CFA CFA Level 1 a practice question about perpetuity in section time value of money

a practice question about perpetuity in section time value of money

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    • Avatar of chen2196chen2196
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        • CFA Level 1
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        Hi I am confused on this question. Aren’t you supposed to use annual payment amount to calculate PV of perpetuity? I don’t know why the answer doesn’t use 2000*12 = 24000 as A, but instead just uses monthly payment 2000. Thank you so much for helping me!

      • Avatar of Zee TanZee Tan
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          Hey @chen2196

          You can use A = 2000*12 = 24000 as A, but your r then has to be 6% rather than 6%/12.

          The answer uses monthly payments because r = 6%/12 = monthly discount rate. They can also use annual payments to calculate the same number as long as the discount rate is annual.

          So PV = Annual payments / Annual discount rate = Monthly payments / Monthly discount rate

          = £24,000 / 0.06 = £2,000 / 0.005

          = £400,000

          Hope that helps!

        • Avatar of chen2196chen2196
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            Thank you very much!

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