Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

10. Time Value of Money

Time Value of Money Equations

Financial Accounting

10. Time Value of Money

Time Value of Money Equations

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Multiple Choice

All else held constant, the present value of a bond increases when the:

future cash flows decrease

time to maturity increases

coupon payments decrease

discount rate decreases

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Verified step by step guidance

Step 1: Understand the concept of present value (PV) of a bond. The present value is the current worth of future cash flows (coupon payments and principal repayment) discounted at a specific rate, known as the discount rate. The formula for PV is: PV = Σ (CF / (1 + r)^t), where CF represents cash flows, r is the discount rate, and t is the time period.

Step 2: Analyze the relationship between the discount rate and the present value. When the discount rate decreases, the denominator in the formula (1 + r)^t becomes smaller, which increases the value of each discounted cash flow. This leads to a higher present value for the bond.

Step 3: Consider the other factors mentioned in the problem. If future cash flows decrease, the numerator in the formula (CF) becomes smaller, reducing the present value. Similarly, if coupon payments decrease, the cash flows decrease, leading to a lower present value. If the time to maturity increases, the cash flows are discounted over a longer period, which can reduce the present value depending on the discount rate.

Step 4: Focus on the correct answer provided: 'discount rate decreases.' This is the key factor that directly increases the present value of a bond, as explained in Step 2.

Step 5: Summarize the reasoning: The present value of a bond increases when the discount rate decreases because the cash flows are discounted at a lower rate, making them more valuable in today's terms.