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Exam 6: Time Value of Money Concepts

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Question 51

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On February 1,2016,Lynda Brown,proud mother of newborn daughter Goldie,purchased $600,000 in zero-coupon bonds that mature on February 1,2036.The bonds pay no interest during the period of time they are outstanding.The interest rate for such borrowings is at 12%. Required: Calculate the price Lynda paid for the bonds.

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$600,000 x 0.10367* ...

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Question 52

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On May 1,2016,Bo Smith,proud father of newborn son Bobo,purchased $200,000 in zero-coupon bonds that mature on May 1,2036.The bonds pay no interest during the period of time they are outstanding.The interest rate for such borrowings is at 9%.Interest compounds annually. Required: Calculate the price Bo paid for the bonds.

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$200,000 x 0.17843* ...

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Question 53

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Given identical current amounts owed and identical interest rates,annual payments of an ordinary annuity will be greater than annual payments of an annuity due.

Use the following to answer questions Present and future value tables of $1 at 3% are presented below: -At the end of the next four years,a new machine is expected to generate net cash flows of $8,000,$12,000,$10,000,and $15,000,respectively.What are the (rounded) cash flows worth today if a 3% interest rate properly reflects the time value of money in this situation?

GHI Company will issue $2,000,000 in 8%,10-year bonds when the market rate of interest is 6%.Interest is paid semiannually. Required: Determine how much cash GHI Company should realize from the bond issue.

Column 3 is an interest table for the:

Provide two examples of the use of present value techniques in accounting.

Column 2 is an interest table for the:

Fenland Co.plans to retire $100 million in bonds in five years,so it wishes to create a fund by making equal investments at the beginning of each year during that period in an account it expects to earn 8% annually.What amount does Fenland need to invest each year?

Listed below are 5 terms followed by a list of phrases that describe or characterize each of the terms.Match each phrase with the number for the correct term.

Garland Inc.offers a new employee a lump-sum signing bonus at the date of employment,June 1,2016.Alternatively,the employee can take $39,000 at the date of employment plus $10,000 each June 1 for five years,beginning in 2020.Assuming the employee's time value of money is 9% annually,what lump sum at employment date would make him indifferent between the two options?

Briefly describe the differences between an ordinary annuity,an annuity due,and a deferred annuity.

Prepare a time diagram for the future value of an ordinary annuity with three payments of $300.Be sure to indicate the periods in which interest is added.

To determine the future value factor for an annuity due for period n when given tables only for an ordinary annuity:

When interest is compounded,the stated rate of interest exceeds the effective rate of interest.

An investment product promises to pay $42,000 at the end of 10 years.If an investor feels this investment should produce a rate of return of 12%,compounded annually,what's the most the investor should be willing to pay for the investment?

ABC Company will issue $5,000,000 in 6%,10-year bonds when the market rate of interest is 8%.Interest is paid semiannually. Required: Determine how much cash ABC Company will realize from the bond issue.

Use the following to answer questions Present and future value tables of $1 at 3% are presented below: -Jose wants to cash in his winning lottery ticket.He can either receive five $5,000 annual payments starting today,or he can receive a lump-sum payment now based on a 3% annual interest rate.What would be the lump-sum payment?

Listed below are 5 terms followed by a list of phrases that describe or characterize each of the terms.Match each phrase with the number for the correct term.

With an ordinary annuity,a payment is made or received on the date the agreement begins.