MATH1510: Financial Mathematics I

Example Sheet 2 Questions for the example class

Attempt these questions before the example class on Monday 20 February. Your tutor will discuss the answers with you. 1. (a) Find a5 at 6 1 %. 2 (b) Find s8 if the eective rate of discount is 10%. 2. A loan of 30,000 is to be repaid by 10 equal payments, done at the end of the year for ten years. Calculate the annual repayment on the basis of an interest rate of 8%. 3. What is the present value of a payment of e1000 due in two months and e375 in half a year, at a rate of discount of 6% p.a. convertible monthly? 4. At what interest rate convertible quarterly would $1000 accumulate to $1600 in six years? 5. A savings plan requires you to make payments of $500 each at the end of every year for 10 years. The bank will then make annual payments to you for a period to be specied later. The rst payment from the bank to you will be one year after the last payment you make to the bank, and the payments of the bank are all equal. Assume an interest rate of 5%. (a) The bank makes seven payments to you. How much is every payment? (b) The annual payments from the bank continue indenitely. How much is every payment? 6. A loan of e5000 with 7% interest is repaid as follows. At the end of every year, the borrower pays e500. Of this payment, e350 is used to pay interest. The remaining e150 goes into an account (called the sinking fund ) and accrues interest (also at 7%). At a certain time, the sinking fund contains e5000, which is used to repay the loan. (a) How much is in the sinking fund after ve years? (b) At what time t contains the sinking fund e5000? (Do not worry about the fact that t is not an integer.) (c) Show that the present value of an annuity over t years with payments of e500 at the end of each year is e5000. (d) How long does it take to pay o the loan with the sinking fund method if the interest on the sinking fund is only 6%?

Homework questions
Hand in solutions to these questions on Wednesday 29 February in your tutors pigeon hole on level 8 of the School of Mathematics. The tutors for this module are Niloufar Abourashchi, Zhidi Du, James Fung, Jitse Niesen and Tongya Wang. H1. (a) Find a7 at 4 1 %. 4 (b) Find a at 7%. (c) Find s12 if the nominal interest rate payable monthly is 5% p.a. H2. (a) A loan of 12000 is to be repaid by a level annuity certain, payable annually in arrears for 25 years and calculated on the basis of an interest rate of 9% per annum. Calculate the annual repayment. (b) A loan of 1000 is to be repaid by a level annuity certain, payable monthly in arrears for two years and calculated on the basis of an interest rate of 9% per annum. Calculate the monthly repayment. H3. Two parents have a child who is about to start studying at a Chinese university. They are setting up a fund which pays their child 15000 yuan annually, with the rst payment being made immediately. This is to continue for four years. Afterwards, the fund is to donate 2000 yuan annually to the university. The rst payment to the university is in four years time (so one year after the last payment to their child) and the payments are to continue indenitely. Assuming an interest rate of 8%, how much does it cost to set up this fund? H4. (a) Perform three steps of the bisection method to approximate the rate at which a20 = 10, starting from trial values i = 0.05 and i = 0.10. State clearly the conclusion. (b) Do the same with the method of successive interpolation. H5. (a) Prove that 1 1 = +i an sn by using the formulas for an and sn . (b) A loan with principal P is to be repaid by a level annuity certain payable annually in arrears for n years. What is the annual payment? (c) A loan with principal P is to be repaid using the sinking fund method (see the last exercise of the example class). At the end of each year, the borrower pays iP in interest and an amount A in the sinking fund. The money in the sinking fund accumulates at the same rate i. What is A if the sinking fund is to contain P after n years? (d) Deduce that repaying a loan by the sinking fund method requires the same annual payment as repaying by an annuity.