ACC 342 Lecture Notes - Lecture 8: Cash Flow, Compound Interest
Compound interest includes interest earned on interest.
t
When interest is compounded, the stated rate of interest exceeds the effective rate of interest
f
The calculation of future value requires the removal of interest
f
The company's credit-adjusted risk-free rate of interest is used when computing present value applying
the expected cash flow approach.
t
The calculation of present value eliminates interest from future cash flows
t
With an ordinary annuity, a payment is made or received on the date the agreement begins
f
In the future value of an ordinary annuity, the last cash payment will not earn any interest
t
An annuity consists of level principal payments plus interest on the unpaid balance
f
With an annuity due, a payment is made or received on the date the agreement begins
t
An annuity is a series of equal periodic payments
t
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Given identical current amounts owed and identical interest rates, annual payments of an ordinary
annuity will be greater than annual payments of an annuity due
t
Other things being equal, the present value of an annuity due will be less than the present value of an
ordinary annuity.
f
A deferred annuity is one in which interest charges are deferred for a stated time period.
f
Monetary assets include only cash and cash equivalents.
f
Most, but not all, liabilities are monetary liabilities.
t
LeAnn wishes to know how much she should set invest now at 7% interest in order to accumulate a sum
of $5,000 in four years. She should use a table for the:
A. Present value of 1.
B. Future value of 1.
C. Present value of an ordinary annuity of 1.
D. Future value of an annuity due of 1.
A. Present value of 1.
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Document Summary
Compound interest includes interest earned on interest. t. When interest is compounded, the stated rate of interest exceeds the effective rate of interest f. The calculation of future value requires the removal of interest f. The company"s credit-adjusted risk-free rate of interest is used when computing present value applying the expected cash flow approach. t. The calculation of present value eliminates interest from future cash flows t. With an ordinary annuity, a payment is made or received on the date the agreement begins f. In the future value of an ordinary annuity, the last cash payment will not earn any interest t. An annuity consists of level principal payments plus interest on the unpaid balance f. With an annuity due, a payment is made or received on the date the agreement begins t. An annuity is a series of equal periodic payments t.
