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
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???
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.
Um . . . ordinary annuity, perhaps?
But why would you assume that it switches to an annuity due at T = 4?
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.
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!
easier to use cash flow option in BA II plus.