CFA CFA Level 1 TVM

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  • This topic has 2 replies, 2 voices, and was last updated Dec-20 by pcunniff.
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  • pcunniff
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    Why on this question are you taking 4000 by the power of 6 vs 8? Refer to the solution below. I am confused as to why they are using 6 vs the power of 8. Can someone help?

    A saver deposits the following amounts in an account paying a stated annual rate of 4%, compounded semiannually:

    Year End of Year Deposits ($

    1) 4,000

    2) 8,000

    3) 7,000

    4) 10,000

    Q. At the end of Year 4, the value of the account is closest to:

    $30,432$30,447$31,677

    B is correct. To solve for the future value of unequal cash flows, compute the future value of each payment as of Year 4 at the semiannual rate of 2%, and then sum the individual future values, as follows:

    YearEnd of Year Deposits ($)FactorFuture Value ($)

    1 4,000(1.02)^6 =4,504.65

    2 8,000(1.02)^4 =8,659.46

    3 7,000(1.02)^2 = 7,282.80

    4 10,000(1.02)^0 = 10,000.00

    Sum =30,446.91

    cfachris
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    Because at the END of year 1, 2 semi annual periods have actually passed, so there are 3 years left to end of year 4, i.e. from end of year 1 to end of year 4 is 3 years, i.e. 6 semi annual periods.

    pcunniff
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    end of year deposits ughh got it. Thanks

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