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Question Bank part 3 Q3.26(ii)

S

shdh

Ton up Member
Hi,

I have this query in Q3.26 (ii) in question bank part 3.

In the solution for the problem, we have taken January as the start of the the security which leads us to take: 5.5 years as the time period and then in the end, we are multiplying the whole equation with 1.05^.25.

While i took the start of the loan from 1 July, and by this way, took 5 years as the time period and then i took out its PV by dividing it by 1.05^.25. This way I am getting a different answer from that given in the solution.

This is what I did:

[4*a(5), payable half yearly + 110/1.05^5]/1.05^.25

I am getting 102.462 as the final value of PV on 1/April/2007.

Is this method valid, as the start of the security is not mentioned in the question. If not, i would appreciate an explanation of taking January as the start of the security.

Thanks and Regards,
Shyam
 
Last edited:
The idea is sound however it's not 5 years. that would mean that there are 10 payments, but in fact there are 11. Remember when you use an annuity due the last payment is at the beginning of the period. So the annuity due actually finishes on 31/12/12 not 1/7/12.
 
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