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Dear John
In part (b), they have calculated annuity payment(annual payment ) based on the principal only. But when we look at the question carefully in the (i), it says that
‘ bond will be repaid on the basis of fixed equal annual payments’
This may confuse to include interest payment to the principal for the calculation of annuity payable per year on loan.
How will i be able to avoid this confusion ?
The question actually makes it very clear – it says “the bond will be repaid on the basis of fixed equal annual payments (constituting of interest and principal) over the next four years”.
However a loan is repaid, the PV of the repayments discounted at the interest rate will always be equal to the amount borrowed (because al the discounting is doing is effectively removing the interest).
Since here the repayments are an equal amount each year, then PV will be the annual payment x the annuity factor. So the annual payment must be the amount borrowed divided by the annuity factor.
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