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About this document
- Pages
- 9 pages
- Price
- $9 one-time, yours to keep
- Membership
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- Format
- Subject
- Accounting, Finance
- Module
- Chapter 6
This exam covers the time value of money, including future value, present value, and annuities. It includes multiple-choice questions and detailed solutions. It is for Chapter 6.
What's inside
- Bond proceeds and cash flows
- Future value of investments
- Present value of annuities
- Noninterest-bearing notes
- Gain or loss on asset sales
- Franchise acquisition cost
Who it is for: Students taking an accounting course with ACC422. (Undergraduate)
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Summary
The time value of money is a key concept in finance. It explains how much money received today is worth more than the same amount received in the future. This document gives examples of how to calculate the present value and future value of money. It also shows how to apply these calculations to real-world financial situations.
Bond Pricing
Bond pricing is based on the present value of all future cash flows. These cash flows include periodic interest payments and the principal amount due at the end of the bond's life. The prevailing market rate of interest at the time of the bond’s issuance is used to discount these cash flows.
Certificates of Deposit
Certificates of deposit (CDs) are investments with a fixed interest rate. The maturity value of a CD is calculated using the future value factor at the fixed interest rate. The market interest rate at maturity is irrelevant if the fair value option is not elected.
Noninterest-Bearing Notes
Noninterest-bearing notes require payments over time. The present value of these payments is calculated using the prevailing market interest rate. This present value is reported as the note receivable or payable on the balance sheet.
Franchise Fees
Franchise fees often involve an initial payment and future payments. The acquisition cost of the franchise is the sum of the initial payment and the present value of the future payments. The present value is calculated using the interest rate at which the franchisee can borrow money.
Key terms
- Time value of money
- The idea that money available at the present is worth more than the same amount in the future.
- Present value
- The current value of a future sum of money given a specific rate of return.
- Future value
- The value of an asset or cash at a specified date in the future.
- Annuity
- A series of equal payments made at regular intervals.
- Annuity due
- An annuity with the first payment occurring at the beginning of the first period.
- Ordinary annuity
- An annuity with the first payment occurring at the end of the first period.
Questions this document helps with
- How do you calculate the present value of a bond?
- What is the maturity value of a certificate of deposit?
- How do you report a noninterest-bearing note on a balance sheet?
Summary written with AI from the document's text.
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