Ch 5 Accounting and the Time Value of Money

Question 1

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

Answer 1

annuity

Question 2

rent occurs at the beginning of each
period

alt def: each rent is payable at the beginning of the period

Answer 2

annuity due

Question 3

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

Answer 3

compound interest

Question 4

an annuity in which the rents begin after a specified number of periods

Answer 4

deferred annuity

Question 5

reduces the amounts or values so that the present value is less than the future amount

Answer 5

discounting

Question 6

the return of annual interest rate compounded

with compounding, the _______ will always exceed the stated rate

Answer 6

effective yield

Question 7

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

Answer 7

expected cash flow approach

Question 8

aka stated and nominal rate

the interest rate written into the loan or investment contract

Answer 8

face rate

Question 9

value at a later date of a single sum that is invested at compound interest

Answer 9

future value

Question 10

the sum of all the rents plus the accumulated compound interest on the rents

Answer 10

future value of an annuity

Question 11

a percentage of the outstanding principal

Answer 11

interest

Question 12

aka the stated and face rate

the interest rate written into the loan or investment contract

Answer 12

nominal rate

Question 13

rent occurs at the end of each period

alt def: each rent is payable at the end of the period

Answer 13

ordinary annuity

Question 14

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

Answer 14

present value

Question 15

the amount borrowed or invested

Answer 15

principal

Question 16

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 _______”

Answer 16

risk-free rate of return

Question 17

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

Answer 17

simple interest

Question 18

aka nominal and face rate

the interest rate written into the loan or investment contract

Answer 18

stated rate

Question 19

a dollar received today is worth more than a dollar promised at some time in the future

Answer 19

time value of money

Question 20

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

Answer 20

rate of interest

Question 21

the number of compounding periods (a period may be equal to or less than a year)

Answer 21

number of time periods

Question 22

the value at a future date of a given sum or sums invested assuming compound interest

Answer 22

future value

Question 23

the future value of $1 (or a single given sum), FV, at the end of n periods at i compound interest rate

Answer 23

future value of 1

Question 24

the value at an earlier date (usually now) of a given future sum discounted at compound interest

Answer 24

present value of 1

Question 25

the future value on the date of the last rent

Answer 25

future value of an ordinary annuity

Question 26

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

Answer 26

present value of an ordinary annuity

Question 27

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

Answer 27

present value of an annuity due

Question 28

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

Answer 28

present value of an annuity

Question 29

the future value one period after the date of the last rent

Answer 29

future value of an annuity due

Question 30

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

Answer 30

future value of an annuity