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Dear John,
How do we get an annuity factor from year 3 to 7 for a discount factor of 11%?
To we first calculate the annuity from 1 – 7 and then deduct from it the annuity of 1-2 to get 3-7?
Also how likely do you think decision trees will come up this June in P4?
To get an annuity factor from time 3 to time 7, you can either do as you have written (the annuity factor for 1 to 7, less the annuity factor for 1 to 2), or alternatively you can take the annuity factor for 1 to 5 (because there are five years of flows) and multiply it by the ordinary discount factor for 2 years (because the annuity starts 2 years late – at time 3 instead of time 1).
Both ways give the same result (they may be slightly different, but only because of rounding – the table figures are rounded to 3 decimal places. But rounding difference are irrelevant and you would get full marks whichever way you used.)
For some questions the examiner’s answer uses the first way, and for some the second way, but either way is acceptable.
With regard to decision trees, I cannot believe that in P4 you would ever be specifically required to produce a decision tree. The only purpose of a tree is to help you sort things out if there are several decisions to be made under uncertainty – it is never ever actually needed (although in F5 the examiner has one time specifically asked for a tree, in which case obviously you would produce one).
In P4, the examiner can have a decision under uncertainty (the current examiner has done so once – in last December’s exam) but he did not ask for a tree and I would not have done one! (You can watch my lecture on last times question 1 to see what I mean).He certainly could again bring in a decision under uncertainty and therefore need you to use the probabilities. I doubt that he will this June, but anything I say is only a guess (and my guesses for June are already on the website).
So…….despite the long answer, my answer to your question is ‘No – I do not think that decision trees will come up’ 🙂
Thank you for your reply. Regarding decision trees, I was asking because there was an article on Acca global on conditional probability showing the use of decision trees. I hope your guess is correct as I really don’t want decisions with Uncertainty as I hate this topic. The last exam was awful due to this topic and I think the examiner was very unfair in testing this. I hope the June 2015 exam is much better.
The article was written because of last December’s exam (which was too late to be of any help!!) although the question in the exam didn’t really need the use of trees.
The examiner said at the meeting with tutors in February that he accepted that question 1 last time was difficult. (Although the probability bit certainly was tricky, the rest of the question wasn’t actually too bad (apart from, as always, the time pressure) and so even ignoring the probability bit it should still have been possible to get decent marks.)However, I will be surprised if there are probabilities involved again this time.
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