- CFA Exams
- CFA Level I Exam
- Study Session 2. Quantitative Methods (1)
- Reading 6. The Time Value of Money
- Subject 3. The Future Value and Present Value of a Single Cash Flow

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**CFA Practice Question**

You have $10,000 to invest. Bank A offers a 5 year, 9% CD with interest compounded annually, and Bank B offers a 5 year, 9% CD with interest compounded monthly. Which would you prefer? Why?

A. You would choose Bank A because the FVA is $15,386.24.

B. You would choose Bank B because you will be $270.57 better off at the end of five years.

C. You would choose Bank B because you will be $302.23 better off at the end of five years.

**Explanation:**FV

_{A}= ($10,000)(1.09)

^{5}= $15,386.24

FV

_{B}= ($10,000)(1.0075)

^{60}= $15,656.81

FV

_{B}-FV

_{A}= $15,656.81 - $15,386.24 = $270.57

By choosing Bank B, you will be $270.57 better off at the end of 5 years.

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**User Contributed Comments**
2

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

Spain81 |
Why is interest rate of bank B 7,5% when the question states it's 9% for both. |

Spain81 |
Never mind I just realized that you have to put the interest rate in terms of months... |