CFA CFA Level 1 Frustration with getting simple question wrong (perpetuity)

# Frustration with getting simple question wrong (perpetuity)

• Author
Posts
• wannabe1988
Participant
• CFA Level 1
1

Hello everyone, just a bit frustrated that I cannot understand why the N=3 instead of N=4. Can someone hep me with this? many thanks!

• Yeshank
Participant
• CFA Level 1
3

I do understand the solution and i solved it in the same way as given in the answer

but isnt the question a bit ambigious about if the payments are made at the end of the year or at the beggining of the year?
if payments begin at t=4 it could be the end of the year payment and we recieve the cash at 31st dec of 4rth year so techincally 4 periods have elapsed??

• wannabe1988
Participant
• CFA Level 1
3

Thank you everyone! I was thinking the same thing as Yeshank in that when they say t=4, i usually assume it to be ordinary annuity unless it is stated as annuity due. Hence t=4. I thought when a question does not state the type of annuity, we usually assume ordinary annuity?

thank you again every for your feedback!

• draftzero
Participant
• CFA Level 1
2

\$250 starting on year 4. When you calculate PV of that payment stream it will be for year 3.

• rsparks
Participant
• CFA Level 2
2

if you do n=999 i= 6% (annual) p= \$250, then compute the PV you will get \$4,166.67. However, you need the PV today and not at T= 4 (this is beginning of year 4 or end of year 3). So, change N = 3, FV to \$4,166.67, p = 0 and compute PV to get \$3,498.42. You’ll soon realize that the CFA will make you take the PV of all future after tax payments; just always have PV of anything on your mind. ðŸ™‚

Participant
• Undecided
2

The question wording is a little clunky. Don’t expect them to say t=4 on the actual exam.

For a standard perpetuity calculation, you are at t = 0 now. The first payment comes in a year later (t = 1). If we push back the payment 3 years (to t = 4), we’ll need to discount 3 years as well.