CFA Level I · CFA Level I Exam · The Time Value of Money in Finance
A borrower will make 36 equal month-end payments of 300. The stated annual rate is 12% compounded monthly. The present value of the payments is closest to:
The present value is about 9,032. Convert the rate to 1% per month, use 36 periods, and apply the ordinary annuity factor of 30.1075 to the 300 payment. Using 12% per period or an annuity due gives incorrect values.
- A2,458
- B9,032Correct
- C9,123
Explanation
The periodic rate is 1% and there are 36 periods. The annuity factor is (1 - 1.01^-36)/0.01 = 30.1075, so PV = 300 x 30.1075 = 9,032. Using 12% per period for 36 periods gives 2,458, and treating payments as beginning-of-month gives 9,123.
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