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  2. 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)

  3. 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

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