Sample FM 5
Sample FM 5
Payments are made to an account at a continuous rate of 100e0.5t from time t = 1 to time t = 3.
The force of interest for this account is δ = 8% .
(A) 313
(B) 432
(C) 477
(D) 606
(E) 657
201.
You are given the following information about a perpetuity with annual payments:
i) The first 15 payments are each 2500, with the first payment to be made three years from
now.
ii) Beginning with the 16th payment, each payment is k% larger than the previous payment.
iii) Using an annual effective interest rate of 3.5%, the present value of the perpetuity is
115,000.
Calculate k.
(A) 1.66
(B) 1.74
(C) 1.78
(D) 1.83
(E) 1.89
103
202.
An insurance company sells an annuity that provides 20 annual payments, with the first payment
beginning one year from today and each subsequent payment 2% greater than the previous
payment.
Using an annual effective interest rate of 3%, the present value of the annuity is 200,000.
(A) 11,282
(B) 16,436
(C) 16,765
(D) 19,784
(E) 24,162
203.
A loan for 10,000 is to be repaid by level annual payments at the end of each year for ten years.
The annual effective interest rate for the loan is 10%, which the bank uses to compute the annual
payment and the balance on the loan at the end of each year. However, for balances during each
year, the bank uses an annual simple interest rate of 10%.
Calculate the balance of the loan halfway through the fourth year.
(A) 7434
(B) 7442
(C) 7885
(D) 8310
(E) 8319
104
204.
DELETED
205.
A company is required to pay 190,000 in 20.5 years. The company creates an investment
portfolio using three bonds with annual coupons, so that its position is Redington immunized
based on an annual effective interest rate of 7%. The table below shows the Macaulay duration
for each of the bonds.
Macaulay Duration
Bond A 10 years
Bond B 15 years
Bond C 30 years
(A) 6,640
(B) 8,630
(C) 11,075
(D) 13,308
(E) 14,240
105
206.
Bond X and Bond Y are n-year bonds with face amount of 10,000 and semiannual coupons, each
yielding an annual nominal interest rate of 7% convertible semiannually. Bond X has an annual
coupon rate of 6% and redemption value c. Bond Y has an annual coupon rate of 5% and
redemption value c + 50. The price of Bond X exceeds the price of Bond Y by 969.52.
Calculate n.
(A) 14
(B) 17
(C) 23
(D) 34
(E) 46
207.
An investor deposited 1000 in each of Bank X and Bank Y. Bank X credits simple interest at an
annual rate of 10% for the first five years and 7% thereafter. Bank Y credits interest at an annual
nominal rate of 5% compounded quarterly. The interest credited in the eighth year by Bank Y
exceeds the interest credited in the eighth year by Bank X by N.
(A) 0.36
(B) 2.14
(C) 20.00
(D) 56.36
(E) 56.93
106
208.
A college has a scholarship fund that pays a sum of money twice a year. The scholarship will pay
out 500 at the end of six months and another 500 at the end of one year. Every year thereafter,
the two semi-annual payments will be increased by 10. For example, in year two, both payments
will be 510 and in year three both payments will be 520.
The scholarship fund earns interest at an annual effective interest rate of 7.5%.
Calculate the fund balance needed today to provide this scholarship indefinitely.
(A) 16,000
(B) 16,589
(C) 16,889
(D) 17,134
(E) 17,200
209.
Sam deposits 5000 at the beginning of each year for ten years. The deposits earn an annual
effective interest rate of i. All interest is reinvested at an annual effective interest rate of 5%.
Calculate i.
(A) 11.6%
(B) 15.6%
(C) 19.1%
(D) 23.2%
(E) 27.6%
107
210.
A loan of 10,000 is repaid at an annual effective interest rate of 8%, with equal payments made
at the end of each year for ten years. The lender immediately deposits each payment into an
account earning an annual effective interest rate of 10%.
Calculate the total amount of interest earned by the lender during the term of the loan.
(A) 11,589
(B) 13,576
(C) 13,751
(D) 14,191
(E) 14,903
211.
A worker is starting an endowment fund for his charity. The fund will accumulate at a nominal
annual interest rate of 12% convertible monthly. Beginning today, the worker will deposit 500
monthly for ten years. No deposits or withdrawals will be made for the subsequent ten years.
Exactly twenty years from today, monthly payments of X will be made to his charity and
continue forever.
Calculate X.
(A) 3270
(B) 3572
(C) 3758
(D) 3796
(E) 3834
212.
Payments of 1000 at the end of each year are paid on a loan of 12,000. The payments are based
on an annual effective interest rate of 10%.
Calculate the outstanding loan balance immediately after the 12th payment.
(A) 909
(B) 10,909
(C) 12,853
(D) 16,277
(E) 20,043
108
213.
A six-year 1000 face amount bond has an annual coupon rate of 8% semiannually. The bond
currently sells for 911.37.
(A) 7.29%
(B) 8.00%
(C) 9.72%
(D) 10.00%
(E) 10.25%
214.
Matthew deposits 100 into Fund X, which earns a nominal annual rate of discount of 12%
convertible quarterly.
At the same time, Sarah deposits 200 into Fund Y, which earns a constant annual force of
interest of 0.08.
Calculate n.
(A) 14.5
(B) 16.6
(C) 17.6
(D) 18.1
(E) 18.6
109
215.
