- This topic has 5 replies, 5 voices, and was last updated Jul-181:43 pm by
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Up1
Hello everyone, just a bit frustrated that I cannot understand why the N=3 instead of N=4. Can someone hep me with this? many thanks!
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Up3
I do understand the solution and i solved it in the same way as given in the answer
but isnt the question a bit ambigious about if the payments are made at the end of the year or at the beggining of the year?
if payments begin at t=4 it could be the end of the year payment and we recieve the cash at 31st dec of 4rth year so techincally 4 periods have elapsed?? -
Up3
Thank you everyone! I was thinking the same thing as Yeshank in that when they say t=4, i usually assume it to be ordinary annuity unless it is stated as annuity due. Hence t=4. I thought when a question does not state the type of annuity, we usually assume ordinary annuity?
thank you again every for your feedback!
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Up2
$250 starting on year 4. When you calculate PV of that payment stream it will be for year 3.
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Up2
if you do n=999 i= 6% (annual) p= $250, then compute the PV you will get $4,166.67. However, you need the PV today and not at T= 4 (this is beginning of year 4 or end of year 3). So, change N = 3, FV to $4,166.67, p = 0 and compute PV to get $3,498.42. You’ll soon realize that the CFA will make you take the PV of all future after tax payments; just always have PV of anything on your mind. 🙂
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Up2
The question wording is a little clunky. Don’t expect them to say t=4 on the actual exam.
For a standard perpetuity calculation, you are at t = 0 now. The first payment comes in a year later (t = 1). If we push back the payment 3 years (to t = 4), we’ll need to discount 3 years as well.
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