compound instrument

Hi

Yes, there's a poor example in the Kaplan kit! If you start with 29,622 as the opening figure instead of the printed figure of 29,542, calculate 9% = 2,666 and deduct 720 gives 31,568 to carry forward.

Calculate 9% on that, add it on, take off 720 gives 33,689 to carry forward.

Calculate 9% on that, add it on, take off 720 gives 36,000 ready to be paid.

The problem is with Kaplan rounding the discount factors. Use your calculator, don't use the Kaplan discount factors.

That's for the working at the bottom of the page. But how did I get to 29,622?

In the working at the top of the page put in the 720, 720 and 36,720 into years 1, 2 and 3. Put in the discount factors for the three years of .91743, .84168 and .77218 and then multiply through.

Ok, where do those discount factors come from? Put in your calculator 1 / 1.09 = X. Then X * 1 / 1.09 = Y, Then Y * 1 / 1.09 = Z

You'll see that X = .91743, Y = .84168 and Z = .77218

Add up those three products in the working at the top of the page and they add to 29,622

Does that explain it?

It's just a question of rounding differences - using .92 instead of .91743 and so on

ok, i got it.
in same solution.
at year 3,
liabilty is zero and equity option is 6,458. in my view, equity option is supposed to be zero bcoz they paid off entire money . why it is not zero?

equity option will NOT be zero. The loan element of the compound instrument will be reduced to zero by the calculated table. The equity element is not loan ( it's equity! ) and is not therefore due to be repaid. Only the loan element is to be repaid.