CFA Latest CFA Level 1 Discussions Level 1 – Time Value of Money

Level 1 – Time Value of Money

  • This topic has 6 replies, 5 voices, and was last updated Aug-20 by kalalah.
  • Author
    Posts
    • fmccray
      Participant
      Up
      16
      Down

      Hello- I have a question. This problem has too many steps.

      Is there a quicker way to do Step 1 & 2?

      On Step 2,

      I am not familiar about -1,-2, …etc or how to do this on calculator. ๐Ÿ™

      6 10,805 10,805 (1.08)-1 =10,004

      7 11,562 11,562 (1.08)-2 =9,912.5

      8 12,371 12,371 (1.08)-3 =9,820.5

      9 13,237 13,237 (1.08)-4 =9,729.6

      10 14,163 14,163 (1.08)-5 =9,639

      SUM = USD 49,106

      Thank you for your help.

      Practice Q:

      Gerard Jones plans to save for his 5-year doctorate degree, which starts 6 years from now. The current annual expenditure is USD7,200 and it is expected to grow by 7 percent annually. Gerard will need to make the first payment 6 years from today. He identifies a savings plan that allows him to earn an interest of 8 percent annually. How much should Gerard deposit each year, starting one year from today? Assume that he plans to make 5 payments.

      A USD8,370.

      B USD8,539.

      C USD8,730.

      Your answer was Wrong.

      Explanation:

      A is correct. This problem can be solved in three steps.

      Step 1: Find the annual expenditures

      Annual Expendituret=6=7,200 (1+0.07)6=USD10,805

      Annual Expendituret=7=7,200 (1+0.07)7=USD11,562

      Annual Expendituret=8=7,200 (1+0.07)8=USD12,371

      Annual Expendituret=9=7,200 (1+0.07)9=USD13,237

      Annual Expendituret=10=7,200 (1+0.07)10=USD14,163

      Step 2: Find the present value of annual expenditures at t = 5

      Time Period Annual Expenditure (USD) Present Value

      6 10,805 10,805 (1.08)-1 =10,004

      7 11,562 11,562 (1.08)-2 =9,912.5

      8 12,371 12,371 (1.08)-3 =9,820.5

      9 13,237 13,237 (1.08)-4 =9,729.6

      10 14,163 14,163 (1.08)-5 =9,639

      SUM = USD 49,106

      Step 3: Find the annuity payment

      N = 5, %i = 8, PV = 0, FV = 49,106, CPT PMT.

      PMT = 8,370.

    • fp92
      Participant
      Up
      2
      Down

      Hi @fmccray

      Let’s see if I can help on this as your Step 2 notation doesn’t seem correct.

      So in your Step 2, I’ve copied and amended the calculations to show you that x^-2 = 1/(x^2), so you can calculate in 2 ways in essence using the y^x key on your BA II plus (assuming you’re using this) and parenthesis “(” & “)” functions on your BA II plus :

      Step 2: Find the present value of annual expenditures at t = 5

      Time Period Annual Expenditure (USD) Present Value

      PV of 10,805 (at t=6) to t=5: 10,805 * (1.08)^-1 =10,004 = 10,805 / (1.08)

      PV of 11,562 (at t=7) to t=5: 11,562 * (1.08)^-2 =9,912.5 = 11,562 / (1.08)^2

      PV of 12,371 (at t=8) to t=5: 12,371 * (1.08)^-3 =9,820.5 = 12,371 / (1.08)^3

      PV of 13,237 (at t=9) to t=5: 13,237 * (1.08)^-4 =9,729.6 = 13,237 / (1.08)^4

      PV of 14,163 (at t=10) to t=5: 14,163 * (1.08)^-5 =9,639 = 14,163 / (1.08)^5

      SUM = USD 49,106

      ——————————-

      For example, if you want to do 11,562 * (1.08)^-2 on your calculator, the steps are:

      Type โ€œ1.08โ€ then hit the โ€œyห†xโ€ button, followed by โ€œ2โ€, then the change sign key “+/-“, then the โ€œ=โ€ sign. Then with the answer (0.8572), just multiply (“x” button) that with 11562, to get 9912.55.

      Alternatively, if you want to do 11,562/(1.08)^2, you can type it as: 11562, then divide sign (รท ), then “(1.08”, “y^x”, then “2”, then “)”, then “=”, which should get you the same 9912.55 answer.

      Does this help? I’m not sure if there is a faster way to compute step 1 and 2 though

    • fmccray
      Participant
      Up
      1
      Down

      Thank you so much. what you showed me to do on the calculator is really helpful. I sure appreciated it.

      I has hoping that there is a quicker way to do step 1 & 2. ๐Ÿ™‚

    • fp92
      Participant
      Up
      3
      Down

      No worries, glad it helped a little. It’s probably a speed thing for Step 1 and 2, hopefully you’ll get there after loads of practice! But agree it seems quite a lot of steps for the amount of time you have each question…

    • Test_20
      Participant
      Up
      1
      Down

      i am having difficulties understanding these kinds of question, would you be able explain why are we calculating the PV?

    • PPG
      Participant
      Up
      1
      Down

      My BA 2 Plus calculator hangs whenever I try to calculate interest rate for TVM reading. I clear TVM in calculator every time when I attempt the problem. Can this issu be resolved or should I buy a new calculator?

    • kalalah
      Participant
      Up
      3
      Down

      How does it ‘hang’? Sometimes it takes a while to calculate and the screen is just blank while it processes. Is that the problem you’re having?

Viewing 6 reply threads
  • You must be logged in to reply to this topic.