22) On January 1, 2011, Nadir Company issued $1,000,000 of 6%, 20-year bonds when the
market rate of interest was 5%. The bonds pay interest annually on December 31. These bonds
sold at a _____ because the market rate of interest is _____ than the stated interest rate.
A) discount; higher
B) premium; higher
C) discount; lower
D) premium; lower
23) On January 1, 2011, Nadir Company issued $1,000,000 of 6%, 20-year bonds when the
market rate of interest was 5%. The bonds pay interest annually on December 31. How much
cash did Nadir receive when the bonds were sold?
A) $1,000,000
B) $1,124,622.60
C) $1,065,085.20
D) $950,386
24) On January 1, 2011, Nadir Company issued $1,000,000 of 6%, 20-year bonds when the
market rate of interest was 5%. The bonds pay interest annually on December 31. How much
cash will bondholders receive when the bonds mature?
A) $1,000,000
B) $1,124,622.60
C) $1,065,085.20
D) $950,386
25) On January 1, 2011, Nadir Company issued $1,000,000 of 6%, 20-year bonds when the
market rate of interest was 5%. The bonds pay interest annually on December 31. How much
cash will bondholders receive on December 31, 2011, the first interest payment date?
A) $60,000
B) $50,000
C) $30,000
D) $25,000
26) On January 1, 2011, Nadir Company issued $1,000,000 of 6%, 20-year bonds when the
market rate of interest was 5%. The bonds pay interest annually on December 31. Nadir uses the
effective interest method of amortization. With each annual interest payment the unamortized
_____ will grow _____.
A) discount; larger
B) discount; smaller
C) premium; larger
D) premium; smaller
27) When interest is computed on the principal only, it is called simple interest.
28) Discounting means trying to negotiate a cheaper interest rate for a loan.
29) Present value is the amount a future sum of money is worth today.
30) The present value of $100,000 at 6% to be received at the end of ten years will be greater
than the present value of $100,000 at 6% to be received at the end of five years.
31) The present value of $100,000 at 5% to be received at the end of ten years will be greater
than the present value of $100,000 at 6% to be received at the end of ten years.
32) Explain the concept of time value of money.
33) What is an annuity?
34) Team Shirts borrowed $15,000 at 6% for two years, to be repaid in equal monthly
installments over the life of the loan. Calculate the amount of the monthly payments.
35) Team Shirts borrowed $50,000 at 6% for two years, to be repaid in equal monthly
installments over the life of the loan. Calculate the amount of the monthly payments.
36) Bank, Rupp & Baroque, Inc. borrowed $100,000 at 6% for two years, to be repaid in equal
monthly installments over the life of the loan. Calculate the amount of the monthly payments.
37) Bank, Rupp & Baroque, Inc. borrowed $100,000 at 6% for two years, to be repaid in equal
monthly installments over the life of the loan. Calculate the total amount of interest Bank, Rupp
& Baroque will pay on this loan.
38) Anika Braun, owner of the Bear’s Den Sports Bar, is considering renovating the bar. She
estimates that she will need to borrow $150,000 to cover all expected costs of the renovation.
She intends to repay the loan with a series of equal annual payments.
Required: Calculate the annual payments required for each of the following loans:
39) Calculate the payment required for each of the loans listed below. Assume that all loan
payments are made at the end of the period described.
Principal
Annual
interest rate
Term
Payments
made
Amount of each
payment
1.
$40,000
5%
5 years
annually
$
2.
$40,000
8%
5 years
annually
$
3.
$40,000
8%
10 years
annually
$
4.
$40,000
8%
10 years
semiannually
$
5.
$40,000
8%
10 years
quarterly
$
40) Calculate the present value of each of the following future amounts:
Future
amount
Interest rate
Present value
1.
$40,000
8%
$
2.
$40,000
8%
$
3.
$25,000
10%
$
4.
$100,000
5%
$
5.
$500,000
6%
$
41) Calculate the payment required for each of the loans listed below. Assume that all loan
payments are made at the end of the period described.
Principal
Annual
interest rate
Term
Payments
made
Amount of
each payment
1.
$50,000
7%
5 years
annually
$
2.
$50,000
6%
5 years
annually
$
3.
$50,000
8%
10 years
annually
$
4.
$50,000
8%
10 years
semiannually
$
5.
$50,000
12%
2 years
monthly
$
42) Compounded, Inc. wants to borrow $100,000 for 10 years at 7% annual interest. The loan
will be repaid in ten equal annual payments at the end of each year. How much will each
payment be?
43) Suppose you want to repay $1,000,000 over 10 years and you know the interest rate is 12%.
If you are willing to make a payment of the same amount at the end of every QUARTER for 10
years, how much will each payment be?
44) Calculate the present value of each of the amounts listed below:
Future
amount
Time period
Interest rate
Present value
1.
$10,000
5 years
8%
$
2.
$10,000
10 years
8%
$
3.
$60,000
2 years
10%
$
3.
