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doubt about solving dmt

A

AMULYA

Member
hello!!
i have doubt ;page no:685 question 4.8 part 3..where the third step im unable to understand .please help me out .or is it simpler to use volatility and multiply by 1+i ;in this case.
 
I don't think using volatility will help here as I think you'd be left with evaluating the same summation.

The alternative (mentioned later in the solution) of converting the summation to an increasing annuity is probably simpler.

We have the sum from 1 to 20 of t*(1.05v)^t. Let V = 1.05v. Then we have the sum from 1 to 20 of t*V^t. This is a standard increasing annuity (Ia)20, at an adjusted rate of interest I, where V = 1/(1+I) gives I = (1/1.05v) -1 = 4.76190%.
 
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