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Annuity question —RRSP account

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    • Avatar of Alice77Alice77
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        • Undecided
        29 Feb 2020 at 12:04 pm
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        Hi guys, 

        so glad to join this. 

        I am currently preparing for CFA level 1. The question I encountered is : 

        currently the RRSP account has a balance of 120000, and this person wanted to start to save $8000 at the end of each year to be able to have $1500000 in 30 years . What’s the interest rate ? 

        I understand in the calculator input as $8000 PMT , PV 120000, N 30 years, but FV is -1500000. The answer is r= 6.54%

        i don’t understand why FV Input in the financial calculator should be negative. 

        Could someone help explain ? 

        Thanks 

      • Avatar of rutadanielrutadaniel
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          • CFA Level 2
          29 Feb 2020 at 4:41 pm
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          My understanding is that it should be:

          PV = $120,000 (money PUT IN account)
          PMT = $8,000 (money GOING IN account)
          N = 30 (number of years)
          FV = -$1,500,000 (money COMING OUT of account at the end, or a final ‘payment’)

          Alternatively, you could view it this way:

          PV = -$120,000 (money LEAVING PERSON to go into RRSP)
          PMT = -$8,000 (money LEAVING PERSON to go into RRSP)
          N = 30 (number of years)
          FV = $1,500,000 (money RETURNING TO PERSON from RRSP)

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