ch 7

1. In sudden changes in interest rates, in the given example Calculate the present value as at 1 January 2004 of the following payments:
£100 on the first day of each quarter during calendar years 2006 to 2015 inclusive.
Assume effective rates of interest of 8% per annum until 31 December 2010 and 6% per
annum thereafter.
Please explain how they have calculated the PV.

2.Q 7.15 Calculate the present value (at time t = 0 ) of payments of £20,000 *1.0381^t-1 payable at
times t = 1,2,3,...,10 , assuming a constant annual effective rate of interest of 9%. Here I used a different method that is mentioned in the example but i dint get d ans....

3.Q 7.17 Calculate the present value as at 1 January 2005 of a 5-year annuity consisting of
payments of £100, starting on 1 January 2005 and payable on the first day of each
month with an “R” in its name. Assume a constant annual effective rate of interest of
8%.

4.Exam style question-
An investor wishes to find the present value of a stream of property income payments.
She proposes to make the following assumptions.
● The level of current payments is £20,000 per annum, paid quarterly in advance.
● Payments will remain fixed for 5-year periods. At the end of each 5-year period
the payments will rise in line with total inflationary growth over the previous
five years.
● Inflation is assumed to be constant at 3% per annum.
● The interest rate for the calculation is 12% per annum effective.
Find the present value of the income stream assuming that the payments continue for 50
years.

 

There's a previous post about this here. Please have a look and if you still have trouble let us know where you're getting stuck.

Tim

 

Can you tell us what bit of the solution you're not understanding, or show us how you calculated it so we can show you what's up?

Thanks

 

And sorry, for your q's 3 and 4, you're gonna have to show us what you're struggling with.

Tim

 

in Q 1 I dint get from where did that v^7 come from?

In Q 2 I was they have used a diff method, my ques is can I do it using method 1 given in section 3.3 example???

In Q 3 why have they used v while calculating the PV for Sep to dec and not while calculating it for Jan to Apr?

In Q 4 why have they used 'j' instead of the given rate????

 

1. The v^7 is discounting the later cashflows from 31 Dec 2010 to 1 Jan 2004, ie for 7 years.

 

2. they've just used method 2, but yes you can use method 1 - although you should get the same answer. Something like:
20,000 /1.09 * [1 - (1.0381/1.09)^10] / [1 - 1.0381/1.09] = 148,770

 

3. The v term is needed to discount from September to January.

 

4. Suggest you have another look at Method 2 on page 18 as it's a bit like that. But they use j to calculate the sum in square brackets by substituting 1.03/(1+i) with 1/(1+j).

 

ok thanx a lot.....