NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Time Value of Money
Mr. Kulkarni invests Rs 10,000 at the beginning of each year for 3 years in an instrument earning 10% per annum compounded annually. What is the value of the investment at the end of year 3?
The value at the end of year 3 is Rs 36,410. Because payments are made at the start of each year, this is an annuity due. The future value is the ordinary annuity value of Rs 33,100 multiplied by 1.10, which equals Rs 36,410.
- ARs 30,000
- BRs 33,100
- CRs 36,410Correct
- DRs 40,051
Explanation
Each instalment is invested for a full year more than under an ordinary annuity. FV = 10,000 x (1.1^3 + 1.1^2 + 1.1) = 10,000 x (1.331 + 1.21 + 1.10) = Rs 36,410. Rs 33,100 is the ordinary annuity value (end-of-year payments), and Rs 40,051 wrongly adds an extra year of compounding.
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