The University of Zambia

School of Natural Sciences

Department of Mathematics and Statistics
MAT2001 - Principles of Financial Mathematics

Tutorial Sheet 1 March 2024

1. For each of the following, explain whether

• the absolute amount of payments are known in advance.

• Timing of payments is known in advance.

a) Zero-coupon bond

b) Fixed-interest security

c) Index-linked security

d) Call deposit

e) Equity

2. Explain the difference between simple and compound interest rates.

3. An investor age 35, deposits K100000 in a fund earning 8% compound interest until
retirement at age 65. Find the amount earned between ages 35 and 45, between ages 45
and 55 and between ages 55 and 65. Demonstrate the principle of consistency.

4. Find the accumulated value of K50000 at the end of 5 years and 4 months invested at 9%
per annum:

a) assuming compound interest throughout.

b) assuming simple interest during the final fractional period.

5. (a) Given an investment of K10000 find the accumulation after 5 years using:

(i) simple discount of 8% pa

(ii) compound discount of 8% pa

(iii) compound interest of 8% pa.

(b) Given a payment of K20000 due in 4 years time, calculate the present value using:

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 (i) simple interest of 3% pa

(ii) simple discount of 3% pa

(iii) compound interest of 3% pa

6. Find the accumulated value of K5000 invested for five years at 8% per annum convertible
quarterly.

7. Find the present value of K10000 to be paid at the end of six years at 6% p.a. payable
in advance and convertible semi-annually.

8. Find the compound interest on K10000 for 2 years compounded at 12% semi-annually i.e.
i(2) = 12%.

9. Twenty thousand Kwacha is invested for 10 years at i(2) = 10% for the first three years,
at i(4) = 8% for the next four years, and at i(12) = 9% for the last three years. Find the
accumulated value after 10 years.

10. A person can buy a lot for K300000 now; or for K120000 now, K120000 in 2 years,

and K120000 in 5 years. Which option is better, if money can be invested at i(12) = 8%

for the first three years and i(4) = 6% for the next 2 years?

11. Find the nominal rate of interest convertible quarterly which is equivalent to a nominal
rate of discount of 6% per annum convertible monthly.

12. Find the accumulated value of K10000 invested for ten years if the force of interest is 5%.

13. Find the accumulated value of 1 at the end of n years if

1
δt = .
1+t

14. A bank account pays 10% effective annual interest rate over 5 years. Find the equivalent:

(a) simple annual interest rate

(b) effective monthly interest rate

(c) effective biennial interest rate

(d) effective annual discount rate

(e) simple annual discount rate.

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15. (a) Explain the difference between effective and nominal interest rates.

(b) Find the discounted value of K10000 due in 2 years at

(i) d (12) = 12%

(ii) d (365) = 7%

(c) The force of interest is given by:


 0.04 + 0.002t if 0 ≤ t < 5 ,
δ(t) = 0.015t − 0.08 if 5 ≤ t < 8 ,
0.07 if 8 ≤ t .


(i) Find expressions for the present value at time 0 of 1 unit due at time t .

(ii) Calculate the present value of a payment of K5000 due at t = 6.