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DF formula for Present value is (1+r)-n
In your lecture on Inflation Real rates you have calculated DF as (1/1.0952)
why are you calculating it this way?
The formula is not (1+r)-n, it is (1+r) to the power of -n.
Anything to a negative power is the same as 1 divided by the expression to the positive power.So……(1+r ) to the power -n is another way of writing 1/(1+r) !
For example, 1.1 to the power of -2 is the same as 1 / (1.1)^2
(It is only rarely that you need the arithmetic in Paper FM anyway because you are given the tables for the discount factors. The problem in Paper FM is getting the cash flows in the first place rather than the actual discounting.)
If you are still not clear then watch my Paper MA lectures on discounting, because this is revision from Paper MA.
Ok i got it. Thank you.
One more question.
Is it necessary to not put full amount when doing question in exam? like if the amount is 3000000 so can we use the full amount instead of 300 ?
Yes – by all means put the full amount (unless obviously the question specifically asks for an answer to the nearest thousand) 🙂
if it has asked to answer in the nearest thousand then we have to answer in 2 or 3 digits rather than full amount?
How many digits depends on how big the answer is!!! If the question asks to the nearest thousand then you put it to the nearest thousand (which means leaving off the last three digits).
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