CFA Level I · CFA Level I Exam · The Time Value of Money in Finance
An investor will receive 5,000 at the end of each year for four years, with the first payment occurring at the end of Year 3. The discount rate is 8% per year. The present value of this series today is closest to:
The present value is about 14,198. The annuity's value at the end of Year 2, one period before the first payment, is about 16,561; this must then be discounted two more years at 8%. Discounting three years or not at all is incorrect.
- A13,146
- B14,198Correct
- C16,561
Explanation
The annuity factor for four years at 8% is 3.3121, so the value one period before the first payment (t = 2) is 5,000 × 3.3121 = 16,561. Discounting two more years: 16,561/1.1664 = 14,198. Discounting three years gives 13,146, and 16,561 omits the deferral.
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