To help you prepare for the rigors of exam day, Wiley has prepared an 8-page cheat sheet with step-by-step instructions for answering ten typical Level I exam questions including time value of money, net present value, internal rate of return, the Sharpe ratio, DuPont analysis and return of equity.
Can you answer this sample Level 1 CFA Exam Question?
An investor has $100,000 held in a two-year bank CD earning four percent with weekly compounding. The terms impose a 10 percent penalty for early withdrawal. How much will the investor receives if he redeems the CD after 18 months?
Answer Rationale: Recognize this is a basic TVM question. (A) is the correct answer.
To solve with a financial calculator:
-100,000 [PV]; 4/52 = 0.07692 [I/Y]; 52 × 1.5 = 78 [N];
[CPT][FV] = 106,181. Apply the 10 percent penalty for early withdrawal, and the investor should receive $106,181 × 0.90 = $95,563. “PV” is a cash outlay, therefore use the negative sign. Identify the interest rate and the compounding – you will need to adjust your inputs accordingly.4% compounded weekly = 4/52 and notice the question asks “how much the investor receives”; therefore, the number of compounding periods must reflect 18 months (not the two-year term of the investment): 52 x 1.5 = 78.
This question requires you to know your TVM calculator functions and how to capture the necessary information in the question and ignore what you do not need.
Pro Tip: Set the “P/Y” setting on your calculator to “1” so the “I/Y” represents the interest rate per compounding period and “N” is the number of compounding periods. Remember before starting a new TVM problem – clear the TVM worksheet and reset to default values: [2ND][QUIT] [2ND][CLR TVM]
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