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Financial Math: Annuities and Loans

This document contains 8 practice problems related to calculating present values and interest rates for various annuity payment schedules. Problem 1 asks to calculate the present value of a 20-year annuity with payments every other year plus additional lump sums in years 3, 9, and 15 at a 4% interest rate. Problem 2 asks to find the amount borrowed given a 10-year payment scheme with payments of $1000 every even year and $2000 every odd year at an 8% interest rate. Problem 3 asks to find the payment amount given annual payments over 20 years totaling $80,000 at a 5% interest rate.

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Lim Wei Han
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32 views2 pages

Financial Math: Annuities and Loans

This document contains 8 practice problems related to calculating present values and interest rates for various annuity payment schedules. Problem 1 asks to calculate the present value of a 20-year annuity with payments every other year plus additional lump sums in years 3, 9, and 15 at a 4% interest rate. Problem 2 asks to find the amount borrowed given a 10-year payment scheme with payments of $1000 every even year and $2000 every odd year at an 8% interest rate. Problem 3 asks to find the payment amount given annual payments over 20 years totaling $80,000 at a 5% interest rate.

Uploaded by

Lim Wei Han
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

UECM1403/UECM1404 Theory of Interest

Tutorial 5: More General Annuities

1. A 20-year annuity pays 100 every other year beginning at the end of the second year, with
additional payments of 300 each at the ends of years 3, 9 and 15. The effective annual
interest rate is 4%. Calculate the present value of the annuity. . . .
………………………… …………………………………………….... . . . . Ans: 1310:25

2. On 1 January, 2000 Smith borrows an amount with the following 10-year payment
scheme. 1000 at the end of each even-numbered year, 2000 at the end of each odd-
numbered year. The final payment will be made in 2009. Find assuming annual
effective interest 8%. . . . . . . ... . . . . . . . . . . . . . ………….. . . . . . . ... . . . . . Ans: 9936.08

3. Smith borrows 50,000 on 1 January, 1999. He repays the loan with 20 annual payments
starting 1 January, 2000. The payments in even years (2000, 2002, …) are each of amount
, and the payments in odd years are each of amount . You are given the annual
effective rate of interest is = 0.05, and the total of all 20 loan payments is 80,000. Find
. . . . . . . . . ………………………………………………………... . . . . . . ..Ans: 4497.30

4. Jane purchases a 15-year annuity-immediate that pays 1000 per year at a price of 10,000.
As Jane receives the annuity payments she reinvests them into an account earning a
nominal annual interest rate of compounded monthly. Jane's yield rate on her investment
for the 15-year period is an annual effective rate of interest of 10%. Find .
……………………………………………………………………………….Ans: 12.65%

5. Over a 3-year period, a series of deposits are made to a savings account. All deposits
within a given year are equal in size and are made at the beginning of each relevant
period. Deposits for each year total RM1200. The following chart shows the frequency of
deposits and the interest rate credited for each year:

Frequency of Interest Rate Credited During


Year
Deposits Year
1 Semi-annually ( )
= 6%
2 Quarterly ( )
= 8%
3 Every 2 months = 7%
rd
Find the value of the account at the end of the 3 year. . . . . . . . …….. . .Ans: RM4059.88

6. (SOA May 2005) A discount electronics store announces the following arrangement:
“We don't offer you confusing interest rates. We'll divide your total cost
by 10 and you can pay us that amount each month for a year."

1
UECM1403/UECM1404 Theory of Interest

The first payment is due on the date of sale and the remaining eleven payments at
monthly intervals thereafter. Calculate the effective annual interest rates the store's
customers are paying on their loans. . . . . . . .. ………. . . . . . . ………... . . . .Ans: 51.16%

7. A 5-year continuous annuity has the following schedule of payments:


1 per year in the first year, 2 per year in the 2nd year, 3 per year
in the 3rd year, 2 per year in the 4th year, and 1 per year in the
5th year.
The force of interest is 0.05. Find the present value of the annuity at the start of the first
year……………………………………………………………………………..…Ans: 7.96

8. A perpetuity-due has annual payments that follow the pattern A, B, A, B, …. If the annual
effective rate of interest is 10%, the present value of the perpetuity is 24,619.05. If
nominal annual interest rate compounded semi-annually is 10%, the present value of the
perpetuity is 24,070.12. Find the present value of the perpetuity if the nominal annual
interest rate is 10% compounded quarterly. . . . . . . . . . . . ……….... . . . . . .. . .Ans: 23,792

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