How To Master The Toughest Questions On The Level I CFA Exam
With the numerous topics covered on the CFA Exam, it can be difficult to prioritize where to focus your efforts. From net present value to internal rate of return, feeling overwhelmed with information is likely (and understandable!).
To help prepare for the rigors of exam day, we’ve prepared a cheat sheet, which includes step-by-step instructions for answering ten common exam questions. There’s no doubt you are likely to see questions dealing with these tricky concepts on the Level I CFA exam, so what better place to start?
- 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 receive 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 x 1.5 = 78 [N]; [CPT][FV] = 106,181. Apply the 10 percent penalty for early withdrawal, and the investor should receive $106,181 x 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 necessary information in the question and ignore what you do not need.
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: [1ND][QUIT][2ND][CLR TVM]