Page 78 - CFA - Day 1 & 2 Course Notes
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LOS 6.f: Demonstrate the use of a Session Unit 2: The Time Value of Money
time line in modelling and solving
time value of money problems..
Example: Computing the rate of return for an annuity
Suppose you have the opportunity to invest $100 at the end of each of the next five years in
exchange for $600 at the end of the fifth year. What is the annual rate of return on this investment?
Answer:
N = 5; FV = $600; PMT = –100; CPT → I/Y = 9.13%
Example: Computing the discount rate for an annuity
What rate of return will you earn on an ordinary annuity that requires a $700 deposit today and
promises to pay $100 per year at the end of each of the next ten years?
Answer:
N = 10; PV = –700; PMT = 100; CPT → I/Y = 7.07%
