Actuarial Outpost any tips for solving loan problems?
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#1
07-18-2010, 09:28 AM
 psp-fifa-fan Member Join Date: Jul 2010 Posts: 571
any tips for solving loan problems?

there are so many different ways and formulas for solving loan problems. i often use the wrong way/formula to solve which do not get me the correct answers or, even if they do, they take me quite a lot of time.

what are some tips for getting to the right way/formula by just reading from the problems?

Thanks
#2
07-18-2010, 10:15 AM
 Scars Member CAS Join Date: Nov 2009 Studying for CAS Exam 5 Posts: 3,883

Quote:
 Originally Posted by psp-fifa-fan there are so many different ways and formulas for solving loan problems. i often use the wrong way/formula to solve which do not get me the correct answers or, even if they do, they take me quite a lot of time. what are some tips for getting to the right way/formula by just reading from the problems? Thanks
If you are making interest only payments on the loan, and you are depositing money into a separate account to pay off the actual loan, you are using the sinking fund method. In which case the annual payment, assuming both the interest payment and the deposit into the separate account are annual and occur at the same time, is
Total annual payment = iL + R
Where L is the loan amount and R is
L = R * s angle n
Where n is the length of the loan and R is the deposit into the account.

A time diagram really comes in handy here, so I'd encourage you to draw one early on in your studying.

If you are paying off the loan with direct payments (deposits on the line), then you use the amortization method. Where
L = R * a angle n

So, just by reading the question, you want to look for "deposited into a separate account" and if you don't see it, you can safely assume it is the amortization method.

As for questions about outstanding balances during the time of the loan and what not, you'll want to refer to the retro/prospective methods. Some questions are actually straight forward enough that knowing how to use the AMORT sheet on a BA-II Plus will really speed things up. My advice with this is learn how to do it by hand, and after that is second nature, pick up the calculator. You never (EVER EVER EVER EVER EVER) want to rely on the calculator for answers to problems. You need to know how to work them by hand. A "theoretical" question will crush you if you don't know how. "Theoretical" meaning no numbers, just interest rate of i, n number of payments, blah blah blah.

Don't be afraid to keep the formulas handy while you work problems. They will just come naturally after working a few dozen problems.

Hope this helps!
#3
07-18-2010, 10:16 AM
 Noumenon84 Philosopher King Join Date: Jan 2009 Studying for FAP.... eventually Posts: 954

As stated above, TIME DIAGRAMS are a huge help.

Even after you "master" the material they are still extremely useful.
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#4
07-18-2010, 12:53 PM
 yashi911 Member Join Date: Feb 2010 College: post graduate Posts: 1,514

Quote:
 Originally Posted by Noumenon84 As stated above, TIME DIAGRAMS are a huge help. Even after you "master" the material they are still extremely useful.
^^ Agreed. Once you can make a time diagram, you can find out an equation for the payment schedule. The biggest thing is recognizing the various forms of

PV = (1+v+v^2.....v^n)

If you adept at this, and good at recognizing special sums, the exam will be cake for you. All interest theory problems can be solved from first priniciples and this formula.
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#5
07-18-2010, 01:51 PM
 brandond Member Join Date: May 2008 Location: Kansas Studying for 3/MFE Posts: 249

Practice, practice, practice. Look at the solutions manual if you get stuck but also figure it out on your own. Like you said there are many many ways of attacking the same problem. You have to get the fundamentals down. If you are competent in the fundamentals, it doesn't matter how you approach it.

Just because the solutions manual solves a particular problem one way doesn't necessarily mean that's the best way for you to solve it. I think it's best to stick with the most natural and convenient way for you, as long as its mathematically sound.

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