•••

••
II-34

PRACTICE MULTIPLE CHOICE TEST 9

•
••
1. A fund earns interest at a force of interest 8t = kt. A deposit of 100 at time t = 0 will
•••
grow to 250 at the end of 5 years. Determine k.

(D) .08 (E) In 2.5

•••
(/i~ .08(1n 1.5) (B) .06 ~C)\.08(ln 2.5)
••
2. At an annual effective interest rate of i, i > 0, the

(i) The present value of 10,000 at the end of 6 years

following are all equal:

(ii) The sum of the present values of 6000 at the end of year t and 56,000 at the end of year 2t
•••
••

(iii) 5000 immediately ••

Calculate the present value of a payment of 8000 at the end of year t + 3 using the same ••
annual effective interest rate . •••
••
(A) 1330 r(BJi 1415
\J
(C) 1600 (D) 1775 (E) 2000
••
3. Barbara purchases an increasing perpetuity with payments occurring at the end of every 2
••
years. The first payment is 1, the second one is 2, the third one is 3, and so on. The price
till
of the perpe-tuity is 110. Calculate the annual effective interest rate.

(A) 4.50% (B) 4.62% (C) 4.75% (E) 5.00%

~4.88%

4. Eric receives 12000 from a life insurance policy. He uses the fund to purchase two different
annuities, each costing 6000. The first annuity is a 24-year annuity-immediate paying K per
year to himself. The second is an 8-year annuity-immediate paying 2K per year to his son.
Both annuities are based on an effective annual interest rate of i, i > O. Determine i.

(A) 6.0% (C) 6.4% (D) 6.6% (E) 6.8%

®6.2% len'\

5. Victor wants to purchase a perpetuity paying 100 per year with the first payment due at the
end of year 11. He can purchase it in either of two ways:

(i) He can pay 90 per year at the end of each year for 10 years.
(ii) He can pay K per year at the end of each year for the first 5 years, and nothing for the
next 5 years.

Calculate K .

•.(A) 150 (B) 160 (C) 170 CD) 175 (E) ] 80

\,-.",
 •••
••
ll-34

PRACTICE MULTIPLE CHOICE TEST 9

•
••
1. A fund earns interest at a force of interest 6t = kt. A deposit of 100 at time t =0 will
•••
grow to 250 at the end of 5 years. Determine k.

(D) .08 (B) In 2.5

•"
;lf~
•.,
.08(1n 1.5) (B) .06 ~f:?08(1n 2.5)
••
2. At an annual effective interest rate of i, i > 0, the following are all equal:

(i) The present value of 10,000 at the end of6 years

(ii) The sum of the present values of 6000 at the end of year t and 56,000 at the end of year 2t ••
(iii) 5000 inunediately ••
Calculate the present value of a payment of 8000 at the end of year t + 3 using the same ••
annual effective interest rate . ••
••
(A) 1330
V 1415
(C) 1600 (D) 1775 (B) 2000
••
••
3. Barbara purchases an increasing perpetuity with payments occurring at the end of every 2
years. The first payment is 1, the second one is 2, the third one is 3, and so on. The price
••
of the perpe-tuity is 110. Calculate the annual effective interest rate.

(A) 4.50% (B) 4.62% (C) 4.75%

'0
03)\4.88% (B) 5.00%

4. Eric receives 12000 from a life insurance policy. He uses the fund to purchase two different
annuities, each costing 6000. The first annuity is a 24-year annuity-immediate paying K per
year to himself. The second is an 8-year annuity-inunediate paying 2K per year to his son.
Both annuities are based on an effective annual interest rate of i, i > O. Determine i.

(A) 6.0% (C) 6.4% (D) 6.6% (B) 6.8%

®6.2% lCn'\

5. Victor wants to purchase a perpetuity paying 100 per year with the first payment due at the
end of year 11. He can purchase it in either of two ways:

(i) He can pay 90 per year at the end of each year for 10 years.
(ii) He can pay K per year at the end of each year for the first 5 years, and nothing for the
next 5 years.

Calculate K.

\ (A:) 150 (B) 160 (C) 170 (D) 175 (B) 180
\
 II-35

6. Esther invests 100 at the end of each year for 12 years at an annual effective interest rate of
i. The interest payments are reinvested at an annual effective rate of 5%. The accumulated
value at the end of 12 years is 1748.40. Calculate i.

(A) 6%
\5 7%
(C) 8% (D) 9% (E) 10%

7. At time t = 0, Billy puts 625 into an account paying 6% simple interest. At the end of year
2, George puts 400 into an account paying interest at a force of interest Ot = 6~t' for t 2: 2.
If both accounts continue to earn interest indefinitely at the levels given above, the amounts
in the two accounts will be equal at the end of year n. Calculate n.

(A) 23 (B) 24 &> 26 (E) 27

~
r<4) 25

8. A bond with a par value of 1000 and 6% semiannual coupons is redeemable for 1100. You
are glVen:

(i) The bond is purchased at P to yield 8%, convertible semiannually.

