Download PDF by A. H. Pollard (Auth.): An Introduction to the Mathematics of Finance

By A. H. Pollard (Auth.)

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00 which repays the full loan. (It is because 12 + 11 + 10 + . . ) Tables have been prepared, based on this assumption that the interest payment reduces uniformly, and are in regular use for determining the outstanding debt at any time and the a m o u n t of interest which has actually been received and can be included in profits. It is a reasonably good approximation for loans u p to five years' duration. It does however always overstate the interest payments in the earlier years and understates them in the later years.

Net rate of VALUE interest (2) Investment 34 50 5 (i) Year 0 1 2 3 4 5 6 7 Q Ο 9 10 11 12 13 14 15 is expected on the (3) Net Cash Receipts 0 6 13 11 12 13 11 10 Q Ο 8 6 5 5 5 5 20 (inc. V. 7% net return. ) EQUATIONS OF VALUE 41 EXERCISES 7-1 W h a t a m o u n t payable in 10 years' time would be equivalent to $500 payable in five years' time plus $1000 payable in 15 years' time? a. ) 7-2 A m a n owes $1000 payable in three years' time and $1000 payable in 13 years' time. H e would like to settle his debt by m a k i n g a $2000 payment.

T h e r e is n o t h i n g "actuarial" about it; it is simply the correct method. W e assume the real rate of interest being charged, /, has been calculated (as in the previous section). As soon as the fourth instalment (say) has been made, the outstanding debt is the present value of the remaining instalments namely . . 20 obtained above u n d e r the rule of 78. I n practice the debtor is often (for good reason) asked to pay more than the figure calculated in this way to discharge his indebtedness.

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