230.

A bank issues a loan to be repaid by level end-of-year payments for ten years at an annual
effective interest rate of 10%.

The bank invests these payments at an annual effective interest rate of 10% for the first four
years and 7% for the next six years.

Calculate the bank’s annual effective yield rate on this loan over the ten-year period.

(A) 7.90%
(B) 8.20%
(C) 8.33%
(D) 8.67%
(E) 9.10%

231.
Two borrowers obtain loans at the same time. Each loan is for the same amount and is repaid
with level end-of month payments.

The first borrower is charged a monthly effective interest rate of i and makes payments of P for k
months to pay off the loan, where k is a positive integer.

The second borrower is charged a monthly effective interest rate of j and makes payments of 120
for 5k months to pay off the loan.

You are given that 0 < j < 0.04 and that i = (1 + j ) − 1 .

5

Determine which statement about P is true.

(A) 400 < P ≤ 450

(B) 450 < P ≤ 500
(C) 500 < P ≤ 550
(D) 550 < P ≤ 600
(E) 600 < P ≤ 650

117
232.
A loan of 4000 has an annual effective interest rate of 5%. The loan is repaid by payments of 250
at the end of each year for ten years along with a final balloon payment at the end of the eleventh
year.

Calculate the outstanding loan balance at the beginning of the seventh year.

(A) 3593
(B) 3660
(C) 3790
(D) 3856
(E) 3910

233.
An investor’s new savings account earns an annual effective interest rate of 3% for each of the
first ten years and an annual effective interest rate of 2% for each year thereafter.

The investor deposits an amount X at the beginning of each year, starting with year 1, so that the
account balance just after the deposit in the beginning of year 26 is 100,000.

Determine which of the following is an equation of value that can be used to solve for X.

11 26
100, 000 1 1
(A) = X∑ k −1
+ X ∑ k −1
(1.03)10 (1.02)15 k =1 (1.03) k =12 (1.02)
10 26
100, 000 1 1
(B) = X∑ +X∑
(1.03)10 (1.02)16 k =1 (1.03)
k
k =11 (1.02)
k

11 26
100, 000 1 1
(C) = X∑ k −1
+ X ∑ k −11
(1.03)10 (1.02)16 k =1 (1.03)
10
k =12 (1.03) (1.02)
11 26
100, 000 1 1
(D) = X∑ k −1
+ X ∑ k −11
(1.03)10 (1.02)15 k =1 (1.03)
10
k =12 (1.03) (1.02)
10 26
100, 000 1 1
(E) = X∑ + X ∑ k −10
(1.03)10 (1.02)16 k =1 (1.03)
k 10
k =11 (1.03) (1.02)

118
234.
A bank issues two 20-year par-value bonds providing annual coupons. Each bond sells for the
same price and provides an annual effective yield rate of 6.5%.

The first bond has a redemption value of 6000 and a coupon of 7.6% paid annually. The second
bond has a redemption value of 7500 and a coupon of r% paid annually.

Calculate r .

(A) 5.6
(B) 5.9
(C) 6.1
(D) 6.7
(E) 7.2

235.
You are given the following information about Bond X and Bond Y:

i) Both bonds are 20-year bonds.

ii) Both bonds have face amount 1500.

iii) Both bonds have an annual nominal yield rate of 7% compounded semiannually.

iv) Bond X has an annual coupon rate of 10% paid semiannually and a redemption value C .

v) Bond Y has an annual coupon rate of 8% paid semiannually and a redemption value
C+K .

vi) The price of Bond X exceeds the price of Bond Y by 257.18.

Calculate K.

(A) −380
(B) −88
(C) 0
(D) 235
(E) 250

119
236.
A perpetuity-immediate with annual payments is priced at X based on an annual effective interest
rate of 10%. The amount of the first payment is 14,000. Each payment, from the second through
the twentieth, is 4% larger than the previous payment. The 21st payment and each subsequent
payment will be 1% larger than the previous payment.

Calculate X.

(A) 185,542
(B) 191,834
(C) 206,540
(D) 208,508
(E) 212,823

237.
An annuity writer sells an annual perpetuity-immediate for 16,000. The first payment is 1,000
and the payments decrease by r% each year.

The annual effective yield rate is 5.7%.

Calculate r.

