Ch7 - page 16 - the example question

Discussion in 'CT1' started by Dimitri, Aug 2, 2012.

  1. Dimitri

    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
     
    Dimitri, Aug 2, 2012
    #1
  2. bystander

    bystander Member

    what other details are in teh question?
     
    bystander, Aug 2, 2012
    #2
  3. nleon

    nleon Member

    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: Aug 2, 2012
    nleon, Aug 2, 2012
    #3
  4. Dimitri

    Dimitri Member

    cheers for that however, the outcome from using the formula is different to the values within the tables.
     
    Dimitri, Aug 2, 2012
    #4
  5. nleon

    nleon Member

    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.
     
    nleon, Aug 2, 2012
    #5
  6. Montgomery

    Montgomery Member

    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
     
    Montgomery, Aug 2, 2012
    #6
  7. John Lee

    John Lee ActEd Tutor Staff Member

    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....
     
    John Lee, Aug 6, 2012
    #7
  8. asmkdas

    asmkdas Member

    Just follow the link

    [​IMG]
     
    asmkdas, Aug 15, 2012
    #8

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