Question 1

If a bond has a contract rate of interest of 6%, but the discount rate of interest is 8%, the bond

Accepted Answer

When the discount rate of interest is higher than the contract rate of interest, the bond will sell at a discount (less than face value).

Question 2

Valente Company is about to issue $3,000,000 of 5-year bonds, with a contract rate of interest of 10%, payable semiannually. The discount rate for such securities is 8%. How much can Valente expect to receive from the sale of these bonds?

Accepted Answer

To calculate the selling price of the bonds, we need to use the present value formula:

PV = C x (1 - (1 + r)^-n) / r + FV / (1 + r)^n

Where:
PV = Present value (selling price)
C = Periodic interest payment (contract rate / 2)
r = Discount rate / 2
n = Number of periods (5 years x 2 semiannual periods = 10)
FV = Face value of the bonds ($3,000,000)

PV = [($3,000,000 x 10% / 2) x (1 - (1 + 8% / 2)^-10) / (8% / 2)] + ($3,000,000 / (1 + 8% / 2)^10) = $3,243,315

Therefore, Valente can expect to receive $3,243,315 from the sale of these bonds.

Question 3

Porter Company has just purchased equipment that requires annual payments of $22,500 to be paid at the end of each of the next 4 years. The appropriate discount rate is 15%. What is the present value of the payments?

Accepted Answer

The present value of the payments is $64,237. This can be calculated using the formula for the present value of an annuity:PV = PMT * [1 - (1 + r)^-n] / rwhere:PV is the present valuePMT is the annual paymentr is the discount raten is the number of yearsIn this case, PMT = $22,500, r = 15%, and n = 4. Plugging these values into the formula, we get:PV = $22,500 * [1 - (1 + 0.15)^-4] / 0.15= $22,500 * [1 - 0.5674] / 0.15= $22,500 * 0.4326 / 0.15= $64,237

Question 4

Wiggins Company is considering purchasing equipment. The equipment will produce the following cash flows: Year 1, $50,000; Year 2, $90,000; Year 3, $130,000. Below is some of the time value of money information that Wiggins has compiled that might help them in their planning and compounded interest decisions.  Wiggins requires a minimum rate of return of 11%. To the closest dollar, what is the maximum price Wiggins should pay for the equipment?

Accepted Answer

The answer of Wiggins Company is considering purchasing equipment. The...

Question 5

If a bond has a contract rate of 10% and is discounted at 10%, then the proceeds received at issuance will be

Accepted Answer

If a bond has a contract rate of 10% and is discounted at 10%, then the discount rate is the same as the contract rate, and the bond will be issued at par (face value) since there is no premium or discount. Therefore, the proceeds received at issuance will be equal to the face value of the bonds.

Question 6

When determining the proceeds received when issuing a bond, the factor applied to the amount of the bond principal is determined from the table of the

Accepted Answer

The answer of When determining the proceeds received when issuing...

Question 7

Travis Tucker invests $10,655.04 now for a series of $1,500 annual returns beginning one year from now. Travis will earn 10% on the initial investment. How many annual payments will Travis receive?

Accepted Answer

First, we need to calculate the future value of the initial investment of $10,655.04 after one year with an interest rate of 10%. This can be calculated using the formula FV = PV(1+r), where FV is the future value, PV is the present value, and r is the interest rate.

FV = $10,655.04(1+0.1) = $11,720.54

Now we need to calculate how many annual payments of $1,500 can be made from this future value of $11,720.54. We can use the annuity formula PMT = FV*(r/(1-(1+r)^-n)), where PMT is the payment amount, FV is the future value, r is the interest rate, and n is the number of payments.

$1,500 = $11,720.54*(0.1/(1-(1+0.1)^-n))

Solving for n, we get n = 13.2. Since we cannot have a fraction of a payment, we round up to 14. Therefore, Travis will receive 14 annual payments of $1,500, starting one year from now. The answer is C) 13.

Question 8

Glover Company is about to issue $3,000,000 of 5-year bonds, with a contract rate of interest of 8%, payable semiannually. The discount rate for such securities is 10%. How much can Glover expect to receive from the sale of these bonds?

Accepted Answer

To calculate the expected proceeds, we need to use the present value formula:

PV = C x [(1 - (1 + r)-n)/ r] + FV/(1+r)n

where PV = present value
C = semiannual coupon payment
r = discount rate
n = number of semiannual periods
FV = face value of the bond

In this case, C = $3,000,000 x 8% / 2 = $120,000
r = 10% / 2 = 5%
n = 5 x 2 = 10
FV = $3,000,000

Plugging in these values:

PV = $120,000 x [(1 - (1 + 0.05)-10)/ 0.05] + $3,000,000/(1+0.05)10

PV = $2,768,338

Therefore, Glover can expect to receive $2,768,338 from the sale of these bonds.

Question 9

Hale Corporation issues an 8%, 9-year mortgage note on January 1 2014, to obtain financing for new equipment. The terms provide for semiannual installment payments of $32,900. The following values related to the time value of money were available to Hale to help them with their planning process and compounded interest decisions.  To the closest dollar, what were the cash proceeds received from the issuance of the note?

