Page 21 - FINAL CFA SLIDES JUNE 2019 DAY 2
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LOS 6.f: Demonstrate the use of a time line in Session Unit 2: The Time Value of Money
modelling and solving time value of money
problems.
Example: Principal and interest component of a specific loan payment: Suppose you borrowed $10,000 at
10% interest to be paid semi-annually over ten years. Calculate the amount of the outstanding balance for the
loan after the second payment is made.
Answer:
PV = –$10,000; I/Y = 10 / 2 = 5; N = 10 × 2 = 20;
CPT → PMT = $802.43
Payment 1: Interest = ($10,000)(0.05) = $500
Principal = $802.43 – $500 = $302.43
Payment 2: Interest = ($10,000 – $302.43)(0.05) = $484.88
Principal = $802.43 – $484.88 = $317.55
Remaining balance = $10,000 – $302.43 – $317.55 = $9,380.02
How about computing I/Y, N, or PMT in annuity problems?
Example: Computing an annuity payment needed to achieve a given FV: At an expected rate of return of 7%, how
much must be deposited at the end of each year for the next 15 years to accumulate $3,000?
Answer:.
• N = 15; I/Y = 7; FV = +$3,000;
• CPT → PMT = –$119.38 (ignore sign)
