Solving for rate using the PVA formula
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 bottle per week for 12 weeks. You can either pay 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**(1-0.1)=8
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?
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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%.
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