Accepted Answer

The answer of Hale Corporation issues an 8%, 9-year mortgage...

Question 10

ischer Company has decided to begin accumulating a fund for plant expansion. The company deposited $20,000 in a fund on January 2, 2012. Fischer will also deposit $60,000 annually at the end of each year, starting in 2012. The fund pays interest at 5% compounded annually. What is the balance of the fund at the end of 2016 (after the 2016 deposit)?

Accepted Answer

The answer of ischer Company has decided to begin accumulating...

Question 11

Chenard Company is about to issue $3,000,000 of 8-year bonds paying a 12% interest rate with interest payable semiannually. The discount rate for such securities is 10%. Below are time value of money factors that Chenard uses to calculate compounded interest.  To the closest dollar, how much can Chenard expect to receive for the sale of these bonds?

Accepted Answer

The answer of Chenard Company is about to issue $3,000,000...

Question 12

A $30,000, 8%, 10-year note payable that pays interest quarterly would be discounted back to its present value by using tables that would indicate which one of the following period-interest combinations?

Accepted Answer

The note pays interest quarterly, so there are 40 periods (10 years x 4 quarters). The annual interest rate is 8%, so the quarterly rate is 2% (8% / 4).

Question 13

avid Jones deposited $6,500 in an account paying interest of 5% compounded annually. What amount would be in the account at the end of 4 years?

Accepted Answer

The answer of avid Jones deposited $6,500 in an account...

Question 14

Potter Company has purchased a patent that requires annual payments of $31,250 to be paid at the end of each of the next 6 years. The appropriate discount rate is 12%. What amount will be used to record the patent?

Accepted Answer

The answer of Potter Company has purchased a patent that...

Question 15

Rhode Company is about to issue $4,000,000 of 5-year bonds, with a contract rate of interest of 8%, payable semiannually. The discount rate for such securities is 10%. How much can Rhode expect to receive from the sale of these bonds?

Accepted Answer

To calculate the amount Rhode can expect to receive from the sale of the bonds, we need to use the present value formula:

PV = C x [(1 - (1 + r)^-n) / r] + FV / (1 + r)^n

Where PV is the present value, C is the periodic interest payment, r is the discount rate, n is the number of periods, and FV is the future value (or face value) of the bond.

In this case, C would be $4,000,000 x 8% / 2 = $160,000 per semiannual period, r is 10% / 2 = 5%, n is 5 x 2 = 10 semiannual periods, and FV is $4,000,000.

Plugging these values into the formula, we get:

PV = $160,000 x [(1 - (1 + 5%)^-10) / 5%] + $4,000,000 / (1 + 5%)^10
PV = $1,845,558 + $1,845,559
PV = $3,691,117

Therefore, Rhode could expect to receive $3,691,117 from the sale of these bonds. Option A is the correct answer.

Question 16

Mergenthaler Company has just purchased machinery that requires annual payments of $50,000 to be paid at the end of each of the next 4 years. The appropriate discount rate is 15%. What is the present value of the payments?

Accepted Answer

We can use the PV formula for an annuity to calculate the present value of the payments:
PV = PMT x [1 - (1 + r)^-n] / r
where PMT = $50,000, r = 15%, and n = 4 (since there are 4 annual payments).
Plugging in the numbers, we get:
PV = $50,000 x [1 - (1+0.15)^-4] / 0.15
PV = $142,749
Therefore, the present value of the payments is $142,749, so the best choice is A.

Question 17

In order to compute the present value of an annuity, it is necessary to know the
1) discount rate.
2) number of discount periods and the amount of the periodic payments or receipts.

Accepted Answer

Both 1 and 2 are necessary to compute the present value of an annuity. The discount rate is used to determine the present value of each payment or receipt, while the number of discount periods and the amount of the periodic payments or receipts are used to calculate the total present value of the annuity.

Question 18

Patterson Company is about to issue $8,000,000 of 10-year bonds paying an 8% interest rate with interest payable semiannually. The discount rate for such securities is 10%. Below are time value of money factors that Patterson uses to calculate compounded interest.  To the closest dollar, how much can Patterson expect to receive for the sale of these bonds?

Accepted Answer

The answer of Patterson Company is about to issue $8,000,000...

Question 19

When determining the proceeds received when issuing a bond, the factor applied to the amount of the interest payments is determined from the table of the

Accepted Answer

The factor applied to the amount of the interest payments is determined from the table of the present value of an annuity of 1. This table is used to calculate the present value of a series of future payments, such as the interest payments on a bond. The other options (present value of 1, future value of 1, and future value of an annuity of 1) do not pertain to the calculation of bond proceeds.

Question 20

alentyne Company borrowed $95,000 on January 2, 2014. This amount plus accrued interest of 5% compounded annually will be repaid at the end of 3 years. What amount will Balentyne repay at the end of the third year?

Accepted Answer

The answer of alentyne Company borrowed $95,000 on January 2,...

Quiz 14: Time Value of Money