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#1
04-01-2007, 02:26 PM
 maurice197 Member Join Date: Jan 2007 Location: WI Studying for CAS 6 (US) Favorite beer: Root Posts: 41
TIA A.1.3. #3

I thought I was doing this right...

I took bill's loan and discounted it back: 5000(1.1)^-5

Then took Sally's loan and discounted that back: 10000(1.08)^-7

Then combined the loans: 8939.51

Finally, an "Equation of Value" like so...

8939.51 = X [(V.07) ^2 + (V.07^3)] and tried to solve for X

I got 5290.48...the answer should be \$5,459.79

Where did I go wrong?
#2
04-01-2007, 04:25 PM
 Bama Gambler James Washer / Notes Contributor SOA Join Date: Jan 2002 Location: B'ham, AL Posts: 16,177

In this problem, you have to be careful where you setup the equation of value. You can not discount the payment in the consolidated loan to time 0 b/c you don't know the rate during time 0-2 (the loan is taken out at time 2). This problem's equation of value has to be setup at time 2 or time 3, b/c the 7% is only effective b/w time 2 and 3. Does that make sense?
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#3
04-01-2007, 05:39 PM
 maurice197 Member Join Date: Jan 2007 Location: WI Studying for CAS 6 (US) Favorite beer: Root Posts: 41
maybe

So I should discount to zero both Bill and Sally, then accumulate to 2. Then use that value for the equation of value for x + xv.07^1???
#4
04-01-2007, 06:26 PM
 Bama Gambler James Washer / Notes Contributor SOA Join Date: Jan 2002 Location: B'ham, AL Posts: 16,177

Since Bill and Sally have different rates, don't discount to time 0, add, and the accumulate. Simply discount their payments to time 2. In other words, setup your equation of value of time 2 (discount all payments to time 2).
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#5
04-01-2007, 08:01 PM
 maurice197 Member Join Date: Jan 2007 Location: WI Studying for CAS 6 (US) Favorite beer: Root Posts: 41
Got it

Thanks!

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