- CFA Exams
- CFA Level I Exam
- Topic 1. Quantitative Methods
- Learning Module 1. Rates and Returns
- Subject 4. Annualized Return
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: FVA = ($10,000)(1.09)5 = $15,386.24
FVB = ($10,000)(1.0075)60 = $15,656.81
FVB-FVA = $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.
FVB = ($10,000)(1.0075)60 = $15,656.81
FVB-FVA = $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.
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... |