section 3.

Annuities

Past Exam Questions on Sections 3h and 3i

1. Peter borrows $5,000 from Kevin for a term of 5 years. Peter agrees to pay interest at the end of
each year at an effective annual interest rate of 8% and to repay the entire $5,000 as a lump sum at
the end of 5 years. Immediately after the third payment, Kevin sells his right to future payments to
Martha at a price that will yield Martha an effective annual rate of return of 5%. Determine Kevin’s
overall yield rate. [CAS 5/99 #9]
(A) < 8.6% (B) 8.6%/9.0% (C) 9.0%/9.4% (D) 9.4%/9.8% (E) ≥ 9.8%
2. John’s estate is to be divided into three equal parts and invested, to be paid out as follows:
(i) John’s two children will each receive their share in 20 level annual payments, beginning one
year after John’s death.
(ii) Charity Q will receive its share as equal annual payments in perpetuity beginning 21 years
after John’s death.
Q’s annual payment is twice the annual payment for one child.
Determine the effective interest rate at which the estate is invested. [CAS 11/93 #9]
(A) Less than 5%
(B) At least 5% but less than 5.25%
(C) At least 5.25% but less than 5.50%
(D) At least 5.50% but less than 5.75%
(E) At least 5.75%
3. Bob purchased Amy’s engagement ring on January 1, 1992 with a $10,000 loan. His loan carries
an interest rate of 21% per year convertible monthly. He pays $600 per month starting February 1,
1992, plus an additional $1600 on June 1, 1992. His last payment will be a partial payment.
Determine when he will make the last full payment of $600. [CAS 11/92 #10]
(A) April 1, 1993 (B) May 1, 1993 (C) June 1, 1993 (D) July 1, 1993 (E) August 1, 1993
4. On 1/1/87, Cathy borrows $1,000 from ABS Finance Company and agrees to pay it back in five
annual installments at an annual effective rate of 11%. The first payment is due one year after the
loan is issued. On 1/1/89 Cathy pays off the balance of the loan plus a $50 prepayment penalty. Find
ABC’s effective overall yield rate i. [CAS 5/91 #20]
(A) i < 12.8%
(B) 12.8% ≤ i < 13.0%
(C) 13.0% ≤ i < 13.2%
(D) 13.2% ≤ i < 13.4%
(E) 13.4% ≤ i
5. A renter with $1,104 has a one year lease. The landlord is willing to accept two payment options:
(i) $1,104 now; or
(ii) $100 paid at the beginning of each month for twelve months.
What monthly interest rate would be required for the two options to be equivalent? [CAS 5/90 #20]
(A) less than .012
(B) at least .012 but less than .013
(C) at least .013 but less than .014
(D) at least .014 but less than .015
(E) at least .015
6. Using an annual effective interest rate j > 0, you are given:
(i) The present value of 2 at the end of each year for 2n years, plus an additional 1 at the end of
each of the first n years, is 36.

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 Past Exam Questions on Sections 3h and 3i

(ii) The present value of an n-year deferred annuity-immediate paying 2 per year for n years is 6.
Calculate j. [SOA 11/89 #7]
(A) 0.03 (B) 0.04 (C) 0.05 (D) 0.06 (E) 0.07

7. You are given an n-year annuity-due of one per year plus a final payment at time n + k − 1
(0 < k < 1). The present value of the payments can be simplified to:

1 − vn+k
.
d
Calculate the final payment. [SOA 5/88 #6]
(1+i)k −1 (1+i)k −1
(A) 1 (B) k (C) 1 − k (D) i (E) d

8. A sum, P, is used to buy a deferred perpetuity-due of 1 payable annually. The effective annual rate
of interest is i, i > 0.
Calculate the deferred period. (logs are to the base e) [SOA 11/86 #7]
! "
log(iP)
(A) log P
d (B) 1 − δ (C) − log(iP)
δ (D) 1 + log(dP)
δ (E) log(dP)
δ

9. A 100,000 loan is to be repaid by 30 equal payments at the end of each year. The outstanding balance
is amortized at 4%.
In addition to the annual payments, the borrower must pay an origination fee at the time the loan is
made. This fee is 2% of the loan but does not reduce the loan balance.
When the second payment is due, the borrower pays the remaining loan balance.
Determine the yield to the lender considering the origination fee and the early pay-off of the loan.
[SOA 5/86 #7]
(A) 4.9% (B) 5.0% (C) 5.1% (D) 5.2% (E) 5.3%

10. You are given the following series of payments:

(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 expression for t ∗ for i > 0. (logs are to the base e) [SOA 11/85 #9]
# $
(1+2v)ä
(A) − δ1 log 30a
20
2
# $
(1+2v)ä
(B) − δ1 log 30ä
20
2
# $
(v+2v2 )ä
(C) − δ1 log 30a
20
2
# $
(v+2v2 )a
(D) − δ1 log 30ä
20
2
# $
(v+2v2 )a
(E) − δ1 log 30a
20
2

11. Two perpetuities have the same annual effective interest rate. Perpetuity A pays $8 at the end of each
year for the first 20 years and then $4 at the end of each year thereafter. Perpetuity B is a perpetuity
due which has a level annual payment of $6.

