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Practice Problems
Problem 25.1
Calculate the present value of a continuous annuity of 1,000 per annum for 8 years at:
(a) An annual effective interest rate of 4%;
(b) A constant force of interest of 4%.
Problem 25.2
Find the force of interest at which s20 = 3s10 .
Problem 25.3
If an = 4 and sn = 12, find .
Problem 25.4
There is $40,000 in a fund which is accumulating at 4% per annum convertible continuously. If
money is withdrawn continuously at the rate of $2,400 per annum, how long will the fund last?
Problem 25.5
Annuity A offers to pay you $100 per annum, convertible continuously, for the next five years.
Annuity B offers you $ X at the end of each year for ten years. The annual effective interest rate i
is 8%. Find X such that you are indifferent between the two annuities.
Problem 25.6
Given = 0.1. Evaluate

(12)

10
a
10

Problem 25.7
You are given dtd st = (1.02)2t . Calculate .
Problem 25.8
Rn
Given an = n 4 and = 10%, find 0 at dt.
Problem 25.9
Payments will be made to you at a continuous rate of $100 per year for the next five years. The
effective rate of interest over this period is i = 0.06. Calculate the present value of this payment
stream.
Problem 25.10
Show that dtd at =

t
s
1

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THE BASICS OF ANNUITY THEORY

Problem 25.11
(m)
(m)
Show that an < an < an < a
n < a
n . Hint: See Example 10.15.
Problem 25.12
Find an expression for t, 0 < t < 1, such that 1 paid at time t is equivalent to 1 paid continuously
between 0 and 1.
Problem 25.13
A bank makes payments continuously at a rate of $400 a year. The payments are made between
5 and 7 years. Find the current value of these payments at time 2 years using an annual rate of
discount of 4%.
Problem 25.14
A company makes payments continuously at a rate of $200 per year. The payments are made
between 2 and 7 years. Find the accumulated value of these payments at time 10 years using an
annual rate of interest of 6.5%.
Problem 25.15
Lauren is being paid a continuous perpetuity payable at a rate of 1000 per year. Calculate the
present value of the perpetuity assuming d(12) = 0.12.
Problem 25.16
If i = 0.04, calculate the accumulated value of a continuous annuity payable at a rate of 100 per
year for 10 years.
Problem 25.17
If = 0.06, calculate the present value of a continuous annuity of 1 payable for 20 years.
Problem 25.18
Rn
You are given 0 at dt = 100. Calculate an .
Problem 25.19
An nyear continuous annuity that pays at a rate of $748 per year has a present value of $10,000
when using an interest rate of 6%, compounded continuously. Determine n.
Problem 25.20
Which of the following are true?
(I) an

(1 + i) = an1 .

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233

(II) The present value of a 10 year annuity immediate paying 10 per month for the first eight
(12)
months of each year is 120a10 a8/12 .
(III) The present value of a perpetuity paying one at the end of each year, except paying nothing
s
every fourth year, is is3 .
4

Problem 25.21
Payments of $3650 per year are made continuously over a five-year period. Find the present value
of this continuous annuity two years prior to the first payment. Given the nominal rate i(365) = 8%.