MATH 400 (Theory of Interest) Exam #2

Review Questions
The actual exam will consist of the questions here except that the portions in
red will be different.

1. A family wants to accumulate $50,000 in a college

education fund at the end of 25 years. They plan to deposit
$1000 in the fund at the end of each of the first 10 years
and $1000 + X in the fund at the end of each of the last 15
years. If the fund earns 8% effective, find X.

2. The cash price of an automobile is $30,000. The

buyer is willing to finance the purchase at 15% convertible
monthly and to make payments of $500 at the end of each
month for five years. Find the down payment that will be
necessary.

3. A man borrows $30,000 for 10 years and repays the

loan with level annual payments at the end of each year. If
the loan carries an effective interest rate of 7.5%, find the
amount of interest will he pay over the life of the loan.

4. An annuity provides a payment of n at the end of each

year for 3 years. The effective annual interest rate is 1/n.
Find the present value of the annuity.

5. A worker aged 40 wishes to accumulate a retirement

fund by depositing $3000 at the beginning of each year for
15 years. Starting at age 55, the worker plans to make 25
equal annual withdrawals at the beginning of each year,
with nothing left in the fund immediately after the last
withdrawal. Find the amount of each withdrawal if the
effective rate of interest is 10% during the first 15 years but
only 8% thereafter.

6. Find the present value on January 1 of an annuity

which pays $800 every three months for four years, where
the first payment is on February 1. The rate of interest is
7% convertible semi-annually.

7. A deferred perpetuity-immediate begins payment at

time n with annual payments of $100,000 per year. If the
present value of the perpetuity due is $531,441 and the
effective rate of interest is i = 1/9, find n.

8. Payments of $100 a year are made into a 12-year

annuity immediate. The effective rate of interest is 4% for
the first eight years and 6% for the last four years. Find the
accumulated value of the annuity at the end of the 12-year
period.

9. A loan of $10,000 is to be repaid in annual payments

of $1000 which begin at the end of the eighth year and
continue thereafter for as long as necessary. With an
annual effective interest rate of 6.5%, find each of the
following:
(a) the time for, and the amount of, the smaller additional
payment according to the mathematical model,

(b) the balloon payment which is smaller than each regular

payment and is added to the last regular payment,

(c) the drop payment which is smaller than each regular

payment and is made one month after the last regular
payment.

10. The accumulation function for a certain 5-year

investment is
20
a(t) = 20 t .
(a) Find the effective interest rate for year n.

(b) Find the accumulated value after four years when

deposits of $800 are made at the beginning of each of the
three years.

(c) Find the present value of deposits of $1000 made at

the end of each of the next four years.

11. Find the accumulated value 21 years after the first

payment is made into an annuity on which there are 10
payments of $3000 each made at three-year intervals. The
nominal rate of interest is 7% convertible semi-annually.

12. Find the present value of an annuity that pays $200 at

the beginning of each half-year for 10 years. The interest
rate is 9% compounded three times a year.

13. The there is $60,000 in a fund which is accumulating

at 6% per annum convertible continuously, and today we
begin withdrawing the money continuously at the rate of
$3600 per annum. Find how long the fund will last.

14. A perpetuity-due has annual payments of 3, 6, 9, 12,

15, 18, . If the interest is 8% effective, find the present
value of the perpetuity.

15. Annual deposits are made into a fund at the beginning

of each year for 12 years. The first 7 deposits are $600
each and the deposits increase by 2.5% per year thereafter.
If the fund earns 5% effective, find the accumulated value
at the end of the 12 years.

16. Suppose interest if 7% effective, and the payments for

a perpetuity are 1 at the end of each of the 1st, 2nd, and 3rd
years, 2 at the end of each of the 4th, 5th, and 6th years, 3
at the end of each of the 7th 8th, and 9th years, etc. find the
present value of the perpetuity.

17. A man endows an annuity, the present value of which

is to be split equally between charities A and B. At the end
of each year, charity A will receive a fixed amount for 30
years. And then, beginning at the end of year 31, charity B
will receive $500 at the end of each year in perpetuity.
Find the present value of the annuity.

18. An annuity will begin quarterly payments in 3 months

and continue until a total of 24 payments are made. The
first payment will be $3000, and each payment will be
$300 less than the previous payment. Find the present
value of the annuity.

Answers to MATH 400 (Theory of Interest) Exam #2

Review Questions
1.

X = $9918.85

2.

$8982.70

3.

t = 17.667 years

4.