Actuarial Outpost Level Principal with Sinking Funds Question
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 Financial Mathematics Old FM Forum

#1
08-01-2017, 01:42 AM
 gpecci Member CAS SOA Join Date: Jun 2017 Studying for FM College: The Ohio State University - Junior Posts: 30
Level Principal with Sinking Funds Question

Question:Betty borrows 19800 from bank x, Betty repays the loan by making 36 equal payments of principal at the end of each month. she also pays interest on the unpaid balance each month at a nominal rate of 12%, compounded monthly , Immediately after the 16th payment is made, bank X sells the rights to future payments to bank Y. Bank y wishes to yield a nominal rate of 14%, compounded semiannually, on its investment. what price does bank X receive?

Calculate the principal: P=550
Interest payments: 198, 192.5,...,5.5
14% compounded monthly = 1.1340% effective monthly rate (I'll call this j)
The price= 550 a angle 20 @ j + 5.5 * (Da) angle 20 @ j = 10857

Why is the formula not 550*20 + 5.5 * (Da) angle 20 @ j ?

Last edited by gpecci; 08-01-2017 at 01:45 AM..
#2
08-01-2017, 01:52 AM
 Breadmaker Member SOA Join Date: May 2009 Studying for CPD - and nuttin' else! College: Swigmore U Favorite beer: Guinness Posts: 3,878

Present value of future cash flows: \$550 to be received in n months is not worth \$550 today.
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#3
08-01-2017, 01:58 AM
 gpecci Member CAS SOA Join Date: Jun 2017 Studying for FM College: The Ohio State University - Junior Posts: 30

Ok, thanks!

I was getting confused because there was another problem I did that was comparing the sum of the payments and I wasn't paying attention to the fact that this was asking for something VERY different.