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Manisha (Querist)
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22 November 2012 can any one plz solve this Q.
Following are the annual interest rates of a security:
Spot rate on one year 8.5%
Forward rate after one year for
one year 9.5%
Forward rate after two year for
one year 13.56%

What is the yield of the security for three years?

(Answer:10.5%)

Dilip

Dilip (Expert)
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23 November 2012 1. Rs 100 invested at 8.5% gives you Rs 108.5 at the end of the year.

2. Then Rs 108.5 invested at 9.5% gives you Rs 118.81 at the end of the period (=108.5 x (1 + .095))

3. Then Rs 118.81 invested at 13.56% gives you Rs 134.92 ( = 118.81 x 1.1356) by the end of the period.

So, Rs 100 becomes Rs 134.92 in 3 years. Implying a return of 10.5%. Calculated as:

= (134.92/100)^(1/3) x 100.

[Note ^ is 'to the power of']

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