$60,000
2 years
5%
$
45) Jason Argo is making plans to finance a series of projects. Calculate the amount of the
payments involved in each of the situations described below. Assume all payments are made at
the end of the period. Round amounts to the nearest penny.
1. He will purchase a truck for $20,000, to be repaid in equal SEMIANNUAL payments over
the next 5 years. The bank has quoted an interest rate of 10%.
2. He will purchase a piece of land for $250,000. The seller would accept 20 ANNUAL
payments at 8%.
3. He will sell old equipment for $2,000. Joe is willing to accept QUARTERLY payments for
the next 3 years at an annual interest rate of 12%.
4. He will purchase land and building for $150,000, with a down payment of $30,000 and
SEMIANNUAL payments for the next 20 years at an interest rate of 8%.
46) Team Shirts issued 10-year bonds with a face value of $100,000. The bonds carry a 7%
stated interest rate and pay interest once a year. They were issued when the market interest rate
was 6%.
a. Calculate the present value of the bond issue.
b. Were these bonds issued at a premium or at a discount?
c. What is the amount of the premium or discount on the bond issue?
d. Calculate the amount of the amortization of the bond premium or discount for the first year,
using the effective interest method.
47) Toby’s Wear issued 10-year bonds with a face value of $60,000. The bonds carry a 7%
stated interest rate and pay interest once a year. They were issued when the market interest rate
was 6%.
a. Calculate the present value of the bond issue.
b. Were these bonds issued at a premium or at a discount?
c. What is the amount of the premium or discount on the bond issue?
d. Calculate the amount of the amortization of the bond premium or discount for the first year,
using the effective interest method.
48) Tim’s Wear issued 15-year bonds with a face value of $50,000. The bonds carry a 7% stated
interest rate and pay interest once a year. They were issued when the market interest rate was
6%.
a. Calculate the present value of the bond issue.
b. Were these bonds issued at a premium or at a discount?
c. What is the amount of the premium or discount on the bond issue?
d. Calculate the amount of the amortization of the bond premium or discount for the first year,
using the effective interest method.
49) Tina’s Wear issued 10-year bonds with a face value of $50,000. The bonds carry a 7% stated
interest rate and pay interest once a year. They were issued when the market interest rate was
8%.
a. Calculate the present value of the bond issue.
b. Were these bonds issued at a premium or at a discount?
c. What is the amount of the premium or discount on the bond issue?
d. Calculate the amount of the amortization of the bond premium or discount for the first year,
using the effective interest method.
50) Tracy’s Wear issued 10-year bonds with a face value of $60,000. The bonds carry a 7%
stated interest rate and pay interest once a year. They were issued when the market interest rate
was 8%.
a. Calculate the present value of the bond issue.
b. Were these bonds issued at a premium or at a discount?
c. What is the amount of the premium or discount on the bond issue?
d. Calculate the amount of the amortization of the bond premium or discount for the first year,
using the effective interest method.
51) The owners of The Country Gentleman, a western clothing store, would like to raise money
for expansion. They think the business can get a better interest rate by going to the financial
markets and selling $100,000 worth of 10-year bonds. The interest rate for bonds has been
fluctuating between 6% and 8%, so they decide to sell the bonds for 7%, which will be paid once
a year.
Required:
a. Calculate the price at which the bonds are sold if the market interest rate is 6%.
b. Calculate the price at which the bonds are sold if the market interest rate is 7%.
c. Calculate the price at which the bonds are sold if the market interest rate is 8%.
52) Terry’s Wear issued 15-year bonds with a face value of $50,000. The bonds carry a 7%
stated interest rate and pay interest once a year. They were issued when the market interest rate
was 8%.
a. Calculate the present value of the bond issue.
b. Were these bonds issued at a premium or at a discount?
c. What is the amount of the premium or discount on the bond issue?
d. Calculate the amount of the amortization of the bond premium or discount for the first year,
using the effective interest method.
53) Match each of the following terms with the appropriate definition.
a. discount rate
b. principal
c. long-term liability
d. present value
e. discounting
f. time value of money
______ 1. the concept that the value of money changes as time passes
______ 2. the interest rate used in a present value problem
______ 3. the process of finding the present value in a time value of money problem
______ 4. what money is worth in today’s dollars
______ 5. the amount of money owed or borrowed
______ 6. obligation incurred when a company borrows money for longer than one year
54) Match each of the following items with the appropriate definition below
a. annuity
b. unsecured bonds
c. bond
d. maturity
e. face value
f. term bonds
g. stated rate
h. secured bond
i. serial bonds
______ 1. a written agreement that specifies a company’s responsibility to pay interest and to
repay the principal at the end of the term of the agreement
______ 2. a series of equal and regular payments
______ 3. the principal of a bond
______ 4. the interest rate printed on the bond
______ 5. the length of the bond term
______ 6. bond that gives the bondholder a claim on a specific asset of the issuing company in
case of default
______ 7. bonds that are not linked to specific assets, but instead are issued on the general credit
of the company
______ 8. bonds that mature periodically over a period of several years
______ 9. bonds that all mature on the same date