CFAI end of chapter questions Reading 38 equation, period

sgupta0827

Question 4 answer
When calculating overpayment for period 1 we use
$0.952 X 1.070024 = 1.01866
Where does 1.070024 come from in this equation ?

strikethree

it is the one year interest rate for year 2
=1.065^2/1.06

soddy1979

thanks heer,
Maybe its panic but I can’t follow the logic behind this equation.
Could you possibly help ?

RoastBeef

So we are calculating the net position a year from now and then discounting back to now ?

KungFuPanda

Basically it is calculating how much is paid each year and whether it is underpaid or overpaid compared to the receipts.
Now your underpayment or overpayment will grow at the annual interest rate for each year right? that is why they are back calculating that rate.

fishmarket

Thanks again heer.