Quant's annuity doubt

danish.hassan7
Good Student
Posts: 10
Joined: Sat Apr 22, 2017 11:51 am

Quant's annuity doubt

Postby danish.hassan7 » Mon May 29, 2017 1:23 pm

If an investor who has a required rate of return of 7% per year pays $1,000 for a five-year ordinary annuity, the annuity pays ________ per year.
Choose one answer.
a. $244 Correct
b. $271 Incorrect
c. $263 Incorrect
The correct answer is A.
If the annuity pays C per year, we have 1,000 = C/0.07*(1-1/(1.07^5)) => C = 1,000*0.07/0.287 = 244.

Could you please explain me the meaning of the question. And the how to derive the formula it uses to solve.

My understanding: the annuity pay per year ...does it means the return on investment

Tags:

edupristine
Finance Junkie
Posts: 873
Joined: Wed Apr 09, 2014 6:28 am

Re: Quant's annuity doubt

Postby edupristine » Tue May 30, 2017 9:08 am

Hi Danish,

An ordinary annuity makes a series of equal payments at the end of each period. So, let's calculate it very simply:-

Please plug these numbers into your calculator: PV= -1000, N= 5, I/Y= 7, FV= 0, then CPT= PMT and you will get annual payments = 243.89 i.e close to 244.

danish.hassan7
Good Student
Posts: 10
Joined: Sat Apr 22, 2017 11:51 am

Re: Quant's annuity doubt

Postby danish.hassan7 » Tue May 30, 2017 2:21 pm

Doubt cleared. Thank you.


Return to “CFA Level I”



cron

Disclaimer

Global Association of Risk Professionals, Inc. (GARP®) does not endorse, promote, review or warrant the accuracy of the products or services offered by EduPristine for FRM® related information, nor does it endorse any pass rates claimed by the provider. Further, GARP® is not responsible for any fees or costs paid by the user to EduPristine nor is GARP® responsible for any fees or costs of any person or entity providing any services to EduPristine Study Program. FRM®, GARP® and Global Association of Risk Professionals®, are trademarks owned by the Global Association of Risk Professionals, Inc

CFA Institute does not endorse, promote, or warrant the accuracy or quality of the products or services offered by EduPristine. CFA Institute, CFA®, Claritas® and Chartered Financial Analyst® are trademarks owned by CFA Institute.

Utmost care has been taken to ensure that there is no copyright violation or infringement in any of our content. Still, in case you feel that there is any copyright violation of any kind please send a mail to abuse@edupristine.com and we will rectify it.