(A) 0.52
(B) 0.55
(C) 0.62
(D) 0.73
(E) 0.91

238.
A perpetuity makes payments every five years with a first payment of 2 to be paid five years
from now. Each subsequent payment is 10 more than the previous payment. The annual
effective interest rate is 9%.

Calculate the present value of the perpetuity.

(A) 34.47
(B) 35.80
(C) 36.33
(D) 37.12
(E) 38.18

120
239.
A four-year 1000 face amount bond, with an annual coupon rate of 5% paid semiannually, has
redemption value of C. It is bought at a price to yield an annual nominal rate of 6% convertible
semiannually. If the term of the bond had been two years, the purchase price would have been
7% less.

Calculate C.

(A) 455
(B) 469
(C) 541
(D) 611
(E) 626

240.
You are given the following information about a fully immunized portfolio:

i) The liability is a single payment of 600,000 due in two years.

ii) The asset portfolio consists of a one-year zero-coupon bond maturing for x and a four-
year zero-coupon bond maturing for y.

iii) The annual effective interest rate is 4.6%.

Calculate x.

(A) 218,800
(B) 325,400
(C) 365,600
(D) 382,400
(E) 402,800

241.
An investor pays 4000 today for a three-year investment that returns cash flows of 1400 at the
end of each year. The cash flows can be reinvested at the positive annual effective interest rate of
i. Using an annual effective rate of interest of 4%, the net present value of this investment is 0.

Calculate i.

(A) 2.5%
(B) 3.0%
(C) 3.5%
(D) 4.0%
(E) 7.0%

121
242.
Susan won the lottery today which will pay an annual perpetuity of X, with the first payment
occurring five years from today.

The perpetuity has a present value of 100,000 based on an annual effective interest rate of 1% for
the first ten years and 5% for all years thereafter.

Calculate X.

(A) 4100
(B) 4224
(C) 4357
(D) 4401
(E) 5696

243.
A 15-year loan of 60,000 is to be repaid with payments of X at the end of each month based on
an annual nominal interest rate of 7.5%, convertible monthly.

When the loan balance is 49,893, the loan is refinanced at an annual nominal interest rate of
6.0%, convertible monthly. Payments remain at X and are paid at the end of each month for as
long as necessary, with a smaller final payment.

Calculate the total number of payments, including the smaller final payment.

(A) 162
(B) 164
(C) 166
(D) 168
(E) 170

244.
Greg buys a 20-year increasing annuity-immediate with annual payments. The first payment is
110 and each succeeding payment is equal to the previous payment plus X. The annuity is priced
at 2000 based on an annual effective interest rate of 10%.

Calculate X.

(A) 16.64
(B) 17.45
(C) 19.19
(D) 21.00
(E) 22.68

122
245.
At an annual effective interest rate of 5%, a 10-year annuity-immediate starting with an annual
payment of 100 increases each year by 15% of the previous year's payment and has a present
value of X.

Calculate X.

(A) 597
(B) 772
(C) 1040
(D) 1247
(E) 1484

246.
A loan of X is repaid with level payments of R payable at the end of each year for n years.

You are given:

i) The interest paid in year 1 is 797.50.

ii) The principal repaid in year n – 4 is 865.

iii) The principal outstanding at the end of year n – 1 is 1144.50.

Determine X.

(A) 9,500
(B) 10,000
(C) 10,500
(D) 11,000
(E) 11,500

123
247.
The amount that must be invested at i% (0% < i% < 10%) to accumulate to Y at the end of three
years at an annual rate of:

i) simple interest of i% is Q

ii) compound interest of i% is R

iii) simple discount of i% is S

iv) compound discount of i% is T

Determine which of the following is true.

(A) Q<R<S<T
(B) R<Q<S<T
(C) S<T<R<Q
(D) T<S<Q<R
(E) T<S<R<Q

248.
Kate buys a five-year 1000 face amount bond today with a 100 discount. The annual nominal
coupon rate is 5% convertible semiannually.

One year later, Wallace buys a four-year bond. It has the same face amount and coupon values as
Kate’s and is priced to yield an annual nominal interest rate of 10% convertible semiannually.
The discount on Wallace’s bond is D.

The book value of Kate’s bond at the time Wallace buys his bond is B.

Calculate B – D.

