day 22 bond 2009 spring v1 - Liabilities,BondsandNotes...

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Liabilities, Bonds and Notes  James Gong
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Agenda Present value of money $1 Annuity Annuity due Bonds Coupon rate and market rate Premium and discount Notes receivable and notes payable Premium and discount Revenue estimation when receiving notes  receivable
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Time Value of Money Always preferable to receive a given sum of money  earlier rather than later  Because present dollars can earn interest and Because borrowing dollars requires payment of interest Therefore, a dollar received later is worth less than a dollar received  now Present value (PV) of a future payment is the value of  that future payment in today’s dollars  at a given interest  rate. Alternatively, it is the most anyone would pay today for the right to  receive the future payment
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Compound Interest Compound Interest Interest has to be paid on any previous interest accrued (owed),  as well as on the principal borrowed. Simple Interest Simple Interest Interest is paid on only the original amount, or principal, borrowed. Simple and Compound Interest
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0 5000 10000 15000 20000 1st Year 10th Year 20th Year 30th Year Future Value of a Single $1,000 Deposit 10% Simple Interest 7% Compound Interest 10% Compound Interest Future Value (U.S. Dollars) Simple and Compound Interest
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Assume that you need  $1,000 $1,000     in  2 years. 2 years.   Let’s  examine the process to determine how much you  need to deposit today at a discount rate of  7%  compounded annually. 0 1 2 2 $1,000 $1,000 7% PV 1 PV PV 0 Present Value of $Y
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    PV PV 0 0  =  FV FV 2 2  / (1+ i ) 2   =  $1,000 $1,000     / (1 .07 ) 2       $873.44 $873.44 0 1 2 2 $1,000 $1,000 7% PV PV 0 Present Value of $Y
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PVIF PVIF i , n is found on Table II Period 6% 7% 8% 1 .943 .935 .926 2 .890 .873 .857 3 .840 .816 .794 4 .792 .763 .735 5 .747 .713 .681 Present Value of $Y
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Annuities Series of two or more cash payments or receipts Each payment the same amount Time between each payment the same length Ordinary Annuity Ordinary Annuity :  Payments or receipts  occur at the  end  of each period. Annuity Due Annuity Due :  Payments or receipts occur at  the  beginning  of each period.
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      PVA PVA 3  =  $1,000 /(1 .07 )   $1,000 /(1 .07 ) $1,000 /(1 .07 ) 3                  =  $934.58 + $873.44 + $816.30        =   $2,624.32 $2,624.32 $1,000 $1,000 $1,000 0 1 2 3 3 4 $2,624.32 = PVA $2,624.32 = PVA 3 7% $934.58 $873.44 $816.30 Cash flows occur at the end of the period Present Value of Annuities
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From Table 4 From Table 4 PVA PVA 3 = $1,000 ( PVIFA 7% , 3 ) = $1,000 ( 2.624 ) = $2,624 $2,624 Period 6% 7% 8% 1 0.943 0.935 0.926 2 1.833 1.808 1.783 3 2.673 2.624 2.577 4 3.465 3.387 3.312 5 4.212 4.100 3.993 Present Value of Annuities
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day 22 bond 2009 spring v1 - Liabilities,BondsandNotes...

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