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

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

Homework Assignment # 3 (max. points = 10) Due at the beginning of class on Thursday, September 15, 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.

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Find the nominal rate of discount, convertible monthly, which is equivalent to a 7.35% nominal rate of interest convertible semi-annually. You invest in an account with an effective annual rate of discount of 9%. Find the amount you need to invest, now, in order to accumulate $3,000 five years from now. You invest $5,000 into an account with varying rates of interest. Calculate the accumulated value of your account after 20 years, given the following interest rates: Time (t) 0 – 10 10 – 15 15 – 20 Rate d 0.06 i (12 ) 0.08 t 0.00025t 2

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Find the present value of an annuity which pays $100 at the end of each year for 30 years. Assume an effective annual interest rate of 8%. Find the present value of an annuity which pays $200 at the beginning of each of the next 20 years? Assume that the effective annual interest rate is 5%. You must accumulate $50,000 at the end of 8 years. You make payments of X into an account, earning a 6% effective annual rate of interest, at the end of each of the next 8 years. Find X (the amount you have to deposit at the end of each year).

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Find the present value of this annuity. 30. Immediately after your last deposit. Suppose you deposit $5. The price of this 30-year annuity is equal to the present value (at the time you purchase the annuity) of the 30 annual cash flows. The effective annual interest rate throughout the entire 70-year period is 7%. and that the effective annual interest rate is 7%. Find the present value of this perpetuity 4 years before the first payment. Assume that the first payment will occur 3 years from now. Find X. A perpetuity pays $250 every year. (8) (9) (10) 2 .(7) A 40-year annuity-immediate pays $100 per year (so that there are a total of 40 payments). Assume an effective annual interest rate of 10%. Find the accumulated value of this account at t = 35. You deposit $500 into an account at each of times t = 1. you take the entire accumulated value in your account and purchase a 30-year annuity. The effective annual interest rate is 12%. 3. …. which will pay you X at the beginning of each year for 30 years. 2.000 at the end of each of the next 40 years into a retirement account.