Annuity-certain which paid

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At time t = 0 an investor purchased an annuity-certain which paid her £10,000 per annum annually in arrear for three years. The purchase price paid by the investor was £25,000.

The value of the retail price index at various times was as shown in the table below:

Time t (years): t = 0 t = 1 t = 2 t = 3

Retail price index: 170.7 183.3 191.0 200.9

(i) Calculate, to the nearest 0.1%, the following effective rates of return per annum achieved by the investor from her investment in the annuity:

(a) the real rate of return; and

(b) the money rate of return

(ii) By considering the average rate of inflation over the three-year period, explain the relationship between your answers in (a) and (b) of (i).

Reference no: EM131101116

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