Deck 11: Understanding Interest, Annuities, and Bond Valuation

Question 1

Simple interest is used in most business transactions.

Answer 1

False

Question 2

A series of payments of equal dollar amounts to be paid periodically are referred to as an annuity.

Answer 2

True

Question 3

When calculating the present value of an annuity you need to know the discount rate, the number of payments, and the amount of the periodic payment.

Answer 3

True

Question 4

When the contractual rate and market rates of interest are equal, a bond will be sold above its face value.

Question 5

In order to calculate the present value of an annuity, it can be done using the table entitled present value of $ 1.

Question 6

The calculation of the market price of a bond involves three variables: payment amount, market interest rate, and the length of time until the amounts are paid.

Question 7

The market price of a bond is determined using a present value calculation.

Question 8

Present value is the value today of a given investment to be received in the future.

Question 9

Interest is the payment for the use of money.

Question 10

For an annuity due, it is assumed that the first payment starts at the end of the period.

Question 11

If the market rate of interest is greater than the contractual rate the bond will sell at a discount.

Question 12

When the market rate is equal to the contractual rate, the bond will be sold at its face value.

Question 13

A series of receipts in varying amounts, to be received periodically, are referred to as an annuity.

Question 14

The present value of an annuity is the value in the future at a specified date of a series of future payments using a compound interest rate.

Question 15

For an ordinary annuity, the payments are at the end of each period.

Question 16

The rate of interest is generally stated using a quarterly rate.

Question 17

Compounding calculates interest not only on the principal but also on the interest earned to date.

Question 18

Present value refers to the value of an investment at the end of a three-year period for a three-year investment.

Question 19

The present value of an annuity is the value today of a series of future payments discounted using a compound interest rate.

Question 20

Bond payments are made up of two components: the principal amount and a series of interest payments.

Question 21

An asset is considered impaired if its carrying amount is less than its recoverable amount.

Question 22

If the bond's contractual rate is 8% and the market rate is 9%, the bond will sell at a discount.

Question 23

The value in use calculation for an asset involves the estimate of future cash flows and calculating the present value of these cash flows

Question 24

Simple interest is calculated by

A) principal x compound interest rate x time.
B) principal x interest rate x time.
C) payment due x interest x number of payments in a year.
D) payment due x compound interest x number of payments in a year.

Question 25

If the bond's contractual rate is 10% and the market rate is 8%, the bond will sell above its face value.

Question 26

You have a target of having $ 5,000 at the end of 5 years. If interest rate is at 3% how much would you need to invest today?

A) $ 4,313.04
B) $ 4,854.36
C) $ 4,442.45
D) Additional information is required to complete the calculation.

Question 27

The present value of a note payable is the amount borrowed.

Question 28

You have two options 1) invest $ 1,000 at 5% simple interest for two years or 2) invest $ 900 for two years at 5% compounded annually. What is the total amount of interest to be received under each scenario?

A) 1 - $ 100; 2 - $ 90
B) 1 - $ 102.50; 2 - $ 92.25
C) 1 - $ 102.50; 2 - $ 90
D) 1 - $ 100; 2 - $ 92.25

Question 29

You decided to borrow $ 2,000 for two years at 5%. How much interest would you pay in the first year?

A) $ 200
B) $ 100
C) $ 50
D) $ 75

Question 30

Value in use of an asset involves a single step calculating the asset's future cash flows.

Question 31

Given an interest rate of 4%, what amount would you have to invest today to end up with $ 1,000 one year from now?

A) $ 250
B) $ 961.54
C) $ 925.93
D) Additional information is required to complete the calculation.

Question 32

The application of present value concepts includes determining the value in use of an asset.

Question 33

You're planning a trip to Europe three years from now and would like to have $ 6,000 at that time. Given an interest rate of 5%, how much would you need to invest today?

A) $ 5,731.10
B) $ 5,714.28
C) $ 5,183.03
D) Additional information is needed.

Question 34

Assuming a simple rate of interest, how much interest in total would you pay if you borrowed $ 5,000 for three years at 8%?

A) $ 400
B) $ 800
C) $ 1,200
D) More information is need to complete the calculation.

Question 35

An annuity is

A) a series of equal dollar amounts to be received or paid periodically.
B) a series of dollar amounts to be paid each month.
C) a series of dollar amounts to be received each month.
D) a one-time payment or receipt.

Question 36

The amount of interest involved in a transaction is based upon

A) the principal.
B) interest rate.
C) time period.
D) a combination of all of the above.

Question 37

As a note payable will be paid using periodic payments, including both principal and interest, the future value of the note is zero.

Question 38

If you want to have $ 2,000 in your pocket at the end of one year, what amount would you have to invest today given an interest rate of 5%?

A) $ 1,951.22
B) $ 1,818.18
C) $ 1,904.76
D) Additional information is required to complete the calculation.

