UNIVERSITY OF ILLINOIS AT URBANA-CHAMPAIGN Actuarial Science Program DEPARTMENT OF MATHEMATICS

Math 210 Theory of Interest Prof. Rick Gorvett Fall, 2011

Homework Assignment # 4 (max. points = 10) Due at the beginning of class on Thursday, October 6, 2011 You are encouraged to work on these problems in groups of no more than 3 or 4. However, each student must hand in her/his own answer sheet. Please show your work enough to show that you understand how to do the problem and circle your final answer. Full credit can only be given if the answer and approach are appropriate. Please give answers to two decimal places e.g., xx.xx% and $xx,xxx.xx . Note: Homework assignments are due at the beginning of the class. If you arrive at the class after it has started, you must hand in your assignment upon entering the classroom. Assignments will not be accepted at the end of the class period.

Problems (1) through (4) involve determining the interest rates which underlie the annuity calculations. You must use a calculator (or Excel, if youd like) to determine these values.

1) A 30-year $1,000-annual-payment annuity-immediate has a present value of $12,000. Find the effective annual interest rate underlying this present value. 2) A 20-year $5,000-annual-payment annuity-immediate has an accumulated vale (immediately after the final payment at time 20) of $166,000. Find the effective annual interest rate underlying this accumulated value. 3) A 25-year $750-quarterly-payment annuity-immediate has a present value of $27,500. Find the effective quarterly interest rate underlying this present value, and use it to determine the equivalent effective annual interest rate. 4) A 30-year $200-monthly-payment annuity-immediate has an accumulated vale (immediately after the final payment at time 30) of $366,000. Find the effective monthly interest rate underlying this accumulated value, and use it to determine the equivalent nominal interest rate convertible monthly.

5) You want to accumulate $1,000,000 over the next 30 years. You intend to do this by making deposits of X into an investment account at the end of each quarter, for 30 years. The account earns i (12 ) = 12%. Find X.
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6) A 30-year annuity-immediate pays $20,000 every third year (for a total of 10 payments). If i ( 4) = 9%, what is the present value of this annuity three years prior to the first payment? 7) A perpetuity will make annual payments of $3,000, with the first payment occurring 18 months from now. The interest rate is i ( 2) = 10%. Find the present value, now, of this annuity. 8) Thirty years from now, you want to be able to purchase a perpetuity-immediate which will pay you $80,000 at the end of each year. In order to make this purchase, you deposit money into an account continuously, at the rate of X per annum, for 30 years. Suppose that the effective annual interest rate is a constant 8.5%. Find the annual deposit rate, X, necessary to achieve this purchase. 9) Same problem as (8) above, except that the interest rate, instead of being i = 8.5%, is actually i (12 ) = 8.5%. Find the annual deposit rate, X, necessary to achieve your goal. 10) Abby offers to pay you at the rate of $10,000 per annum, continuously, for the next 10 years. Ben offers to pay you X at the end of each of the next 10 years. The force of interest applying to both offers is 12%. Find the value of X such that you are indifferent between these two offers.