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Chapter 06  Time Value of Money Concepts
(Spiceland 6
th
ed)
Question 61
Interest is the amount of money paid or received in excess of the amount borrowed or lent.
Question 62
Compound interest includes interest not only on the original invested amount but also on the
accumulated interest from previous periods.
Question 63
If interest is compounded more frequently than once a year, the effective rate or yield will be
higher than the annual stated rate.
Question 64
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 65
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 66
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 67
An annuity is a series of equalsized cash flows occurring over equal intervals of time.
Question 68
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 69
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.
61
Chapter
6
Time Value of Money Concepts
QUESTIONS FOR REVIEW OF KEY TOPICS
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Answers to Questions (continued)
Question 610
Present
Value
?
0
Year 1
Year 2
Year 3
Year 4
___________________________________________
$200
$200
$200
$200
n
= 4,
i
= 10%
Question 611
Present
Value
?
0
Year 1
Year 2
Year 3
Year 4
___________________________________________
$200
$200
$200
$200
n
= 4,
i
= 10%
Question 612
A deferred annuity exists when the first cash flow occurs more than one period after the date
the agreement begins.
Question 613
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 614
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 Spring '11
 Stubb

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