I'm trying to practice for the CFA exams next Dec. I've got a problem book and the solutions, but the solutions don't tell me specifically how to solve for rate using a financial calculator using the TVM keys. Could someone please help?

The question is a well known finance question that most people have probably seen before: You can earn/save 177% per year buying wine by the case. You will consume one $10 bottle per week for 12 weeks. You can either pay $10 per week or buy 12 bottles now. If you buy the case of 12 bottles you get a 10% discount (hence the earning/saving of 177%). Prove this.

The solution given is that the cost of a case is 12*$10*(1-0.1)=$108 Then use the PVA formula with PVA=108, t=12, C=10 to solve for rate (which should be 1.98%). Then you convert that rate to EAR and you get 177%.

But I can't get the financial calculator to correctly solve for rate. This is what I've done: I set the calculator to 1 P/YR, then input N=12, PV=108, PMT=-10 and then computed for I/YR which gives me 1.66% instead of the 1.98% the answer book supplies. Any ideas on where I am going wrong with the financial calculator, please?


which gives me 1.66% instead of the 1.98%

Set the calculator to "Begin Mode" where payment occurs at the beginning of each period. Calculate again and you will get 1.98%.

  • Thanks so much - that's fixed it. I was worried I was way off with my inputs, but that is a nice simple fix. – Only_me Apr 30 '20 at 8:28

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