CFA CFA Level 1 Question to be solved from CFA Level 1 mock – Perpetuity

Question to be solved from CFA Level 1 mock – Perpetuity

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    • Avatar of krishTakrishTa
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        • CFA Level 1
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        4
        ::
        This can be solved in 2 steps.
        Time line 1 -> What is the amount that Reena need to deposit to award $25,000 annually @ 4% semi annually, starting from next year
        Step 1 -> calculate Effective Annual rate which is ((1 + r/m)^m) -1. Hence EAR = ((1+0.04/2)^2) -1 = 4.04%
        Step 2 -> PV of a perpetuity where annual return is $25,000 and rate of return is 4.04% is A/r = 25,000/0.0404 = 618,811.88
        Time line 2 -> What is the amount that Reena needs to deposit now so that the deposit is 618,811.88 by the end of 3 years @4% semi annually
        This is simple TVM problem where FV = 61,8811.88, r = 4.04, N = 3. I got the answer $549,487.24
        Option b.

        Hope I am correct
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