CFA Practice Question

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CFA Practice Question

Suppose you are considering purchasing a financial asset that promises to pay 10 annual payments of $1,000, with the rate of return quoted as 9% per annum. How much should you pay for the annuity if the first payment is made in one year's time?
A. $5,759.02
B. $6,417.66
C. neither of these amounts
Explanation: Using hp-12C:
f CLEAR FIN: 0.00000000
f CLEAR REG: 0.00000000
10 n: 10.00000000
9 i: 9.00000000
1000 CHS PMT: -1,000.000000
g END: -1,000.000000
PV: 6,417.657701

Using TI BA II Plus:
2nd QUIT: 0.00
2nd CLR TVM: 0.00
1000 ± PMT: PMT = 1,000.00
10 N: N = 10.00
9 I/Y: I/Y = 9.00
CPT PV: 6,417.66

Thus, the series of cash flows of $1000 per year is currently worth $6417.66.

User Contributed Comments 2

User Comment
danlan N=10, I=9, PMT=-1000, FV=0 ==> PV=6417.66
Kuki always use the Present value of any series of cashflows to find out its actual worth.
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