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PRACTICE MULTIPLE CHOICE TEST 4 11

,
.,

~r You are given in atidt = 100. Calculateanj'

o
(A) 100nO (B) nO (D) 100 - nO (E) n - 100
(C;; n - 1000

2. In Fund A, the accumulated value of 1 at any time t > 0 is 1 + t. In Fund B, the accumu-
lated value of 1 at any time t > 0 is 1 + e. T is the time when the force of interest for
Fund A is equal to the force of interest for Fund B. Calculate T.

(A) .41 (B) 1.00 (C) 1.41 (D) 2.00 (E) 2.41

3. Sue loans Betty an amount L, which is repaid by 30 equal annual. payments on an

amortization basis at rate j. Sue remits each payment to a fund earning 6%. The I
accumulated value of the fund immediately following the final deposit is k. Find an .1\

expression for L, given that $301i = m. i"

i
(A) 79.058(1+jm)
km (B) 79.058(1+j)
km

(D) _ km (E) None of

A,B,C,D

4. A loan, for amount A, is to be amortized by n annual payments of 1, based on an interest

rate of i. P is the present value, at interest rate i, of the principal portions of the loan
payments. Determinean expression for (I a)nj .
v2 • 1
(A) ~(A
'1.
- P) (C) -,-(A - P)
'1.

1
(E) (t(A - P)

5. An insurance company owns a 1000 par value 10% bond with semiannual coupons. The
bond will mature for 1000 at the end of 10 years. The company decides that an 8-year bond
would be preferable. Current yield rates are 7% compounded semiannually. The company
uses the proceeds from the sale of the 10% bond to purchase a 6% bond with semiannual
coupons, maturing at par at the end of 8 years. Calculate the par value of the 8-year bond.

(A) 1000
~' 1291
(C) 1306 (D) 1419 (E) 1497
 IT-16

6. In Fund X money a::"..:....-::~:a:es 2,: :~or:eof interest Ot = .01t + .10, for 0 $ t $ 20. In Fund

Y money ac::..::;::'..::a:esa: ~-.:-._.?: e:re:tive rate i. An amount of 1 is invested in each of Fund

X and Fund Y :-::-:: :·e2:S -=-:-.e ';alue of Fund X at the end of 20 years is equal to the value
of Fund Y at r::e e:-:: ::':: :.e2:3. Calculate the value of Fund Y at the end of 1.5 years.

(A) elG (E) e,50

7. The preser.: \'a:-..:e0:' a ?2.Y::1entof 1004 at the end ofT months is equal to the present value
l
of 314 after ::-.or.::., :-l
after 18 months, and 419 after 24 months. The effective annual
interest ra:e is 5° J. Cal=ulate T.

CA) 14 CB) 15 (C) 16 (D) 17 (E) 18

8. A perpetui:y pays 1 at the end of the first year, 2 at the end of the second year, 3 at the end
of the third year, and so on. Which of the following expressions give the present value of
this perpetuity?

CA) I & IT CB) I&ill (C) IT&ill "iP) ITonly (E) None of A, B, C, D

The proceeds of a life insuraJe policy are left on deposit, with interest credited at the end
of each year. The beneficiary makes withdrawals from the fund at the end of each year t,
t = 1,2, .. , , 10. At the minimum interest rate of 3% guaranteed in the policy, the equal
annual withdrawal would be 1000. However the insurer credits interest at 4% for the first
four years and 5% for the next six years. The actual amount withdrawn. at the end of the
year t is Wt = ;;~
Il-t!.D3
, where Ft is the amount of the fund, including interest, prior to
.-
the withdrawal. Calculate WlO .
/
(A) 1160 ffl) 1167 (C) 1172 (D) 1177 (E) 1183

1O. You are given Ot = 1 it.

A payment of 300 at the end oD years and 600 at the end of 6
years has the same present value as a payment of 200 at the end of 2 years and X at the end
of 5 years. Calculate X.

(A) 306 }BJ'/~16 (C) 376 (D) 456 (E) 506

11. A 30-year 10,000 bond that pays 3% annual coupons matures at par. It is purchased to yield
5% for the first 15 years and 4% thereafter. Calculate the amount for accumulation of
discount for year 8.

(A) 78 CB) 83 (C) 88 (D) 93

~'98
 II-17
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12. You are given tv;: Se-:-:~5 ::' ::::.~e-:::.5 Series A is a perpetuity with payments of 1 at the
end of each of :'~e :::-s: : : ::~s :::: :':".ee::d of each of the next 2 years, 3 at the end of each
of the next 2 ;'ea:s, ::.: 5: ::-. 5:::-:es B is a perpetuity with payments of K at the end of
each of the firs: :: :.e:::: : .:: ::: :':'.ee::: of each of the next 3 years, 3K at the end of each of
the next 3 yea:s. a::: 5: ::-. -=-.'.e ~:-esent values of the two series of-payments are equal.
Calculate K.

