Assignment 3: General Annuities

1. A perpetuity paying 1 at the beginning of each 6-month period has a present value of
20. A second perpetuity pays 𝑋 at the beginning of every 2 years. Assuming the same
annual effective interest rate, the two present values are equal. Determine 𝑋. (Ans:
3.71)

𝑛
2. For a given 𝑛, it is known that 𝑎̅𝑛⏋ = 𝑛 − 4 and 𝛿 = 10%. Find ∫0 𝑎̅𝑛⏋ 𝑑𝑡. (Ans: 40)

3. A perpetuity has payments at the end of each four-year period. The first payment at
the end of four years is 1. Each subsequent payment is 5 more than the previous
payment. It is known that 𝑣 4 = 0.75. calculate the present value of this perpetuity. (Ans:
48)

4. A perpetuity makes payments starting five years from today. The first payment is $1000
and each payment thereafter increases by 𝑘% per year. The present value of this
perpetuity is equal to $4096 when computed at 𝑖 =25%. Find 𝑘. (Ans: 7851.19)

5. If 𝑋 is the present value of a perpetuity of 1 per year with the first payment at the end
of the second year and 20𝑋 is the present value of a series of annual payments 1, 2,
3, . . . with the first payment at the end of the third year, find 𝑑. (Ans: 1/21)

6. A loan of 10,000 is repaid with a payment made at the end of each year for 20 years.
The payments are 100, 200, 300, 400, and 500 in years 1 through 5, respectively. In
the subsequent 15 years, equal annual payments of 𝑋 are made. The annual effective
interest rate is 5%. Calculate 𝑋. (Ans: 1075)

7. An insurance company purchases a perpetuity-due providing a geometric series of

quarterly payments for a price of 100,000 based on an annual effective interest rate of
𝑖. The first and second quarterly payments are 2000 and 2010, respectively. Calculate
𝑖. (Ans: 10.6%)

8. Mike buys a perpetuity-immediate with varying annual payments. During the first 5
years, the payment is constant and equal to 10. Beginning in year 6, the payments
start to increase. For year 6 and all future years, the payment in that year is 𝐾% larger
than the payment in the year immediately preceding that year, where 𝐾 <9.2. At an
annual effective interest rate of 9.2%, the perpetuity has a present value of 167.50.
Calculate 𝐾. (Ans: 4.0)

9. Seth, Janice, and Larry each borrow 5000 for 5 years at an annual nominal interest
rate of 12% compounded semiannually. Seth has interest accumulated over the five
years and pays all the interest and principal in a lump sum at the end of five years.
Janice pays interest at the end of every six-month period as it is accrued and the
principal at the end of five years. Larry repays his loan with 10 level payments at the
end of every six-month period. Calculate the total amount of interest paid on all three
loans. (Ans: 8747.64)