CFA Practice Question

There are 410 practice questions for this study session.

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.
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