G. Computing the Present Value of a Long-Term Note or Bond
1. The present value (or market price) of a long-term note or bond is a
function of the:
a. payment amounts.
c. discount rate.
2. The payment amounts are made up of two elements:
a. a series of interest payments (an annuity),
b. the principal amount (a single sum).
3. To compute the present value of the bond, one must discount both the
interest payments and the principal amount.
from Table 3.
b. Multiply the amount of the interest payments by the appropriate
present value factor from Table 4.
4. Since interest on bonds is paid semiannually, the discount rate used in
computing the present value of the bonds is the semiannual rate.
H. Computing the Present Values in a Capital Budgeting Decision
1. The decision to make long-term capital investments is best evaluated using
investment.
2. When the present value of the cash receipts (inflows) from a capital
investment exceeds the present value of the cash payments (outflows), the
net present value is positive, and the investment should be accepted.
3. When the present value of the cash payments (outflows) for a capital
I. Using Financial Calculators.
1. Financial calculators can be used to solve present and future value
problems using the following keys.
a. N = Number of periods
b. I = interest rate per period
10 MINUTE QUIZ
Circle the correct answer.
True/False
1. Simple interest is computed on the principal and any interest earned that has not been paid
or received.
True False
2. The future value of an annuity is the sum of all the payments plus the accumulated
compound interest on them.
True False
3. The process of determining the present value is referred to as discounting the present
amount.
True False
4. In computing the present value of an annuity, it is necessary to know the discount rate, the
True False
5. To compute the present value of a bond, both the interest payments and the principal
amount must be discounted.
True False
Multiple Choice
1. Interest that is computed on the principal and any interest earned is called
a. simple interest.
b. present interest.
c. future interest.
d. compound interest.
b. compounded value of an annuity.
c. future value of a single amount.
d. future value of an annuity.
3. The process of determining the present value is referred to as discounting the
a. compound amount.
b. future amount.
c. present amount.
d. simple amount.
a. discount rate.
b. number of discount periods.
c. amount of the periodic payments.
d. year the payments will begin.
5. Cogswell Company issued 6%, 10-year bonds that pay interest semiannually. The discount
appropriate discount rate is
a. 8%.
b. 6%.
c. 4%.
d. 3%.
ANSWERS TO QUIZ
True/False
Multiple Choice