1/
(da3T
a2j

13. A loan 0:' ; 0.'::: :5 ::::-.c:-::zed'Jy equal annual payments for 30 years at an effective annual
interest rate c:' 5:: =:Je:e:-rr.inethe year in which the interest portion of the payment is most 11

nearly eq'Ja: :c ::-.e-::'::-:' of the payment.

(A) 6 (B) 7 (C) 8 (E) 25

cyf23

14. Fund A is invested at an effective annual interest rate of 3%. Fund 13 is invested at an
effective annual interest rate of 2.5%. At the end of 20 years, the total in the two funds is
.••!j
10,000. At the end of 31 years, the amount in Fund A is twice the amount in Fund 13.
Calculate the total in the two funds at the end of 10 years.

(A) 5732 (B) 6602 (C) 7472 (E) 812

~r7569

You are given the following series of payments: !Iilltl

(i) 100 at time t = 1, 3, 5, .. , , 19

(ii) 200 at time t = 2,4, 6, ... ,20.
An actuary is asked to determine the time, t*, such that the present value of the series of
payments is equal to the present value of a single payment of 3000 made at time t*. Derive
an exact. expressions for.t*, for > O.i
'6' og
(A) - 1 1 [0 +30a-
2v)a-2
21
01
] (B) - i .log [0 + 30a2j
2V)a201]
 ••
••
ll-18

16. Mary purchases a:-:

payments as [0::0'.;5
g
:....-.::e~:......... a:...
'1uity-immediate for 50,000 that makes twenty annual
••
(1')
(ii)
P , 2P ~.'-'l(';:;'-"Q~-,'
•...• &.,.._~_.~J....i. ·o,.,-oughl0·and
,

lO(1,OS:?, E, : ,CI5:,I?, .." 10(1.0510)P in years 11 through 20.

••
The annual e:fe:::';e :r::erest rate is 7% for the first 10 years and 5% thereafter. Calculate P.

(A) 564 (B) 574 }C) 584 (D) 594 (E) 604
•••
••
17. A 1000 par value, 8% bond with quarterly coupons is callable five years after issue. The
bond matures for 1000 at the end of ten years, and is sold to yield a nominal rate of 6%
compounded quarterly under the assumption that the bond will not be called. Calculate the
redemption value, at the end of five years, that will yield the purchaser the same nominal
•••
(ill

rate of 6% compounded quarterly .

••
(A) 1060 (B) 1067 (C) 1073 (D) 1080 ••
•••
•••!
 (
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••
ill-18

•
SOLrTIO~'S TO PRACTICE MULTIPLE CHOICE TEST 4

1 ' ...
••
1.
in o atj dt = El -,.- :-'.'::: = -: .:".- Q;j] = 100.
Solving for a;j' we easily have
••
-
a~=n- 100 - . ,-- .. --,
C .••.••... ,~ •.. ::.::,[_
~
.
•••
••
2. The force of ir:te:-est :c':- L~':.....
:s given by 6A = ftI(~+tt) = 1 ~ t. The force of interest for
••
filii
Fund B is rriven bv ["
~ . -
1 "'~
= t(:_~2)
I-t~
= ~2'
I+t
Then T is the value oft for which 6A = OB,
••
Equating, -1-r-' t = ~,
1- t- so that 1 + t2 = 2t + 2t2, or t2 + 2t - 1 = O. •••
Then T =
-2";"
_.'
/4 '"- 4(1)(-1) = - 2AI or Al. Since T must exceed zero, we have T = .41,
•••
ANSWER A
~

3. The amortization payment is P = aL , so the accumulated value of the fund after the final
30i)

"L _ L(l+j)30 . 8301.06 __ k . 830i)

depOSIt IS a-.
301)
'830/.06 - 8-.
30/;
- k. Thus we have L -
(1+))
,30
8301,06
' Note

tah t (1 +) ')30 = 1+)msmcem=

" (1 +j)30~ - 1 . Th en L =f1..L~~\{70n'Q\,
k .m ANSWE RD

4. The principal portion of the tth payment is vf-Hl, so the present value of all principal portions
n n
is P = 2::
t=]
v~ . vf-H] = 2::
t=l
vn+ I = n . Vn+ 1. Note that the loan payment is 1 = q,~, so that
nl
.. - n· vn
a- a- - n . vn+ I
.---.
a;;r = A.' Recall that (I a);;r = nl t = nl by multiplying both
a-nl - n· vn+1
_ A-P
numerator and denominator by v. Thus we find (I a);;r = --d - d
ANSWERE

5.
(Algebraic solution) The 10% bond sells for P = 1000v2o + 50a201, valued at j = .035
effective semiannually. P is also the price of the 8-year 6% bond, so P = C . vl6 + .03C . aT6j,
also at j = .035. Equating and solving for C we have
1000v2o + 50a2Qi (1000)(.50257) + (50)(14.21241) ANSWERB.
C = v16 + .03aT6j = .57670 + (.03)(12.09416) = 1291.27,
 ID-19

(Calculator solt::iC'r:' T::e 5: :~:::::::or ~he equations P = SOaZOI.035 + 1000v~o35 and

P = (.03C)a:5:::: - C .: :=::: ::a.:-: be implemented on the BA-35 as follows: hit IAC/ONI,
enter 20, hit ~, e::te:- ::5, :-.:: cc:!, enter 50, hit IPMTI, enter 1000, hit IFVI, and then hit ICPTI
IPVltoobtainP= 1::::.:9. Fromthesecondequationabove,wehaveC = 1213.19 16 .
.03aT6j.035+ v.035
Enter 16, hit [S, emer .0::, hit iPMTI, enter 1, hit IFVI, and then hit !CPTllpv/ to obtain .93953 as
the denominator of C. Then C = l~n)J = 1291.27.

6. After 20 years the value of Fund X is

exp [fO 8, dt] = exp [120(.01H.10)dt] ~ exp 1.005t'+.lOt] iO ~ e', which is also the
value of Fund Y. Therefore (1 + i)ZO= e4• We seek (1 + i)I.5 = [(1+i)ZO].075= (e4).075 = e·3,
ANSWERC

7. Since the interest rate is effective annual, an equation of value can be written, in years, as
1004· vT/1Z = 314· V1/1Z + 271· v1S/IZ + 419· VZ4/1Z, where all values are at i = .05. Note
that 314+271 +419 = 1004. By the method of equated time (see KelIison, page 45), an
314(.1..) + 271(l§.) +419(~)
approximation to T is given by '& ;:::; IZ 100~ J? = 1.26560, so T ;:::;15.18,
suggesting Answer B. The exact value ofT is given by

T = _ 12 [ In [(314)(1.0S)-I/IZ + (271)(1.05rIS/1~2 + (419)(1.0SrZ4/1Z] In (1004)]

= 14.987, ANSWERB.

8. The increasing perpetuity-immediate has present value (I a)ool = v + 2vz + 3v3+ ....
Multiplying by (1 +i) and subtracting gives

i'(Ia)ool = (1 +2v+3v2+4v3+ ... ) - (v+2v2+3v3+ ... )

= 1+ v + vZ + v3 + ... = 1~ v = ~.
Therefore (I a)ool = i~' and Iis clearly false.
Substituting i = 1 ~ d gives 12
I-d
= 1 dz d , so IT is true.

Substituting eO + e-o = 1+ i+ v = £ + (1-d)

_
-
I + dd - d2 _
-
i2 + id
id
- idz
=1=tcz' so III isfalse.
Only IT is true, ANSWERD.
 ill-20 ••
9. We are given that W = 1000 wO'.lld exhaust the fund at i = .03, so therefore the initial f..:.: :0
•-
Fo

FI =
= 1000 . aTOj.03' At t
Fo(1.04) =
= 1, J us, before the withdrawal, we have
1000· c::03(1.04). The withdrawal is
-
••
1000· aTOj.D3(1.04) 1000(1.04) .

••
1000· aiOi.03(1.04) _ _
WI = ..
aTOi.03 - Cl 03)
.. aTOi.03 - (1 . 03) , leaVIng
1000(1.04) . a9i.03
FI - = =
•••
W1 1000(1.04)(aTOi.Q3-v.03) 1.03 . At t = 2 we have
1000(1.04)2. a9i03 .. 1000(1.04)2 . a9i.03 1000(1.0..1,:
F2 = 1.03 ' so the WIthdrawal IS W2 = (1 .03) . a9/.03
"- = .,
(1.0.c) .
. 1000(1.04i·aSi03 ... 1000(1.04)4.

••
a6,,1
leaVIng F2 - W2 = 2
(1.03)
. Proceedmg In thIS way we find
(1.03t
.l_ ••
... 1000(1.04)\1.05)5 . aTi 03 ..
In the fund Just after the fourth WIthdrawal, and (1.03)9 . In the fund Just after

the ninth withdrawal. Since aTi.03 = (1.03)-1, this is really 1000(}:0,,4J:l~1.05)5. Finally WlO is ••
••
this balance with interest at 5%, so WlO = 1000~\'~oi;1~1.05)6 = 1166.53, ANSWER B . ••
p
10. The equation of value is 300· v3 + 600· v6 = 200· v2 + X· v5. We need to find .-
••
vn =
300(1 +3)-2 +
exp[-ln8tdt] = exp[-2.1n(l+t)I~] = e1n(J+nrz
600(1 +6)-2 = 200(1 +2)-2 + X(1 +5)-2, so X =
=(1+n)-2.
300 600 200
16 + 1-
36
Thus we have

9"' = 315.82, •
••
fIJII
ANSWERB .
••
••
••
11. (Algebraic solution) At the end of year 7 we have ••
B'V7 = 10,000· V.J~4. v~05 + 300 . aT5j.04 . V~05 + 300 . aSi.05· The interest required for year 8 is
.-,
5% of BV7, and the amount for accumulation of discount (write-up) is the excess of this over the P ,./

coupon of 300. Thus we have

WUg = .05 [(10,000)(.55526)(.67683) + (300)(11.11836)(.67683) + (300)(6.46325)] - 300

- 97.74, ANSWERE.

(Calculator solution) B'V7 can be calculated as follows: Hit IAC/ONI, enter 15, hit lli], enter 4,
hit I%il, enter 300, hit IPMTI, enter 10,000, hit IFVI, and then hit !CPTIIPVIIFV! to compute and
store 8888.16 as the value at time 15 of future bond cash flow. Now enter 8, hitlli], enter 5, hit
I%il, and then hit ICPTIIPVI to obtain B'V7 = 7954.82. Then the write-up is
(7954.82)(.05) - 300 = 97.74.
 12. We have PVA = v + v2 ~ 2:' -::1. ~ - 37.:5 + 3v6 + .,.

="7£1+-: t·- . :- -1. ~.. T -:- .,. -_1(1)

"7£ 1- v2 '

S·lIDl'1ar 1y , pTrVB = ~
K2 - t··0 . ~V: - t"~ . ~
K2 + ' " = ~
K2 ( -----.,.
1 ) ,
1-v~
Equatmg
. ~21 ( 1-v21)
= ~}" -'-'1
1, : - .,)c"
we find K = ~1 -
1 - vv3
= -=,
a3i
a21

13. The interest portion of the payment in year t is P(I_v30-t+I), and we seek the value 0: : :::
which P(1_v31-t) = f, so that v3J-t = ~. Using a 5% interest table we find v8 = .6-t~~.
suggesting t = 23, to the nearest integer. Exactly, using a real calculator, we have
t -_ in (2/3),
M\J ;- 31 -
"
_
22.69,
.
ANS\VER D.

14. lfthe initial funds are A and B, we have A(1.03fo + B(1.025fo = 10,000 and
A(1.03)31 = 2B(1.025)3J. We seek A(1.03)JO + B(1.025)JO. The second given equation :yields
A = 2B(1.025)31
31'
(1.03)
S ub'stltutmg
. th"IS In th e fiIrst equatIOn
.. gIVes

2B(1.025)31 + B(1.025)20 = 10000 so B = 10,000 2107.46,

(1.03)1 J ' (1.025)20 + 2(1.025)31 =
(1.03)11
d A - 2B(1.025)3J - 3624 73
an - (1.03)31 - ..
Therefore we seek 3624.73(1.03)10 + 2107.46(1.025)]0 = 7569.07, ANSWERD.

15. The present value of the series can be found by viewing 100 at each of t= I",. , 20, and
a-
another 100 at t = 2,4, .. , , 20. Thus PV = 100a201 + 100 8~1
21
, and this is equal to 3000vt*.

1 [ a201 ] 1 [a2Ol . 821 + a2Ol]

a20 . a2i + v a20 v +v +v a20

Then vt* = 30 a201 + 821 ' and t* =[ - I6' log

MuItiplyingbyv2,wehavet*=-tlog I =-tlog ' re[c(aUing2
30a21 2 308]21 30a21 I, -0.
that :)Og v]=
ANSWERE
 --
ill_?'1

26, The present value of the f::-s: :er~ payments is P . (I a)iOi,07' The present value 0:" ::-.e .~- ~

payments, at time t = 10, is 10(10P) = lOOP, since each payment is discounted at t-~e:'~-=~-,;cO.:'
(5%) as the growth rate in the payments. Then the total present value at time t = 0 i:

P[C] a)iOi.D7 + 100(1.07)-10] 7' 50,000.

The value of (Ia>i0i,07 is 34.73901, and we then find P = 584.29,

17.
-
The bond has quarterly coupons of20, and yield rate of .015 effective per quarter. Th:lS

P = 20a401,015 + 1000v~015 = 1149.58.

If the bond is called after five years, we seek the redemption value to still yield .015 per q:.:~~~
given the purchase price. Thus

1149.58 = 20a20j,015 +C . V~0015'

so

C = 1149.58-(20)(17.16846)
""TAf"\.A""T
= 1085.85,
ANS\\'"ER :::