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Basic Question 0 of 6
You are examining two perpetuities which are identical in every way except that perpetuity A will begin making annual payments of $P to you two years from today while the first $P payment of perpetuity B will occur one year from today. It must be true that ______
B. the current value of perpetuity B is greater than that of A by $P.
C. the current value of perpetuity B is equal to that of perpetuity A.
D. the current value of perpetuity A exceeds that of B by the PV of $P for one year.
E. the current value of perpetuity B exceeds that of A by the PV of $P for one year.
A. the current value of perpetuity A is greater than that of B by $P.
B. the current value of perpetuity B is greater than that of A by $P.
C. the current value of perpetuity B is equal to that of perpetuity A.
D. the current value of perpetuity A exceeds that of B by the PV of $P for one year.
E. the current value of perpetuity B exceeds that of A by the PV of $P for one year.
User Contributed Comments 6
| User | Comment |
|---|---|
| Shaan23 | nice...thought more people would've got this wrong...good job guys |
| Shishishi | explain? :( |
| floydtrend | PV of $P since it will be recvd one yr in future not equal to $P, hence, E is correct |
| engr2012 | Can someone explain this? |
| choas69 | using the formula PV= CF/r to to discount future cash flows to determine the value of what ever it is. draw a two time lines for both A and B time line for B will start sooner by a year. Hence, after discounting the future cash flows its only natural that the one year gap in starting will lead to B having more value because it will bring cash sooner. |
| cy10088 | omg |
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 the present value(PV) of fixed-income and equity instruments based on expected future cash flows
calculate and interpret the implied return of fixed-income instruments and required return and implied growth of equity instruments given the present value (PV) and cash flows
CFA® 2025 Level I Curriculum, Volume 1, Module 2.