CFA Practice Question

CFA Practice Question

Suppose you were given $4,000 today and deposited it into an account paying 8% per year, compounded monthly. If you know that you will need $5,000 in the account 6 years from now, what monthly withdrawal can you make from the account, beginning one month from now, that will leave the account with exactly $5,000 in it in 6 years?
A. $204.45
B. $123.45
C. $15.80
Explanation: On the BAII Plus, press 72 N, 8 divide 12 = I/Y, 4000 PV, 5000 +/- FV, CPT PMT. On the HP12C, press 72 n, 8 ENTER 12 divide i, 4000 PV, 5000 CHS FV, PMT. Note that the answer is a negative number. This is because it is a withdrawal from the account balance, just as the $5,000 is. It is a very small value because most of the $4,000 is needed to ensure there is $5,000 in the account in 6 years! Make sure the BAII Plus has the value of P/Y set to 1.

User Contributed Comments 9

User Comment
synner on BAII, N=72, I/Y=8/12, PV=4000, FV=5000, CPT PMT = 124.4

the closest one is b. did i do something wrong?
synner oh, note PV=-4000, and FV = 5000
julamo That's actually PV=4000 and FV=-5000, see it as "you receive 4000 at the start (+) and you want to be able to withdraw 5000 at the end (-)"
cong Good one Julamo.
pepper logically the first 2 answer is way off. don't even have to calculate.
indrayudha I thought PV=-4000 (since you're giving the money to the bank) and FV=5000 (you will receive that money from the bank), hence the PMT=+15.80 (as it should be, since you receive those from the bank).
Andy552 If you use -4,000 you come out with 124.4658 which is the incorrect answer according to the above.

I agree though, why is the FV negative and the PV positive when you're despoiting money? Same as buying a treasury stock surely?
Ifi2703 Guys, with the BAII you get the same answer whether or not you put the negative sign in front of the PV or the FV. It doesnt matter, so long as one of them is negative and one is positive.

Make sure you use the CLR TVM button everytime, make it a habit - i've gotten many worng answers because of that!! :-(
cfastudypl You are right Ifi2703
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