FAR Module 13A

Question 0

When interest is compounded more than once a year what two extra steps are needed

Answer 0

1) multiply “N” by the number of times interest is compounded annually. This will give you the total number of interest periods
2) divide “I” by the number of times interest is compounded annually. This will give you the appropriate interest rate for each interest period

Question 1

Define “compounding”

Answer 1

Earning interest on interest

Question 2

Define “annuity”

Answer 2

A stream of equal payments

Question 3

When is the payment paid for an Annuity Due

Answer 3

The beginning of the period

Question 4

When is the payment paid for an Ordinary Annuity

Answer 4

At the end of the period

Question 5

What is another term for an Ordinary Annuity

Answer 5

An annuity in arrears

Question 6

This is a “less than” concept

Answer 6

Present value

Question 7

What is the formula to calculate PV

Answer 7

1/(1+i)^n

Question 8

How do you make your own PV table for an Ordinary Annuity? How do you change from PV$1 to PVOA$1?

Answer 8

Use the PV formula [1/(1+i)^n] to calculate the PV for each period - this is the PV of $1 (does not account for annuity)

The PVOA$1 for period 1 will be the same as the PV$1 for period one. For each period after that you add the previous pd of PVOA$1 + the current pd of PV$1

Question 9

How do you convert the Ordinary Annuity table PV factors to an Annuity Due PV factor?

Answer 9

Multiply the ordinary annuity factor by (1+i)

Question 10

When a note is exchanged for cash and no other rights or privileges are exchanged what is the present value of the note

Answer 10

The present value of the note is equivalent to the cash exchanged

The cash exchanged may not always be equal to the face amount of the note (the amount paid at maturity)

Question 11

When the face amount of the note does not equal the present value, the difference is what

Answer 11

Recognized as either a discount or premium

Question 12

This results when the face of the note exceeds its present value

Answer 12

A discount

Question 13

This results when the present value of the note exceeds the face value

Answer 13

A premium

Question 14

Loan origination costs are recognized by who

Answer 14

The lender only

There is no effect on the borrower

Question 15

What are loan origination costs

Answer 15

costs incurred by the lender (bank) when originating/acquiring a loan

Question 16

What are the two loan origination costs and how are they treated

Answer 16

1) direct -> defer and recognize these costs over the life of the loan
2) indirect -> expensed as incurred

Question 17

How are loan origination fees assessed

Answer 17

In the form of points, where the point is 1% of the face amount of the loan

Question 18

What are loan origination fees

Answer 18

Additional bank revenue that reduces what the borrower gets. This is usually nonrefundable

Question 19

Loan origination fees affect who

Answer 19

Both the lender and the borrower

Question 20

How do loan origination fees affect the lender and borrower

Answer 20

Decreases the loan on both sides - defer and recognize the nonrefundable fee over the life of the loan

Question 21

What disclosures are required for long-term borrowings? How far out must this information be disclosed?

Answer 21

1) aggregate amounts of maturities
2) sinking fund requirements

These must be made for each of the five years following the balance sheet date

Question 22

For financial assets and financial liabilities using the fair value option, how often is the fair value reported?

Answer 22

At the end of each reporting period

Question 23

When financial assets and liabilities are reported at the end of each reporting period at fair value, the resulting gain or loss is reported where

Answer 23

In earnings of the period

Question 24

T/F

under the fair value option there is no “discount” or “premium”. Instead you will recognize an unrealized holding gain or loss

Answer 24

TRUE

Question 25

Under IFRS, borrowing costs must be capitalized if…

Answer 25

they are related to the acquisition, construction, or production of a qualifying asset

Borrowing costs that do not meet the rules for capitalization are expensed in the current period.

Note that finance costs, such as interest expense, must be disclosed separately

Question 26

What is a qualifying asset under IFRS? List examples (6)

Answer 26

An asset that takes a substantial period of time to get ready for its intended use.

Examples include inventory, plant, property, equipment, intangible assets, or investment property