An individual is planning to purchase £100,000 nominal of a bond on 1 June 2016 which will be redeemable at 110% on 1 June 2020. The bond will pay coupons of 3% per annum at the end of each year. The individual wishes to invest the coupon payments on deposit until the bond is redeemed. It is assumed that, in any year, there is a 55% probability that the rate of interest will be 6% per annum effective and a 45% probability that it will be 5.5% per annum effective. It is also assumed that the rate of interest in any one year is independent of that in any other year. (i) Derive the necessary formula to determine the mean value of the total accumulated investment on 1 June 2020. [4] (ii) Calculate the mean value of the total accumulated investment on 1 June 2020. [2] can anyone please help me with this question- dont understand how to do any of it. also, question 1 & 2 sound the exact same- how would you know that the second question would be using S
You are using a varying stochastic model (Chapter 15) to accumulate an annuity. Part (ii) is just putting the numbers in the general formula that they wanted you to do in part (i) but didn't make super clear.
