CHAPTER 6 Flashcards
What is Interest?
Cost of using money over time.
What is Interest Expense?
The recognition during a reporting period of a borrower’s cost for using resources.
What is Interest Revenue?
The recognition during a period of a lender’s return for loaning resources.
What is Compound Interest?
Includes interest on previously computed and recorded interest.
Lump-Sum Amount?
It is a single amount. It often refers to a one-time-only investment, which involves an amount that earns compound interest from the start to the end of an investment time frame resulting in an ending amount.
What is the Present Value?
Refers to an amount earlier than the end-point of an investment. The value today of a future amount that is discounted to the present with interesting discounting.
What is the Future Value?
Refers to an amount later than the starting point of an investment. The value at a future date that assumes an investment increased by interest accumulation.
What do you to the EXCEL FV formula if its: Annually, Semi-Annually, Quarterly, Monthly?
Annual = APR is the rate of the year, NPER once a year Semi-Annual= APR/2, NPER*2 twice a year Quarterly = APR/4, NPER*4 4x a year Monthly= APR/12, NPER*12 12x a year
What is Discounting?
A mathematical process for reducing a future value to a present value.
What are the two approaches in computing present value in order to estimate the fair value of an asset or liability?
The traditional approach and the expected cash flow approach.
What is the traditional approach?
Risk the future cash flows is reflected in the interest rate used to discount the cash flows. The rate can be set without a formal assessment of the uncertainty of individual cash flows. The higher the risk, the higher the interest rate.
What is the expected cash flow approach?
Incorporates a range of potential cash flows and assigns probabilities to cash flow amounts within the range. In this way, the risk is applied directly to the cash flows allowing accountants to recognize uncertainties in groups of cash flows. The expected cash flow approach is appropriate for situations where payments are estimated and not contractual.
What is the difference between an Ordinary Annuity and Annuity due?
Ordinary Annuity: End of Period Payments. Annuity Due: Beginning of period Payments
What is a deferred Annuity?
o A deferred annuity occurs when an annuity stream is delayed. When computing the present value of a deferred annuity, interest is recognized during the deferral period.
How do you solve for a deferred annuity?
Solve the present value first of the payment arrangements. Then use this answer as the future value for the present value of the delay. Thats the final answer
