Ch7 - page 16 - the example question

[Dimitri]

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

 

[bystander]

what other details are in teh question?

 

[nleon]

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.

 

[Dimitri]

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

 

[nleon]

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.

 

[Montgomery]

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

 

[John Lee]

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....

 

[asmkdas]

Just follow the link

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