Exam 2 - Chapter 12

Question 1

Define:

Time Value Concept

Answer 1

$1 today is worth more than $1 tomorrow because tomorrow’s future value equals today’s $1 plus one day of interest

Question 2

Answer:

Time value concept s important with ___(a)___

Answer 2

a. long-term liabilities

Question 3

Define:

Long-Term Liabilities

Answer 3

Liabilities which will be paid off or due over the course of more than 1 year or 1 accounting cycle

Question 4

Answer:

If you have 25 year bonds you pay these off ___(a)___ versus ___(b)___

Answer 4

a. 25 years later

b. present value of the bonds today

Question 5

Answer:

When we present long-term bonds or long-term liabilities on today’s ___(a)___, we have to calculate the ___(b)___ because ___(c)___

Answer 5

a. financial statement
b. present value
c. present value and future value are so different from each other

Question 6

Answer:

We always list the ___(a)___ on the financial statement because we never ___(b)___

Answer 6

a. present value

b. prepare future financial statements

Question 7

List:

Types of Present Value

Answer 7

1. Payment of a Single Sum
2. Present Value of Ordinary Annuity
   3.

Question 8

Define:

Present Value of Single Sum

Answer 8

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

Question 9

Equation:

Present Value of Single Sum

Answer 9

Future Value * Present Value Factor

Question 10

Answer:

Present value factor is determined by you ___(a)___ and ___(b)___

Answer 10

a. number periods

b. market interest rate

Question 11

Answer:

Why do you use market interest rate in determining present value?

Answer 11

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

Question 12

Answer:

In determining present value we care about ___(a)___ so we have to use ___(b)___

Answer 12

a. market value

b. market interest rate

Question 13

Answer:

The present value of a single sum factor is calculated using a ___(a)___ table or a ___(b)___ table

Answer 13

a. present value of $1

b. present value of single sum

Question 14

Define:

Ordinary Annuity

Answer 14

You have equal amounts and equal intervals at the end of each period

Question 15

Answer:

With an ordinary annuity, what is the present value at time 0?

Answer 15

Periodic Rent * Ordinary Annuity Factor

Question 16

Answer:

How is the ordinary annuity factor determined?

Answer 16

Number of periods and market interest rate

Question 17

Answer:

What tool is used to get the ordinary annuity factor?

Answer 17

Present value of ordinary annuity table

Question 18

Answer:

What is the periodic rent in an ordinary annuity?

Answer 18

The equal amount at the end of each period

Question 19

Answer:

The bond ___(a)___ will be different from the bond ___(b)___

Answer 19

a. selling pice

b. bond value

Question 20

Answer:

The bond selling price is the ___(a)___ you want to get from ___(b)___

Answer 20

a. total amount of money

b. issued bonds

Question 21

Answer:

What is the bond selling price?

Answer 21

The present value for all the cash flows related with the bond during the life of the bond

Question 22

List:

Types of Cash Flows Related to Bonds

Answer 22

1. Annuity

2. Principal

Question 23

Define:

Annuity (with Bonds)

Answer 23

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

Question 24

Example:

Annuity of bonds - Issue $1,000,000 in bond and claim interest rate is 5%

Answer 24

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

Question 25

Define:

Principal (with bonds)

Answer 25

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

Question 26

Answer:

The principal of a bond is only paid ___(a)___ during the life of the bond, so it is a ___(b)___

Answer 26

a. once

b. single sum

Question 27

Answer:

You have to calculate the ___(a)___ if the principal bond at ___(b)___

Answer 27

a. present value

b. the maturity

Question 28

Answer:

You add ___(a)___ and ___(b)___ together to get the bond selling price

Answer 28

a. annuity

b. principal

Question 29

Answer:

What does the bond selling price determine?

Answer 29

How much cash you’re going to receive when you initially sell this bond to the market

Question 30

Answer:

Theoretically, bonds can be issues at ___(a)___, ___(b)___, or ___(c)___

Answer 30

a. premium
b. face value
c. discount

Question 31

Answer:

What happens when a bond is issued at a premium?

Answer 31

When issued a bond, the cash you receive is going to be higher than the face value of the bond

Question 32

Answer:

Explain how the cash received for a bond issued at premium is higher than face value

Answer 32

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

Question 33

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)___

Answer 33

a. cash
b. lower
c. originally wanted to get

Question 34

Answer:

In theory bonds can be issued at ___(a)___. Since nobody can ___(b)___, it ___(c)___ in the real market

Answer 34

a. face value
b. predict a market interest rate
c. never occurs

Question 35

Answer:

Face value of the bond is the ___(a)___

Answer 35

a. amount of money managers want to get

Question 36

Answer:

How do you enter bond information on a balance sheet when you issue the bond

Answer 36

Debit cash for how much you will receive in the future

Credit the selling price

Credit the difference as discount on bonds payable