FAR - F5 Concepts

Question 1

Equation: Present Value of $1

Answer 1

Present Value = Future Value/(1+r)^n

Question 2

Equation: Future Value of $1

Answer 2

Future Value = Present Value*(1+r)^n

Question 3

Equation: Present Value of an Ordinary Annuity

Answer 3

Present Value of Ordinary Annuity = Annuity Payment*Present Value of Ordinary Annuity of $1 for appropriate n and r

Question 4

Equation: Present Value of an Annuity Due

Answer 4

Present Value of Annuity Due = Present Value of Ordinary Annuity*(1+r)

Question 5

Equation: Future Value of an Ordinary Annuity

Answer 5

Future Value of an Ordinary Annuity = Periodic Payment*Future Value of an Ordinary Annuity of $1 for appropriate n and r

Question 6

When no interest rate is stated on a note, how is the note handled?

Answer 6

1. Use market rate %
2. Record payable at face value
3. Record asset at present value
4. If a difference exists between the face value and the present value, the difference must be amortized using the effective interest method (like a mortgage)

Question 7

Equation: Times Interest Earned

Answer 7

Times Interest Earned = Earnings before Interest and Taxes/Interest Expense