- CFA Exams
- CFA Level I Exam
- Topic 1. Quantitative Methods
- Learning Module 1. Rates and Returns
- Subject 4. Annualized Return
CFA Practice Question
If the nominal interest rate is 7%, the effective annual rate is:
II. 7.21% with monthly compounding
III. 7.25 % with continuous compounding
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 (**)
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 (*)
1 ENTER: 1.00000000
7%: 0.07000000
g ex: 1.07250818
Δ%: 7.25081810
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. |