[Anonymous]

When you use present value tables, for the interest, do you use the stated interest or the market interest rate? I always thought it was the market interest rate but the question below says its not.

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On January 1, year 1, Duripan Corp. invested $10,000 in 5-year certificates of deposit at 8% interest. Future value factors are as follows:

Future amount of $1 at 8% for 5 periods 1.469

Future amount of $1 at 10% for 5 periods 1.611

Future amount of an ordinary annuity of $1 at 8% for 5 periods 5.867

Future amount of an ordinary annuity of $1 at 10% for 5 periods 6.105

Assume that Duripan does not elect the fair value option to report its financial assets. What will be the maturity value of these CDs, assuming that the market interest rate at maturity is 10%?

$14,690

$16,110

$58,670

$61,050

A. This answer is correct. If Duripan does not elect the fair value option to report financial assets, the market rate of interest at maturity is irrelevant because the $10,000 was invested at a fixed rate of 8%. Since a single lump-sum amount was invested, the future value factor at 8% for 5 periods is used. Therefore, the value of the investment at maturity is $14,690 ($10,000 x 1.469).

[How many letters do you need]

Try not to get PV questions mixed up with Future Value. In this case, they are asking what will be the total value of the investment in five years. Don't get this mixed up with a bond valuation question where you discount at the market rate. All they really want to know is “If this is invested in a CD at 8%, how much will be there when it matures in five years?”. In these cases you use the FV factor at the stated interest rate.

As a side note, beware for a variation of questions like these where they ask for the amount in the account in today's dollars. Those guys require a FV calc followed by a PV discount. Probably a little advanced for the CPA but you never know….

MBA,CMA,CPA, CFF?, ABV?

[CPA soon]

The general rule is you only use the stated interest rate to calculate the interest payment amount which will be annually or whatever. Everything else is effective rate.

FAR - 71, 68, 74, (8/31/14) 78 ✔
REG - 67, 71, 71, (10/18/14) 78 ✔
BEC - (11/29/14) 86 ✔
AUD - 73, (4/4/15) 86 ✔

I can't believe this is over! 2 years and 3 months..

[Author]

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