Present Value - Fundamentals

Question 1

What type of annuity has the payment come at the end of the accounting period?

Answer 1

Ordinary Annuity (Annuity in Arrears)

Question 2

What type of annuity has the payment come at the beginning of the accounting period?

Answer 2

Annuity Due (Inadvance)

Question 3

What is the Present Value formula?

Answer 3

= 1/(1+i)^n

Question 4

If a loan/cash flow is less than one year, do you have to worry about capturing present value?

Answer 4

No

Question 5

Loan Origination Costs:

Answer 5

1. Incurred by Bank
2. Direct Costs are added to Loan
3. Indirect Costs are expense for bank
4. Have no affect on Borrower

Question 6

Loan Origination Fees (Points):

Answer 6

1. Additional Bank revenue that reduces what the borrower gets but still has to pay back
2. Subtracted from Loan amount

Question 7

When creating an amortization schedule, the Carrying Value should always approach what?

Answer 7

The amount owed

1. For the lender, this will go from the Loan amount minus the discount to the original value of the loan
2. For the borrower, this will go from the CV (minus orig. fees) to zero

Question 8

If FVO is elected what should not be figured?

Answer 8

Discounts or premiums

Question 9

Discounts on Notes Payable is what type of account?

Answer 9

Contra-Liability

Question 10

Where will the Debit Balance of Discount on Notes Payable be amortized to?

Answer 10

Interest Expense

Question 11

A Discount occures on Notes Payable when?

Answer 11

The face value of the note exceeds its present value

Question 12

A Premium occures on Notes Payable when?

Answer 12

The present value of the note exceeds its face value