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Jenna R.

Accounting, Micro/macroeconomics and Personal Finance tutor

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Personal Finance

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Question:

What are the factors that are used to calculate your FICO (credit) score? Which is the most heavily weighted?

Jenna R.

Answer:

A FICO score is broken down into five components: 1. Payment history 2. Amount owed 3. New credit 4. Length of credit history 5. Mix of different types of credit Payment history is the most heavily weighted factor.

Algebra

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Question:

Find the slope of a line that goes through points (1,3) and (10,9).

Jenna R.

Answer:

A line can be expressed by the equation y = mx + b. Here, we are looking for m, which is the slope. The variables x and y represent points on the line (x,y) such as the points given in the problem. The b represents they y intercept. To find the slope for this problem let (1,3) be represented by (x,y), and let (10,9) be represented by (x*,y*). Plug them into the slope equation: (y* - y) / (x* - x) so, m = (9 - 3) / (10 - 1) = 6 / 9 = 2/3 So the slope of of the line that goes through points (1,3) and (10,9) is 2/3.

Accounting

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Question:

On January 1, 2016, Accounting Company issues $800,000 of ten-year 10% bonds that pay interest semi-annually on June 31 and December 31 of each year. The market rate for similar bonds is 12%. Record the issuance of the bonds on January 1.

Jenna R.

Answer:

The first thing you need to do to solve this problem is to find out how much Accounting Company was paid for the bonds. The stated rate (10%) and the market rate (12%) are different in this case, so we know the bonds were not issued at face amount. Because investors want to earn the highest return on there investments possible, they will not buy bonds with a rate lower than the market rate unless the bonds are offered at a discount. The price they will pay will be reduced so they are effectively earning a 12% return. Second, we know that long-term liabilities are recorded at the present value of their future cash flows. There are two kinds of cash flows associated with the bonds: interest payments made semi-annually throughout the life of the bond, and repayment of the principal amount at maturity. We can find the present value of each and add them together to get the issue price of the bond. The interest actually paid to the investor is calculated as: face amount x interest rate x fraction of the year. In this case: $800,000 x 10% x 6/12 = $40,000. This amount is paid twice a year for 10 years, or 20 times total. Now we can use a present value table or financial calculator to find the price of the bond. The interest rate we will use is 6% because 12% is the annual rate and interest is paid every six months. The number of periods is 20. i = 6% n = 20 Present value of interest payments: $40,000 x 11.46992 = 458,796.80 (Using the present value of an annuity table) Present value of face amount: $800,000 x 0.31180 = 249,440.00 (Using the present value of a dollar) We add them together: 458,796.80 + 249,440.00 = $708,236.80 So the issue price of the bonds, or the amount of cash received, is $708,236.80, but Accounting company also needs to record the difference between the issue price and the face amount that they will owe in ten years. This is called the discount on bonds payable: 800,000 - 708,236.80 = $91,763.20 The journal entry on January 1, 2016: Cash 708,236.80 Discount on Bonds Payable 91,736.20 Bonds Payable 800,000

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