- CFA Exams
- CFA Level I Exam
- Topic 1. Quantitative Methods
- Learning Module 2. Time Value of Money in Finance
- Subject 2. Fixed Income Instruments and the Time Value of Money
CFA Practice Question
A beginning amount of $75,000 is invested in a money market account. At the beginning of each year, a withdrawal of $7,073.07 is to be made, to pay insurance premiums. The money market account pays an interest rate of 8%. How many withdrawals will this account support?
A. 21
B. 20
C. 17
Explanation: BGN; PV = -$75,000; PMT = $7,073.07; i = 8%; CPT n = 20
User Contributed Comments 12
| User | Comment |
|---|---|
| flemato347 | when trying to solve this problem by using the present value annuity equation I arrive at: 75000=7073.07{1-(1/1.08)^n)/.08); that can be condensed to 10.60={1-(1/1.08)^n)/.08} but where would you go from here to solve for the ln of n? thanks. |
| topdan | I get 24,5... |
| tanyak | me too...I don't really get this END function on the Texas calculator...can someone explain how to solve this on the calculator? |
| AlexYuen | 75,000 = 1.08 x PV (OA) 75,000/1.08 = PV(OA) Hence, PV = 75,000/1.08, PMT=7073, FV=0,I=8 |
| wuyi | Note: Cash withdraw is at the beginning of each year! |
| coolnan | Texas BAII plus: 2ND BNG 2ND SET 2ND QUIT 7037.07PMT 8 I/Y -75000PV CPT N = 20.25 |
| Profache | If the problem states witdrawns/deposits are made in the BEGINING of the period, you set the BEGIN funciton in the calculator. If made at the end of each year, set the function to END |
| phillyj | on BA-II, how do you change to a annuity due setting? |
| nishanttcs | Earlier I too got 24.5 as the answer. However there is a trick here. The time we deposit 75000, we take out 7073.07 to pay 1st installment. Now are left with 67926.93 (PV). Use i = 8%, PMT = 7073.07. You get NPER = 19 (exactly). Hence total installments supported are 19+1 = 20 |
| rjdelong | i also used nishanttcs method, but then I didn't know how to set my calc to use BGN... so this was how to compensate |
| merc10112 | Do not work these problems out by hand...use your calculator instead. Save your time for other questions |
| Lolalolita | nishanttcs, excellent trick! setting the ba ii to BGN mode saves you time. |