April 2008 Q3 (i) I am having some problems with both the Institute’s (IoA) and BPP’s solution to this problem. I might be misinterpreting the question? Can anyone explain what the payments at time K would be for say K = 1 , and K = x, for some integer value x, where (1 < x)? If you could help here, please define (mathematically) what any values represent. What I am having trouble with is the Accumulated Inflation Payment, so it would be great understand where I am going wrong. Once I know the exact payments, I will retry to get PV and hopefully either of the IoA’s or BPP’s solutions, if indeed their solutions are the correct ones. Note: In both the IoA and BPP solutions, it seems as if the are looking at accumulation over the entire time until each payment rather than over a 5 year period prior to each period. (Also, BPP’s solution uses an apparent constant, c, which is indexed by the summation index variable, t ? And they do not define, how to calculate c) Thank you, in advance.
I just came across this question and got stuck trying to figure out the cumulative inflation part. I couldn’t wrap my head round the constant c in the answer provided in the revision booklet...
