Why should I choose AnalystNotes?

AnalystNotes specializes in helping candidates pass. Period.

Basic Question 25 of 27

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 ______

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
You need to log in first to add your comment.
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

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.