I thought that the model solution was perhaps difficult to read for the layperson. The bits which I believe would be hard to understand are: a) the description of APR as "the interest rate you would need to earn to be financially neutral at the end of the deal if you invested in the loan"; b) the part saying the APR will ... "charge for one month's interest on the first instalment and two years' interest in the last one" Here's why: a) "financially neutral" is jargon, it seems more of a way of getting out of giving a proper description. Also the concept of investing in a loan is something that probably is beyond the non-financially minded person. b) Do we really need such a detailed account of APR? I think this might just confuse our friend. I would instead describe APR as: " APR is an interest rate that provides a clear measure of how expensive a loan is to the consumer. This allows you to compare the value for money of different loans without needing to understand exactly how they work. APR can be described best by considering an example. Imagine that instead of taking out a loan for your kitchen, you have decided to save up for it. You decide to save over a period of 2 years and can afford to pay £100 into the savings account at the beginning of each month. The APR of the loan you describe is the rate of interest the bank would need to pay into your saving account, so that after 2 years your savings account would have grown to exactly £2,000." What do you think? Better or worse?
The solution in the Q&A Bank is an acceptable but not perfect solution and there are certainly many alternatives. I like your first paragraph on APR being a clear measure - perhaps end this by saying so the lower the APR the more attractive the loan. It is important in the APR definition to convey the importance of the timing of the repayments. In other words get across that the loan amount is reducing over time and this is reflected in the APR calculation. It would be worth having a look at the Examiner' Report for the September 2005 examination, in particular the approximate agreement of the APR figure for the reader - just in case you need to cover this in a question.
Just spotted this in CA3 S05 Q1: "Some candidates described the APR as a rate which was financially neutral . This was usually unhelpful, as it implied neutrality between two different scenarios, whereas there was only one scenario in the question, and usually only one in the answer." I rest my case
The contexts in the two questions are quite different, so we need to use different explanations, each tailored to the scenario in the question. In the exam question, we're talking about a decreasing loan, whereas in the tutorial question we're talking about a loan that we have an option to pay off or not. I think inflation would be OK for most situations, as long it's in the right context. You could always avoid it by saying that "the cost of things goes up over time", but make sure it fits the situation and doesn't sound patronising. Depends on your audience. This is the 3% calculation: Variance = 110*110*11/16*1100 (from note 5)=9150625 Then prob (x>85000)=phi(90750-85000/sqr9150625)=phi(1.9)=0.97 For the 1% calculation: Variance = 150*150*1100*55%*45%, then same sort of calc as above. Always write "any questions" on the summary slide. If you like, you could also put it in the 'agenda', but I don't think it's vital. Hope this helps Ian
