Book 5, Alternative investments, figure 8 on page 20. I can’t understand how they calculate interest expense 31 381; 31 108…

i thought that year 1 expense should be 393 750*0,08=31500? NO?

Thank you.

Book 5, Alternative investments, figure 8 on page 20. I can’t understand how they calculate interest expense 31 381; 31 108…

i thought that year 1 expense should be 393 750*0,08=31500? NO?

Thank you.

There is something off with their number. They are saying 8% per annum (compounded monthly) so maybe they mean they are compounding monthly to end with 8% so the simple implied interest would be less… 7.XX%, which makes sense, b/c if you did LN 1.08 to get the continuos rate it would come out 7.696% for $30,303 of i-xp. Less than straight $31,500. The actual rate would be between (7.696-8.00%). The only other thing that would take this i-xp down to match the book is if they made the first payment ahead so less interest was accrued.

I won’t worry about it. I worry about the Band-of Investment Method and the interest split there: pg. 35.

Thank you!

what exactly causes you worry?

it is so strange. But i got so, that mortgage constant - is your level payment.(that is interest +principal repayment).

In numbers from p 20 example. If we put on calculator FV=1, N=360,PV=0, Interest=8/12 we’ll get=0.00067, than multiply by 12 = 0.00805. This is supposed to be principal repayment.

0.00805*393750=3170 (we can also get it if we use FV=393750, and the pmt*12)

Than if we use 393750*0.08=31500-interest

The whole payment =31500+0.00805*393750=34670 - this is what comes under Annual debt service on p.20.

So the rate is =0.08+0.00805=0.08805

The same is if you use PV=393750, cmp pmt=2889, multiply by 12=34670 devide by 393750=0.08805

Maybe you got it too, and everyone got ) but just in case)

By “worry” I mean pay more attention to pg.35 b/c it is more likely to show up on the exam having been on a past sample. Your math is spot on, I really think they r making an assumption or doing something more n not saying so unintentionally to get such an off i-xp… if u have to know, email CFAI, tell them they r wrong n they wil l try to prove u r wrong…lol n u will know.