CFA Practice Question

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CFA Practice Question

The new products officer for the Strong-n-Safe Bank is trying to determine the stated rate for a new 4 year CD. The effective rate will be 6.95% and the CD will offer continuous compounding. The advertised stated rate would be closest to ______.

A. 6.72%
B. 6.82%
C. 7.20%
Correct Answer: A

User Contributed Comments 35

User Comment
tawi How did they get that?
tawi Ok I got it ! The formula for Eff. Ann. Rate is EAR= e^r -1
brimann Using the interest conversion capabilities of the BAII+ I used the continuous compounding fuction on 12 which = 162,754 and plugged that in for C/Y, EFF = 6.95 then CPT NOM = 6.7191
KD101 Brimann's idea is good. Here are the step by step Hit 2nd - [ICONV] See NOM - Hit Down Arrow See EFF - Hit 6.95 See C/Y - Hit 12 then 2nd[e^X] and hit ENTER Now Down Arrow Key Now when you see NOM - Hit CPT You get 6.7191
gruszewski By the way KD101, C/Y can be any large number, why making it more difficult than it is with this e^X :-)
gruszewski the fastest way is ln(1.0695)
Hamma Thus is this the formula then? EAR(continuous compounding)= e^r - 1 0.0695 = e^r - 1 ln(1.0695)=r
debby2 stated interest rate = ln (1+EAR)
Will1868 debby2 is smart
MARINGI gruszewski. thats pretty fast
Win1977 Still confused on this one, could someone explain it based on using the BAII calc?

0is4eva Recall that:
FV(N) = PV * (1 + EAR)^N = PV * e^(r * N)
r is the stated annual rate, EAR = effective annual rate.

Abbreviate formula, recall that N=1, and solve for r:
(1 + EAR) = e^(r)
ln(1 + EAR) = ln( e^(r) )
ln(1 + EAR) = r
ln(1.0695) = r
r = 0.06719 = 6.72%
Cooltallgal What C/Y is 12? The question only mentioned 4 years compound, but didn't say its compounding monthly...
faya e^r-1 results in compounded return = 0.0695

To 'un-compound', take logs - ie. ln(1+r) = ln(1.0695) = 0.06719 as Ois4eva says.
gizi Using BA11 Plus:

EFF = 6.95
C/Y = 365 (365 dys in yr)
CPT NOM = 6.719
Kofo pls: can someone say how to do this using the HP12C
AndressaS Here you go using HP12C:
6.95 ENTER
100 %
1 +
g LN
Total: 0.06719 x 100 = 6.72%
StanleyMo it has mentioned continuous compounding, so the formula use would be EAR = E^Rs-1
kamil1 in HP (1+0.0695)ln
Than just multiply by 100 to get rid of the rounding
ravdo When I do it exactly the way suggested by AndressaS and kamil1, my answer turns out to be 2.07. What am I doing wrong? Please take it step by step with the HP12C calc
TammTamm Thanks debby2, the way you explained this appears to be the easiest way to remember it.
JKiro note debby2 "formula" is for continous compounding
gazelle ravdo, If you are using the ALG Mode,try those following steps:
[G][LN] = 0.6719 X 100= 6.72%
mwali Hi Gizi: your method is straight forward. Thanx
SANTOSHPRABHU STATED INTEREST RATE = ln (1 + EAR) = ln (1+0.0695)= 0.0671912 X 100 = 6.72% (4 year CD is an additional information and will not effect in our calculation of Stated Int Rate)
pokigbo HP 12c Platinum
0.0695 [+]
100 [x]
hussein1978 what is cd
vatsal92 Corporate Deposits
deliawmx CD means certificate of deposit.
Yrazzaq88 Use this in your texas instruments

Effective interest = 6.95%
C/Y = 48 (4 years)
Nom = CPT

Chl4072 1.0695 [LN]
Finally get the answer!!!
marianne19 see irazaaq for computation 4 years to 12 months = 48 months
nohuchi EAR(continuous compounding)= e^r - 1

EFF = 6.95
C/Y = 365 (365 dys in yr)
CPT NOM = 6.719

abs013 There's too many different ways in the comment section.
EFF = 6.95
C/Y = 12*4 = 48
CMPT NOM = 6.72
anthealing [2nd][ICONV]
[2nd][CLR WORK]
[C/Y]=1,000,000,000 (means e)
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