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pault co

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › pault co

  • This topic has 1 reply, 2 voices, and was last updated 11 months ago by John Moffat.
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  • July 16, 2024 at 3:13 pm #708557
    razarazzack
    Participant
    • Topics: 2
    • Replies: 0
    • ☆

    why are we taking the rate for year 1 as it is and calculating the forward rates for 2,3 and 4 ?

    July 16, 2024 at 4:59 pm #708571
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    3.7% is the rate for the first year.

    The rate of 4.25% is the overall/average rate per year for 2 years.

    Since we know that it is 3.70% for the first year, it means that the rate for the second year (so as to end up with an overall average of 4.25%) must be 1.0425^2 / 1.037 – 1 = 0.048 or 4.80%

    It is the same logic for the 3rd and 4th years.

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