CFA Level I · CFA Level I Exam · The Time Value of Money in Finance
An investor deposits 10,000 at a stated annual rate of 6% compounded quarterly. The balance after 2.5 years is closest to:
The balance is about 11,605. Quarterly compounding at 6% means 1.5% per quarter over ten quarters, so 10,000 grows by a factor of 1.015 to the tenth power, roughly 1.1605, rather than using the stated annual rate directly.
- A11,495
- B11,605Correct
- C11,618
Explanation
Quarterly rate = 1.5%; periods = 10. FV = 10,000 x 1.015^10 = 10,000 x 1.160541 = 11,605. Using annual compounding 1.06^2.5 gives 11,572-type errors, and 11,495 mistakenly uses simple-style growth.
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