CFA Practice Question

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CFA Practice Question

You wish to accumulate $500,000 by making annual deposits of $9,869.82 into a money market account. All deposits will be made at the beginning of each year. The account pays an interest rate of 16%. How many deposits will be necessary?

A. 13
B. 14
C. 50
Correct Answer: B

BGN; FV = $500,000; PMT = -$9,869.82; i = 16%; CPT n = 14

User Contributed Comments 18

User Comment
Laurel Don't understand how to use the calculation to get this answer.
tawi I got 14 but it does not seem practical
KD101 Tawi Power of compounding and 16% return - Imagine you had fund returning 16%. If you just put $100 at the begining - it would be $799 (no more adding any monthly into it)
Gina if by formula: 500,000 = 9869.82*[((1+.16)^N-1)/.16] * (1+.16)
43.67*(.16)=((1.16)^N - 1
geet i get doesn't that mean only 13 payments are required and it accumulates to 500000 by time 13.99 so the 14th payment isnt required..?
ivot66 by the solution you are supposed to get n=14.99!!!!
ivot66 oops my bad the PV value has to be "0"
cptp How can I do it using TI Ba2?
octavianus Don't forget to set your calculator to BEGINNING payments for Annuity DUE
bobert I got 51 the first time I calculated it and I don't know why. When I saw the answer was 14 I redid the problem and it worked. Does anyone have any idea where I went wrong so I do not make the same mistake again?
StanleyMo Hello Bobert: that because you have key 0.16 instead of 16 for the I/Y
mordja useing T1 BA2

set BGN mode
set P/Y = 1
FV = 500,000
PMT = -9869.82
I/Y = 16

result 14.00
BMore Here's how I did it using the formula:

500000 = 9869.82 * (((1.16^n)-1)/.16) * 1.16

43.6719 = ((1.16^n)-1)/.16

(log 7.9875 / log 1.16) = n

n ~ 13.99 or 14
johntan1979 It's actually 13.99999765, not 13.99 which is very sloppy work by any standards.
chipster TI BAII CALC:

2nd BGN
500,000 FV
-9869.2 PMT
16 I/Y
CPT-->N = 14
msk500 Each time I try solving for n, I get this error message. Can anyone tell please tell me why?
eisenherz msk500, you always need to enter opposite signs for PV or PMT and FV - if you try entering minus PV, you will not get error
mcbreatz Can someone explain to me why I am wrong but using the equation where LN(7.99)=LN(1.16)n gives us the n for a regular annuity? Since payments are made at the beginning of the year its actually an annuity due and would require one lass payment? Resulting in the correct answer being 13?
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