- 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 at 13% per year. At the beginning of each year for the next 30 years, a withdrawal is to be made, to pay insurance premiums. What is the largest premium this investment will support?
A. $10,005.80
B. $8,854.69
C. $7,836.01
Explanation: BGN, PV = -$75,000; n = 30; i = 13%; CPT PMT = $8,854.69
User Contributed Comments 11
| User | Comment |
|---|---|
| LRS24 | Is this the correct answer, I may be reading it wrong but $75k earns $9750 per year meaning $8,854.69 will easily be provided for without impacting the principle |
| Eckhardt1978 | at lrs24: -75k makes 10,004.4345, the largest premium is 8,854,69 because of 10,005.80 is impossible without impacting the principle. |
| chenchow | I am not sure whether I did it wrong, but I typed PV = -75K, n=30, i=13% into my calculator, and compute PMT, I get $10,005.80 . Anyone in the same shoe? |
| vstolin | Read again: BEGINNING of the year. Switch your calculators to "BEG" and you'll get 88854 |
| george2006 | Watch out for "Begining"... and set BGN on your calculator! |
| dg18sox | not sure why but I pressed Beginning of the year PV =-75k, n=30, i=13 and compute pmt and I get $8,419.70 anyone else have that problem? |
| bwbarksdale | perhaps you still had something loaded in as FV from doing a previous problem. |
| aakash1108 | The basic formula for Annuity is: PV = A[1- (1/(1+ r)^N)/r] Take PV = 75000-A (as 1st Annuity is already paid and cannot be discounted. N = 29 (because the first annuity is already paid, remaining annuities = 29) R = 0.13 With this we get: (75000-A)=A[ 1 - (1/(1.13)^29/0.13)] 0.13(75000-A)=A[1-(1/34.615838)] (Moved 0.13 to the left hand side and simplified (1.13)^29) 9,750 - 0.13A = A (1 - 0.02889) 9,750 - 0.13A = 0.97111A 9,750 = 0.97111A + 0.13A 9,750 = 1.10111A A = 9,750/1.10111 A = 8854.70 |
| malikhwa | On BAII PLUS Clear Previous Work: (2ND)(CLR WORK) Set to Beginning: (2ND)(BGN) (2ND)(SET) 75000(PV) 30(N) 13(I/Y) (CPT)(PMT) |
| thekobe | just be sure to read the instructions, as the problem indicates you have to set the TI to 2nd set and then BGN mode! |
| davcer | just remember to reduce tne periods to n-1 while doing your calculations and finally adding one annuity to your previous answer when the question says begining of the year. |