- CFA Exams
- CFA Level I Exam
- Study Session 2. Quantitative Methods (1)
- Reading 6. The Time Value of Money
- Subject 2. Calculate the Effective Annual Rate

###
**CFA Practice Question**

Which of the following investments will grow to the largest future value?

I | 8.40% | Monthly

II | 8.60% | Quarterly

III | 8.64% | Semi-annually

Investment | Stated Annual Interest Rate | Frequency

I | 8.40% | Monthly

II | 8.60% | Quarterly

III | 8.64% | Semi-annually

A. I

B. II

C. III

**Explanation:**Use the EAR (effective annual rate) to compare the investments:

I. (1 + .084/12)

^{12}- 1 = 8.73%

II. (1 + .086/4)

^{4}- 1 = 8.88%

III. (1 + .0864/2)2 - 1 = 8.83%

Investment II has the largest EAR.

###
**User Contributed Comments**
1

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

Mels08 |
Also use the Calculator BAII Plus 2nd ICONV NOM 8.4 C/Y 12 CPT EFF 8.73 Do the same with the rest |