Chapter 5

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

future value number of compounding periods interest 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

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

monetary assets.

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

present future

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

annuity

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?

$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

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

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

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

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

True

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.

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

deferred annuity

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.

stated; market