F5 Notecards (General) Flashcards
6 Present Value Concepts
1- PV of $1 2- FV of $1 3- PV of an ordinary annuity 4- FV of an ordinary annuity 5- PV of an annuity due 6- FV of an annuity due
Annuity definition
A large number of business transactions involve multiple payments or receipts
2 Examples of annuities
1- Bond Interest Payments
2- Lease Rental Payments
Ordinary Annuity vs Annuity Due
Ordinary Annuity = due at END of year (AKA in arrears)
Annuity Due = due at BEGINNING of year
If given an “Annuity Due” table and are asked for “Ordinary Annuity”, what to do:
Subtract 1 from annuity due = ordinary annuity
Present Value Formula =
Present value = future amount X present value factor
Lessee definition and how they account for lease
- The renter
- Accounts for rental as an operating lease
- Accounts for sale as capital lease (GAAP) or finance lease (IFRS)
Lessor definition and how they account for lease
- The owner
- Accounts for rental as an operating lease
- Accounts for sale as sales-type or direct financing type (GAAP) or finance lease (IFRS)
Face Value of Bond =
PV of future interest payments (@ market rate) (use PV of annuity)
PLUS
PV of principal (at market rate) (use PV of $1)
Carrying Value of Bond with Premium =
Face value + Unamortized premium
Carrying Value of Bond with Discount =
Face value - unamortized discount
2 Ways to account for discount/premium amortization
1- Straight-line method
2- Effective interest rate method
Straight-line method calculation =
(Premium or discount) / # periods outstanding = amortization
Interest expense = (face value X stated rate) - premium amortization + discount amortization
Effective Interest Rate Method Calculation
I/S: net carry value X effective interest rate = interest expense
B/S: bond face X coupon rate = interest paid
Interest expense - interest paid = amortization
What PV factor to use to determine periodic payments to be made into a sinking fund:
Future value of an annuity of $1 at an assumed rate
