CFA Practice Question

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CFA Practice Question

You anticipate that you will receive $4,500 at the end of 5 years. If you had the money today, it could be invested at a rate of 5% per year. What is the present value of the money?

A. 3,525.87
B. 5,743.27
C. 21,428.57
Correct Answer: A

PV = 4500 x (1/1.05)5 = 3525.87

User Contributed Comments 19

User Comment
Laurel The calculation showed FV=PV(1+r)n How did the FV end up being multiplied by the PV? Why is the 1 divided by the interest rate instead of added to it?
Deano This is rediculous - you cannot rearrange the formula to get PV=FV(1/r)n, they are two completely different formulae.
Deano Actually - DOH! It's simple just rearrange to PV = FV/(1+r)^N this works, really easy actually...
Iyer You dont even have to apply the formula[for this particular question]. I looked at the 4 choice, I know PV should be lower than FV ( at a positive 5% rate]. Since B,C,D are all greater than 4500 they are all wrong. Hope this was useful :)
vivi Good tip Iyer. The formula is : PV = FV (1 + r) ^-n. You're discounting back (negative) since PV is the value at point A and FV is the value at point B. This is the same as : PV = FV (1 / 1 + r)^ n.
KD101 I agree with Iyer - I always first try to eliminate answers and then see if only one is left - and then apply formulas
jimmymh hey guys, it's easier to plug it in the calculator and find the answer.
Will1868 No kidding go by an HP12c and save the headache
jimlis BAII - enter 4500 and hit FV;enter 5 and hit I/Y;enter 5 and hit N;then hit CPT and PV.
kaliokale Dun even use your calculator. You can tell the answer is A by just looing at the numbers.
SamehHassan without the calc, you can tell it is A as it is the only value is less than the future value on the question. others are greater amount.
CRickert You guys are funny. This is day one stuff in any Intro to Finance class. Time to take a break.
TammTamm Why even learn the formula when you can input the numbers in the calculator.
Compute PV
answer: 3525.87
Crown01 PV<FV therefore, in exam hall, just choose A, -> save your time. :)
jabran why even compute. The first answer is the only logical answer (PV < FV).
owot good 1......... jabran, dats wot i was wandering too
jorgeman81 exactly in the exam you don't have much time, for sure no time to calculate the formula just to input the values in the BAII or the HP, and if you can guess the answer without using the calculator that's even better
Kaloyan unless the rate is negative. Then PV got to be bigger than FV. haha
johntan1979 Lots of wise-***es but the passing rate remains around 40% annually. Go figure.
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