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Practice Problems
Problem 25.1 Calculate the present value of a continuous annuity of 1,000 per annum for 8 years at: (a) An annual eective interest rate of 4%; (b) A constant force of interest of 4%. Problem 25.2 Find the force of interest at which s20 = 3s10 . Problem 25.3 If an = 4 and sn = 12, nd . Problem 25.4 There is $40,000 in a fund which is accumulating at 4% per annum convertible continuously. If money is withdrawn continuously at the rate of $2,400 per annum, how long will the fund last? Problem 25.5 Annuity A oers to pay you $100 per annum, convertible continuously, for the next ve years. Annuity B oers you $ X at the end of each year for ten years. The annual eective interest rate i is 8%. Find X such that you are indierent between the two annuities. Problem 25.6 Given = 0.1. Evaluate
a
(12)

10 a 10

Problem 25.7 d st = (1.02)2t . Calculate . You are given dt Problem 25.8 Given an = n 4 and = 10%, nd
n 0

at dt.

Problem 25.9 Payments will be made to you at a continuous rate of $100 per year for the next ve years. The eective rate of interest over this period is i = 0.06. Calculate the present value of this payment stream. Problem 25.10 d at = Show that dt
t s 1

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THE BASICS OF ANNUITY THEORY

Problem 25.11 (m ) (m ) Show that an < an < an < a n < a n . Hint: See Example 10.15. Problem 25.12 Find an expression for t, 0 < t < 1, such that 1 paid at time t is equivalent to 1 paid continuously between 0 and 1. Problem 25.13 A bank makes payments continuously at a rate of $400 a year. The payments are made between 5 and 7 years. Find the current value of these payments at time 2 years using an annual rate of discount of 4%. Problem 25.14 A company makes payments continuously at a rate of $200 per year. The payments are made between 2 and 7 years. Find the accumulated value of these payments at time 10 years using an annual rate of interest of 6.5%. Problem 25.15 Lauren is being paid a continuous perpetuity payable at a rate of 1000 per year. Calculate the present value of the perpetuity assuming d(12) = 0.12. Problem 25.16 If i = 0.04, calculate the accumulated value of a continuous annuity payable at a rate of 100 per year for 10 years. Problem 25.17 If = 0.06, calculate the present value of a continuous annuity of 1 payable for 20 years. Problem 25.18 n You are given 0 at dt = 100. Calculate an . Problem 25.19 An nyear continuous annuity that pays at a rate of $748 per year has a present value of $10,000 when using an interest rate of 6%, compounded continuously. Determine n. Problem 25.20 Which of the following are true? (I) an
d

(1 + i) = an1 .

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(II) The present value of a 10 year annuity immediate paying 10 per month for the rst eight (12) months of each year is 120a10 a8/12 . (III) The present value of a perpetuity paying one at the end of each year, except paying nothing s every fourth year, is is3 .
4

Problem 25.21 Payments of $3650 per year are made continuously over a ve-year period. Find the present value of this continuous annuity two years prior to the rst payment. Given the nominal rate i(365) = 8%.