CFA Practice Question

CFA Practice Question

Jeremy Mansfield is saving for a down payment on a house. He can only set aside 400 a month over the next three years, starting immediately. However, he will buy a house after 5 years. How much money will Jeremy have for the down payment if he can earn 6.5% annually on his deposits?
A. 18,048
B. 20,546
C. 18,145
Explanation: Since Jeremy starts to save right away, this is an annuity due for 36 months. We solve this problem in two steps. First, we compute the FV after 36 months. We then compound this FV for another 24 months to arrive at its value for the down payment. Monthly interest is 6.5/12 = 0.5417%. With the calculator in the BGN mode: PMT = 400; N = 36; I/Y = 0.5417; CPT FV = 15,939. In the second step, we compute its FV after 60 months, or additional 24 months (= 60 - 36). In the end mode, enter: PV = 15,939; N = 24; I/Y = 0.5417; CPT FV = 18,145.

User Contributed Comments 7

User Comment
nmirza 1. since annual interest rate why cant we use n = 3 i/y=6.5 and pmt = 4800. since annual interest does it matter if we save a monthly amount or an annual amount at end of period.

2. after the initial 3 year waiting period, why are we still using per month amounts(i/y, pmt, n) intead of annual??
paternr6 When I compute the FV after the first 36 months, I find 15 852 and no 15 939. I compute the same way the correction does. Does someone agree?
whipp Must use "BEGIN" mode for payments to get FV = $15,939
group common sense. if I can earn monthly compound interest for 3 years I can earn it for 5 years too as long as the lenders / banks are offering a monthly comounding product in that country at 6.5% p.a. rate. since in the question it is nowhere said that after 3 years banks/ lenders has stopped offering such a product, we have to keep calculating at monthly comounding only. Its a CFA question in true sense

Guys/guls pls start thinking beyond calculator function of begening and end mode.
pstebelp I computed the total for the first three years, compounding monthly, then took that sum out an additional 2 years at an annual rate and came up with a FV of 18,078 when I should have stayed monthly! However, the question just made mention of the fact that he could earn 6.5% annually.
lisab0131 I did the same thing pstebelp. The only reason i compounded for the first 3 years was because he was saving $400 a month...
tzanchan You can just compute it as a regular annuity and multiply the result by 1+ .065/12 in case you don't want to be messing around with your calculator settings during the test. If you do change the setting to BEGIN, remember to change it back.
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