Chapter 8 Notes

Chapter 8 Notes - Accounting Chapter 8 Liabilities Notes...

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Accounting Chapter 8 Liabilities Notes Lecture Slide Notes: Time Value of Money o Time is money. Money you deposit in a bank account earns interest o The fact that money earns income over times is called the time value of money Present Value of $1 o The amount a person needs to invest today to receive money in the future is called the present value of that future amount o Present value is always less than the future amount o The present value (PV) has a table PV of an annuity o An annuity is a series of consecutive equal periodic payments. o Utilize the table locating interest rate and payment periods. Multiply the amount by how much you want each payment to be worth and that is your PV (how much to deposit in the bank now to receive those equal consistent payments considering interest being made) Corporate Borrowing o When investors want to lend money as a way of investing, depositing money in a bank is the safest option o If investors decide to lend money to a company instead, what is the interest rate they should demand? What factors should go into their decisions? The riskiness of the company (the higher the risk, the higher the interest rate) The Fed.’s interest rate decisions (market rate) Idiosyncratic risk is not compensated Definitions: o Principal is also called face value, maturity value, or par value. This is the amount the issuing company has promised to pay at maturity o Contract interest rate (coupon rate) is usually quoted in annual terms. It determines the dollar amount of cash interest payments.
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