Assignment X2.1

Could someone please provide a simple numerical example that shows how to derive the 2.55%? I understand that we don't have to show this in the exam and I know that we'd expect the effect of charges to be greater using monthly payments, just wanted to check that the 2.55% is indeed correct.

An Excel spreadsheet attachment would be brilliant.

Cheers

 

If you invest early on, initial charge is about 5%, ie about 1% a year. If you invest late on, initial charge would be the whole 5% or so. So on average about half this??

 

I believe the figures in the question are incorrect. I'd say the 1.55% ought to be 1.45% and the lump sum deducts more charges than the regular too. Looks like it's been wrong on the assignment for years then...

 

As you say David, when faced with CA3, you are hardly likely to have to prove anything exactly and certainly don't have time in the exam to dig deeply. Proves everyone is human: tutors, examiners, students. It's appreciated that errors are corrected as soon as practical after being noticed and that you take the time to respond here.

 

bystander, the only reason we explore the 1.55% is not for a bit of fun but in order to make sense of the 2.5% stated later in the question. The 2.5% does not make sense, hence it's impossible to communicate nonsense.

 

I think I can agree the numbers in the question (although we're not actually asked to check them and so for the time allowed in CA3 I think you would just go with them as they look reasonable to me). They are quoting reduction in yields.
11,856/10000 is the 5 year growth. Take the 5th root (and subtract one) and you get 3.46%. 5% less this is about 1.55%. Bingo.
Similarly, if you work out the projected fund value for an investment of £2000 pa paid monthly, with initial charge of 4.75% and annual charge of 0.5%, you get £10.755. Using a 5-year monthly annuity[s5(12)], the solution to 2000[s5(12)] =10755 is about i=2.5%. ie a reduction in yield of 2.5%.
Hope this helps.