- CFA Exams
- CFA Level I Exam
- Study Session 2. Quantitative Methods (1)
- Reading 6. The Time Value of Money
- Subject 4. The Future Value and Present Value of a Series of Equal Cash Flows (Ordinary Annuities, Annuity Dues, and Perpetuities)

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**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 ______

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.

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

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**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 |