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Old 03-17-2018, 02:09 PM
Nagsinde2002 Nagsinde2002 is offline
Join Date: May 2017
College: University of Wisconsin - Madison (1st year)
Posts: 20
Default Prospective and Retrospective Methods Question

Hello, I was looking at Example 37.2 from "A Basic Course in the Theory of Interest and Derivatives Markets: A Preparation for the Actuarial Exam FM/2" by Marcel B. Finan and I am confused why they set it up like this:

The problem reads: A loan is being repaid with 16 quarterly payments, where the first 8 payments are each $200 and the last 8 payments are each $400. If the nominal rate of interest convertible quarterly is 10%, use both the prospective method and the retrospective method to find the outstanding loan balance immediately after the first six payments are made.

Using the prospective method, it was set up like this:
B(p,6) = 200(v + v^2) + 400(v + v^2 + ....+ v^8)

If the question asks for the loan balance after 6th payment shouldn't it be:
200 * (annuity-immediate of n = 10) and not include the 400.

If someone can clarify this, that would be helpful.
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