Chapter 9

Question 1

Long Term Notes

Answer 1

liabilities with a maturity>1 year

Question 2

Debt vs. Equity (stock)

Answer 2

advantages:
1. interest expense is tax deductible
2. debt does not dilute ownership

Disadvantages:
1. must have the cash flow to repay the debt and to make int. payments
2. interest expense is a legal obligation

Question 3

Simple interest

Answer 3

interest accrued over time on principle only

example:
invest $1000 for 3 years earning 9% simple interest how much do u have at the end of 3 years

year 1: 1000x.09= $90
year 2: 1000x.09= $90
year 3: 1000x.09= $90
= 270 total interest + 1000 = $1270

Question 4

compound interest

Answer 4

Principle + accumulated interest earns/incurs interest in the future

Example:
invest 1000 for 3 years 9% interest rate compounded annually what is your investment worth a the end of the 3 years

yr 1: 1000 x .09= $90 @yr end its 1090
yr 2: 1090 x .09= 98 @ yr end its 1188
yr 3: 1188 x .09= 107 @ yr end its 1295

Question 5

PV of a $1 (present value of a single amount)

Answer 5

PV= present value, the current value of an amount to be received today

FV= future value, amount accumulated at a future time from a single payment or investment

n= time period (# of compounding periods)

I= interest rate corresponding to # periods

Question 6

Annuities

Answer 6

• use PVOA table
• a series of equal periodic payments

Question 7

ordinary annuity

Answer 7

payment or receipt made at end of each period

Question 8

PVOA ( Present value of Ordinary Annuity)

Answer 8

an amount that if invested at a compound interest now would provide for a series of equal payments at the end of each period in the future