Want to see what the CFA exam will be like? Sign up for Wiley’s Free CFA Program Practice Exam to find out

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?

A. \$95,563

B. \$97,502

C. \$106,181

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]