- CFA Exams
- CFA Level I Exam
- Study Session 2. Quantitative Methods (1)
- Reading 6. The Time Value of Money
- Subject 4. The Future Value and Present Value of a Series of Equal Cash Flows (Ordinary Annuities, Annuity Dues, and Perpetuities)

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**CFA Practice Question**

A beginning amount of $75,000 is invested in a money market account. At the beginning of each year (starting from the second year) for the next 30 years, a withdrawal of $8,854.69 is to be made, to pay insurance premiums. What interest rate must the investment pay to support the premium payments?

A. 11.34%

B. 10.28%

C. 13%

**Explanation:**PV = -$75,000; PMT = $8,854.69; n = 30; CPT i = 11.34%

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**User Contributed Comments**
6

User |
Comment |
---|---|

miso |
I always get 13%. Can someone expain |

amak |
Don't set BGN. Instead it is ordinary due, since the payment starts from the second year. |

dimos |
since the withdrawal starts from the second year (which means at the end of the first year) it is ordinary annuity. That is why the solution is 11.34%. In order to be annuity due, it should say "starting today..." |

labsbamb |
get it.No BGN. payment start at begining of 2nd year, meaning end of first year. |

sheenalim |
with a Texas BA II Plus I can't compute the answer with a TVM (Time Value of Money) worksheet. Instead the Cashflow worksheet must be used, using the IRR method. |

rsanfo |
BA II Plus ========== 2ND BGN, 2ND ENTER (do this until you see END) 2ND, QUIT 30, N -75000, PV 8854.69, PMT CPT, I/Y (result = 11.33512) |