Question 39

You have two options 1) invest $ 10,000 at 5% simple interest for two years or 2) invest $ 9,000 for two years at 5% compounded annually. What is the total amount of interest to be received under each scenario?

A) 1 - $ 1,000, 2 - $ 900
B) 1 - $ 1,025, 2 - $ 922.50
C) 1 - $ 1,025, 2 - $ 900
D) 1 - $ 1,000, 2 - $ 922.50

Question 40

In calculating the present value of an annuity, it is required to know the

A) discount rate.
B) number of payments.
C) amount of each payment.
D) all of the above

Question 41

RGI Services has just renovated their local warehouse. In order to do so they borrowed $ 20,000 at 5%, which is required to be repaid in two years.
Instructions
a) How much simple interest will RGI have to pay? Show your calculations.
b) If the loan document indicated compound interest, what would the total interest be?

Question 42

You have received the following investment schedule: Instructions
For each investment, indicate with a C if the interest is compound or S if it is simple.

Question 43

What is the present value of a $ 25,000 bond, 5 year with a contractual rate of 5% and a market rate of 6% with semi-annual interest payments?

A) $ 23,946.91
B) $ 23,933.72
C) $ 25,000.00
D) $ 24,375.00

Question 44

Ashwin has just invested $ 10,000 in a compound interest three-year certificate with a rate of 6%.
Instructions
Calculate the total amount of interest in total Ashwin will receive.

Question 45

We are considering a note payable of $ 10,000 with an interest rate of 5% for five years. Determine the blended annual payment amount.

A) $ 2,152.47
B) $ 2,309.75
C) $ 2,000.00
D) $ 2,100.00

Question 46

T-Mall has a piece of equipment on their production line that they think will last another 6 years and is expected to generate $ 6,500 of annual cash flows. Using a discount rate of 5%, what is the value in use of this equipment?

A) $ 31,962
B) $ 32,992
C) $ 29,102
D) $ 39,000

Question 47

What is the present value of $ 2,000 of cash received each year for 5 years at a 6% discount rate?

A) $ 11,144.65
B) $ 8,424.73
C) $ 7,472.60
D) $ 10,600.00

Question 48

A $ 100,000, 5-year bond with an interest rate of 5% is for sale when the market interest is at 5%. This bond will sell at

A) a discount.
B) a premium.
C) neither a discount or a premium.
D) more information is needed.

Question 49

You have won the local lottery and will receive $ 1,000 cash each year for three years. If the discounted rate is 5%, what is the present value of this award?

A) $ 2,590.92
B) $ 2,723.25
C) $ 4,579.71
D) $ 3,150.00

Question 50

A $ 500,000, 4-year bond with an interest rate of 6% is for sale when the market interest is at 5%. This bond will sell at

A) a discount.
B) a premium.
C) neither a discount or a premium.
D) more information is needed.

Question 51

An investment opportunity advertises as follows: invest $ 33,842 and receive $ 50,000. In the fine print, the advertisement indicates an interest rate of 5%.
Instructions
Determine how many years the investor must wait to receive $ 50,000.

Question 52

Match the items below by entering the appropriate code letter in the space provided:
A. Compound interest
B. Discount rate
C. Annuity
D. Simple interest
E. Annuity due
F. Ordinary annuity
G. Discount
H. Present value
1. A series of equal payments or receipts
2. Calculated by taking the principal x interest rate x time
3. Also referred to as the effective rate
4. One where the first payment starts at the beginning of the period
5. Calculated based upon interest not only on the principal but also on interest earned
6. One where the first payment is at the end of each period
7. If the bond's contractual rate is less than the market, it will be sold at a ___
8. The discounting of future cash flows is often referred to as the process of determining the ___

Question 53

Calculate the market price of a $ 10,000, 5-year bond when the market is at 4% and the contractual rate is 6%. Bond interest is paid semi-annually.

A) $ 10,000.00
B) $ 9,146.94
C) $ 10,898.26
D) $ 10,900.59

Question 54

You are scheduled to receive a bonus of $ 1,000 cash each year for three years. Assuming a discount rate of 3%, what is the present value of this bonus?

A) $ 3,090.00
B) $ 2,912.62
C) $ 2,828.61
D) $ 2,745.42

Question 55

Your company is getting to ready to market their $ 1,000 bonds which have an interest rate of 4.5% and a five-year term. Current markets estimate interest rates at 5%. What will your bonds likely sell for?

A) $ 1,000
B) > $ 1,000
C) < $ 1,000
D) You will be unable to sell them at this rate.

Question 56

KPop estimates their embossing machine will last another three years and will generate the following cash flows: Year 1 2 3
$ 5,000 $ 6,000 $ 6,500
Using a rate of 6% what would the equipment's value in use?

A) $ 15,514
B) $ 16,458
C) $ 16,700
D) $ 33,111

Question 57

Ali is in planning to go to university in 5 years. After doing some research, he estimated tuition will run about $ 15,000 for the first year. Interest rates are currently at 5% and not expected to change over the next 5 years.
Instructions
How much money must Ali's Mom invest today to pay cover the tuition for his first year?

