Present Value - Fundamentals

Question 1

Time Value of money

Answer 1

You only have to consider the time value of money when the CFs go beyond one year.

Question 2

Compouding

Answer 2

When interest is compounded more than once a year:
1. multiply the number of periods by the number of times interest is compounded
to get the total number of interest periods
2. Divide the interest by the number of times interest is compounded annually to get the appropriate int rate for each int period.

Question 3

Convert an Ordinary Annuity to Annuity Due Factor

Answer 3

Multiply the ordinary annuity factor times ( 1+i )

Question 4

Loan origination Costs

Answer 4

Incurred by the lender (bank)
Direct cost- recognize the costs over the life of the loan
Indirect costs-expensed as incurred

There’s no effect for the borrower

Question 5

Loan origination Fees (points)

Answer 5

Both the lender and the borrower defer and recognize the fee over the life of the loan, 1 point = 1% of the principal loan amount.

Lender - subtract from loan
Borrower - subtract from loan

Question 6

Disclosures

Answer 6

Footnotes: the aggregate amounts of maturities and the sinking fund requirements for all long-term borrowings for each of the five years following the BS date.

Question 7

Fair Value Option

Answer 7

1. Can elect to measure financial assets or financial liabilities at FV
2. Must elect to use FV method on specific items
   a. can be elected on instrument by instrument basis
3. Report unrealized gains and losses in Income from continuing operations
4. Classification on statement of CFs rules of FAS 95 apply.

Question 8

Fair Value election

Answer 8

1. The date an eligible item is first recognized
2. The date the entity enters into a firm commitment
3. When financial assets cease to qualify for FV treatment due to specialized accounting rules, can elect to use fair value (ie. equity method of investments)
4. Percentage of ownership change and can no longer consolidate
5. Modification of debt.

Question 9

Financial Asset

Answer 9

Cash, evidence of an ownership interest in an entity or a contract that conveys a right to receive cash or another financial instrument or to exchange other financial instruments on potentially favorable items.

Question 10

Financial Liability

Answer 10

A contract that imposes an obligation to deliver cash or another financial instrument to exchange other financial instruments on potentially unfavorable terms.

Question 11

Effective Interest Rate

Answer 11

The interest rate on a loan or financial product restated from the nominal interest rate as an interest rate with annual compound interest payable in arrears.
It is used to compare the annual interest between loans with different compounding terms (daily, monthly, annually, or other).

Question 12

PV FV Formula

Answer 12

FV or PV = TVMF x Amount

Question 13

Borrowing costs - IFRS

Answer 13

Must be capitalized if they meet certain criteria; if they are related to the acquisition, construction, or production of a qualifying asset - an asset that takes a substantial period of time to get ready for its intended use.
Borrowing costs that do not meet the rules for capitalization are expensed in the current period.