Hello,
The alternate solution to part ii) states that the expected assets are calculated using the interest rate of 6%, i.e., 65×1.06^3+5×(1.06^2.5+1.06^1.5+1.06^0.5) =£93.8m and the actual assets are calculated using the investment return of 7%, i.e., 65× 1.07^3+5×(1.07^2.5 + 1.07^1.5+ 1.07^0.5) =£96.3m.
However, I was wondering why the investment return of 7% is not used in part i) instead of 6% when calculating the actual actives?
I am happy that the expected actives uses the 6% and gives £66.2m.
Whereas I thought that the actual actives should be something like:
( 50*1.07^3 )x(1.03/1.04)^3 +0.24x8x(1.03^0.5x1.07^2.5 + 1.03^1.5 x 1.07^1.5 + 1.03^2.5 x 1.07 ^0.5 ) =£66.2 ? Do you know why this 1.07 (7% investment return) is not used in the provided solution?
Many thanks
Dom
The alternate solution to part ii) states that the expected assets are calculated using the interest rate of 6%, i.e., 65×1.06^3+5×(1.06^2.5+1.06^1.5+1.06^0.5) =£93.8m and the actual assets are calculated using the investment return of 7%, i.e., 65× 1.07^3+5×(1.07^2.5 + 1.07^1.5+ 1.07^0.5) =£96.3m.
However, I was wondering why the investment return of 7% is not used in part i) instead of 6% when calculating the actual actives?
I am happy that the expected actives uses the 6% and gives £66.2m.
Whereas I thought that the actual actives should be something like:
( 50*1.07^3 )x(1.03/1.04)^3 +0.24x8x(1.03^0.5x1.07^2.5 + 1.03^1.5 x 1.07^1.5 + 1.03^2.5 x 1.07 ^0.5 ) =£66.2 ? Do you know why this 1.07 (7% investment return) is not used in the provided solution?
Many thanks
Dom