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In which cases do we need to manipulate the Real Equation of value formula?

+1 vote
asked Jan 14, 2017 in BUS 2016H - Financial Mathematics by Maya (430 points)

Question 2 and 4 from Tutorial 3 both require us to use the Real Equation of value. 
However, Question 2 requires us to manipulate the formula; and Question 4 requires us to make use of the formula without any manipulation. Why is that? 
How do we know that we need to manipulate the formula? 

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1 Answer

+2 votes
answered Jan 16, 2017 by Sure (700 points)
selected Jan 16, 2017 by Maya
Best answer

For Q2 the first coupon has a known \(Q(t_{1} - LAG)\) and so you cannot estimate it as \(Q(t_1 - LAG) = Q(t_L)(1 + \alpha)^{t_1 - LAG - t_L}\). Instead you use the known value 8 months before purchase. But for Q4 any value of \(Q(t)\) after purchase date \(t_{0}\) must be estimated.