinable, is called a secured obligation. monetary liability. current liability. noncurrent liability.

monetary liability.

Which of the following are monetary assets? note receivable inventory accounts receivable cash

note receivable accounts receivable cash

Which of the following items require time value of money concepts? (Select all that apply.) inventory pensions bonds payable capital leases

pensions bonds payable capital leases

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

present

Most monetary assets are valued at the _____ value of _____ cash flows.

present future

Most monetary liabilities are valued at the _____ value of _____ cash flows.

present future

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

present future

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. $9,524 $9,500 $8,227 $8,548

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

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 $80 $20,800 $400

$800

Which of the following are the four variables in present value annuity problems? The present value The total of all payments The number of periods The future value The payment amount The interest rate

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

Which of the following accounts uses time value of money concepts to value the account? cash common stock inventory capital leases

capital leases

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

compound

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

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

effective

The rate at which money will actually grow during a full year is referred to as the future rate. simple rate. effective rate. present value rate.

effective rate.

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

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

time value

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. $1,266 $1,333 $2,133 $1,837

$1,837 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

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? 8 years 7 years 10 years

10 years $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.

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? 3% 5% 7%

5% $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.

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

Which of the following situations would involve the calculation of the future value of an ordinary annuity? Determining a single amount borrowed today, which will be repaid in 3 years. Determining the value of a liability that must be reported on the balance sheet today. Depositing an amount to a savings account each month that will grow to purchase a car in 5 years.

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

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. simple interest payment. ordinary annuity.

annuity due.

On a financial calculator, the PMT key is used to input the annuity payment. interest rate. future value. present value.

annuity payment.

A fixed payment at fixed intervals is called a(n) present value. annuity. maturity value. future value.

annuity.

A series of payments in the same amount is referred to as future value. maturity value. present value. annuity.

annuity.

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 $15,000. $16,936. $18,600. $20,501. $20,000.

$16,936. 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 $1,266 $2,133 $1,333

$2,774 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. $16,000 $20,053 $2,955 $23,639

$20,053 $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.) $20,725 $15,000 $22,175

$22,175 $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. $6,105. $5,000. $4,500.

$3,791. 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. $3,680 $6,591 $3,901 $5,300

$3,901 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 $6,720. $4,804. $5,280. $6,000.

$4,804. The present value ordinary annuity factor of 12% for 3 periods is 2.40183. $2,000 x 2.40183 = $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. $38,609 $40,539 $66,034 $62,890

$40,539 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 $7,619 $7,600 $6,268

$6,911 8000/1.053=$6,911

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? 27% 12% 10% 11% 14%

12% $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.

$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? Annuity value Future value Present value Market value

Present value

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? 8 years 6 years 7 years 9 years

9 years $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 payable Inventory Accounts receivable

Accounts receivable

How are most monetary assets and liabilities valued? At the future value of present cash flow. At the present value of future cash flows. At the future value of future cash flows.

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? Complex interest Simple interest Compound interest

Compound interest

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

Compound interest

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

Effective interest rate

Which of the following formulas represent the present value? FV (1 + i)n FV divided by (1 + i)n FV times (1 + i)n PV (1 + i)n

FV divided by (1 + i)^n

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. True False

False

Which of the following is a deferred annuity? First payment begins at the end of year 1. First payment begins at the beginning of year 1. First payment begins at the beginning of year 3.

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 Annuity value Present value Market value

Future value

Simple interest is computed by multiplying which of the following? Initial investment Period of time Accumulated interest Applicable interest rate

Initial investment Period of time Applicable interest rate

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

Interest

Which of the following accounts uses time value of money concepts to value the account? Inventory Accounts payable Treasury stock Long-term bonds

Long-term bonds

Match each abbreviation on a financial calculator to its function. N %I PV FV PMT CPT

N matches Number of periods %I matches Interest rate PV matches Present value FV matches Future value PMT matches annuity payment CPT matches Compute

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 future value The payment amount The present value of the annuity The number of periods

The payment amount

Which concept means that money can be invested today to earn interest and grow to a larger amount in the future? Interest growth concept Dollar growth concept Investment value concept Time value of money concept

Time value of money concept

Present value calculations are used in calculating pension contributions for defined benefit plans. True False

True

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 False

True

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

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

deferred

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

deferred annuity

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 market value future value

present value

On January 1, Gino signs a note payable for $10,000. The note has an interest rate of 3%. If Gino repays $10,300 at the end of year 1, the interest is ______ interest. complex simple compound

simple

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

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

stated, nominal, coupon, or face

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) effective; coupon market; stated stated; market coupon; stated effective; stated

stated; market

The formula FV = $1(1+i)n is used to calculate the future value of $1. the future value of an annuity of $1. the future value of an annuity due of $1. the present value of an annuity of $1.

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 present value of a series of payments. the present value of a single amount.

the future value of a series of payments.

The difference between $100 invested now and $105 at the end of year 1 represents the compound interest rate. future value. time value of money. interest rate.

time value of money.

Which of the following is not a monetary liability? wages payable notes payable unearned revenue accounts payable

unearned revenue