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CM1A Sept 2023 Q11(i)

G

Greg Raine

Member
Hi,

I have gone over the examiner's report and am a bit unsure on the part in bold where it says:

5,300*a:<12>:10@i% - 300*a:<12>:1@i%*Iadue:10@i%

When answering it I just put this, which causes a slightly different answer overall:

5,300*a:<12>:10@i% - 300*Iadue:10@i%

If anybody could please explain the inclusion of the bit in bold, this would be great!

Many thanks,
Greg
 
Hi Greg,

The bit in bold is needed because the payments are made monthly but the increase needs to be applied only once per year.

Using your approach doesn't work as it doesn't allow for the fact that the payment is made in 12 installments per year. If you were to replace your Iadue:10 with Iadue:<12>:10 instead, that also wouldn't work as it would value payments that increase every month. So instead, we use the a:<12>:1 to work out the equivalent value of the 12 payments per year at the beginning of each year, and then the Iadue:10 to turn those equivalent annual payments into a PV at time 0.

Thanks,
Richie
 
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