CFA Level 1: Debt Payment Calculation

Debt Payment Calculation

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Question

If you owe a debt of $1,000 today and also owe $500 in 24 months, what single payment could you make 12 months from today that would pay off both of these debts, if interest is assessed at 8% per year, compounded monthly?

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Explanations

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A. B. C. D. E.

D

To solve this question, set the problem up as the sum of two compound interest calculations. Move the $1,000 from today over to month 12 and add it to the $500 brought back from month 24 to month 12. On the BAII Plus, press 12 N, 8 divide 12 = I/Y, 1000 PV, 0 PMT, CPT FV, which yields $1,083.00. Then press STO 1.

Then press 500 FV, CPT PV which yields $461.68. Finally press + RCL 1 = to see the answer. On the HP12C, press 12 n, 8 ENTER 12 divide i, 1000 PV, 0 PMT,

FV. Then press STO 1. Then press 500 FV, PV. Finally press RCL 1 + to see the answer.

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