Help with Elan Q (Annuity PV)

CFA Level I Fixed Income
#1

Hi Guys,

Can you help me out with a problem I have?

Q: An annuity pays 12k every year for 5 years with the first payment at the end of Year 4. Given a 13% discount rate, the PV is?

a) 42,207

b) 29,251

c) 28,334

1st step: Calc PV at beginning of year 4: -> 42,207

2nd step: FV 42,207, PMT 0, I/Y 13, N 4 -> 25,886

Elan uses N=3, I dont see why?

Please help me out here!

#2

I’m quoting off the Schweser book: “the PV was computed one period before the first payment… The PV annuity function on your calculator set in “END” mode gives you the value one period before the annuity begins.” I sort of just memorized that as a rule. If someone understands it better, please explain why it’s that way.

#3

PV at beginning of yr 4 is the same as PV at the end of yr 3. So you discount it back to time today i.e 3 yes. Set up a timeline and see

#4

Got ya! End of year 3 = beginning year 4, thanks a lot! Somehow I couldn’t figure it out myself…