Appendix E Flashcards
Interest Definition
The payment for the use of another party’s money
Interest is generally stated as a _____ rate (time period)
Annual
Interest is the difference between which values?
The principal and the total amount repaid/collected
Principal definition
The amount borrowed or invested
Simple Interest Formula
Principal x Rate x time
P x I x N
Simple interest definition
Interest computed on the principal amount only for one period
Compound interest definition
Interest computed on the principal AND on any interest earned that has not been paid/withdrawn
Compound interest uses the ________ at each year end to computer interest in the succeeding year
Accumulated balance
Accumulated balance definition
Principal plus interest to date
Which interest is most commonly used?
Compound
When is simple interest generally applicable?
Only short term situations of a year or less
Future value of a single amount definition
The value at a future date of a given amount invested, assuming compound interest
Future value formula
P x (1 + i) to the Nth
Annuity definition
A series of payments or receipts of equal dollar amounts
Future value of an annuity definition
The sum of all the payments (receipts) plus the accumulated compound interest on them
What info do you need to calculate the future value of an annuity which you don’t need for future value of a single amount
The number & amounts of periodic payments/receipts
When is a manual calculation of each individual future value cash flow required?
When the periodic payments/receipts are not equal in each period.
The future value an annuity of 1 table assumes that the payment/receipts to be made when?
At the end of the period
Present value definition
The value now of a given amount to be paid or received in the future assuming compound interest
Discounting the future amount definition
The process of determining the present value
When are present value computations used?
- Determine the market price of a bond
- Determine the amount to be reported for notes payable and lease liabilities
- Capital budgeting and other investment proposals
- All rate of return and internal rate of return computations
Present Value Formula
FV / (1 + i) to the Nth
What are the percentage columns known as on the “Present value of 1” table?
Discount rates
For the present value of 1, the further into the future (# of periods) that the future value is, the _______ the present value
Smaller
When are present values of an annuity used?
- Loan agreements
- Installment sales
- Mortgage notes
- Lease/rental contracts
- Pension obligations
Present value of an annuity definition
The value now of a series of future receipts or payments, discounted assuming compound interest
When making calculations and the time frame is less than one year, what do you do?
Convert the annual interest rate to the applicable time frame
Semiannually is ___ times a year
2
Biannually is ___ times a year
2
When an investor’s market interest rate is equal to the bond’s contractual interest rate, the present value of bonds will ________ the face value of the bonds
Equal
The present value of a long term note or bond is a function of which 3 variables?
- The payment amounts
- The length of time until the amounts are paid
- The discount rates
To calculate the present value of a long term note or bond, what two elements make up the “Payment Amounts”
- A series of interest payments (the annuity)
- The principal amount (a single sum)
