- CFA Exams
- CFA Level I Exam
- Topic 1. Quantitative Methods
- Learning Module 1. Rates and Returns
- Subject 4. Annualized Return
CFA Practice Question
You have received $350 today. You will invest the money at a rate of 8% per year, compounded quarterly. How much will your investment have increased to by the end of 5 years?
B. $514.26
C. $520.08
A. $490.00
B. $514.26
C. $520.08
Correct Answer: C
FV = ($350) (1.02)20 = $520.08
User Contributed Comments 10
| User | Comment |
|---|---|
| synner | using the previous problem's formula EAR=(1+.08/4)^(4*5)=1.4859 FV=PV*EAR = 520.08 using BAII plus, C/Y=4, N=5,I/Y=8,PV=350 CPT FV=520.08. which proves it's correct to use the calc this way. and in the previous question, just got the wrong answer. don't get it. |
| timspear | In the last question the effective annual rate was just 7% in this one it is (1.02)^4-1= 8.24% because of the strange way americans quote interst rates. In the UK they would just say the rate is 8.24% rather than 8%. |
| cslee | so what is the difference between compounding quarterly and continously compounding? is continously compounding we are compounding the interest time to time (day to day/minute to minute?) |
| chuong | Simplest way: N= 20 (5*4), I/Y = 2 (8/4) , PV=350 => FV=520.08 |
| peteSP | Chuong, why use 2(8/4) .. ? |
| peterhryb | 8% interest rate divided by 4 periods for quarterly compounding |
| Metalpro | Can any one tell the plug in for the TI BA II calculator for this?? Inspite of not needed for this sum. |
| Sp1993 | Metalpro: TI BA II: [2ND] [CLR TVM] [350 = PV] [2 = I/Y] [20 = N] [CPT] [FV] FV = 520.0815 |
| cschulz316 | +1 Sp1993 - Don't adjust your P/Y. At some point you will forget to change it back and get everything wrong afterwards. |
| apoorv11 | the continuous compounding means that the compounding occurring in a year is infinity. So, the formula of Continuous compounding is FV = PVe^r*n If you use this formula you will get the correct answer. Also this formula is given in CFA book. |