CFA Level I · CFA Level I Exam · The Time Value of Money in Finance
A bank offers a deposit with a stated annual rate of 6% compounded monthly. A client invests USD 20,000 for 3 years. The future value at maturity is closest to:
The future value is about USD 23,933. With monthly compounding the periodic rate is 0.5% over 36 periods, giving a factor of about 1.1967. Annual compounding would understate the result at USD 23,820, and simple interest would give USD 24,000.
- AUSD 23,820
- BUSD 23,933Correct
- CUSD 24,000
Explanation
Monthly rate = 0.06/12 = 0.005 and N = 36. 1.005^36 = 1.196681. FV = 20,000 x 1.196681 = 23,933.6, about USD 23,933 (rounded to nearest listed value). USD 23,820 is annual compounding (1.06^3 = 1.191016), and USD 24,000 is simple interest.
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