- CFA Exams
- CFA Exam: Level I 2021
- Study Session 2. Quantitative Methods (1)
- Reading 6. The Time Value of Money
- Subject 3. The Future Value and Present Value of a Single Cash Flow

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**CFA Practice Question**

You have received $350 today. You will invest the money at a rate of 8% per year, compounded quarterly. How much will your investment have increased to by the end of 5 years?

B. $514.26

C. $520.08

A. $490.00

B. $514.26

C. $520.08

Correct Answer: C

FV = ($350) (1.02)

^{20}= $520.08###
**User Contributed Comments**
10

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

synner |
using the previous problem's formula EAR=(1+.08/4)^(4*5)=1.4859 FV=PV*EAR = 520.08 using BAII plus, C/Y=4, N=5,I/Y=8,PV=350 CPT FV=520.08. which proves it's correct to use the calc this way. and in the previous question, just got the wrong answer. don't get it. |

timspear |
In the last question the effective annual rate was just 7% in this one it is (1.02)^4-1= 8.24% because of the strange way americans quote interst rates. In the UK they would just say the rate is 8.24% rather than 8%. |

cslee |
so what is the difference between compounding quarterly and continously compounding? is continously compounding we are compounding the interest time to time (day to day/minute to minute?) |

chuong |
Simplest way: N= 20 (5*4), I/Y = 2 (8/4) , PV=350 => FV=520.08 |

peteSP |
Chuong, why use 2(8/4) .. ? |

peterhryb |
8% interest rate divided by 4 periods for quarterly compounding |

Metalpro |
Can any one tell the plug in for the TI BA II calculator for this?? Inspite of not needed for this sum. |

Sp1993 |
Metalpro: TI BA II: [2ND] [CLR TVM] [350 = PV] [2 = I/Y] [20 = N] [CPT] [FV] FV = 520.0815 |

cschulz316 |
+1 Sp1993 - Don't adjust your P/Y. At some point you will forget to change it back and get everything wrong afterwards. |

apoorv11 |
the continuous compounding means that the compounding occurring in a year is infinity. So, the formula of Continuous compounding is FV = PVe^r*n If you use this formula you will get the correct answer. Also this formula is given in CFA book. |