MATH2P75

Assignment 2

Dr. Pauline Fu

Assignment 2 (5%)
Due July 2 by 7:00 PM
Introductory Financial Mathematics
MATH 2P75, Spring 2014
Department of Mathematics and Statistics
Brock University
Objectives (weeks 6 to 8)

Calculate future value and present value of both ordinary simple annuities

and ordinary general annuities.

Calculate the fair market value of a cash flow stream that includes an

annuity
Compute the principal balance owed on a loan immediately after any

payment.
Compute the interest rate per payment interval in a general annuity.
Compute the periodic payment in ordinary and deferred annuities.
Compute the number of payments in ordinary and deferred annuities.

Solve the following problems. Show all your work in details. Put
double lines for your answers. Include a cover page showing
your name, student number, email, course name and course
code, assignment number, your instructors name, and the date
of submission. Submit your assignment to your TA: Shahid
Mohammad (sm12dk@brocku.ca)
1. Calculate the future of an ordinary annuity consisting of monthly
payments of $300 for five years. The rate of return was 9%
compounded monthly for the first two years, and will be 7.5%
compounded monthly for the last three years.
For the first 2 years, PMT = $300, n = 2(12) = 24, i =

9%
12

= 0.75%
7.5%

For the subsequent 3 years, PMT = $300, n = 36, i = 12 = 0.625%

The future value, 2 years from now, of the first 24 payments is

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Assignment 2

Dr. Pauline Fu

1 i n 1
1.0075 24 1

i
0
.
0075

= $7856.54

= $300
The future value, 5 years from now, of this amount and the last 36 payments is
1.00625 36 1

36
0
.
00625

= $21,901.45
$7856.54 1.00625
+ $300
2. How much larger will the value of an RRSP be at the end of 20 years
FV PMT

if the contributor makes month-end contributions of $500, instead of

year-end contributions of $6000? In both cases the RRSP earns 7.5%
compounded semiannually.
.

The amount in the RRSP will be the future value of the payments.

For monthly contributions,

PMT = $500, n = 12(20) = 240, i =

7.5%
2

= 3.75%, c =

2
12

c
0 .1 6
and i2 1 i 1 = 1.0375
1 = 0.0061545239
n
1 i 1
FV PMT

1.0061545239 240 1

0
.
0061545239

= $500
= $273,000.71

For annual contributions,

2
1

PMT = $6000, n = 20, i = 3.75%, c =

2
and i = 1.0375 1 = 0.076406250

1.076406250 20 1

0
.
076406250

FV = $6000
= $263,882.50
The value of the RRSP will be
$273,000.71 $263,882.50 = $9118.21 larger
for the case of monthly contributions.

= 0.1 6
7.5 I/Y
P/Y 12 ENTER
C/Y 2 ENTER
240

0 PV
500 + / PMT
CPT FV

Ans: 273,000.71

Same I/Y, PV
P/Y 1 ENTER
C/Y 2 ENTER
20

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6000 + / PMT
CPT FV

Ans: 263,882.50

3. Charlene has made contributions of $3000 to her RRSP at the end of every half year
for the past seven years. The plan has earned 9% compounded semiannually. She has
just moved the funds to another plan earning 7.5% compounded quarterly, and will now
contribute $ 2000 at the end of every three months. What total amount will she have in
the plan five years from now?
The amount is the RRSP will be the future

MATH2P75

Assignment 2

Dr. Pauline Fu

value of all payments. For the past 7 years,

9%

PMT = $3000, n = 2(7) = 14, i = 2 = 4.5%

The amount currently in Charlene's RRSP is
1 i n 1
1.045 14 1

FV PMT

i
0
.
045

= $56,796.33
= $3000
For the next 5 years,
7. 5%

PMT = $2000, n = 4(5) = 20, i = 4 = 1.875%

The amount in the RRSP 5 years from now will be
1.01875 20 1

20
0
.
01875

1.01875
= $130,346.18
$56,796.33
+ $2000

4. The interest rate on a $100,000 loan is 7.5% compounded quarterly.

a. What quarterly payments will reduce the balance to $75,000 after five
year?
b. If the same payments continue, what will be the balance 10 years after
the date that the loan was received?
.
payments

a.

The original loan equals the combined present value of 5 years'

and the $75,000 balance. Substitute
7.5%
PV = $100,000, FV = $75,000, n = 4(5) = 20 and i = 4

= 1.875%
into
1 1 i n

PV PMT

+ FV 1 i
1 1.01875 20

20

0.01875

+ $75,000 1.01875
$100,000 = PMT
Solving for PMT gives PMT = $2916.79.
n

b.
The original loan equals the combined present value of the n = 40
payments made during the first 10 years and the balance (FV) just after those
40 payments.
1 1.01875 40

40

0.01875

+ FV 1.01875
$100,000 = $2916.79
40
FV = ($100,000 $81,567.70) 1.01875
= $38,751.12

The balance after 10 years will be $38,751.12.

5. William wants the value of his RRSP 25 years from now to have the purchasing
power of $400,000 in current dollars.

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Assignment 2

Dr. Pauline Fu

a. Assuming an inflation rate of 2.5% per year, what nominal dollar amount
should William have in his RRSP after 25 years?
b. What contributions should he make at the end of every three months to
achieve the goal if his RRSP earns 7.5% compounded semiannually?

a.

Use formula (8-2) to adjust PV = $400,000 for n = 25 years of

inflation at i = 2.5% per year.
FV PV 1 i n = $400,000 1.025 25 = $741,577.64
William should have $741,577.64 in his RRSP 25 years from now

to have
the same purchasing power as $400,000 current dollars.
b.

The contributions form an ordinary general annuity having

FV = $741,577.64, n = 4(25) = 100, i =

0.5, and

7. 5 %
2

= 3.75%, c = 4 =

i2 1 i c 1 = 1.0375 0.5 1 = 0.01857744

Hence,
1.01857744 100 1

0
.
01857744

$741,578 = PMT
PMT = $2598.90
William should make quarterly contributions of $2598.90.

6. a. How long will it take monthly payments of $600 to repay a $65,000 loan if the
interest rate on the loan is 9.5% compounded semiannually?
b. How much will the time to repay the loan be reduced if the payments are $50
more per month?

a.

Original loan = Present value of all payments

9 .5 %
2
0.1 6
PV = $65,000, PMT = $600, i = 2 = 4.75%, c = 12
,

and
i2 1 i c 1 = 1.0475 0.16 1 = 0.007764383
i PV
0.00776438 3 $65,000

ln 1
ln 1

PMT
$600

n=

ln 1 i
ln 1.00776438 3
=
=
237.86
The loan will be paid off after 238 months or 19 years and 10
months.

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b.
loan will be paid

Assignment 2

Dr. Pauline Fu

If PMT = $650 instead of $600, we obtain n = 193.69. That is, the

off after 194 months or 16 years and 2 months. The time to repay

the loan will be

reduced by (19 years + 10 months) (16 years + 2 months) = 3
years and 8 months.

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