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Exam 7: Accounting and the Time Value of Money

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Question 1

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Bangin Inc.financed the purchase of a machine by making ten annual payments of $13,000 with the first payment due today.The purchase cost of the machine is considered to be the present value of those payments.What was the purchase cost of the machine to Bangin assuming a discount rate of 9%?

A) $59,633
B) $75,467
C) $83,429
D) $90,938

E) A) and B)
F) All of the above

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Question 2

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Compound interest includes interest earned on interest.

A) True
B) False

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Question 3

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You decide to deposit $5,000 at a local bank for three years at a 8% rate of interest compounded quarterly.The future value of your investment is most nearly equal to ________.

Compound interest is computed on both the principal and on the accumulated interest.

Anne wants to accumulate $25,000 by December 31,2019.To accumulate that sum,she will make twelve equal quarterly deposits of $1,761.55 at the end of March,June,September,and December for the next three years,beginning on March 31,2016,into a fund that earns interest compounded quarterly.What annual rate of interest must the fund provide to yield the desired sum?

What is the market price of a $500,000,ten-year,12% bond issue sold to yield an effective rate of 10% if interest is paid semiannually?

A series of equal periodic payments that starts more than one period after the agreement is called ________.

Simple interest is computed on just the accumulated interest left on deposit.

Bob Marby purchased a TV from Tryton Sales and signed a 2-year,6% promissory note for $1,200.What is the amount required to pay off the note if it accrues simple interest?

Future value factors are determined by two characteristics: the interest rate and the number of compounding periods.

You have discovered an investment opportunity that earns a 8% rate of interest compounded quarterly.Which of the following amounts is most nearly equal to the amount you should deposit today to have $7,000 in five years?

You are provided with two time-value-of-money tables.One is a present value table and one is a future value table.How can you tell which table is which type?

Terry Brown purchases a used car and agreed to pay $200 per month for two-and-a-half years with the first payment due at the end of the first month.What was the purchase price of the car assuming an annual rate of 12%?

Which of the following equations is consistent with the relationship between the future value (FV) and the present value (PV) given a discount rate (R) and the number (N) of compounding periods?

An example of a deferred annuity is payments for ________.

Determining the future value of one or more previous cash flows is known as ________.

The future value of an annuity due for any given interest rate and number of periods is always less than the future value of an annuity due for the same interest rate and number of periods.

Bobby's parents loaned him $80,000 to fund his college education.His parents are not charging interest.They desire to be paid one lump sum of $80,000 when Bobby can accumulate that amount.Bobby established a savings plan that earns 8% compounded annually.His new job promises to pay an annual holiday bonus that will enable him to make equal annual,year-end deposits of $6,400 starting next year.Approximately how many years will it take Bobby to accumulate the $80,000?

How is the effective interest rate determined?

For any discount rate and number of periods,the present value of an annuity due factor is always greater than the corresponding the present value of an ordinary annuity factor.