(A) 724
(B) 738
(C) 756
(D) 838
(E) 917

124
249.
A company has liabilities of 1000 and 300 due at the end of years two and four, respectively. The
company develops an investment program that produces asset cash flows of X and Y at the end of
years one and three, respectively. The investment portfolio is constructed to match the present
value and duration of the company’s payment obligations based on an annual effective rate of
interest of 5%.

Y
Calculate .
X

(A) 2.14
(B) 2.75
(C) 3.42
(D) 4.05
(E) 4.91

250.
A homeowner borrows 1000 to be repaid with payments at the end of each year for 20 years.
There are two repayment options. The first option is equal annual payments based on an annual
effective interest rate of 3%. The second option is payments of 50 each year plus interest on the
unpaid balance at an annual effective interest rate of i. The total payments under the two options
are the same.

Calculate i.

(A) 2.86%
(B) 3.00%
(C) 3.28%
(D) 3.44%
(E) 4.76%

251.

A debt is amortized with 120 level payments at the end of each month based on an annual
effective interest rate of 8%. The amount of principal in the sixth payment is 600.

Calculate the amount of principal in the 24th payment.

(A) 532
(B) 673
(C) 700
(D) 704
(E) 784

125
252.
2
Fund X accumulates at a force of interest of δ t = , where t is measured in years,
1 + 2t
0 ≤ t ≤ 20 . Fund Y accumulates at an annual effective interest rate of i. An amount of 1 is
invested in each fund at time t = 0. After 20 years, Fund X has the same value as Fund Y.

Calculate the value of Fund Y after five years.

(A) 2.46
(B) 2.53
(C) 2.60
(D) 2.67
(E) 2.74

253.
You have the option of purchasing one of the following two annuities-immediate:

i) The first annuity makes annual payments of 1000 for 20 years.

ii) The second annuity is a perpetuity that also has annual payments. The
payment in each of the first 10 years is 600. Beginning in year 11, the
payments increase to 1200, and remain at 1200 forever.

At an annual effective interest rate of i > 0 , both annuities have a present value of X.

Calculate X.

(A) 8700
(B) 8750
(C) 8800
(D) 8850
(E) 8900

126
254.
S perpetuity-immediate is purchased at a price of 5000 based on an annual effective rate of i,
where i > 0 . The perpetuity pays 150 in the first year and increases by 10 each year thereafter.

Calculate i.

(A) 5.7%
(B) 6.2%
(C) 6.7%
(D) 7.2%
(E) 7.7%

255.
Erin borrows X at an annual effective rate of 5%. If the principal and all accumulated interest is
paid in one lump sum at the end of 20 years, 1000 more in interest would be paid than if the loan
was repaid with level payments at the end of each of the first ten years.

Calculate X.

(A) 389
(B) 540
(C) 704
(D) 736
(E) 954

256.
A 20-year loan of 500 based on a 5% annual effective interest rate is repaid with level
installments at the end of each year.

Determine the installment in which the principal and interest portions are most nearly equal to
each other.

(A) 1st
(B) 7th
(C) 10th
(D) 13th
(E) 20th

127
257.
The total present value of 10,000 now and 10,815 two years from now is the same as the present
value of 20,800 one year from now at either of two different annual effective interest rates, x and
y.

Calculate the absolute value of the difference between x and y.

(A) 1.8%
(B) 2.0%
(C) 3.0%
(D) 4.0%
(E) 5.0%

258.
Bond A is a 15-year 1000 face amount bond with an annual coupon rate of 9% paid
semiannually. Bond A will be redeemed at 1200 and is bought to yield 8.4% convertible
semiannually.

Bond B is an n-year 1000 face amount bond with an annual coupon rate of 8% paid quarterly.
Bond B will be redeemed at 1376.69 and is bought to yield 8.4% convertible quarterly.

The two bonds have the same purchase price.

Calculate n.

(A) 12
(B) 14
(C) 15
(D) 16
(E) 18

128
259.
At the end of each year for 60 years, Marilyn makes a deposit to a bank account that credits
interest at an annual effective interest rate of i. She deposits 2 at the end of the first year, and
each subsequent year her deposit increases by 2. At the end of 60 years, Marilyn uses the
accumulated amount to purchase a 5-year annuity-immediate paying annually at the same annual
interest rate of i, with a first payment of X and each subsequent payment increasing by 5%.

