2013 Fall Q21B: Ways of Accounting for Time Value of Money in Excess Ratio
Hi,
I can understand the formula for the Discounted Excess Ratio= [APV(beg)-APV(end)-Paid(All)+II]/APV(beg)
And Undiscounted Excess Ratio= [Unpaid(beg)-Unpaid(end)-Paid(All)]/Unpaid(beg)
But I dont understand the 2 ways namely:
1. Explicily calculate II and add to excess amount
2. Discount the Undiscounted Amounts to reverse effect of discounting
As can be seen from the discounted formula, it calculate both the discounting and the II...
Can you please elaborate more on this?
Thanks and Warm Regards,
Wilson
Comments
Hi,
I'm not sure I really follow your question, so I apologise if I am a little off the mark.
Basically what the examiner's report is trying to say is that you can account for the time value of money either by accumulating interest forwards, or discounting backwards. In simpler terms, just make sure everything is either at time T or T-1. It's a really bad question and I don't think you will see it again. Right now you have two things, one is at time T and one is at time T-1.
For your formula, you have discounted amounts at times T and T-1. The key is we need them on the same basis (evaluated at the same time). When you add investing income, you are pulling the APV at T-1 forwards to time T. Only then can you make a comparison
Hi,
Okay. I think I can understand then. So basically the Discounted Excess Ratio approach use the Method #1 which is adding the Investment Income explicitly.
Thanks and Warm Regards,
Wilson
Yeap you are right!
Thank you
Hi there, I am wondering if you could show the calculation for the discounting approach? I tried it but I don't seem to be getting an answer that is even close.
To be honest, the CAS will never ask you to do it using method 2 because it's only explained conceptually and I would definitely not spend too much time on this.