MATH 2280 MATHEMATICAL THEORY OF INTEREST

ASSIGNMENT 2
Due: 11:30pm on Oct. 9, 2023.

1. Bruce deposits 75 into a bank account. His account is credited interest at a nominal rate of
interest i(12) convertible monthly.
At the same time, Peter deposits 100 into a separate account. Peter’s account is credited
interest at a force of interest of δ. After 15 years, the value of each account is 200.
Calculate i(12) and δ.

2. The force of interest for an investment account is given by δt = 3/(t + 50), t > 0 . If 100 is
deposited to the account at time 5, determine the account value at time 9.

3. Bruce wants to buy a 20-year annuity. The annuity will pay $2000 at the end of each year for
the first ten years, and pay $3000 at the end of each year for the next ten years.
What is the present value of the annuity, if the annual effective interest rate is 5%?

4. Tom and Mary decide at the birth of their daughter that they will need to provide 200,000
at their daughter’s 18th birthday to fund her college education. They plan to contribute
X at each of their daughter’s 6th through 17th birthdays to fund the money needed. They
anticipate earning a constant 5% annual effective interest rate on their contributions.
Determine X.

5. A 48-month car loan of $12,000 can be completely paid off with monthly payments of $300
made at the end of each month. What is the nominal rate of interest convertible monthly on
this loan?

6. An education fund of $20,000 provides a payment of $1000 every six months starting
immediately. If the fund balance is not able to pay $1000 at any of the future payment dates,
it will pay whatever left in the fund. Calculate the number of payments, and the final payment
to exhaust the fund, if i(2) = 6%.

7. A perpetuity-immediate pays 1500 per year. Alice receives the first 20 payments and Denise
receives the remaining payments. Alice’s share of the present value of the original perpetuity
is 30%. The annual effective rate of interest is a same constant for each year.
Calculate the present value of the payments received by Denise.

8. Jack inherited a perpetuity-due, with annual payments of 10,000. He immediately exchanged

the first 10 payments of the perpetuity for a perpetuity-immediate having the same present
value. The perpetuity-immediate has annual payments of X starting at the end of the 11th
year.
All the present values are based on an annual effective interest rate of 5.5%. Calculate X.