Which of the following expressions represents a correct equation of value?

I.
2 ( s60 − 60 )
=
(
X 1 − (1.05v )
5
)
i i − 0.05
II. 2 ( Ia )60 = Xv 60
(1 + 1.05v +  + (1.05v ) )
4

59
III. 2∑ s60−t = X ( v + 1.05v 2 +  + 1.054 v5 )
t =0

(A) I only
(B) II only
(C) III only
(D) I, II, and III
(E) The correct answer is not given by (A), (B), (C), or (D).

260.
The table below defines available zero-coupon bonds and their prices:
Redemption
Years to Bond Price Value
Maturity Per Bond Per Bond
1 961.54 1,000
2 966.14 1,050
3 878.41 1,000

A company chooses to purchase 15 one-year zero-coupon bonds; 20 two-year zero- coupon

bonds; and 30 three-year zero-coupon bonds.

Calculate the Macaulay duration of this portfolio.

(A) 1.97
(B) 2.11
(C) 2.16
(D) 2.20
(E) 2.23

129
261.
On his 65th birthday, an investor withdrew an amount P from a fund of 1,000,000 and withdrew
the same amount on each successive birthday. On the date of his 82nd birthday, the fund was
again equal to 1,000,000 after the withdrawal.

The fund earns an annual effective interest rate of 10%.

Calculate P.

(A) 81,655
(B) 88,915
(C) 90,909
(D) 98,879
(E) 109,729

262.
The first payment of a five-year annuity is due in five years in the amount of 1000. The
subsequent four annual payments increase by 500 each year. The annual effective interest rate is
i.

Determine which of the following formulas gives the present value of the annuity.

(A) v 6 500a5 i  500  Ia 5 i 

 
6  
(B) v 500a5 i  500  Ia5 i 
 
5  
(C) v 500a5 i  500  Ia5 i 
 
(D) v5 500a5 i  500  Ia5 i 
 
(E) v 1000a5 i  500  Ia5 i 
5 
 

130
263.
An 18-year bond, with a price 61% higher than its face value, offers annual coupons with the
coupon rate equal to 2.25 times the annual effective yield rate.

An n-year bond, with the same face value, coupon rate, and yield rate, sells for a price that is
45% higher than its face value.

Calculate n.

(A) 10
(B) 12
(C) 14
(D) 17
(E) 20

264.
A ten-year bond paying annual coupons of X has a face amount of 1000, a price of 450, and an
annual effective yield rate of 10%.

A second ten-year bond has the same face amount and annual effective yield rate as the first
X
bond. This second bond pays semi-annual coupons of . The price of the second bond is P.
2

Calculate P.

(A) 439
(B) 442
(C) 452
(D) 457
(E) 461

131
265.
Consider two loans. Loan A has an initial principal of P0 and an annual nominal interest rate of i,
convertible monthly. Loan B also has an annual nominal interest rate of i, but the interest is
convertible daily.

At the end of the first month, a payment of m is made on Loan A, which includes one month of
interest. The remaining balance on Loan A is then P1 .

Let j be the monthly effective interest rate of Loan B, assuming there are 12 equal months in a
year and 365 days in a year.

Determine which of the following represents j.

12
 1  P1 − P0 + m  
(A) 1 +   −1
 12  P0  
1/12
  P1 − P0 + m  
(B) 1 + 12   −1
  P0  
12
 12  P1 − P0 + m  
(C) 1 +   −1
 365  P0  
12/365
 365  P1 − P0 + m  
(D) 1 +   −1
 12  P0  
365/12
 12  P1 − P0 + m  
(E) 1 +   −1
 365  P0  

132
266.
Let P(0, t) be the current price of a zero-coupon bond that will pay 1 at time t.

Let X be the value at time n of an investment of 1 made at time m, where m < n.

Assume all investments earn the same interest rate.

Determine X.

P(0, m)
(A) −1
P(0, n)
P(0, n)
(B) +1
P(0, m)
P(0, m)
(C) +1
P(0, n)
P(0, m)
(D)
P(0, n)
P(0, n)
(E)
P(0, m)

267.
A borrower planned to repay a loan of L with level payments at the end of each month for 30
years. The loan had an annual nominal interest rate of 6%, convertible monthly. Starting with the
181st payment, the borrower increased the monthly payment to 2000, which enabled the
borrower to pay off the loan five years earlier than planned.