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section 3. Annuities

At time t = 0, the present value of perpetuity A is equal to that of perpetuity B. What is the effective
annual interest rate i? [CAS 5/85 #6]
(A) Less than 3.6%
(B) At least 3.6%, but less than 3.8%
(C) At least 3.8%, but less than 4.0%
(D) At least 4.0%, but less than 4.2%
(E) 4.2% or more
12. A $74.93 loan is to be repaid in two $50 installments. The effective annual rate of interest on the
loan is 3%.
The first installment is due in six years.
When is the second installment due? [CAS 5/84 #12]
(A) 14 years (B) 15 years (C) 16 years (D) 17 years (E) 18 years
13. A person deposits 100 at the beginning of each year for 20 years. Simple interest at an annual rate
of i is credited to each deposit from the date of deposit to the end of the twenty year period. The
total amount thus accumulated is 2,840.
If instead, compound interest had been credited at an effective annual rate of i, what would the
accumulated value of these deposits have been at the end of 20 years? [SOA SAMPLE/83 #12]
(A) 2,980 (B) 3,100 (C) 3,200 (D) 3,310 (E) 3,470
14. Smith deposits $100 at the beginning of each year in Savings Account A and $100 at the beginning
of each year in Savings Account B. At the end of N years the balance in each account is $2,350.
The effective annual rate of interest on Savings Account A is 3.5%.
The effective annual rate of interest on Savings Account B is i% for the first N − 6 years and 5%
for the last six years.
Which of the following is closest to i? [CAS 5/83 #8]
(A) 1.50% (B) 1.75% (C) 2.00% (D) 2.25% (E) 2.50%
15. A loan of $12,000 is to be repaid within one year with level monthly payments, due at the beginning
of each month.
The 12 payments equal $1,000 each. A finance charge of $632 is also due with the first payment.
Which of the following is closest to the effective annual interest rate on the loan? [CAS 5/83 #14]
(A) 12.7% (B) 12.9% (C) 13.1% (D) 13.3% (E) 13.5%

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 Solutions to Past Exam Questions on Sections 3h and 3i

Solutions to Past Exam Questions on Sections 3h and 3i

1. Kevin lends $5,000 in return for the following payments: 8% × $5,000 = $400 at the end of years
1 to 3 plus a lump sum X from Martha, where X = 400a 2 + 5,000v2 at 5% = 743.76 + 4,535.15 =
5,278.91. (X could be determined in one operation on the BA II Plus by entering 2 N 5 I/Y 400 +/–
PMT 5,000 +/– FV CPT PV .) Thus, for Kevin we have:

5,000 = 400a 3 + 5,278.91v3

This can be solved for i on the BA II Plus (while 5,278.91 is still in the display) by entering 2nd
[CLR TVM] FV 3 N 5,000 +/– PV 400 PMT CPT I/Y . The result is i = 9.69% ANS. (D)
2. Let the total value of the estate = 1
1
Payment to each child for 20 years =
3a 20
i
Payment to charity in perpetuity, starting in 21 years =
3v20
% &
i 1 2i
We are given that 3v20
=2 3a = 3(1−v20 )
20
Cancelling i and taking reciprocals:
3! " 1
3v20 = 1 − v20 or v20 =
2 3
Solving for i: i = 5.65%. ANS. (D)
3. Let n = number of months of $600 payments.
21
10,000 = 600a n + 1,600v5 at % = 1.75% per month
12
10,000 − 1,600v5
an = = 14.221567
600
Solve for n on the BA II Plus by entering 1.75 I/Y 14.2216 PV 1 +/– PMT CPT N , resulting in
n = 16.50. Thus, the last full payment of $600 will be made at the end of 16 months (and the drop
payment will be made at the end of 17 months). 16 months after 1/1/92 is 5/1/93. ANS. (B)
4. Cathy makes the following payments:
1,000
= $270.57 at times 1 and 2
a 5 11%

