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SOA/CAS COURSE 2 - INTEREST THEORY - QUIZ 2

General Annuities and Fund Return Measurement

1. A loan of amount 1000 is repaid with 12 annual payments of 100 each starting one year after the

loan is made. The annual effective interest rate is 3.5% for the first four years. Find the annual effective interest rate for the final 8 years.

 A. 2.12% B. 2.15% C. 2.18% D. 2.21% E. 2.24% 2. At annual effective rate of interest , a perpetuity paying 25 every 3 months has a present value of

X at the time of the first payment. At the same interest rate, a perpetuity paying Y every month also has a present value X at the time of the first payment. Then Y is equal to which of the following (all rates are equivalent to annual effective interest rate )?

A.

E.

B.

C.

D.

3. A loan can be paid in full, at the same positive rate of interest, by either 6 monthly payments of

209.56 each (starting one month after the loan is made) or 12 monthly payments of 108.99 each (also starting one month after the loan is made). Find the corresponding payment for an 18 month

repayment.

 A. 75.54 B. 75.90 C. 76.26 D. 76.72 E. 77.08 4. Bill deposits money into a bank account at the end of each year. Bill's deposit in year is equal to

The bank credits interest at an annual effective rate of . The amount of

interest earned in Bill's account during the 11th year is equal to 500. Calculate .

 A. 7.25% B. 7.75% C. 8.00% D. 8.25% E. 8.75% 5. An investor pays for an annuity which provides payments of 100 at the beginning of each month

for 10 years. These payments are invested at a nominal annual interest rate of 12% convertible

monthly. Monthly interest payments are reinvested at a nominal annual interest rate of 6% convertible monthly. The annual yield rate over the 10 year period is 8% effective. Calculate .

A. 9600

B. 9650

C. 9700

D. 9750

E. 9800

6. You are given an annuity-immediate paying 10 for 10 years, then decreasing by one per year for

nine years and paying one per year thereafter, forever. The annual effective rate of interest is 4%. Calculate the present value of this annuity.

 A. 119 B. 121 C. 123 D. 125 E. 127 7. A perpetuity with annual payments is payable beginning 10 years from now. The first payment is 50. Each annual payment thereafter is increased by 10 until a payment of 150 is reached. Subsequent

payments remain level at 150. This perpetuity is purchased by means of 10 annual premiums with the first premium of due immediately. Each premium after the first is 105% of the preceding one. The annual effective interest rates are 5% during the first 9 years and 3% thereafter. Calculate .

 A. 281 B. 286 C. 291 D. 296 E. 301 8. A stock is currently selling at 80 per share to yield 10% per annum compounded semi-annually.

The stock is expected to pay dividends at the end of each year forever. The next dividend (payable one year from now) is 2 and is expected to increase at a rate of X% per year. Calculate X.

 A. 7.00 B. 7.25 C. 7.50 D. 7.75 E. 8.00 9. You are given the following information about an investment account:
 Jan. 1, 1999 Mar. 1, 1999 Apr. 1, 1999 T, 1999 Jan. 1, 2000 Account Value 100 108 102 118 130 (Before deposit or withdrawal) Deposit 20 X Withdrawal 12

The time-weighted yield rate for 1999 is 13.61%, and the dollar-weighted yield rate is 12.04%. Calculate T.

 A. May 1 B. July 1 C. September 1 D. October 1 E. November 1 10. On January 1, an investment account is worth 300,000. months later, the value has increased

to 315,000 and 15,000 is withdrawn. months prior to the end of the year, the account is again

worth 315,000 and 15,000 is withdrawn. On December 31, the account is worth 315,000. The annual effective yield rate, using the dollar-weighted method, is 16%. Calculate .

A. 2.00

B. 2.25

C. 2.50

D. 2.75

E. 3.00

SOA/CAS COURSE 2 - INTEREST THEORY - TEST 2 SOLUTIONS

1.

calculator, we get % .

.

Using the unknown interest function on the

2.

Then

Suppose that

is the 3-month interest rate and

,

where

1-month discount rate. Since

and

is the 1-month interest rate equivalent to . is the 3-month discount rate, and

is the

, we have

,

.

3.

have

. Since

.

, it follows that

for an 18-month repayment, we

(interest is at a monthly rate). With monthly payment

so that

4. Bill's deposits form an increasing annuity. For the first 10 years, the annuity is a 10 year increasing

annuity whose first deposit is 100 and subsequent deposits increase by 100 each year. The balance in

the account at the end of the 10th year is . The interest earned in the 11th year is the

interest, at rate , on the balance at the end of 10 years. The interest in the 11th year is

which

told

,

we

are

, and using the unknown interest function on the calculator gives us

 A 5. The balances in the primary account are 100 at start of the first month of the first year, 200 at the

start of the 2nd month of the first year,

The interest generated from that primary account at an interest rate of 1% per month will be 1 at the

, 120 at the

end of the 12th month of the 10th year. These interest payments form a 120 payment (monthly)

increasing annuity and are reinvested at .5% per month. The accumulated value of the reinvested

interest is . At the end of 10 years, the investor has a total amount of

end of the first month of the first year, 2 at the end of the 2nd month of the first year,

, 12,000 at the start of the 12th month of the 10th year.

. To say that the annual yield rate over the 10 year period is 8% effective means that if had been invested at 8% effective, it would have accumulated to 2 , Therefore, , so that . Answer: C

6. The annuity can be broken into 3 parts: 10 payments of 10 each, followed by 9 payments

decreasing by 1 per year from 9 to 1 (from time 11 to 19), followed by a perpetuity of 1 per year (from time 20 on). The total of the present values of the three parts is

.

7. The premiums are paid from the beginning of the first year (time 0) to the beginning of the 10th

year (time 9). The premiums form an annuity with geometrically increasing payments, with each payment times as large as the previous payment. Since the interest rate up to time 9 (the end of the first 9 years) is 5%, and is equal to , the accumulated value of the premiums at the time of the 10th premium (which occurs at time 9) is . Time 9 is one year before the

payment in the perpetuity. The perpetuity has payments of 50, 60, 70,

This perpetuity can be expressed as a level perpetuity of 150, 150, 150,

decreasing annuity with payments 100, 90, 80,

From time 9 on, the annual effective interest rate is 3%. The present value of the perpetuity at time 9

is . Since the perpetuity is to be paid for by the premiums, we have

, 150, 150, 150, minus the 10 payment

, 10 .

, and then

.

8.

increase geometrically by

The annual effective rate of interest is . The stock pays annual dividends that

per year. The theoretical price of the stock is Answer: D

.

, so that

9. From Jan 1 to Mar 1, the balance grows from 100 to 108; after the withdrawal of 12 on Mar 1, the

balance is 96 and grows to 102 on Apr 1; after the deposit of 20 on Apr 1 the balance is 122 and

reduces to 118 at time T; after the deposit of X at time T the balance is 118 X and grows to 130 on

Jan 1, 2000. The time-weighted yield is , which we are told is .

It follows that . The withdrawal of 12 occurs at time during the year, the deposit of 20

The equation for the dollar-weighted

return is . We are given that the

The

deposit of occurs at time .67 ( of the year) in the year, which is Sep 1 (8 months into the

year).

dollar-weighted return is .

occurs at time , and the deposit of

occurs at time

.

From the dollar-weighted equation, we get

.

years

remaining until the end of the year), and the second withdrawal of 15,000 occurs years before the

end of the year. The equation for the dollar-weighted return is

Solving for results in .

10. The first withdrawal of 15,000 occurs months after the start of the year (or with