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A 15 year annuity of 300 dollar starting at T3, interest rates are 6%
Solution given in the study text: discounting the annuity as usual 300* 9.712= 2913.6
This gives the value of annuity at T2
Discount the answer back to T0= 2913.6* 0.890= 2593.1
My question is the calculation part of the figure 0.890 they calculated it from the annuity table they took the difference between the figures of T2 and T1 but what is the logic behind it? Is there any other way we can work out this problemAlthough 0.890 is indeed the difference between the 2 year and 1 year annuity factors, this is a silly way of obtaining it.
Because the annuity starts 2 year late (at time 3 instead of time 1) we discount the answer for 2 years at 6%, and 0.890 is the normal present factor for 2 years at 6% from the tables provided.
If you are still unsure then do watch my free Paper MA lectures on investment appraisal, because all of the basic discounting arithmetic in Paper FM is revision from Paper MA.
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