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Old 09-14-2019, 08:21 PM
Berkmaster Berkmaster is offline
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"John borrows 10,000 from Tony and agrees to repay the loan with 10 equal annual installments of principal plus interest on the unpaid balance at 5% effective. Immediately after the loan is made, Tony sells the loan to Chris for a price which is equal to the present value of John's future payments calculated at 4%. Calculate the price that Chris will pay for the loan."

The answer in the back of the book (Finan, 41.2) is 10,472.28 but I get 10,503.98.

It seems straightforward. 10,000 * a_10_.04 / a_10_.05. I would appreciate your feedback. Thank you.
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Old 09-14-2019, 08:41 PM
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If I treat it as an immediate annuity, I get 10,503.98; if I treat it like an annuity due, I get 10,403.98.

Is there errata for this question?
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Old 09-14-2019, 08:46 PM
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The loan isn't paid in equal installments, it's paid in equal installments of principal.
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Old 09-14-2019, 08:47 PM
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Neither, you are both interpreting the payment stream differently from the Finan's intent.

He means (10 equal annual installments of principal, thus 1000 each) (plus interest on the unpaid balance at 5% effective)

If he meant a level annuity, wouldn't you expect him to just say 10 equal annual installments? or 10 equal annual installments of principal and interest?

The wording certainly could have been clearer and I hope and think it would be on an exam question.

ninja'd
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Old 09-14-2019, 08:47 PM
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Quote:
Originally Posted by Academic Actuary View Post
The loan isn't paid in equal installments, it's paid in equal installments of principal.
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Old 09-15-2019, 12:25 AM
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Thank you very much. While I find Finan's book to be a great book in terms of education, he does leave much to be desired quite often on his wording.

I've found many many typos.
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