CFA Practice Question

There are 410 practice questions for this study session.

CFA Practice Question

If the nominal interest rate is 7%, the effective annual rate is:

I. 7.19 % with quarterly compounding
II. 7.21% with monthly compounding
III. 7.25 % with continuous compounding

Which one of the following is true?
A. I and III
B. II and III
C. I, II and III
Explanation: Using Texas Instruments BA II PLUS
For m = 4
2nd ICONV: NOM = previous value
2nd CLRWORK: NOM = 0.00
7 ENTER: NOM = 7.00
DownArrow: EFF = 0.00
DownArrow: C/Y = previous value
(**)4 ENTER: C/Y = 4.00
UpArrow: EFF = 0.00
CPT: EFF = 7.19
(I) is correct
Note: For n = 12, replace 4 by 12 in line (**)

Using HP 12C
For m = 12
f CLEAR REG: 0.00000000
f CLEAR FIN: 0.00000000
7 ENTER: 7.00000000
(*) 12 n divided by i: 0.58333333
100 CHS ENTER PV: - 100.00000000
FV: - 107.2290081
Divided by 12: 7.22900810
(II) is not correct
Note: For quarterly compounding, replace 12 by 4 in line (*)

For m = 8, i.e., continuous compounding:
1 ENTER: 1.00000000
7%: 0.07000000
g ex: 1.07250818
Δ%: 7.25081810

(III) is correct.

User Contributed Comments 7

User Comment
aspazia how do you get III true on a Texas BA II Plus?
thanks
jmcneal Type in .07 hit the 2nd key then E^x it returns 1.07250818. Then subtract 1.
sh21 Thanks jmneal!
shiva5555 For III, I think the natural log is easier to remember. Ln(1-.07) = 7.25 %
TiredHand Using that info I get EFF = 7.229% on monthly compouding, which is not the same as 7.21% in the answer
TiredHand Got it - B is NOT THE ANSWER because the monthly compounding EAR is not 7.21% it is in fact 7.229%. I love the BAII Plus
lordcomas Or type in:
1,000,000.00 ENTER: C/Y
Then compute for EFF.
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