This is a question from CFA level I. 24. A financial contract offers to pay 1,20

Question

This is a question from CFA level I.

24. A financial contract offers to pay 1,200 per month for five years with the first payment made immediately. Assuming an annual discount rate of 6.5%, compounded monthly the present value of the contract is closest to: A. 61,663 B. €61,330. C. 63,731. Answer Using a financial calculator: N-60; the discount rate, l/ys (6.5%/12)-0.54166667; PMT Future value 0; Mode - Begin; Calculate present value (PV) PV- 61,662.62 €1,200; Alternatively: Treat the stream as an ordinary annuity of 59 periods and add the current value of €1.200 to the derived answer. Using a financial calculator: N = 59, the discount rate, I/Y = (6.596/12) = 0.54166667; PMT = €1,200; Future value =E0; Mode End: Calculate PV: PV €60,462.62; Total PV = €1,200 + €60,462.62 = €61,662.62

Explanation / Answer

Monthly payment 1200 Annual Interest rate 6.50% Monthly Interest rate (6.5/12) 0.5417% Annuity factor for 60 periods 51.385 ($ 1.00+ 59 payments i.e. 51.385) Present value of Payments 61662 ($ 1200*51.385) Answer is A. 61,663

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