TVM and Bonds Payable


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Unformatted text preview: INTEGRATING SPREADSHEETS INTO THE TRADITIONAL TEACHING OF TIME VALUE OF MONEY McCormack, G. Ed Berea College ABSTRACT A thorough understanding of and the ability to apply the concept of time value of money (TVM) is critical for undergraduate business students. This seems to be a topic that requires considerable redundancy in the curriculum. The traditional courses where this topic is introduced and reintroduced are Accounting II, Introduction to Financial Management, Managerial Accounting, and Intermediate Accounting. This paper is most useful as a supplement to the Accounting II text, used with the chapter on bonds payable; usually the first serious exposure students get to time value of money. It can also be used quite effectively in Intermediate Accounting. The paper begins with a simple illustration of compound interest, and then uses it to develop the exponential function for the future value of $1. Since compound interest is something students already understand, converting the series of repeated multiplication calculations to an exponential function is easy to understand. Manipulating the future value function to solve for the present value comes next. Then the concept of annuities is developed. The discussion then moves on to tables and spreadsheet. To make them less mysterious, they are tied back to the formulas.. Finally the topic of bonds payable is introduced. The focus is on cash flows and the derivation of market values using TVM concepts with formulas, tables, and spreadsheets. This section is easily referenced to your text. Amortization and accounting entries for bonds are then developed. Exercises are provided throughout the paper to reinforce each step. This paper, when coordinated with materials from the text being used, is intended to provide a thorough and understandable first exposure for all business students to the concepts of time value of money using the mathematical formulas, the tables, and spreadsheets. INTRODUCTION In our society there are opportunities to invest funds and earn a positive return on the investment. You can go to a bank and deposit your money into a money market account or purchase a certificate of deposit (a CD). The U.S. Treasury borrows money from the public, so you can invest in Treasury securities of various types. These are considered to be very safe investments. There are many types of investments. You can purchase stocks or bonds of public companies. You could invest your money to start your own business. Businesses invest money in land, buildings, equipment, inventories, receivables, and even in people. These types of investments are much riskier than those mentioned earlier, but they are all examples of different types of investments. Because there are positive-return investment opportunities, we cannot view a dollar to be received in the future, say three years from now, the same as a dollar received today. Often students mistakenly believe the reason for this is inflation. mistakenly believe the reason for this is inflation....
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