Page 59 - CFA - Day 1 & 2 Course Notes

LOS 6.e: Calculate and interpret the Session Unit 2: The Time Value of Money
future value (FV) and present value (PV)

of a single sum of money, an ordinary

annuity, an annuity due, a perpetuity (PV
only), and a series of unequal cash flows.

Annuities

FV of an Ordinary Annuity
Example: FV of an ordinary annuity

What is the future value of an ordinary annuity

that pays $150 per year at the end of each of the
next 15 years, given the investment is expected to
earn a 7% rate of return?

This problem can be solved by entering the relevant data and computing FV.

N = 15; I/Y = 7; PMT = –150; CPT → FV = $3,769.35

Implicit here is that PV = 0; clearing the TVM functions sets both PV and FV to zero.

15 × $150 = $2,250
(Difference = $3,769.35 - $2,250 9 = $1,519.35 is interest earned rate of 7% per year.