(ii) The amount of principal adjustment for the 16th semiannual period is 5.

Calculate P.

\ EA) 760 (B) 770 (C) 790 (D) 800 (E) 820

9. A perpetuity with annual payments is payable beginning 10 years from now. The first
payment is 50. Each annual payment thereafter is increased by 10 until a payment of 150 is
reached. Subsequent payments remain level at 150. This perpetuity is purchased by means
of 10 annual premiums, with the first premium of P due immediately. Each premium after
the first is 105% of the preceding one. The annual effective interest rates are 5% during the
first 9 y~ars and 3% thereafter. Calculate P.

(A) 281 (B) 286 (D) 296 (E) 301

(9291

10. A deposit of 1 is made at the end of each year for 30 years into a bank account that pays
interest at the end of each year at j per annum. Each interest payment is reinvested to earn
an annual effective interest rate of j12. The accumulated value of these interest payments at
the end of30 years is 72.88. Determine j.

(A) 8.0% (B) 8.5% (C) 9.0% (D) 9.5%

(~10.0%
 II-36

11. An investment fund is estaplished at time 0 with a deposit of 5000. 1000 is added at the
end of 4 months, and an additional 4000 is added at the end of 8 months. No withdrawals
are made. The fund value, including interest, is 10,560 at the end of 1 year. The force of
interest at time t is , , I~ .•.\1_, for 0 ::; t::; 1. Determine k.

f r",'
(A) .072 (B) .076 '8 .080 (D) .084 (E) .088

12. Bart buys a 28-year bond with a par value of 1200 and annual coupons. The bond is
redeemable at par. Bart pays 1968 for the bond, assuming an annual effective yield rate of
i. The coupon rate on the bond is twice the yield rate. At the end of 7 years, Bart sells the
bond for P, which produced the same annual effective yield rate of to the new buyer. i
Calculate P.
-
(A) 1470 (B) 1620 (C) 1680 (15) 1840 (E) 1880

13. An investment will triple in 87.88 years at a constant force of interest O. Another
investment will quadruple in t years at a nominal rate of interest numerically equal to 0 and
convertible once every 4 years. Calculate t.

(A) 101 years (B) 106 years (C) 109 years (E) 125 years

14. John borrows 10,000 for 10 years and uses a sinking fund to repay the principal. The
sinking fund deposits earn an annual effective interest rate of 5%. The total required
payment for both the interest and the sinking fund deposit made at the end of each year is
1445.04. Calculate the annual effective interest rate charged on the loan.

(A) 5.5% (B) 6.0% ®J6.5% (D) 7.0% (E) 7.5%

~'

15. You are given:

(i) The present value of an annuity-due that pays 300 every 6 months during the first 15
years and 200 every 6 months during the second 15 years is 6000.

(ii) The present value of a 15-year deferred annuity-due that pays 350 every 6 months for
15 years is 4000.

(iii) The present value of an annuity-due that pays 100 every 6 months during the first 15
years and 200 every 6 months during the next 15 years is X.

The same interest rate is used in all calculations. Determine X.

/"
(A) 3220 (B) 3320 (C) 3420 \ (Dy 3520 (E) 3620
"'-*/
 II-37

16. An n-year 1000 par value bond with 4.20% annual coupons is purchased at a price to yield
an annual effective rate of i. You are given:

i) If the annual coupon rate had been 5.25% instead of 4.20%, the price of the bond
would have increased by 100.

ii) At the time of purchase, the present value of all the coupon payments is equal to the
present value of the bond's redemption value of 1000.

Calculate i.

(A) 5.0% (B) 5.5% (C) 5.9% (E) 6.5%

17. A twenty-six week Treasury bill maturing for 10,000 is bought at a discount to yield 3.51 %
annually. For the same purchase price, a zero-coupon bond maturing for 50,000 at the end
of 20 years is available. The nominal yield rate convertible semiannually on this bond is i.
Calculate i.

(A) 4.15% (B) 4.25% ·~.30% (D) 8.50% (E) 18.10%

ii

I;
ill
ili

I
 ID-43

SOLUTIONS TO PRACTICE MULTIPLE CHOICE TEST 9

1.
15 ktdt = ~, so a(5) = e25k/2 and 250 = 100a(5). Taking logs, k = f5 ·In(2.5),
At~SWERC.

