UNIVERSITY OF ILLINOIS AT URBANA-CHAMPAIGN Actuarial Science Program DEPARTMENT OF MATHEMATICS

Math 210 Theory of Interest Prof. Rick Gorvett Fall, 2011

Homework Assignment # 6 (max. points = 10) Due at the beginning of class on Tuesday, October 25, 2011 You are encouraged to work on these problems in groups of no more than 3 or 4. However, each student must hand in her/his own answer sheet. Please show your work enough to show that you understand how to do the problem and circle your final answer. Full credit can only be given if the answer and approach are appropriate. Please give answers to two decimal places e.g., xx.xx% and $xx,xxx.xx . Note: Homework assignments are due at the beginning of the class. If you arrive at the class after it has started, you must hand in your assignment upon entering the classroom. Assignments will not be accepted at the end of the class period.

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Suppose a project requires you to invest $150 now, and $60 two years from now. The project returns $192 one year from now. Find all the yield rates (internal rates of return) of this project. For problem (2) above, find the range of annual interest rates which will produce a net present value greater than zero. For an investment of $1,000 now and $500 five years from now, you can receive a 10year $200 annual payment annuity, with the first payment occurring one year from now. The effective annual interest rate is 10%. Find the net present value of tis investment opportunity. What is the internal rate of return on a project that requires a $10,000 investment now, and provides returns to the investor of $7,000 one year from now and $7,000 two years from now? On 1/1/11 (month/day/year), you deposit $1,000 into a mutual fund. On 1/1/12, the value of your fund is $800. On 1/1/13, the value of your fund is $1,200. On 1/1/14, the value of your fund is $1,500. Find both the geometric and the arithmetic average annual rates of return during your three-year investment period. On 1/1/11, you deposit $40,000 into an account. At the end of each of the next four calendar quarters, the value of the account and the deposit/withdrawal activity is as follows:
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Date 3/31/11 6/30/11 9/30/11 12/31/11

Account Value $ 44,000 32,000 46,000 44,000

Activity $ 6,000 withdrawal 8,000 deposit 4,000 withdrawal -----

(The account values represent the amount in the account immediately before the deposit or withdrawal activity on that date.) Find the time-weighted rate of return on the account during 2011. (7) For problem (6) above, find the dollar-weighted rate of return on the account during 2011. On 1/1/11, you deposit $8,000 into an account. On 8/19/11, your account is worth $10,000, and you then either deposit or withdraw (youll have to determine which) X into or from the account. On 12/31/11, your account is worth $14,000. Your time-weighted rate of return on the account during 2011 was 25%. Find X (and identify whether X was deposited or withdrawn). You invest $5,000 into a fund on 1/1/11. On 7/1/11, you deposit another $2,000 into the fund. On 10/1/11, you withdraw $3,000 from the fund. On 12/31/11, your fund is worth $6,000. What was the annual dollar-weighted rate of return on your investment? You have just inherited an endowment with a principal of $1,000,000. At the end of each year, in perpetuity, you are paid the interest from this endowment; the endowment earns an annual effective interest rate of 7.5% on this $1,000,000 principal. (You cannot touch the principal of the endowment.) You invest each of these interest payments into an account earning an annual effective interest rate of 5%. How much do you have in this account after 20 years (not including the endowment principle)?

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