ACCY 111 Chapter 6

Compound interest is calculated on both the initial principal amount and the accumulated interest from previous periods. This means that as time goes on, the interest earned in each period is added to the principal amount, resulting in a larger base for calculating interest in the next period. Therefore, compound interest does indeed include interest earned on interest.

An annuity is a financial product that involves making equal periodic payments over a certain period of time. These payments can be made monthly, quarterly, annually, or at any other regular interval. By making these equal payments, individuals or investors can accumulate savings or receive a regular income stream. Therefore, the statement that an annuity is a series of equal periodic payments is correct.

An annuity due is a type of financial agreement where a payment is made or received at the beginning of the agreement, rather than at the end. This means that with an annuity due, the payment is made or received on the date the agreement begins. Therefore, the statement is true.

This statement is true because most liabilities refer to financial obligations or debts that are owed by an individual or a company. These liabilities are typically expressed in monetary terms, such as loans, accounts payable, or accrued expenses. However, it is important to note that there may be certain non-monetary liabilities, such as warranties or guarantees, which do not involve direct financial obligations.

The statement is true because when computing present value using the expected cash flow approach, the company's credit-adjusted risk-free rate of interest is used. This rate takes into account the company's credit risk, which is the risk that the company may default on its debt obligations. By adjusting the risk-free rate of interest to reflect the company's credit risk, a more accurate present value can be calculated.

The calculation of future value does not require the removal of interest. In fact, interest is an essential component in determining the future value of an investment or loan. Future value calculations involve compounding the principal amount with the interest rate over a specific time period to determine the total value at a future date. Therefore, the statement that the removal of interest is necessary for future value calculation is incorrect.

In an ordinary annuity, the last cash payment will not earn any interest because it is made at the end of the annuity period. Since interest is typically earned over time, the last payment does not have enough time to accumulate any interest. Therefore, it is correct to say that the last cash payment in an ordinary annuity will not earn any interest.

The calculation of present value involves discounting future cash flows by a certain interest rate to determine their current value. By doing so, the interest component is removed from the future cash flows, allowing for a more accurate representation of their current worth. This is done to account for the time value of money and to make meaningful comparisons between cash flows occurring at different points in time. Therefore, the statement that the calculation of present value eliminates interest from future cash flows is true.

With an ordinary annuity, a payment is not made or received on the date the agreement begins. In an ordinary annuity, the first payment is typically made or received at the end of the first period, rather than at the beginning. This is in contrast to an annuity due, where the first payment is made or received at the beginning of the period.

Annual payments of an ordinary annuity will be greater than annual payments of an annuity due because in an ordinary annuity, payments are made at the end of each period, while in an annuity due, payments are made at the beginning of each period. This means that in an ordinary annuity, the interest on the outstanding balance for each period is not included in the payment, resulting in higher annual payments compared to an annuity due where the interest is included in the payment.

When interest is compounded, the effective rate of interest exceeds the stated rate of interest. This is because compounding allows the interest to be calculated on both the initial principal and any accumulated interest, resulting in a higher effective rate.

The present value of an annuity due will be greater than the present value of an ordinary annuity, assuming all other factors remain the same. This is because in an annuity due, the cash flows occur at the beginning of each period, allowing for additional time for the money to earn interest. As a result, the present value of the annuity due will be higher compared to an ordinary annuity where the cash flows occur at the end of each period.

Monetary assets include not only cash and cash equivalents but also other assets that are readily convertible into a fixed or determinable amount of money. This may include short-term investments, accounts receivable, and marketable securities. Therefore, the statement that monetary assets include only cash and cash equivalents is incorrect.

An annuity does not consist of level principal payments plus interest on the unpaid balance. Instead, an annuity consists of level payments made at regular intervals, such as monthly or annually, for a specific period of time or for the duration of an individual's life. The payments can be made by an individual or an insurance company, and they are typically used as a source of income during retirement. The amount of each payment is determined by factors such as the initial investment, interest rates, and the length of the annuity.

A deferred annuity is not one in which interest charges are deferred for a stated time period. In a deferred annuity, the payments are deferred until a later date, usually during retirement. The interest charges in a deferred annuity are typically not deferred, but rather accumulate over time based on the annuity's interest rate. Therefore, the correct answer is False.