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June 2012 Q 3 (a)
I do not understand the model answer stating ‘ 3.76^1/4% is less than 3.8% four yield rate,…’ This can be found in the last paragraph of Part a. I do not get how 3.76^1/4 is less than 3.8% due to the period of payment.Sir, could you please put it into simple words?
I really appreciate your time.
The choice is to get nothing until the fourth year or to get interest in each of the 4 years.
In the first case, you are getting an average of 3.8% per year, whereas in the second case you are getting an average of 3.7625%.
The reason you are getting less in the second case is that you are getting interest throughout the 4 years rather than having to wait all four years to get anything back.
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