## Exercise 2.4 Clarification

 Author Message Ben98gs Forum Newbie         Group: Forum Members Posts: 2, Visits: 1 In Exercise 2.4 it tells you that the discount rate is 10%.  Through my studying for the FM exam I know that what they call the discount rate (usually denoted 'd') something different...  d = i / (1+i) Just for clarification, everytime you talk about the discount rate for homework, tests, etc.  You will be meaning the interest rate used to discount the payments correct?  Just making sure this terminology will not switch back and forth. bjz99 Forum Newbie         Group: Forum Members Posts: 3, Visits: 1 I would assume so.  From what I've read/done so far, the point of Corp Fin isn't to go into much detail (definitely not as much as FM).[NEAS: Correct. The distinction on Exam FM is an actuarial one. Finance people use 1/(1+r).] CVOG Junior Member         Group: Forum Members Posts: 25, Visits: 1 Also, since we're on the subject of assignments and question 2.4:"...\$2000 that produces cash flows of \$700 in year 1, ..."Does this mean that it's an annuity-immediate and \$700 pops into my hands at the end of the year? Or does this mean that \$700 is accumulated by the end of the year?Which of these do you REALLY mean, Mr. Neas?"...\$2000 that produces cash flows of \$700 at the end of year 1,...""...\$2000 that produces cash flows continuously at a rate of \$700 per year,..."My answers for both:-\$146.90 = NPV of the annuity-immediate scenario-\$45.76 = NPV of the continuously-payable scenario[NEAS: \$700 at the end of year 1. The VEE course does not use continously compounding.] Tank6969 Forum Newbie         Group: Forum Members Posts: 2, Visits: 1 I assumed it meant 700 at the end of year 1, 2, and 900 and the end of year 3. Discounted back at a rate of 10%. I got an NPV of -108.94. It says the discount rate is 10% but I Don't believe it means D=.10 therefore I=.0909.  Judging from the sample problems and solutions I believe it means the rate at which it's discounted backwards should be 10% meaning your interest rate is actually 10%. -2000 now+700(1/1.1)+700(1/1.1)^2+900(1/1.1)^3-108.94 NPV......of course i could be wrong CVOG Junior Member         Group: Forum Members Posts: 25, Visits: 1 If d=.10 and d=1-v, then v=.9If v=.9 and v = 1/(1+i), then i = (10/9)-1 = 1/9 = .1111111111111111111111111I haven't gotten the book yet, so maybe that's what the first forum writer was talking about. Are there two different meanings for 'discount rate'? Tank6969 Forum Newbie         Group: Forum Members Posts: 2, Visits: 1 That would be correct if you were taking Exam FM. In the book they just define/word it differently, it's more clear what they want when looking at the practice problems with solutions. dolemitefunk Forum Newbie         Group: Forum Members Posts: 3, Visits: 1 I understand that this isnt an actuarial course, but by habit I do sometmes use some actuarial notation for example v=(1/(1+i)), or 'a angle' for annuities.  Is it ok if I use this notation in the homework assignments as long as I define the variable?[NEAS: The course instructors are familiar with actuarial notation. But the final exam uses the notation in the textbook. For instance, the discount rate is the interest rate used to determine the present value of future cash flows, not the reciprocal of the interest rate. For the homework, you can use the actuarial terms.]
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