Cash Flow Question

CFA Level I
#1

Hey sorry this might sound dumb but I am just struggling with how to do this question using the calculator (BA II Plus Professional)

A client invests €20,000 in a four year certificate of deposit that annually pays interest of 3.5%. The annual CD interest payments are automatically reinvested in a separate savings account at stated annual interest rate of 2% compounded monthly. At maturity, the value of combined assets is closest to?

I entered the following: N= 36 I/Y = 2/12 PMT = -700 and computed for the FV.

The answer I am getting is obviously wrong. I tried adding the principle amount, but could not get the correct answer. where did I go wrong?

Thanks in advance!

#2

How many payments will you receive?

How frequently? (This is one period.)

What’s the effective interest rate for one period?

#3

I alredy made this question before, theres probably oher methods to solve this one through, heres one:

As you alredy know the payment you would have a annuity (4 payments) of 700:

Think of the 700 you will receive at the end of year 0 this would be invested for 36 months

the $700 received at the end of year 1 would be invested for 24 months

the $700 received at the end of year 2 would be invested for 12 months

the $700 received at the end of year 3 would be received in the end of year 3 so it wouldn`t be reinvested at all.

i = 2/12

#4

You can`t assume all 4 payments were received in the end of the first year, you need other 2 calculation for the 24 and 12 months (2 of $700 each) and the last one would be just $700 (the last is not compounded as you receive it in the end of the last year)

#5

The EAR method is better and faster through:

(1+0,02/12)12 - 1

You would get EAR = 0,020184360

multiply that by 100 and put in your calc = 2,018436

now you r = 2,018436

0 PV

700 CHS PMT

4 N

FV = $2.885,92 + initial sum of 20K

#6

Thanks for solving my doubt. Finding EAR and solving the sum sounds much faster and easier in this particular question. Thanks much!