CFA Practice Question

There are 410 practice questions for this study session.

CFA Practice Question

You are examining two perpetuities which are identical in every way except that perpetuity A will begin making annual payments of $P to you two years from today while the first $P payment of perpetuity B will occur one year from today. It must be true that ______

A. the current value of perpetuity A is greater than that of B by $P.
B. the current value of perpetuity B is greater than that of A by $P.
C. the current value of perpetuity B is equal to that of perpetuity A.
D. the current value of perpetuity A exceeds that of B by the PV of $P for one year.
E. the current value of perpetuity B exceeds that of A by the PV of $P for one year.
Correct Answer: E

User Contributed Comments 6

User Comment
Shaan23 nice...thought more people would've got this wrong...good job guys
Shishishi explain? :(
floydtrend PV of $P since it will be recvd one yr in future not equal to $P, hence, E is correct
engr2012 Can someone explain this?
choas69 using the formula PV= CF/r to to discount future cash flows to determine the value of what ever it is.

draw a two time lines for both A and B
time line for B will start sooner by a year.

Hence, after discounting the future cash flows its only natural that the one year gap in starting will lead to B having more value because it will bring cash sooner.
cy10088 omg
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