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Old 05-30-2015, 01:58 AM
mc2147 mc2147 is offline
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Default ASM Practice Exam Question 6

Jan gives Ted a loan at 4% effective to be repaid by 10 annual payments of 100, followed by 5 annual payments of 200. Just after Ted makes the 5th payment, Jan and Ted discover that the payments should have been 10% higher than they were originally scheduled. They agree that Ted will make increased payments of K in the 6th through 10th years to adjust for error. The payments of 200 in the 11th to 15th years will not change . Determine K.

This is how I approached it:
I find the AV of both scenarios at the end of 15 years and set them equal

110 s angle 10 + 220 s angle * I^10 = 100 s angle 5 + K * s angle 5 * I^5 + 200 s angle 5 * I^10

However, the solution gives a different number. The book solves this by equating the outstanding balances at t = 5. How is this different from the AV method?

Last edited by mc2147; 05-30-2015 at 02:17 AM..
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Old 05-30-2015, 10:14 AM
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Steve Paris Steve Paris is offline
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Quote:
Originally Posted by mc2147 View Post
Jan gives Ted a loan at 4% effective to be repaid by 10 annual payments of 100, followed by 5 annual payments of 200. Just after Ted makes the 5th payment, Jan and Ted discover that the payments should have been 10% higher than they were originally scheduled. They agree that Ted will make increased payments of K in the 6th through 10th years to adjust for error. The payments of 200 in the 11th to 15th years will not change . Determine K.

This is how I approached it:
I find the AV of both scenarios at the end of 15 years and set them equal

110 s angle 10 + 220 s angle * I^10 = 100 s angle 5 + K * s angle 5 * I^5 + 200 s angle 5 * I^10

However, the solution gives a different number. The book solves this by equating the outstanding balances at t = 5. How is this different from the AV method?
There's nothing wrong with your approach. It's your equation that's messed up. For example, the first term on the LHS of your equation should be 110 s angle 10 * (1.04^5).
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