HELP! Keep messing up time value of money problems by one period

CFA Level I Quant
#1

Hi,

I know how to identify different TVM problems, but whenever I’m calculating either the present value or future value of the lump sum or an

problem
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nuity, I seem to mess up by one time period. For example, in the problem below, I got to the $66,242 lump sum, but then discounted by 4 periods since we get the money at the end of year 4. Why does the solution discount it by 3???

#2

Immediate annuity PV is as of yr 3, so use END on your BAII; annuity due has PV as of time 4, so you would use BEG on your BAII.

#3

Um . . . ordinary annuity, perhaps?

#4

But why would you assume that it switches to an annuity due at T = 4?

#5

When I was a young, handsome actuarial student, we used the terms immediate or due to describe annuties where the first payment happened 1 period from now or right bleeping now, respectively. The current syllabus for the Society of Actuaries for the Financial Mathematics exam shows me that fine tradition is still being upheld. :older_man:

#6

I have two choices for calculating the PV at time 0 of the deferred annuity: calculate the PV of an immediate annuity at time 3 and discount that by 3 years interest OR calculate the PV of an annuity due at time 4 and discount that by 4 years interest. Either way should give you the same final answer!

#7

easier to use cash flow option in BA II plus.

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