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Basic Question 5 of 13
You have received $350 today. You will invest the money at a rate of 8% per year, compounded quarterly. How much will your investment have increased to by the end of 5 years?
B. $514.26
C. $520.08
A. $490.00
B. $514.26
C. $520.08
User Contributed Comments 10
| User | Comment |
|---|---|
| synner | using the previous problem's formula EAR=(1+.08/4)^(4*5)=1.4859 FV=PV*EAR = 520.08 using BAII plus, C/Y=4, N=5,I/Y=8,PV=350 CPT FV=520.08. which proves it's correct to use the calc this way. and in the previous question, just got the wrong answer. don't get it. |
| timspear | In the last question the effective annual rate was just 7% in this one it is (1.02)^4-1= 8.24% because of the strange way americans quote interst rates. In the UK they would just say the rate is 8.24% rather than 8%. |
| cslee | so what is the difference between compounding quarterly and continously compounding? is continously compounding we are compounding the interest time to time (day to day/minute to minute?) |
| chuong | Simplest way: N= 20 (5*4), I/Y = 2 (8/4) , PV=350 => FV=520.08 |
| peteSP | Chuong, why use 2(8/4) .. ? |
| peterhryb | 8% interest rate divided by 4 periods for quarterly compounding |
| Metalpro | Can any one tell the plug in for the TI BA II calculator for this?? Inspite of not needed for this sum. |
| Sp1993 | Metalpro: TI BA II: [2ND] [CLR TVM] [350 = PV] [2 = I/Y] [20 = N] [CPT] [FV] FV = 520.0815 |
| cschulz316 | +1 Sp1993 - Don't adjust your P/Y. At some point you will forget to change it back and get everything wrong afterwards. |
| apoorv11 | the continuous compounding means that the compounding occurring in a year is infinity. So, the formula of Continuous compounding is FV = PVe^r*n If you use this formula you will get the correct answer. Also this formula is given in CFA book. |
I am using your study notes and I know of at least 5 other friends of mine who used it and passed the exam last Dec. Keep up your great work!
Barnes
Learning Outcome Statements
calculate and interpret annualized return measures and continuously compounded returns, and describe their appropriate uses
CFA® 2024 Level I Curriculum, Volume 1, Module 1.