2. Present Value of a Deferred Annuity, Valuation of Long-Term Bonds, Long-term Leases, Installment notes and Pension Obligations

Steps for calculating the Present Value of a Deferred Annuity

1. Calculate the PV of the annuity as of the beginning of the annuity period (present value of an ordinary annuity) using Table 4, "Present value of an Ordinary Annuity of $1"

2. Reduce the single amount calculated in step 1 to its present value as of today.

In depth explanation under general notes.

Steps for Valuation of Long Term Bonds

1. Calculate the present value of the annuity amount (interest payments)

2. Calculate the present value of the lump sum payment at the end.

3. Add both numbers calculated together.

4. To get interest expense for the first 6 months of the bond, multiply the sum of the two numbers calculated by the interest rate.

• Steps with examples in general notes

Valuation of Long-Term Leases

Calculate the Present value of an annuity due using "Present Value of an Annuity due of $1" table. Get the PVA factor and multiply the lease amount by this number.

- This is the amount the company should value the asset at when acquired.

Amount to pay for each payment for note payments (Valuation of installment notes, problem asks what is the amount of annual installment payments for a note)

Amount the note is for / Present value factor

Steps for Valuing a Pension Obligation

1. Compute the present value of the annuity as of the year right before the beginning date of the payment.

2. We then reduce the amount calculated in step 1 to the present value as of the end of the current year.

• In depth explanation under general notes