Question 58

Suri has the following investments in her portfolio: Instructions
Calculate the total amount of interest Suri will receive on her portfolio.

Question 59

Assume that you will receive $ 5,000 cash each year for four years. Considering a discount rate of 2%, what is the present value of this annuity?

A) $ 19,038.64
B) $ 9,430.45
C) $ 20,400.00
D) $ 16,236.40

Question 60

Strategic Services gives RGI Consulting a $ 225,000 five-year note indicating an interest rate of 6% to cover the consulting services they arranged. As part of this agreement, Strategic Services will make annual blended payments at the end of the year.
Instructions
Calculate the annual payment amount that RGI Consulting can expect to receive.

Question 61

Wyatt Industries is about to issue $ 150,000 bonds with a 10-year term. The interest on these bonds is 3% with annual interest payments. The market rate is currently at 4%.
Instructions
Calculate how much Wyatt will receive from the sale of these bonds.

Question 62

A subsidiary ledger maintains account details that the general ledger cannot capture.

Question 63

You recently purchased a new sectional sofa from Steve's Fine Furniture. The price of the deal was $ 4,500 with the option of an extra $ 500 off the list price or no payment for two years. What is the effective interest rate of this deal?

Question 64

A new lease contract has just been signed for a digital engraving machine. It has been determined that this lease is a capital lease containing the following terms:
Term - 5 years
Payments - $ 5,000 due at the end of each contract year
Discount Rate - 6%
Instructions
Calculate the amount used to capitalize the engraving machine. Round your answer to the nearest dollar.

Question 65

You are looking at purchasing a new car. The contract on the offer includes an interest rate of 5% and purchase price of $ 30,000. You can see that the annual blended payments are $ 5,184.60 but you are unable to read the term as there's a mark on the contract.
Instructions
Determine how many years will it take you to pay off this car loan.

Question 66

The accounts payable subsidiary ledger contains data for individual customers such as balances owing.

Question 67

Simon has $ 8,714.40 in his savings account. Without adding any additional funds to this account Simon would like to have $ 10,000 in it at the end of 4 years. What interest rate would Simon need in order to achieve his goal?

Question 68

Joe is interested in Marissa's 1974 yellow Corvette. He offers to purchase it from her for $ 25,000. This would include $ 5,000 up front and then moving forward, equal blended payments over the next 6 years at 7%. The payments would be made at the end of each year.
Instructions
How much will the payment be from Joe at the end of each year?

Question 69

Rainbow Bridge Pet Care Centre is looking at issuing $ 200,000 of 5-year bonds in order to finance their small animal wing. The bonds have an interest rate of 5% with semi-annual interest payments. The day they go to issue the bonds, the market rate is at 4%.
Instructions
Determine how much Rainbow Bridge will bring in from the sale of these bonds.

Question 70

A general ledger is a group of accounts that share a common characteristic such as accounts receivable but have additional details.

Question 71

The market interest rate is 5%. Your company has just announced the following:
Series A Bonds
$ 500,000
6% semi-annual interest
5-year bonds
Instructions
How much can they expect to collect from the series A bond sales?

Question 72

Ting Towables has a programmable plastic moulding machine. This machine is expected to last another 4 years. The most recent estimates for its future cash flows have been calculated at: Instructions
Calculate the moulding machine's value in use using a discount rate of 4%.

Question 73

Each general ledger control account does not have to equal the total balance of the individual accounts in the related subsidiary ledger.

Question 74

Fung-Yee dreams of owning her own home 10 years from now. At that time, she would like to have $ 30,000 saved up for a down payment. Interest rates are expected to remain at 4%.
Instructions
Calculate how much Fung-Yee would have to invest today to realize her dream. Round your answer to the nearest dollar.

Question 75

Stillwater Limited's managing partner has just purchased an investment that pays an annual amount of $ 5,000 at the end of each year for the next 10 years. This investment has a guaranteed return of 4%.
Instructions
Calculate how much Stillwater likely paid for this investment.

Question 76

Each general ledger control account must equal the total balance of the individual accounts in the related subsidiary ledger.

Question 77

Suki Services has just leased a new printer that the chief accountant has determined is a capital lease. The terms are as follows:
Term - 5 years
Payments - $ 7,000 due at the end of each contract year
Discount Rate - 4%
Instructions
What is the present value of the rental payments rounded to the nearest dollar?

Question 78

Common subsidiary ledgers include accounts payable, accounts receivable, and inventory.

Question 79

Key West Surfboards is issuing $ 260,000 worth of their bonds today. The bonds have a 5-year term and
an interest rate of 4% equal to that of the market.
Instructions
Calculate the sales price of these bonds.

Question 80

Cost of goods sold is typically calculated at the end of the period under a periodic inventory system.