[vodrldnr]

For which of the following transactions would the use of the present value of an annuity due concept be appropriate in calculating the present value of the asset obtained or liability owed at the date of incurrence?

1. A capital lease is entered into with the initial lease payment due one month subsequent to the signing of the lease agreement.

2. A capital lease is entered into with the initial lease payment due upon the signing of the lease agreement.

3. A ten-year 8% bond is issued on January 2 with interest payable semiannually on July 1 and January 1 yielding 7%.

4. A ten-year 8% bond is issued on January 2 with interest payable semiannually on July 1 and January 1 yielding 9%.

answer : 2.

it seems like the all 4 is annuity due.? since the payment is 1st day of month ?

am I misunderstanding the fist date of month = first date of period ???

can someone plzzzz explain what they mean by period when defining annuity due or ordinary annuity ??

It ain't About How Hard You Hit

[reallytired]

Annuity due means that the payment is due upon agreement to whatever you are dealing with (i.e. in this case, the capital lease required payment UPON signing) and ordinary annuity means it is NOT due upon agreement. Number 4 says the bond was issued 1/2 but the first interest payment isn't due until 7/1, thus making it an ordinary annuity.

B- Pass
A- Pass
R- Pass
F- Pass

B 10/29/16
A 10/1/16
R 9/2/16
F 7/26/16

[Anonymous]

Ordinary Annuity: Payment is due at the end of each period.
Annuity Due: Payment is due at the beginning of each period, starting with the date of lease signing.

Answer 1: Initial payment due 1 month subsequent to the lease signing
Answer 2 (CORRECT): Initial payment due upon lease signing (at beginning of period)

FYI: Answers 3 and 4 are exactly the same, when referring to ordinary vs. due. Market rate of interest has no bearing. This is tells you that you can eliminate BOTH 3 and 4. But, just to be safe…

Answers 3 and 4: Date issued January 2, Payments July 1 and January 1. Bonds pay INTEREST which requires passage of time. This means payment occurs at the END of a period. BOTH are ordinary annuities

[vodrldnr]

wow guys. thank you so much …

now I can understand it !!!!

“upon agreement to whatever you are dealing with ” this is a really cool and easy to understand !

It ain't About How Hard You Hit

[Author]

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