Spice+4e+Ch06+Qex+Sol

# Spice+4e+Ch06+Qex+Sol - Chapter 6 Time Value of Money...

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Question 6-1 Interest is the amount of money paid or received in excess of the amount borrowed or lent. Question 6-2 Compound interest includes interest not only on the original invested amount but also on the accumulated interest from previous periods. Question 6-3 If interest is compounded more frequently than once a year, the effective rate or yield will be higher than the annual stated rate. Question 6-4 The three items of information necessary to compute the future value of a single amount are the original invested amount, the interest rate (i) and the number of compounding periods (n). Question 6-5 The present value of a single amount is the amount of money today that is equivalent to a given amount to be received or paid in the future. Question 6-6 Monetary assets and monetary liabilities represent cash or fixed claims/commitments to receive/pay cash in the future and are valued at the present value of these fixed cash flows. All other assets and liabilities are nonmonetary. Question 6-7 An annuity is a series of equal-sized cash flows occurring over equal intervals of time. Question 6-8 An ordinary annuity exists when the cash flows occur at the end of each period. In an annuity due the cash flows occur at the beginning of each period. Question 6-9 Chapter 6 Time Value of Money Concepts QUESTIONS FOR REVIEW OF KEY TOPICS

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Table 2 lists the present value of \$1 factors for various time periods and interest rates. The factors in Table 4 are simply the summation of the individual PV of \$1 factors from Table 2.
Answers to Questions (continued) Question 6-10 Present Value ? 0 Year 1 Year 2 Year 3 Year 4                                                                                               ___________________________________________ \$200 \$200 \$200 \$200 n = 4, i = 10% Question 6-11 Present Value ? 0 Year 1 Year 2 Year 3 Year 4                                                                                               ___________________________________________ \$200 \$200 \$200 \$200 n = 4, i = 10% Question 6-12 A deferred annuity exists when the first cash flow occurs more than one period after the date the agreement begins. Question 6-13 The formula for computing present value of an ordinary annuity incorporating the ordinary annuity factors from Table 4 is: PVA = Annuity amount x Ordinary annuity factor Solving for the annuity amount, Annuity amount = The annuity factor can be obtained from Table 4 at the intersection of the 8% column and 5 period row. Question 6-14 Annuity amount = Annuity amount = \$125.23

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Answers to Questions (concluded) Question 6-15 Companies frequently acquire the use of assets by leasing rather than purchasing them. Leases usually require the payment of fixed amounts at regular intervals over the life of the lease.
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