Kevin makes a deposit at the end of each year for 10 years into a fund earning interest at a 4%
annual effective rate. The first deposit is equal to X, with each subsequent deposit 9.2% greater
than the previous year’s deposit. The accumulated value of the fund immediately after the 10th
deposit is 5000.
Calculate X.
(A) 255
(B) 260
(C) 270
(D) 279
(E) 293
216.
An investor pays 962.92 for a ten-year bond with an annual coupon rate of 8% paid
semiannually. The annual nominal yield rate is 10% convertible semiannually.
(A) 117
(B) 122
(C) 127
(D) 132
(E) 137
110
217.
An investor makes deposits into an account at the end of each year for ten years. The deposit in
year one is 1, year two is 2 and so forth until the final deposit of 10 in year ten. The account pays
interest at an annual effective rate of i.
Immediately following the final deposit, the investor uses the entire account balance to purchase
a perpetuity-immediate at an annual effective interest rate of i. The perpetuity makes annual
payments of 10.
(A) 68.0
(B) 72.4
(C) 76.2
(D) 81.3
(E) 91.3
218.
A 25-year loan is being repaid with payments of 1300 at the end of each year. The loan payments
are based on an annual effective interest rate of 8%.
The borrower pays an additional 4000 at the time of the fifth payment and will repay the
remaining balance with a payment of X at the end of each of the subsequent ten years.
Calculate X.
(A) 893
(B) 1300
(C) 1306
(D) 1500
(E) 1902
111
219.
A firm has a liability cash flow of 100 at the end of year two and a second liability cash flow of
200 at the end of year three.
The firm also has asset cash flows of X at the end of years one and five.
Using an annual effective interest rate of 10%, calculate the absolute value of the difference
between the Macaulay durations of the asset and liability cash flows.
(A) 0.018
(B) 0.020
(C) 0.022
(D) 0.024
(E) 0.026
220.
A bank lends 100,000 to Sam. The loan is repaid with level payments at the end of each year for
30 years based on an annual effective interest rate of 5%.
The bank reinvests the loan payments at an annual effective interest rate of 4%.
Calculate the bank’s annual effective yield rate over the 30-year period.
(A) 4.0%
(B) 4.1%
(C) 4.2%
(D) 4.4%
(E) 4.5%
112
221.
A life insurance company sells a two-year immediate annuity with annual payments of 1000 for
a price of 1817.
● The first bond matures in one year and earns an annual effective interest rate of
6%. The second bond matures in two years and earns an annual effective interest
rate of 7%.
● 999.35 is invested in the first bond and 817.65 is invested in the second bond.
● The two bonds are held to maturity.
As long as the effective annual one-year reinvestment rate is at least X% one year from now, the
principal and interest earned will be sufficient to make the two annuity payments.
Calculate X.
(A) 6.0
(B) 6.6
(C) 7.0
(D) 7.3
(E) 7.7
222.
You are given the following term structure of interest rates:
Length of
investment Spot
in years rate
1 7.50%
2 8.00%
3 8.50%
4 9.00%
5 9.50%
Calculate the one-year annual effective rate for the fifth year implied by this term structure.
(A) 9.0%
(B) 9.5%
(C) 10.0%
(D) 10.5%
(E) 11.5%
113
223.
Determine which of the following expressions represents the modified duration for a zero-
coupon bond that is currently priced at an annual effective yield rate i and an n-year maturity.
(A) n
(B) n (1 + i )
n (1 + i )
−1
(C)
n
∑ t (1 + i )
−t
t =1
(D) n
∑ (1 + i )
t
t =1
n
∑ t (1 + i )
−t
t =1
(E) n
∑ (1 + i )
−t
t =1
224.
A company has liabilities of 1000 due at the end of each of the next three years. The company
will exactly match the cash flows of assets and liabilities. The following zero-coupon bonds are
available:
Maturity Yield
1-Year 8%
2-Year 9%
3-Year 10%
Calculate how much more will be invested in the 1-year bond than in the 3-year bond.
(A) 0
(B) 84
(C) 132
(D) 158
(E) 175
114
225.
The table below shows the cash flows for a particular investment and the prevailing
spot rates.
Cash flow n- year
n (at end of year n) Spot rate
1 10 4.0%
2 12 4.5%
3 15 5.5%
4 20 7.0%
(A) 47.33
(B) 48.64
(C) 49.50
(D) 50.04
(E) 51.14
226.
The price of a 36-year zero-coupon bond is 80% of its face value.
A second bond, with the same price, same face value, and same annual effective yield rate, offers
4
annual coupons with the coupon rate equal to of the annual effective yield rate.
9
Calculate the number of years until maturity for the second bond.
(A) 45
(B) 54
(C) 63
(D) 72
(E) 81
115
227.
An investor purchases a 1200 face amount zero-coupon bond for a price of 1000. With respect to
the bond’s annual effective yield rate, the Macaulay duration is four years and the modified
duration is d years.
Calculate d.
(A) 3.33
(B) 3.82
(C) 3.86
(D) 4.00
(E) 4.19
228.
An insurer has a liability that is expected to result in the following cash outflows.
The insurer uses an 8% annual effective interest rate to discount future cash flows.
229.
A company created a portfolio in order to protect its position using Redington immunization.
Under which of the following changes in the yield rate is the immunization strategy guaranteed
to be effective?
116