Question for the tutors: Probably being paranoid here! An example payment stream: continuous payments of £5000pa for 4 years starting at time 2. Followed by continuous payments for £9000pa for 4 years, and so on, increasing by £4000 in each 4 year time period for a total of 20 years (i.e. ending at t=22). The obvious solution here would be an increasing continuous payment annuity of £16,000 in the first time period, £32,000 in the second etc for 5 periods, plus a level continuous payment annuity of £4000 for 5 time periods. The calc is easy enough but error prone - you have to remember to calculate the total payments in each time period (e.g. it's £20,000 in the first period, not £5,000!) and you have to use a rate of interest of (1+annual rate)^4. I personally found it easier to write the calc simply as: (ā_4)x(5000V^2 + 9000V^6 + 13000V^10 + 17000V14 + 21000V18). Much faster and simpler. If the payment stream was over a longer period I would have used the increasing annuity calc. My question is: If the exam question doesn't specify the calc method to be used, would I lose marks if I use common sense and use the quicker and simpler calc (for short time periods like in this example) instead of the method that I suspect the exam Q is really looking for? Thanks! Tim
Any method which gives the correct answer will receive the full marks. They're quite flexible in CT1 so have no fear!
