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Exam 6: Time Value of Money Concepts

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Question 51

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The calculation of future value requires the removal of interest.

A) True
B) False

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Question 52

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A deferred annuity is one in which interest charges are deferred for a stated time period.

A) True
B) False

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Question 53

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The total cash interest payments in 2009 for these notes.

Column 6 is an interest table for the:

A series of equal periodic payments in which the first payment is made one compounding period after the date of the contract is:

MBI Company's largest computer has a cash selling price of $200,000. A customer wishes to buy the computer on a lease purchase plan over five years, with the first payment to be made at the inception of the lease. Interest is at 10%. Required: a. Compute the amount of the annual lease payment and the gross amount due (total payments) under the lease. b. Compute the amount of interest income earned by MBI for the first year of the lease.

JKL Company will issue $2,000,000 in 12%, 10 year bonds when the market rate of interest is 10%. Interest is paid semiannually. Required: Determine how much cash JKL Company should realize from the bond issue.

Sondra deposits $2,000 in an IRA account on April 15, 2009. Assume the account will earn 3% annually. If she repeats this for the next nine years, how much will she have on deposit on April 14, 2019?

What would happen if Eastern imputed an interest rate larger than the one used in this disclosure?

How much must be deposited at the beginning of each year in order to accumulate to $10,000 in four years if interest is at 9%?

In the future value of an ordinary annuity, the last cash payment will not earn any interest.

Samson Inc. is contemplating the purchase of a machine that will provide it with net after-tax cash savings of $100,000 per year for 8 years. Interest is 10%. Assume the cash savings occur at the end of each year. Required: Calculate the present value of the cash savings.

LeAnn wishes to know how much she should set aside now at 7% interest in order to accumulate a sum of $5,000 in four years. She should use a table for the:

How much must be invested now at 9% interest to accumulate to $10,000 in five years?

King Corporation has a defined benefit pension plan. One of its employees has vested benefits under the plan which will pay him $40,000 annually for life starting with the first payment of $40,000 on the day he retires at the age of 65. The employee has just reached the age of 50. King consulted standard mortality tables to come up with a life expectancy of 80 for this employee. The implicit interest rate under the plan is 9%. Required: a. What will be the present value of the pension obligation at the time of the employee's retirement? b. What is the present value of the pension obligation at the current time?

An annuity consists of level principal payments plus interest on the unpaid balance.

An investor purchases a 20-year, $1,000 par value bond that pays semiannual interest of $40. If the semiannual market rate of interest is five percent, what is the current market value of the bond?

Suppose that Healdsburg wants to buy back the 7.75% notes on December 31, 2009 (i.e., 5 years early) when the going interest rate is 6%, thereby retiring the $345,154,000 in debt. How much would Healdsburg have to pay for the notes (principal only)?

Fenland Co. plans to retire $100 million in bonds in five years, so it wishes to create a fund by making equal investments at the beginning of each year during that period in an account it expects to earn 8% annually. What amount does Fenland need to invest each year?

Titan Corporation has a defined benefit pension plan. One of its employees has vested benefits under the plan which will pay her $30,000 annually for life starting with the first $30,000 payment on the day she retires at the age of 65. The employee has just reached the age of 45. Titan consulted standard mortality tables to come up with a life expectancy of 80 for this employee. The implicit interest rate under the plan is 9%. Required: a. What will be the present value of the pension obligation at the time of the employee's retirement? b. What is the present value of the pension obligation at the current time?