Page 19 - FINAL CFA I SLIDES JUNE 2019 DAY 2

LOS 6.e: Calculate and interpret the FV & PV Session Unit 2: The Time Value of Money
of a single sum of money, an ordinary annuity,
an annuity due, a perpetuity (PV only), and a
series of unequal cash flows. Solving TVM Problems When Compounding Periods Are Other Than Annual

Example: The effect of compounding frequency on FV & PV: Compute the FV 1 year from now of $1,000 today and the
PV of $1,000 to be received one year from now using a stated annual interest rate of 6% with a range of compounding
periods.

Example: Computing EARs for a range of compounding frequencies using a stated rate of 6%, compute EARs for semi-
annual, quarterly, monthly, and daily compounding.

Answer: EAR with:
• semi-annual compounding = (1 + 0.03)2 – 1 = 1.06090 – 1 = 0.06090 = 6.090%
• quarterly compounding = (1 + 0.015)4 – 1 = 1.06136 – 1 = 0.06136 = 6.136%
• monthly compounding = (1 + 0.005)12 – 1 = 1.06168 – 1 = 0.06168 = 6.168%
• daily compounding = (1 + 0.00016438)365 – 1 = 1.06183 – 1 = 0.06183 = 6.183%