Q&A Bank 2.16 - trouble with understanding accumulated interest on debt

Discussion in 'CT1' started by Jinnentonix, Aug 27, 2016.

  1. Jinnentonix

    Jinnentonix Member

    Hi there

    I don't really undertstand why in part 2, the statement "Since the interest rate here equals the accumulation rate here, the starred annuity factor is calculated at 0%".

    Could someone please simplify the explanation for just that part (the accumulated value of the debt) as I've been trying to wrap my head around it for ages without success. :(

    Thanks for any help!
     
  2. Jinnentonix

    Jinnentonix Member

    Nah, it's CT1.

    My understanding of it at this point in time is that the growth rate of the payments is 7%. However, the discount rate is 7%. Therefore you are just summing raw payments where all the adjustment factors are cancelled out.

    \[ (1.07 * $5,000)\] would be the first (inflated) payment which is discounted by 7%

    i.e. \[ (1.07 * $5,000)/1.07\] and so forth.

    Please let me know if my understanding is correct.
     
    John Lee likes this.
  3. John Lee

    John Lee ActEd Tutor Staff Member

    That is correct.
     

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