CFA Practice Question

There are 410 practice questions for this study session.

CFA Practice Question

An investor invests $5000 today for 7 years at an interest rate of 8% compounded quarterly. Which of the following is true?
A. The effective annual interest rate is 8.24 % and the future value of the investment at the end of 7 years is $8,705.12.
B. The effective annual interest rate is 8.24 % and the future value of the investment at the end of 7 years is $8,725.12.
C. The stated nominal annual interest rate is 8.35 % and the future value of the investment at the end of 7 years is $8,705.12.
Explanation: Using Texas Instruments BA II PLUS

To work out the future value:
2nd QUIT: 0.00
2nd CLR TVM: 0.00
2nd P/Y: P/Y = previous value
4 ENTER: P/Y = 4.00
2nd QUIT: 0.00
5000 ± PV: PV = - 5,000.00
28 N: N = 28.00
8 I/Y: I/Y = 8.00
CPT FV: FV = 8,705.12

And to find the effective annual interest rate:
2nd QUIT: NOM = previous value
2nd CLR TVM: NOM = 0.00
8 ENTER: NOM = 6.00
DownArrow: EFF = 0.00
DownArrow: C/Y = previous value
4 ENTER: C/Y =4.00
UpArrow: EFF = 0.00
CPT: EFF = 8.24

Using HP 12C

To find future value:
f CLEAR FIN: 0.00000000
f CLEAR REG: 0.00000000
28 n: 28.00000000
2 i: 2.00000000
5000 CHS PV: -5,000..000000
g END: - 3,000..000000
FV: 8,705.12

To find effective rate:
f CLEAR FIN: 0.00000000
f CLEAR REG: 0.00000000
8 ENTER: 8.00000000
4 n x i: 2.00000000
100 CHS ENTER PV: -100.00000000
FV: -108.2432160
i: 8.24321600

User Contributed Comments 1

User Comment
Jmcb Or just remember the formula for EAR...(1.02)^4-1
(since it is quarterly compounded) = .0824 = 8.24%

The calculator keystrokes they give seem a bit much...
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