Q9 september 2009

Q9 september 2011

I don't understand how PV is calculated.

T spot effective rate for consecutive years rates are y(t) = 0.02 0.04 0.06 0.08 0.1

Valuation rate of interest are a(t)=0.031 0.052 0.073 0.094 0.115

So PV in mind mind should be
PV= 100 (1+a(5))/(1+y(t))^5 +10*sum (1+a(k))/(1+y(k))^k

but it is not the case because PV factors in the solution differ.

Thx for any help

 

sorry it is september 2011 exam question 9

 

How do you get the PV?

 

In part (ii), I assume.

You calculate the PV by taking each cashflow and discounting it accordingly using the relevant interest rate. The rate of interest is different for each duration.

The 1-year rate is 3.1%. So the 1-year discount factor is 1.031^-1. This should be applied to the cashflow of 10 at time 1.
The 2-year rate is 5.2%. So the 2-year discount factor is 1.052^-2. This should be applied to the cashlfow of 10 at time 2.

Then do the other years similarly.

The rate j is calculated by amending a spot rate, so it is used like a spot rate (ie applying only to specific durations of investment).