The question says that the first receipt is in 4 years time. So the second receipt is in 5 years time, the third receipt is in 6 years time, and so on until there is a total of 10 receipts.

Hi sir, There is an example in the book, where an investment in irredeemable bonds (PV) of $95 generates an interest of $ 12 per annum, indefinitely. It says that interest is paid half yearly, that is $6 every six months. In order to calculate (r), they have used the compounding method:- [1+(6/95)]^2 -1 = 13% In this case, why can’t we use the same method, by reversing the formula of perpetuity, 6/r = 95 therefore 6/95 = r. So r will be 6.3% per annum and (6.3/2) = 3.1% half yearly. I can’t understand why the compounding method is used, when the interest is paid every six months, why would it compound?

In future please ask this sort of question in the Ask the Tutor Forum, and not as a comment on a lecture.

You would rather receive $6 in 6 months time and $6 in 12 months time, than wait 12 months for all $12. The reason is that you could invest the $6 received in 6 months time for a further 6 months and end up with a bit more than $12 in 12 months time.

(I am surprised that this is in your book because it is more of a Paper F2 type question)

i have noticed in this lecture you are using the present value table instead of the annuity table. Is there any reason for this? I just want to be clear so i understand the correct table to use in the exam. thanks

claire says

sir please when solving the example 5 , i noticed you inluced the 4th year when counting 10 years , why ?

John Moffat says

The question says that the first receipt is in 4 years time. So the second receipt is in 5 years time, the third receipt is in 6 years time, and so on until there is a total of 10 receipts.

Mahrukh says

Hi sir,

There is an example in the book, where an investment in irredeemable bonds (PV) of $95 generates an interest of $ 12 per annum, indefinitely. It says that interest is paid half yearly, that is $6 every six months. In order to calculate (r), they have used the compounding method:-

[1+(6/95)]^2 -1 = 13%

In this case, why can’t we use the same method, by reversing the formula of perpetuity,

6/r = 95 therefore 6/95 = r. So r will be 6.3% per annum and (6.3/2) = 3.1% half yearly.

I can’t understand why the compounding method is used, when the interest is paid every six months, why would it compound?

John Moffat says

In future please ask this sort of question in the Ask the Tutor Forum, and not as a comment on a lecture.

You would rather receive $6 in 6 months time and $6 in 12 months time, than wait 12 months for all $12. The reason is that you could invest the $6 received in 6 months time for a further 6 months and end up with a bit more than $12 in 12 months time.

(I am surprised that this is in your book because it is more of a Paper F2 type question)

caroline22 says

hello,

i have noticed in this lecture you are using the present value table instead of the annuity table. Is there any reason for this? I just want to be clear so i understand the correct table to use in the exam.

thanks

caroline22 says

hello,

sorry paused the lecture too soon.

Thanks

John Moffat says

I am please you sorted it out 🙂