Calculate L.

(A) 253,554
(B) 277,772
(C) 310,414
(D) 330,347
(E) 333,583

133
268.
An insurance company aims to structure a portfolio of assets and liabilities so that:

i) Its assets and liabilities have equal present values and equal modified durations.

ii) The convexity of its assets exceeds the convexity of its liabilities.

Determine which term precisely describes the company’s position.

(A) Diversified
(B) Fully immunized
(C) Fully leveraged
(D) Exactly matched
(E) Redington immunized

269.
A three-year bond with face amount X and a coupon of 4 paid at the end of every six months is
priced at 90.17. A three-year bond with face value of 1.6X and a coupon of 4 paid at the end of
every six months is priced at 132.47. Both have the same yield rate.

Calculate the annual nominal yield rate, convertible semiannually.

(A) 6%
(B) 8%
(C) 9%
(D) 11%
(E) 12%

270.
Prosperity Insurance sells a two-year annuity with equal payments at the end of each year. The
price of this annuity is 9297. Prosperity Insurance creates a portfolio made up of a one-year zero-
coupon bond and a two-year zero-coupon bond to immunize this annuity.

The company uses an annual effective interest rate of 5% to vaue its assets and liabilities.

Calculate the amount invested today in the two-year zero-coupon bond.

(A) 3769
(B) 4535
(C) 4762
(D) 5000
(E) 9297

134
271.
Bond A and Bond B are each five-year 1000 face amount bonds. In addition:

i) Bond A has an annual coupon rate of 5% paid semiannually.

ii) Bond B has an annual coupon rate of 3% paid annually.

iii) The price of Bond B is 100 less than the price of Bond A.

iv) The annual effective yield rate for Bond A is 4%.

Calculate the annual effective yield rate for Bond B.

(A) 4.15%
(B) 4.20%
(C) 4.25%
(D) 4.30%
(E) 4.35%

272.
A 100,000 loan has an annual nominal interest rate of 8% convertible quarterly. The loan will be
repaid with quarterly payments and the first payment is due three months from the date of the
loan.

For the first five years each payment will be 2500. All payments thereafter will be 5000 except
for a final balloon payment, which will be less than 10,000.

Calculate the balloon payment.

(A) 7920
(B) 8078
(C) 9056
(D) 9154
(E) 9237

135
273.
An investor purchases a 20-year, 1000 face amount bond with semiannual coupons at a price
equal to the redemption value of 900. The bond yields an annual nominal rate of 10% convertible
semiannually.

After ten years, the investor sells the bond, yielding to the buyer an annual nominal rate of 8%
convertible semiannually. The investor uses the proceeds to purchase a 10-year, 1000 face
amount bond with redemption value 1100 and semiannual coupons. The yield rate on the new
bond is an annual nominal rate of 8% convertible semiannually.

Calculate the semiannual coupon payment for the new bond.

(A) 34
(B) 38
(C) 41
(D) 45
(E) 50

274.
An insurance company has liabilities due at the end of each of the next two years. The liability due
at the end of the second year is twice that for the first year.

The company uses a combination of the following two bonds to match the liabilities. The second
bond has annual coupons.

Term to maturity (in years) Annual coupon rate Annual effective yield
1 0% 6%
2 5% 8%

Assume both bonds are redeemed at par and the company invests 9465 in the two-year bond.

Calculate the amount the company should invest in the one-year bond to construct an exactly
matched portfolio.

(A) 4245
(B) 4398
(C) 4481
(D) 4717
(E) 4953

136
275.
An insurance company has a single liability due in three years. The company fully immunizes its
position by purchasing one-year and four-year zero-coupon bonds. The face value of the one-
year bond is 20,000 and the face value of the four-year bond is 50,000.

Assume that the yield curve is flat.

Calculate the amount of the liability.

(A) 40,000
(B) 55,699
(C) 69,624
(D) 73,333
(E) 97,500

276.
A perpetuity-immediate pays 20 for 10 years, decreases by 1 per year for 19 years, and then pays
1 per year thereafter. At an annual effective interest rate of 6%, the present value is equal to X.

Calculate X.