2. We are given 10,000v6 = 6000vt + 56,000v2t = 5000. The second equation implies vt = .25
and the first equation implies v6 = .50, so that v3 = J50.
Then 8000vt+3 = 8000vt. v3 = (8000)(.25)· J50 = 1414.21, ANSWER B

..
a- - nvn
3.
(1 a)-In = nl. Z Taking the limit as n -t 00, we find n--+oo
lim a-In = -d1and n-+cc
hm nvn = 0, so

that (1a)ool = (~) = 110. Substitute d = 1ii and cross multiply to obtain 110i2 - i-I = 0,
which implies i = .10 as an effective biannual rate. Then the effective annual rate is
(1.10)1/2 - 1 = .0488, ANSWER D

4.
We are given 6000 = K· a241 = 2K· a8j' Then we have

6000 = 2K.
K· aSj
a241 = 1 (1_V24)
2" 1-v8 = 1, whIch
•.. ImplIes 2 = 1 + v8 + v16, from which we find
v8 = .618 and i = .062, ANSWER B

5. Item (i) tells us that 90slOfi = 100/i, from which we find (1+i)lO = 190/90, and i = .0776.
Then,fromitem(ii), 1?0 = (K,sSli)(1+i)5 imp1iesK = 151.93, ANSWER A

6. The series of interest payments is 100i, 200i, ... , 1100i, made and immediately reinvested at
times t= 2, 3, ... , 12. The accumulation of the interest payments at time 12 is thus

100i . (1S >m.05 = 100i [:5-11~05

- 11] = 7834.25i. Then at the end of 12 years we have

1748.40 = 1200 + ~
'--v---' 7834.25i, which solves for i = .07, ANSWER B
deposits ace. int.

7. After n years, the amount in Billy's account is A(n) = 625(1+.06n). George's account
accumulates from t= 2 to t = n, producing

400 . exp (in 6 i t dt) = 400· e1n(6+n)-ln (6+2) = 400 ( ~ ). Then at time t = n we have
.625(l+.06n) = 400( ~), which solves for n = 26, ANSWER D
 (
ill-44 •
•
8. The semiannual coupon is 30 and the semiannual yield rate is .04. Item (ii) tells us that
•
= BVl6 = (1.04)BV1S-30 - BVjs, from which we find BVjs = 875. •
5 - BVjs Then, retro-
•
spectively, BVjs = p(1.04)IS - 30SiSj.04' and P = 30aiSj.04 + 875(1.04)-IS = 819.41,
•
ANSWERE
•
...
... I •
9.
3% 2150
.. 10
20 1I140
I.11
21
,60 Out
9P(l.05)
5%
19
I P(1.05)2 ...
P(1~05)9 50
v'

•
••
•••
The accumulated value of the deposits at t = 9 is
p(1.05)9 +P(1.05)(1.05)8+ ... + p(1.05)9 = 10P(1.05)9, and the present value of the with-
••
drawals, also at t = 9, is ••
••
40aoo/.03 + 1O(Ia)cci.o3 - 1O(1.03)-11(Ia)ool.03 = .b~+ lOC~) [1-(1.03)-11] = 4510.07 .
••
= = =
Equating att 9 we find P 4510.07
10(1.05)9
290.72
'
ANSWER C
••
••
10. The sequence of interest payments is j, 2j, ... , 29j at times t = 2, 3, ... , 30, respectively. The till
•••
= j. = j [8-29U;/2- 29] ' from
accumulated value of the interest is 72.88 (I s)29/i/2 which we
••
find 8291J!2 = 65.44. Then the BA-35 calculator directly finds j/2 = .05, so j = .10, fill
ANSWERE .
•••
~
11. The accumulated fund at t = 1 is

5000 . exp [1' 0, dt] + 1000 . exp [J,;, 8, dt] + 4000 . exp [/';, 8, dt] .

Notethatl10tdt = -In[l+(l-t)kJI; = In[l+(1-r)kJ. Then the fund value is

10,560 = 5000(1+k) + 1000(l+~k) + 4000(1+1k), which solves for k = .08, ANSWER C

12. Here g = r = 2i, so

1968 = Po = K + (g/i)(C-K) = K + 2(l200-K), so that K = 432 = l200vf8, from

which we find i = .03716. Then at time 7,
P7 = 1200V21 + '----v-"
(g/i)(1200-1200v21) = 1842.29, ANSWER D
still 2

1
I
1
 ill-45

13. We are given 3 = e87.886,s06=.0125l7. We are also given

4 = (l +46)t/4 = (1.050068i/4, from which we find t = 113.64, ANSWER D

14. If i' is the rate charged on the loan, then we have

1445.04 = 1O,000i' + ~O,OOO
, from which we find
1Oj.05
i' = .065, ANSWER C

15. We are given PV; = 300i:i301 + 200· 301i:i301 = 6000, and PV;i = 350· 301i:i30j = 4000.
Th en 30 I"
a301 = /80 an d"a301 = 2T'
260 W e see k

PViii = 100i:i301 + 200 . 301i:i301 = 100 (22610)+ 200 (~) = 3523.81, ANSWER D

16. We are given

P = 42anji + 1000vf
and

P + 100 = 52.5anji + 1000vf,

where = 1OOOvf. Subtracting the two price equations

42anji gives 100 = 10.5anli, so

anji = l8.~and 42 ( l8.~)= 1OOOvi, from which we find vi = .40. Then

vi _ 1 - .40 _ 100
anji
1-
= -z-' - - i-m,
which solves for i = .063, ANSWER D

17. The purchase price of the 26-week (l82-day) T-bill is calculated as

From the zero-coupon bond data we find

9822.55 = 50,000 ( 1+ T
'(2») -40 '

from which we find i(2) = .083, ANSWERC