CFA Practice Question

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CFA Practice Question

At the end of 15 years, you wish to have accumulated $500,000. You plan to accumulate this money by making annual deposits of $10,003.93 into a money market account. All deposits will be made at the beginning of each year. What interest rate must the account pay each year?

A. 8%
B. 12%
C. 14%
Correct Answer: C

BGN; FV = $500,000; PMT = -$10,003.93; n = 15; CPT i = 14%

User Contributed Comments 12

User Comment
tawi Can't seem to work this out
KD101 If you did question - 4 and got answer to 14 years - I would have ruled out the other choices as for both FV is same and Annuity is only approx. 10% higher in this Question - so the interest rate could be approx. slightly more than 10% lower - hence 16 to 14% is more likely than other.
Mario612 Can someone tell me the keystrokes to get this answer.
Mario612 on the BA II Plus calculator
Done On TI BAII+


FY= -500,000
N= 15
PMT= 10,003.93

[CPT] [I/Y]
The answer come to 14%
HBomb I haven't as yet bought a financial calculator so does anyone know how to do this the old fashioned way by using the formula? I simplify it down to the point where 49.98 = {(1+r)^15}/r but can go no further as i dont know how to get the denominator and numerator r's together. Cheers for any help on this matter.
gullan This is just some change to explanation by user *Done*
PMT should be negative as payments are made and FV should be pocitive. However answer will remain the same in both the cases.
rivers HBomb
10,003.93 x ((1.14^15/.14)-1) x 1.14 = 500,049
i just picked one and substituted, very long way to do it but never fails to get the right answer (if you are not using one of these calculators)
josie491 need to set calculator to BGN mode first.
Pls look out for key words "beginning of each year" or "end of each year". Calculator mode BGN = beginning of each year. END = end of each year.
VikramJ Rivers and HBomb,
I dont have my financial calc at work so I've been using Excel for these and plugging in. Using the formula you wrote, I actually get a answer of 570,000. You have to be careful about the parentheses - most importantly putting the brackets around the [(1+r)^N-1]. I used
=10003.93*(1.14^15-1)/0.14*1.14 to get 499,999
mcbreatz I keep tripping myself up with these beginning v ending questions. The way the question is phrased wouldn't using n as 15 give you the interest rate to find a value of 500,000 at the beginning of year 15 vs the end of year 15?
Yannetta how to calculate it using end mode on texas?
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