CFA Practice Question

There are 410 practice questions for this study session.

CFA Practice Question

An investment pays $2,500 per month at the beginning of each month and will continue to do so for five years. What is the effective annual rate on this investment if the investment costs $130,000 today?
A. 6.0%
B. 6.2%
C. 6.5%
Explanation: Set the calculator in the BGN mode, as this is an annuity due. Calculate monthly interest rate:

PMT = 2,500; PV = -130,000; N = 60; CPT I/Y = 0.5%
EAR = (1 + 0.5/100)12 - 1 = 0.061678 or 6.2%

User Contributed Comments 19

User Comment
linr0002 The I/Y computed is 0.4816846 instead and not 0.5%. This gives a more exact ans of 5.9358% for the effective rate. This seems to be the more correct ans.
sonderfall I don't think so "linr0002" because the payment is at the beginning = 0.4989%
ohwos sonderfall is right
FCFA Is there a way to calculate EAR on BAII?
cswin need to convert I/Y to EAR
coolnan sonderfall is right as this is annuity due problem. should use BGN mode
AndyBear EAR = (1 + .5/100)12 - 1 = 0.061678 or 6.2%
Why divide by 100?
samerthehammer Please explain how you got the EAR calculation the ^12 is to get the monthly but what is the 100 for.
Allen88 the 100 is to convert the .5% to a decimal form.
tw46605 how do you use the BGN function?
rayrlee on a HP 12c, g then 8 to convert to BGN
vampiremeg why is it divided by 100 instead of 12?
Sanghamitra how to convert to bgn in txs II?
Sanghamitra @andy - divide by 100 because the I/Y is in percentage terms - .5%. so u make it .5/100
prtwf um... what's wrong with my BA II?
i did the calculation in bgn mode and still got -0.479 as I/Y... help...
jorgeman81 same here prtwf!
lordcomas I also got the wrong answe even if I set it as Begin mode.
kingdave here we have the number of years which is five. I don't understand where discounting rate of 0.5% is coming from. can you please explain.
bemccall95 @Everyone
Set your calculator to BGN mode, then enter the following things:
N= 60 PV= -130,000 PMT= 2,500 FV= 0
Solve for I/Y, then divide this by 100 to get it in decimal form, then add 1 and you should have 1.005. Then do (1.005^12) - 1 and you should get something like 6.15%, which they round up to 6.2%.
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