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Q&A Bank 2.16 - trouble with understanding accumulated interest on debt

J

Jinnentonix

Member
Hi there

I don't really undertstand why in part 2, the statement "Since the interest rate here equals the accumulation rate here, the starred annuity factor is calculated at 0%".

Could someone please simplify the explanation for just that part (the accumulated value of the debt) as I've been trying to wrap my head around it for ages without success. :(

Thanks for any help!
 
Nah, it's CT1.

My understanding of it at this point in time is that the growth rate of the payments is 7%. However, the discount rate is 7%. Therefore you are just summing raw payments where all the adjustment factors are cancelled out.

\[ (1.07 * $5,000)\] would be the first (inflated) payment which is discounted by 7%

i.e. \[ (1.07 * $5,000)/1.07\] and so forth.

Please let me know if my understanding is correct.
 
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