270.57a 3 11% = $661.20 at time 2

(i.e., the PV of the 3 remaining payments)
$50 at time 2 (pre-payment penalty)
Thus, ABC’s equation of value is:

1,000 = 270.57a 2 i + (661.20 + 50)vi2

This can be solved for i on the BA II Plus by entering 2 N 1,000 PV 270.57 +/– PMT 711.20 +/–
FV CPT I/Y . The answer is 13.53%. ANS. (E)
5. 1,104 = 100ä 12 j

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section 3. Annuities

If we want to avoid the [BGN] mode on the BA II Plus calculator, we can substitute 1 + a 11 for
ä 12 , giving: 1,004 = 100a 11j . Enter 11 N 1,004 PV 100 +/– PMT CPT I/Y . The answer is 1.55%.
ANS. (E)
6. 2a 2n + a n = 36
! "
2 a 2n − a n = 6

Solving this pair of simultaneous equations, we get a n = 10, a 2n = 13

a 2n 13 n
= 1 + vn = , v = 0.3
an 10
1 − vn 1 − 0.3
an = = = 10,
j j
0.7
j= = .07 ANS. (E)
10

7. The payments are 1 at the beginning of each year for n years and a final payment (call it X) a
fraction of a year after the last payment of 1, i.e., at time n − 1 + k. (This is an annuity-due, so the
last payment of 1 is at time n − 1.) Thus:

1 − vn+k
= ä n + Xvn+k−1
d
' (
1 − vn+k − (1 − vn)
X= (1 + i)n+k−1
d
' (
v (1 + i)k − 1 (1 + i)k − 1
= = ANS. (D)
d i
% &
8. 1
P = vn
d
ln P = n ln v − ln d
ln(dP) ln(dP)
n= =−
ln v δ
i
Since this answer does not appear, substitute d = 1+i :
)! " *
i
ln 1+i P [ln(iP) − ln(1 + i)]
n=− =−
δ δ
[ln(iP) − δ] ln(iP)
=− = 1− ANS. (B)
δ δ

100,000
9. The scheduled payments are a = 5,783.01 at the end of each year for 30 years and 2% ×
30 4%
100,000 = 2,000 on the date of the loan. The borrower makes 2 payments of 5,783.01 and a payment
of 5,783.01 a 28 .04 = 96,362.66 (the outstanding balance) at time 2. Thus, the lender’s equation of
value is:

100,000 = 2,000 + 5,783.01a 2 j + 96,362.66vj2

This can be solved for j on the BA II Plus by entering 2 N 98,000 PV 5,783.01 +/– PMT 96,362.66
+/– FV CPT I/Y . The answer is 5.0864%. ANS. (C)

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 Solutions to Past Exam Questions on Sections 3h and 3i

10. The PV of the payments is equal to

! " ! "
100 v + v3 + . . . + v19 + 200 v2 + v4 + . . . + v20
+ , + ,
100v 1 − v20 + 200v2 1 − v20
=
1 − v2
100va 20 + 200v2a 20
=
a2

This is equal to 3,000vt∗, so taking natural logs, we get:

-+ , .
∗ 1 v + 2v2 a 20
t = − ln
δ 30a 2

since ln v = −δ ANS. (E)

11. 4
A: PV = + 4a 20
i
6 6(1 + i)
B: PV = =
d i
+ 20
,
4 4 1− v 6(1 + i)
+ =
i i i
4 + 4 − 4v20 = 6 + 6i
2v20 + 3i − 1 = 0
Trial and error shows that i > 4.2% ANS. (E)

12. 74.93 = 50v6 + 50vt at 3%

74.93 − 50v6
vt = = .661116, t = 14 ANS. (A)
50

13. 100[(1 + 20i) + (1 + 19i) + . . . + (1 + i)] = 2,840

(20)(21)
20 + i = 28.4, i = .04
2
At i = .04 compounded:

100s̈ 20 .04 = 3,096.92 ANS. (B)

14. A: 100s̈ N .035 = 2,350, N = 17

B: 100s̈ 11i (1.05)6 + 100s̈ 6 .05 = 2,350

! "
2,350 − 100s̈ 6 .05
6
s̈ 11i = v.05 = 12.206585
100
i = 1.725% ANS. (B)

15. The payments on the $12,000 loan are $1,632 immediately and $1,000 at the end of each of the next
11 months:

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section 3. Annuities

12,000 = 1,632 + 1,000a 11j , where j = monthly effective rate

a 11j = 10.368, j = .999386%

i = (1 + j)12 − 1 = 12.67% ANS. (A)

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