Q&A bank part 3 -ques 3.6 - 3.10

Hi pals
Q3.6-3.10 A stock of nominal amount 200000 is redeemable in 4 equal instalments,the first being in 11 yrs time.Redemption is at par and interest of 7 1/2 %pa is payable hly in arrears. Does that not mean 50000 is paid equally in the 11th,12th,13th,14th years. If yes, how is the answer for calculating value of interest payments (Q3.06) be evaluated. In book it shows
PVi=0.075(200000a (2)/11+ 150000 v^11a(2)/1+ +100000v^12a(2)/1 + 50000v13a(2)/1)

Kindly explain
Regards
Radhi

 

Here goes:

50,000 is redeemed at time 11, leaving 150,000.
50,000 is redeemed at time 12, leaving 100,000.
50,000 is redeemed at time 13, leaving 50,000.
50,000 is redeemed at time 14, leaving 0.

The interest is payable on the whatever amount is currently outstanding. Hence, the interest is payable on:

200,000 until time 11
150,000 between time 11 and time 12
100,000 between time 12 and time 13
50,000 between time 13 and 14.

Valuing this gives the equation in the solution.

 

Thank You Ted
Regards
Radhi