Hi all, Am getting a little confused on the rules surrounding time units here. for example in this question we are given an annuity paying £40 at the end of each month forever with i^4=10%. my instinct was to have all units in quarters so payments in quarters = 4*40=160 per quarter then can keep i^4 as is and use 160*a^p_inf]=160/i^p=160/0.1=1600 this is wrong and the solutions convert use monthly units - i am unsure why this is? please could someone help? Thanks
Hi Molly, your approach doesn't work because (a) you've used the wrong number of months per quarter, and (b) you've ignored interest between the time that each payment is made and the end of the quarter. With three months per quarter, we cannot say that 40 at the end of each month is the same as 120 at the end of each quarter. For example, this incorrectly says that 40 at months 1, 2 and 3 is the same as 120 at month 3. In reality, the 40 at months 1 and 2 would need interest applying until month 3 to get the equivalent value at that time. I hope this helps but do let me know if not. Thanks, Richie
