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Extra tut question number 2.2: annuity-certain payable half-yearly

+1 vote
asked Apr 11, 2016 in BUS 2016H - Financial Mathematics by Pandy (2,850 points)
edited Apr 11, 2016 by Pandy

The question states:

"Find the present value, at 10% per annum effective, of an annuity-certain of R100 p.a., payable half-yearly in advance for 10 years."

By converting \(i=0.1 \) into an effective rate, compounded half-yearly, and then using the normal annuity in advance formula i.e. \( \frac{1-V^{n}}{1-V} \) I get the correct answer of R660.18. However, when attempting to use the annuity payable p-thly formula I run into issues.

First, I get a nominal interest rate, convertible half-yearly using \( i^{(2)}=2(\sqrt{1+i}-1) =0.09762\).

I then use the formula \( \frac{1-V_{j}^{np}}{1-V_{i^{(2)}}} \) where \(j=\frac{i^{(2)}}{2} \) and land up with the answer R345.25 and I'm not sure where I've gone wrong.

Thanks for any help :)

commented Apr 11, 2016 by asilmotala (2,610 points)
edited Apr 12, 2016 by asilmotala

You could be entering it incorrectly into your calculator. I just attempted the question using the p-thly annuity formula and got the correct answer.

To be honest I am not sure what method you are referring to in the first method you describe, as the p-thly annuity formula is essentially the only way I am aware of of solving a problem like this (obviously you can do this from first principles by using the annual effective interest rate and the geometric sum formula, but you will end up with the p-thly annuity formula).

Hope this helps

Edit: So I just reread your question as it was bothering me. I found the error. In your denominator for the p-thly annuity formula, you $$v$$ should be with respect to $$j$$ again and not $$i(2)$$.

commented Apr 12, 2016 by Pandy (2,850 points)
edited Apr 12, 2016 by Pandy

Great, thanks very much!

I'm still a bit confused though as the slides say the formula for an annuity payable p-thly in advance is \( \frac{1-V_{j}^{np}}{d^{(p)}} \). 

My understanding is that \( d^{(p)}=1-V^{(p)}=1-\frac{1}{1+i^{(p)}} \). So i'm unsure as to where you got the \(j\) from. Am I missing a simplifying step somewhere?

EDIT: Sorted, thanks. Answer below from Dean_Bunce got me to the right answer.

1 Answer

+2 votes
answered Apr 11, 2016 by Dean_Bunce (1,160 points)
selected Apr 12, 2016 by Pandy
Best answer

Find $$d^{(p)}$$ from 1.1 and then apply the normal formula for an annuity paid pthly in advance (1-$$v^{(n)})/d^{(p)}$$

commented Apr 11, 2016 by Dean_Bunce (1,160 points)

sorry find $$d^{(p)}$$ from: