---- .~._-----~----------_ ..

-,

II-ll

PRACTICE MULTIPLE CHOICE TEST 3

1. A loan of 1000 is made at an interest rate of 12% compounded quarterly. The loan is to be
repaid with three payments: 400 at the end of the first year, 800 at the end of the fifth year,
and the balance at the end of the tenth year. Calculate the amount of the final payment.

(A) 587 (C) 737 (D) 777 (E) 812

~)
/-
658

2. On January 1, 1996, Sam invests 1000 in a fund for which the force of interest at time t is
expressed by .10(t - 1)2, where t is the number of years since January 1,1996. Calculate
the accumulated value of the fund on January 1, 1998.

(A) 1065 (B) 1067

/
(f:) 1069 (D) 1071 (E) 1073

3. You are given Ot = 10~ t 't 2:: O. Calculate a4j'

(A) 2.34 (CB) 2.62 (C) 2.85 (D) 3.01

/
~E) 3.23

4. A car dealer offers to sell a car for 10,000. The current market loan rate is a nominal rate of
interest of 12% per annum, compounded monthly. As an inducement, the dealer offers
100% financing at an effective annual interest rate of 5%. The loan is to be repaid in equal
installments at the end of each month over a four-year period. Calculate the cost to the
dealer of this inducement.

(A) 700 (B) 900 (C) 1100 (D) 1300 (E) 1500

5. A 30-year bond has an annual coupon rate of 6% for the first 10 years, 7% for the next 10
years, 8% for the last 10 years, and matures at its par value of-lOO. The bond is bought to
produce an effective annual yield rate of 7%. Determine an expression for the price of the
bond. (All interest functions are at 7%.)

(A) 6aiOi + 7vlOaiOi + 8v20aiOi + ._ u. }QO ", -

(B) 100

~J 100 - v2°aiOi + aiOi

(D) 7a-301 + 100v30

/ (oE) 100 + v20 aiOi - aiOi

 - -~

;6. Determine the present value of 1 payable at the end of years 7, 11, IS, 19,23, and 27.
J'(

a28i - a4j
(A) (B) CC)
sJi +d f.

r",{1
,---
a28i - a4i a28i - a4j
(D)
sJi - an sJi + an

7. You are given the following information:

(i) The sum of the present values ofa payment of X at the end of 10 years and a ;::2.:.-::-.~:-.:
of Y at the end of 20 years is equal to the present value of a payment of X -;- }' a: ::-.=
end of 15 years.
(ii) X + Y = 100
(iii) i= 5%
!,•
i

(B) 48 (C) 50 (D) 52 (E) 5-: ••

••

8. A bond with coupons equal to 40 sells for P. A second bond with the same maturity value
and term has coupons equal to 30 and sells for Q. A third bond with the same maturity
value and term has coupons equal to 80. All prices are based on the same yield rate, and an
••
coupons are paid at the same frequency. Determine the price of the third bond. Qa
QI
(A) 4P - 4Q CB) 4P +4Q (C) 4Q - 3P (E) 5Q - 4P
1f1. SP - 4Q QJ.
ill
9. The following table gives the pattern of investment year and portfolio interest rates over a
three-ye~r period, where m = 2 is the time after which the portfolio method is applicable.
••
Calendar Year Investment Year Rates Portfolio Calendar Year
of Original Rates of Portfolio
'Y
Investment y ~1 iy+2 Rate y +2
z 9.00% 10.00% 11.00% z+2
z+l 7.00 8.00
z+2 5.00

An investment of 1000 is made at the beginning of each of calenda, yea:-o ::. :: - :. a:1d
z + 2. What is the average annual effective time-weighted rate of reh.:...-=:
:'c:- :::= ::.:e=-yea;
period?

(A) 7.72% (B) 7.96% (C) 8.24%

 II-13

10. A loan of 125,000 w:ll ~= :e::~.: '::. ::a:.ments at the end of each month over 30 years.
Payments for a giver. yea: 2.:-=:=··e: ~:-.: are 2% greater than those for the pre\ious year.
The monthly paY1T.e:-,::':: ::-.e :-:':3: yea: is P. The effective annual interest rate is 5%.
Calculate P.

(A) 516 (C) 537 (D) 547 (E)

558

~. You are given:

I
(i) o = 2t3 ~ 8: .0 < t < 1
t t4 -+-8t- - 16· - -
(ii) i
is the effective ar.I1Ualrate equivalent to Ot.
(iii) Fund X accumulates with simple interest at rate i.
(iv) Fund Y accumulates at Ot.
(v) An amount of 1 is deposited in each fund at time t = O.
At what time, t, is the excess of Fund X over Fund Y a maximum?

(A) .250 (B) .375 (C) .500 (D) .625 (E) .750

12. As settlement of a 100,000 death benefit, a beneficiary elected to take an annuity-immediate

payable monthly for 25 years. The monthly payment was calculated using an effective
annual interest rate of 3%. After making payments for 10 years, the insurance company
decides to increase the monthly payments for the remaining 15 years by changing the
effective annual interest rate to 5%. Calculate the increase in the monthly payment.

(A) 60 (B) 62 (C) 64 (E) 68

/ 13. James iilVests 2000 at an effective annual interest rate of 17% for 10 years. Interest is
payable annually and is reinvested at effective annual rate j. At the end of 10 years, James'
accumulated interest is k. Peter invests 150 at the end of each year for 20 years at effective
annual rate 14%. Interest is paid annually and reinvested at effective annual rate j. Find an

expression for Peter's accumulated interest after 20 years. (In answers, 1 = /:0)

(t/J 21 [0+1)2_1 _ 20] (B) 2! [0+1)2-1 _ 20] (C) 21 [0+1)2-1 - 19]

/ J J 2 J j( 1+1) -1 J J
(D) 2J [0+1)j - 20 ] (E) None of A, B, C, D

14. Which ofthe following are equal to 1?

+ i.

r
alOiO slOi)
/I. 1+ s9I / ~(l+i)lO . alOi - Ss

(A) 1& II (B) I&ill

All (E) None of A, B, C, D
 II-14

15. A perpetuity has pay:::e:::.o ~: ~-:e e:;-:: of each four-year period. The first pa:mer.t at the end
of four years is 1. :::-.:.::-"s"';":5eq:.;entpayment is 5 more than the pre'.-:ous pa:ment.
Calculate the preser.: \"~:...;e::' :':-.:5?erpetuity, given that v4 = .75.

(A) 45 (C) 52 (D) 60 (E) 80

16. For an investment a:::..:...-.:' y:;:.; are given:

--9--
--17
Date --X
118 --
10499
14/1/96
1/1/9730
3/1/96
TI96 I
: :96--
100
Deposit

The time-weighted yield rate is 13.75% and the dollar-weighted yield rate is 12.8:
Calculate T.

(A) 5/1 (C) 7/1 (D) 8/1 (E) 9/:

~6/1

-
17. An investment of 700 is to be used to make payments of 10 at the end of the first year, 20
at the end of the second year, 30 at the end of the third year, and so on, every year for as
long as possible. A smaller final payment is paid one year after the last regular payment.
The fund earns an effective interest rate of 5%. Calculate the amount of the smaller final
payment.

(A) 35 (B) 67 (C) 70 (E) 146

 SOLUTIO~-S TO PRACTICE MULTIPLE CHOICE TEST 3

1. The effective rate c:- ::-.::-=::.: :: ?e~ quarter, and the payments a:e ::"..-:.:'= ~: :'-.= =-:-.::-'....~ ;0 , -
and 40 quarters. S::::= :'-.= ,:~. :: :::e present value of the payments, "-e :-.':'.=

1000 == 400(1.0: -"-:::.:: -::_P(1.03)-40 = 355.39+4429':- :'::.:::-

, or,t, _ :.:.: :: _ ~ ~ C~ _
Then P == • ~ -- --.- --; - - J == 6)7.86 , ANSWERB
t
t
2. The investment :s ::-.'::= .:: : =:. a:1d we seek its value at t == 2. Thus we r.a-.e
t
~
AV ~ 1000· C,C :, Co = 1000, exp [1'.10(t-1)2 dt]
4

,•
== 1000· exp ['10(t-1)31:]
4
== 1000· e·2/3 == 1068.94,

•
3.
a4j == v -+- 1...: - 1..3 - 1...4 == t
r=I exp [- lo r 8t dt] .
C
•
r •
Now - la ,st dt
r 100
== -2 . In (10+t)1r 0 == 2 ·In(lO) - 2 . In (lO+r)
100 100 100 100
== In( (lO+r)
102 2)' so
•
v == (10+r)2' Thus a4j == (11)2 + (12)2 + (13)2 + (14i
•
== 100(.008264 + .006944 + .005917 + .005102) == 2.62,
•
ANSWERB.
•
••
4. Under the dealer's financing plan, the monthly payment is
10,000 10,000 22979 W'th t th . d th b ..
•
12. £2)
41·05
== (12)(1.022715)(3.5460)

borrow 10,000 from a bank, and the dealer would receive all 10,000 at the point of sale. The
== ., I ou e In ucement, e uyer WOUlO

••
••

present value, at point of sale, of the monthly payments that the dealer will receive, vah,:ed at the
••
••
market rate of .01 effective per month, is 229.79a481.01 == 8726.07. Thus the dealer's cost to
offer the inducement is 10,000 - 8726.07 = 1273.93, Al'\SWER D

(Calculator comment: To calculate £2)

41.05 == 112' a481" J where j == (1.051'' 12 - 1, on the R~-
••
35, proceed as follows: Hit IAC/ONI, enter 5, hit 12ndll r> APRI, enter :2, hit ,= •anc t:--.'::-. ::--.::
••
I -;- I, enter 12, hit I = I to obtain j == .4074%. Hit I%il, enter 48, hit Ji... er::er 12. t.:: 2:-.:' : X
ea
IPMTI, and then hit ICPTIIPV! to obtain the annuity value 3.6265.)
••
••
eI
••
••
 ffi-13

5. Straightforwardly, the p:::e ~o.= = 6::':0 + 7vlOaTOT+ 8v20aTOT+ 100v3o, where all functions
are at 7%. This expreSS10:: S:-.:·:· 0 :-.l: ::either (A) nor (D) can be correct. We note that

P - 7(aTOT
+ ?,l:
~ "'~
~ -. . .:: -,:
'- - a-101+ v20a-101+ 100v3o

= 7a301 - c::- - '."::.:~ - :00 (1-.07a30/)

- 100..L 7c:~: - .:~ - : ::a'i'O! - 7a301
= 100 - c.,...,... -

6. PV = V7+t'!!..L;,::_:::_t23+v27

= t.7[1-1;'~/-.
1 -;,~ _ = t.i_v3l
1 - v4 = _(1 1 _
v3_1_) v4(1_-_v_7_) = --a4-1~'
a3i/-a7i .. -. c..wo
whiche];m':1~'Q,

answers (A) and (B). Since the other three answers all have a281 - a4j in the numerator, we
\'_' t'- - v31 _ v4 _ v28 _ (1-v28) - (1-v4) _ a281 - a4j
proceed as foUo \~. 1- v4 - (1 +t.)3 - v - [(1 +t.)3 - 1] + (1 -v ) - s- + a- ,
31 ]/

ANSWERE

7. The given information says thatXvlO + Yv20 = (X + Y)v15 = 100v15 48.10.

ButY = lOO-X, so we have Xv 10+ (100-X)v20 = 48.10,
so X - 48.10 - 100v2o - 48.10 - 37.69 - 4392 ANSWER A
- vlO _ v20 - .6139 - .3769 - .,

8.
We are given P = 40a;j + M· vn, Q = 30a;j + M· vn, and X = 80a;j + M· vn, where

all interest functions are at the same rate. Thus P - Q = 10a;;j" and X - Q = 50a;j' Then

a;j= PiOQ, soX = Q+50(PiOQ) = Q+5(P-Q) = 5P-4Q, ANSWERD

9. The value of the fund on 12/31/ z is 1000(1.09) = 1090.00, at which time the second deposit of
1000 is made. The value of the fund on 12/31/z + 1 is
(1090.00)(1.1 0) + (1000)(1.07) = 2269.00,
at which point the third deposit of 1000 is made. The value of the fund on 12/31/z + 2 is I

(1090.00)(1.10)(1.11) +(1000)(1.07)(1.08) + (1000)(1.05) = 3536.49.

Then the time-weighted rate of return is
.
tT = ( 1090)(2269) 3269.00 - 1 =. 28018 ,
1000 2090 (3536.49)
as an effective rate over the three-year period. The average annual rate is
i = (1.28018)1/3 - 1 = 8.58%,
ill-I 4 •
•
10. The payments for :1-.e:::-s: :-=.::.:- ::.::.·.. e a pres,ent value of p. aT2:; = :: :~~::,=
~'::~:~~---,~=.;
,
f
of the first year.
payments is (1.02)1: :,-55S:':?
S:~..::.:=.:-::- ::.= 7esent value at the beginning of L"-:e5-e:::::
,:he value of the third year's pa}me::'3:; :::.:
~ ::'::z:
~~~::.-=_
.~
,
•
the beginning of the :::::-: :.e.:=.:-,aIld so on. The total present value is t:e:-e:'::-e
•
125,000 = 11.6882::"=:: -ll.02)v+(1.02?if+ .. , + (1.02f9v29:. a:: = __
•
= . '----
1168x"'~~ -,. _ TO.)
1.0~ + (1.02)2+ m m
.. , + (1.02)29] t
•
= .
1168\'1~~ L~-: - (ffi)30]
--." .
'-ill
1 . -
10' -
_ .03
11.68823P(1.05) [1-
1. v)
'-
~-)
(1.02\::'
- --
_ -:-
, ,- -,, --
.c';:',- •
. 125.000
Fmally, P = ".,'":'
<:2 .::()O = 526.01,

1 _ (1Q£)30
. ~-------
~""'-"'::: - •. --
,•
•

(Calculator comment: The ratio 1.?52

1- T.05
equals 1 + v + ... + v29, which is a:::=-.
--.
~ --~
•
L8~ = v = (1-'-j)-1. HitIACIONI, L8i -1 = .02941, hit [X] 1001 = ,[%D, enter30:r..:: :.: •
enter 1, hit IPMTI, hit 12ndIIBGNIICPTI!PV! to obtain a30Jj = 20.3312.) •
o
•
•
11.
First we find aCt) under Ot as aCt) = exp [ lotOr dr] = + 8rof; 8r+ 16 dr] ,which
exp [t)0 r 42r3 •
evaluates to
•
[i = exp [tn(t4+8t2+16)1/2 -In(16)112] •
exp ·In (r4+8r2+ 16)1:]
•
•
= exp [In { (t4+8t'4+ 16)]/2
i=
}] = !(t4+8t2+16)]/2
•
Therefore a(1) = ~(1 + 8 + 16)1/2 = ~(25)1/2 = 1.25, and a(1) - 1 = .25. At time t
•
we have accumulated values ofax(t) = 1 + .25t and ay(t) = ~(t + 8t2 + 16)1/2.
•
Then 6 (t) = ax(t) - ay(t) = 1.25t - ~(t4+8e+16)1/2,
•
and it 6 (t) = .25 - k(t4+8t2+16fI/2 (4t3+16t). Equating the derivative to zero, we find
•
.25 = 1 ( (t4 +8t2+
8' 4t3+16t16) 1/2 ) ' so that 2(t4+8t2+16)1/2 = 4t3 + 16t , or •
2[(t2+4)2] 1/2 = 4t(t2+4), or 2(t2+4) = 4t(t2+4), or 2 = 4t, so t = ~, ANSWERC
••
ea

••
Cl

••
••
••
•t!
e
 12. (AI geralCSoulO.,,_:::,:
b· It' - -" = __ : -l,SO
, th a t(1+")300
z =~t·.._;-
,.'
C1+i')180 = (1.03'::' ~-.: ,::- ~.::-~:arly let i" = (1.05)1/12 - 1, 5e::.z:
(1 +z''')180 = (1.. (-
)~'.:-:
: - :-: --...---:.
" ;:ayment IS a--
. P 1 = 100,000
300/i'
. .
A...
-,.e:- ~ ==,
.
-=:::

..
. '' .. -'Ii-Ja-
180lif
the annuity is P . ':T = • "

':~i' ' and thiS amount IS the t.-:e::~~

(Calculator so:''::: :~. =- e: ?: and Pr be the original and revised payments, respe.:::'.:

basic relatio;:s:-.::;s ::.:-e::': ,000 = Po' a3001J' where j = (1.03)1/12 - I, and

BALI20 = ?:. '::5:.- = Pr' aT86Tk' where k = (1.05)1/12 - 1. This can be impler.:-e::.::-_=
----'-
the BA-:5 as ::::0'.1.'5: Hit IAC/ONI, enter 3, hit 12ndll [> APRI121 = 11...;-1121= II%i!te s-::::--:.
as a perce:1:. e:::e:- 300, hit [R], enter 100,000, hit !PVI, and then hit ICPTllpMTI to c::.:.=
Po = 472.: ~, E:J:er 180, hit [R], then hit ICPTIIPVI to obtain BAL120 = 68,557.02. Enter 5, :-...:::
12ndll :> APR 12 i = 11...;-112I = I~ to compute k and store as a percent. Hit ICPT! IPMT ::
obtainP~ = 538.19. Then the increase is 538.19-472.11 = 66.08.

13.
James earns 340 interest each year, which accumulates at j to 340slOIJ' which is given as k, so
that slOjj = 3~0' Note that, since Peter's first investment is at the end of the first year, his
interest of (150)(.14) = 21 is available at t = 2. By investing another 150 at t = 2, he has
2(21) interest to invest at t = 3, increasing to 19(21) interest at t = 20. The accumulation of the

interest payments is given by 21(1 sh9Tj = 21 [S201'

) j 20 ] . To evaluate
-
8201j, we first note that

(1+j)10 - 1 k 'h (1 ')10 j. k

SlOTj = j = 340' so t at + J = 340 + 1,

so ( 1+J ')20 = ( 1 + j.340k)2 = (1 + 1)2 . Tb us S20Jj = (1+1i - 1 Finally, Peter's

ANSWER A
accumulated interest is 2) ( (1 + 1~2- 1 - 20),

t
 ill-16

aTOj \ 1 +isloj) = aloT [1 + (1+i)IO - 1)

14. = v1°(1+i)10 = 1,yes.
I. • + 89i slOI

n. vlOsTOj - a9i = 1,yes.

An expressions reduce to 1, ANSWER D. (Note: This type of symbolic question can now be
handled by quickly evaluating the expressions at any interest rate to see if they equal 1.)

15.

The sum of the increasing series is found as

x= 1+ 2v4 + 3v8 + '"

v4 + 2v8 + ...
1 + v4 + v8 + ..,

_ 1
In turn 1 + v4
,
+ v8 + '" = _1-4
1- v - .25 = 4.

ThenPV
= v\4) + 5v8 (_4_)
1-v4

16. Recall that the dollar-weighted method uses the dates of deposit and withdrawal, but tr.e t::::e-
weighted method does not. Thus we use the time-weighted result to find X. The equation is

1+iT = 1.1375 100 95 ill

= (104)(99)(118)( 130)
118+x'

.which can be solved for x = 8. The total amount of interest earned is

130 - 100 - 17 - 8 + 9 = 14, and the dollar-weighted equation is

where t is the number of months from date T to the end of the year. The equatior: s'J:-.es :-J~
t = 6.059, so date T is shortly before July 1, A.-"'-:"S·,:,t:R C

-
17. 700 is the present value of ar. mcreasing annuity, so we have

___ . 1i~ - nvn

iJv = 10(1 a);j, or M = 70.

Since this equation cannot be solved explicitly for n, we use trial and error. Eventually we find
(I a)14T = 66.452 and (I a ~T5T = 73.680. Thus we have 14 regular payments and a drop payment
at t = 15. Then

700 = 1O(Ia)14/+R.v15 = 10(66.452)+R·v15,

so

R = 700~~~4.52 = (35.48)(1.05)15 = 73.76,

ANSVlERD