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CFA Level 1 - Quantitative Methods - Time Value of Money
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Sarah is planning to invest in a fixed-income security that promises a future cash flow of $15,000 after 5 years. She wants to determine the maximum price she should pay for this security today if her required rate of return is 6% per annum, compounded annually. What is the present value of this investment?
a.
The present value of the investment is $13,382.26. This is calculated by discounting the future cash flow of $15,000 by the required rate of return of 6% over 5 years and adding the initial investment amount.
b.
The present value of the investment is $9,833.05. This is calculated by discounting the future cash flow of $15,000 by the inflation rate of 2% over 5 years, assuming the required rate of return is adjusted for inflation.
c.
The present value of the investment is $11,215.21. This is calculated by discounting the future cash flow of $15,000 by the required rate of return of 6% over 5 years.
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