Exam 2 - Chapter 12 Flashcards
Define:
Time Value Concept
$1 today is worth more than $1 tomorrow because tomorrow’s future value equals today’s $1 plus one day of interest
Answer:
Time value concept s important with ___(a)___
a. long-term liabilities
Define:
Long-Term Liabilities
Liabilities which will be paid off or due over the course of more than 1 year or 1 accounting cycle
Answer:
If you have 25 year bonds you pay these off ___(a)___ versus ___(b)___
a. 25 years later
b. present value of the bonds today
Answer:
When we present long-term bonds or long-term liabilities on today’s ___(a)___, we have to calculate the ___(b)___ because ___(c)___
a. financial statement
b. present value
c. present value and future value are so different from each other
Answer:
We always list the ___(a)___ on the financial statement because we never ___(b)___
a. present value
b. prepare future financial statements
List:
Types of Present Value
- Payment of a Single Sum
- Present Value of Ordinary Annuity
3.
Define:
Present Value of Single Sum
You look at the timeline of the value (say 0 to 5) where 5 is the future value and otherwise there are no other cash inflows or cash outflows, so you are calculating the present value of the future value at time 0
Equation:
Present Value of Single Sum
Future Value * Present Value Factor
Answer:
Present value factor is determined by you ___(a)___ and ___(b)___
a. number periods
b. market interest rate
Answer:
Why do you use market interest rate in determining present value?
Because only market interest rate will how to discount the future value to the present value
We care about market value so we have to use market interest rate
Answer:
In determining present value we care about ___(a)___ so we have to use ___(b)___
a. market value
b. market interest rate
Answer:
The present value of a single sum factor is calculated using a ___(a)___ table or a ___(b)___ table
a. present value of $1
b. present value of single sum
Define:
Ordinary Annuity
You have equal amounts and equal intervals at the end of each period
Answer:
With an ordinary annuity, what is the present value at time 0?
Periodic Rent * Ordinary Annuity Factor
Answer:
How is the ordinary annuity factor determined?
Number of periods and market interest rate
Answer:
What tool is used to get the ordinary annuity factor?
Present value of ordinary annuity table
Answer:
What is the periodic rent in an ordinary annuity?
The equal amount at the end of each period
Answer:
The bond ___(a)___ will be different from the bond ___(b)___
a. selling pice
b. bond value
Answer:
The bond selling price is the ___(a)___ you want to get from ___(b)___
a. total amount of money
b. issued bonds
Answer:
What is the bond selling price?
The present value for all the cash flows related with the bond during the life of the bond
List:
Types of Cash Flows Related to Bonds
- Annuity
2. Principal
Define:
Annuity (with Bonds)
One of the cash flows related to bonds
At the end of each period you pay cash to the bond holders based on the bond terms
Example:
Annuity of bonds - Issue $1,000,000 in bond and claim interest rate is 5%
During the life of the bond, at the end of each year you’re going to pay 5% in cash
This is non-negotiable and won’t be changed during the life of the bonds
Define:
Principal (with bonds)
One of the cash flows related to bonds
At the end of the life of the bond you pay off a lump sum to the bond holders. The lump sum is the principal
Answer:
The principal of a bond is only paid ___(a)___ during the life of the bond, so it is a ___(b)___
a. once
b. single sum
Answer:
You have to calculate the ___(a)___ if the principal bond at ___(b)___
a. present value
b. the maturity
Answer:
You add ___(a)___ and ___(b)___ together to get the bond selling price
a. annuity
b. principal
Answer:
What does the bond selling price determine?
How much cash you’re going to receive when you initially sell this bond to the market
Answer:
Theoretically, bonds can be issues at ___(a)___, ___(b)___, or ___(c)___
a. premium
b. face value
c. discount
Answer:
What happens when a bond is issued at a premium?
When issued a bond, the cash you receive is going to be higher than the face value of the bond
Answer:
Explain how the cash received for a bond issued at premium is higher than face value
Suppose the slated interest rate is 8% and market interest is 6%, so you purchased above market. Then the bond becomes very popular, which raises the price of your bond
Answer:
When you give a discount to bond holders when you issue the bonds, the ___(a)___ you are going to receive when you issue the bonds is going to be ___(b)___ than the money you ___(c)___
a. cash
b. lower
c. originally wanted to get
Answer:
In theory bonds can be issued at ___(a)___. Since nobody can ___(b)___, it ___(c)___ in the real market
a. face value
b. predict a market interest rate
c. never occurs
Answer:
Face value of the bond is the ___(a)___
a. amount of money managers want to get
Answer:
How do you enter bond information on a balance sheet when you issue the bond
Debit cash for how much you will receive in the future
Credit the selling price
Credit the difference as discount on bonds payable
