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# Chap006 (2) - Chapter 06 Time Value of Money Concepts...

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Chapter 06 - Time Value of Money Concepts 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 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. 6-1 Chapter 6 Time Value of Money Concepts QUESTIONS FOR REVIEW OF KEY TOPICS

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Chapter 06 - Time Value of Money Concepts 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 6-2
Chapter 06 - Time Value of Money Concepts 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. Certain

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Chap006 (2) - Chapter 06 Time Value of Money Concepts...

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