Doubts

Exercise Set 2 - question 4

Exercise Set 2 - question 4

by Matilde P. T. Ferreira da Fonseca -
Number of replies: 2

Hello professor,

In 4.a) I don't understand why we discount 2 periods, if the deposits start being made 3 years from now.

In 4.b) I don't understand how can we conclude "The amount is deposited earlier, so saved amount will increase" because in my perspective even though the deposit is earlier, the amount deposit decreased for the half, so how can we jump in that conclusion? In fact, I computed the amount and following my computations, the amount saves will decreasescreenshot

In reply to Matilde P. T. Ferreira da Fonseca

Re: Exercise Set 2 - question 4

by Julio Crego -
4a) The annuity formula provides the PV one period before the first payment. Hence, you get the value in year 2 if the first payment is in year 3

4b) The amount he saves every year is the same because he saves 1000 every six months (so 2000 a year). The difference is that he reinvests the return of the 1000 in the first half of the year.