Ch 5 Accounting and the Time Value of Money Flashcards
a series of payments or receipts that occur at equal intervals of time
an ________ requires the following:
1. periodic payments or receipts (called rents) of the same amount
2. the same-length interval between such rents
3. compounding of interest once each interval
annuity
rent occurs at the beginning of each
period
alt def: each rent is payable at the beginning of the period
annuity due
interest accrues on the unpaid interest of past periods as well as on the principal
alt def: the return on, or growth of, the principal for two or more time periods
compound interest
an annuity in which the rents begin after a specified number of periods
deferred annuity
reduces the amounts or values so that the present value is less than the future amount
discounting
the return of annual interest rate compounded
with compounding, the _______ will always exceed the stated rate
effective yield
an approach that uses a range of cash flows and incorporates the probabilities of those cash flows to provide a more relevant measurement of present value
expected cash flow approach
aka stated and nominal rate
the interest rate written into the loan or investment contract
face rate
value at a later date of a single sum that is invested at compound interest
future value
the sum of all the rents plus the accumulated compound interest on the rents
future value of an annuity
a percentage of the outstanding principal
interest
aka the stated and face rate
the interest rate written into the loan or investment contract
nominal rate
rent occurs at the end of each period
alt def: each rent is payable at the end of the period
ordinary annuity
the value at an earlier date (usually now) of a given future sum discounted at compound interest
the value now (present time) of a future sum or sums discounted assuming compound interest
present value
the amount borrowed or invested
principal
the pure rate of return plus the expected inflation rate
“the FASB takes the position that after computing the expected cash flows, a company should discount those cash flows by the _______”
risk-free rate of return
interest on principal only, regardless of interest that may have accrued in the past
alt def: computed on the amount of the principal only, the return on (or growth of) the principal for one time period
simple interest
aka nominal and face rate
the interest rate written into the loan or investment contract
stated rate
a dollar received today is worth more than a dollar promised at some time in the future
time value of money
interest is usually expressed as an annual rate, but when the compounding period is shorter than one year, the interest rate for the shorter period must be determined
alt def: unless otherwise stated, an annual rate that must be adjusted to reflect the length of the compounding period if less than a year
rate of interest
the number of compounding periods (a period may be equal to or less than a year)
number of time periods
the value at a future date of a given sum or sums invested assuming compound interest
future value
the future value of $1 (or a single given sum), FV, at the end of n periods at i compound interest rate
future value of 1
the value at an earlier date (usually now) of a given future sum discounted at compound interest
present value of 1
the future value on the date of the last rent
future value of an ordinary annuity
the value now of $1 to be received or paid at the end of each period (rents) for n periods, discounted at i compound interest
present value of an ordinary annuity
the value now of $1 to be received or paid at the beginning of each period (rents) for n periods, discounted at i compound interest
present value of an annuity due
the present value (worth) of a series of rents discounted at compound interest; in other words, it is the sum when invested at compound interest that will permit a series of equal withdrawals at regular intervals
present value of an annuity
the future value one period after the date of the last rent
future value of an annuity due
the future value of a series of rents invested at compound interest; in other words, the accumulated total that results from a series of equal deposits at regular intervals invested at compound interest
both deposits and interest increase the accumulation
future value of an annuity
