CFA Level I · CFA Level I Exam · The Time Value of Money in Finance
An investor will receive 1,000 at the beginning of each year for five years, starting today. The discount rate is 6% per year. The present value of these payments is closest to:
The present value is about 4,465. Payments made at the start of each year form an annuity due, so the ordinary annuity value of 4,212 is multiplied by 1.06. Using 4,212 ignores the timing, and 5,637 is a future value.
- A4,212
- B4,465Correct
- C5,637
Explanation
The ordinary annuity factor is (1 - 1.06^-5)/0.06 = 4.2124, giving 4,212. Payments at the start of each period form an annuity due, so multiply by 1.06: 4,212.36 x 1.06 = 4,465. The value 4,212 treats the payments as end-of-year, and 5,637 is the future value of the ordinary annuity.
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