Query in Quants

rishabhhurkat
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Query in Quants

Postby rishabhhurkat » Tue Dec 15, 2015 2:58 am

I am not getting the concept of Intuition.
Please explain the same...

edupristine
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Re: Query in Quants

Postby edupristine » Tue Dec 15, 2015 8:11 am

Hi,
Please tell us the source of this topic.

rishabhhurkat
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Posts: 24
Joined: Wed Dec 09, 2015 9:29 am

Re: Query in Quants

Postby rishabhhurkat » Thu Dec 17, 2015 2:41 am

It is on Ch. TVM

PVperpetuity= A/i

Intuition: Present Value of a perpetuity is the amount that must invested today at the interest rate i to yield a payment of A each year without affecting the value of the initial investment

Explain the meaning of above with a Example...

edupristine
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Re: Query in Quants

Postby edupristine » Thu Dec 17, 2015 8:51 am

For Example: A person wants $10000 every year (at the end) starting from now. How much should he pay to receive such payments? Expected return= 10%
SOLUTION: P= A(1+I)
A= P/(1+I)
A= 10000/(1+I) + 10000(1+I)^2 + 10000(1+I)^3+ 10000(1+I)^∞
= 10000[1/1+0.1 + 1/(1+0.1)^2 + 1/(1+0.1)^3 +……………+1/(1+0.1)^∞
= 10000* [1/(1+0.1)/1-(1/1+0.1)]= 10000/0.1 (A/I)
= $1 Lakh
Logic is If he pays $90,000, the fund shall be exhausted at some time and perpetual shall not be possible.

rishabhhurkat
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Posts: 24
Joined: Wed Dec 09, 2015 9:29 am

Re: Query in Quants

Postby rishabhhurkat » Fri Dec 18, 2015 7:49 am

ok got it!!

Thank You...

edupristine
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Re: Query in Quants

Postby edupristine » Fri Dec 18, 2015 9:56 am

Our Pleasure.. :)


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