Other Time Value of Money Issues
3 important questions on Other Time Value of Money Issues
Valuation of Long-Term Bonds
-Produces 2 cash flows= Periodic Interest Payments (annuity) + Principal paid at maturity (Single-Sum)
-The current market value of the bonds is the combined PV of the interest annuity and the principal amount.
-The current market value of the bonds is the combined PV of the interest annuity and the principal amount.
FASB position about computing expected cash flows
-FASB takes the postion that after computing the expected cash flows, a company should discount those cash flows by the risk-free rate of return
PV Measurement: Steps to Apply
1. Use each Cash flow estimate * Probability to get expected cash flow
2. Sum up all expected cash flows
3. Apply the PV of these cash flows, assuming a risk-free rate (Pure rate + expected inflation rate)
2. Sum up all expected cash flows
3. Apply the PV of these cash flows, assuming a risk-free rate (Pure rate + expected inflation rate)
The question on the page originate from the summary of the following study material:
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