Skip to content

CFA Level I · CFA Level I Exam · The Time Value of Money in Finance

An investor deposits a fixed amount today in an account paying a stated annual rate with annual compounding. If the investor holds the deposit for the same number of years but the interest rate is higher, the future value of the deposit will most likely:

The future value will be higher. Future value equals the present value multiplied by (1 + r) raised to the number of periods, so with the principal and horizon fixed, a higher interest rate increases the compounding factor and therefore the ending amount.

  1. Abe lower, because the discount factor is larger
  2. Bbe higher, because the compounding factor increases with the rateCorrect
  3. Cbe unchanged, because the principal is the same

Explanation

The future value equals PV x (1 + r)^N. For a fixed N and PV, a higher r raises the compounding factor and so raises the future value. The other options confuse the direction of the rate effect or ignore the rate.

Did you get it right without looking?

One question tells you little. A timed set on The Time Value of Money in Finance shows your real accuracy, how long you take and where you lose marks.

Practise The Time Value of Money in FinanceFree diagnostic mock

More The Time Value of Money in Finance questions