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Flashcards in F5 Notecards (General) Deck (15)
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6 Present Value Concepts

1- PV of $1
2- FV of $1
3- PV of an ordinary annuity
4- FV of an ordinary annuity
5- PV of an annuity due
6- FV of an annuity due


Annuity definition

A large number of business transactions involve multiple payments or receipts


2 Examples of annuities

1- Bond Interest Payments
2- Lease Rental Payments


Ordinary Annuity vs Annuity Due

Ordinary Annuity = due at END of year (AKA in arrears)
Annuity Due = due at BEGINNING of year


If given an "Annuity Due" table and are asked for "Ordinary Annuity", what to do:

Subtract 1 from annuity due = ordinary annuity


Present Value Formula =

Present value = future amount X present value factor


Lessee definition and how they account for lease

-The renter
-Accounts for rental as an operating lease
-Accounts for sale as capital lease (GAAP) or finance lease (IFRS)


Lessor definition and how they account for lease

-The owner
-Accounts for rental as an operating lease
-Accounts for sale as sales-type or direct financing type (GAAP) or finance lease (IFRS)


Face Value of Bond =

PV of future interest payments (@ market rate) (use PV of annuity)
PV of principal (at market rate) (use PV of $1)


Carrying Value of Bond with Premium =

Face value + Unamortized premium


Carrying Value of Bond with Discount =

Face value - unamortized discount


2 Ways to account for discount/premium amortization

1- Straight-line method
2- Effective interest rate method


Straight-line method calculation =

(Premium or discount) / # periods outstanding = amortization

Interest expense = (face value X stated rate) - premium amortization + discount amortization


Effective Interest Rate Method Calculation

I/S: net carry value X effective interest rate = interest expense
B/S: bond face X coupon rate = interest paid

Interest expense - interest paid = amortization


What PV factor to use to determine periodic payments to be made into a sinking fund:

Future value of an annuity of $1 at an assumed rate