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Ch7 - page 16 - the example question

D

Dimitri

Member
Hi Guys,

Wondering if you could help me, my brains just about dead right now!
the question states: assume effective rates of interest of 8% and 6% but uses 0.076225 and 0.057847 as rates instead. Why is this and how do you get these values?

Cheers
Dim
 
The denominator for an annuity payable in advance is the discount rate,but in this case it's a nominal discount rate ie d^(4) since working in periods of quarters.
You need to find d^(4) by plugging the value for the effective interest rate ie 8%, into the formula for the nominal rate of discount to find d^(4).

Or you can get d^(4) straight from the tables.
 
Last edited by a moderator:
cheers for that however, the outcome from using the formula is different to the values within the tables.
 
cheers for that however, the outcome from using the formula is different to the values within the tables.

It can be due to rounding differences, I occasionally get a slightly different answer to the notes but usually only by a hundredth or a thousandth depending on degree of accuracy used in earlier calculations.
 
well it depends how you calculate the d^4. Convert i into d and then calculate d^4. You can not convert i^4 into d^4 straight away using 1+i=1/1-d.

Montgomery
 
cheers for that however, the outcome from using the formula is different to the values within the tables.

We did d(4) @8% = 4(1 - 1.08^(-0.25)) = 0.07622539...

and d(4) @6% = 4(1 - 1.06^(-0.25)) = 0.05784655...

Calcualting the answer using these and no rounding gives 2456.794801.

Values from the Tables are rounded to about 5 SF and so if you use everything from the Tables (including the v) gives 2456.798602.

So we have only 5 SF agreement.

However, if you were going to use Tables then you would use the a_5 result and multiply it by the i/d(4) result instead....
 
Just follow the link

convert.php
Hi Guys,

Wondering if you could help me, my brains just about dead right now!
the question states: assume effective rates of interest of 8% and 6% but uses 0.076225 and 0.057847 as rates instead. Why is this and how do you get these values?

Cheers
Dim
 
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