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Assignment X2.5

9

9346776

Member
Why are we using increasing annuity due when it's clearly written the loan was paid in arrear
Increasing annuity due gives £1 733
Increasing annuity in arrear gave me £1 672
 
You'll see in the alternative answers given that there other ways of doing it. But because we have payments of 100, 100, 120, 120, we can't just value it with an annual increasing annuity as the payments increase every other year. You have to play around with the algebra. They have rearranged to get (1+2v^2+ ...) which is an increasing annuity due (valued by adjusting the interest rate). If you rearrange to v^2 + 2v^4 you can use an annuity in arrear.
 
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