(A) 208
(B) 213
(C) 218
(D) 223
(E) 228

277.
An actuary’s child will be going to college 15 years from now. To save for the estimated cost of
2000, the actuary makes deposits into a fund at the end of each year for the next 15 years. The
first deposit is X. Each subsequent deposit is 3% larger than the previous deposit.

The fund earns an annual effective rate of 8%.

Calculate X.

(A) 45
(B) 57
(C) 62
(D) 67
(E) 88

137
278.
Two immediate annuities have the following characteristics:

X: Pays 1/m, m times per year, for 10 years

Y: Pays P at the end of years 2, 4, 6, 8, and 10

You are given

i) The accumulated value at time 1 of 1/m paid at times 1/m, 2/m, …, 1 is 1.0331.
ii) s2 = 2.075 .
iii) The present value of X equals the present value of Y.

Calculate P.

(A) 1.94
(B) 2.01
(C) 2.03
(D) 2.07
(E) 2.14

279.
A debt is amortized with 60 equal monthly payments at an annual effective interest rate of 12%.
The amount of principal in the third payment is 900.

Calculate the amount of principal in the 33rd payment.

(A) 668
(B) 900
(C) 1008
(D) 1195
(E) 1213

138
280.
At the beginning of each year, a payment of 5000 is invested in a fund. The payments earn an
annual effective interest rate of 8%. At the end of each year, the interest is reinvested in the
fund at an annual effective interest rate of 5%. The amount in the fund at the end of ten years,
immediately prior to the 11th annual payment, is X.

Calculate X to the nearest 100.

(A) 67,600
(B) 70,300
(C) 75,700
(D) 78,200
(E) 80,700

281.
A 1000 par value ten-year bond with 7.6% semiannual coupons is bought to yield 6.0%
convertible semiannually.

Calculate the book value of the bond at the end of year six immediately after the coupon
payment.

(A) 1054
(B) 1056
(C) 1059
(D) 1062
(E) 1065

282.
A loan of amount a4 i
is repaid with payments of 1 at the end of each year for four years. The
2
sum of the interest paid in the last two years is equal to 1  i  times the sum of the principal
repaid in the first two years.

Calculate i.

(A) 0.543
(B) 0.567
(C) 0.592
(D) 0.618
(E) 0.645

139
283.
Paul makes one investment of 500 on January 1, 2005 and collects 600 on January 1, 2007 for an
annual effective yield of X%.

Toby invests 100 on January 1, 2005, invests another 100 on January 1, 2006, and collects an
amount Z on January 1, 2007 for an annual effective yield of Y%.

The combination of Paul’s and Toby’s cash flows, produces an annual effective yield of 10%.

Calculate Y % −X %.

(A) 0%
(B) 1%
(C) 2%
(D) 3%
(E) 4%

284.
A ten-year certificate of deposit pays an annual effective interest rate of 8%. If the balance is
withdrawn before the end of ten years, the purchaser can choose between two different penalties:

i) a loss of the last nine months’ interest.

ii) a reduction in the annual effective rate of interest to j.

If the purchaser withdraws the funds after three years, the two penalties are equivalent.

Calculate j.

(A) 5.74%
(B) 5.94%
(C) 6.14%
(D) 6.34%
(E) 6.54%

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285.
An investor deposits 1000 at the beginning of each year for 20 years. The fund earns interest at
an annual effective rate of 9.25%.

At the end of 20 years, the investor wishes to use the fund to purchase a 30-year annuity-due
with monthly payments of 500 based on an annual nominal interest rate of 10% convertible
monthly.

Calculate the balance, if any, in the fund after paying for the annuity.

(A) The fund balance is insufficient to purchase the annuity.

(B) 0
(C) 35
(D) 370
(E) 510

286.
A perpetuity pays 1 at the beginning of each three-month period. Another perpetuity pays X at
the beginning of each four-year period. Using an annual effective interest rate of i, each
perpetuity has a present value of 300.

Calculate X.

(A) 15.41
(B) 15.61
(C) 15.91
(D) 16.21
(E) 16.41

287.
A loan with an annual nominal interest rate of 9%, convertible monthly, is repaid with 60
monthly payments. The first payment is 1000 and each succeeding payment is 2% less than the
previous payment.

Calculate the outstanding loan balance immediately after the 40th payment is made.

(A) 6889
(B) 7289
(C) 7344
(D) 7407
(E) 7862

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288.
A 15-year loan with an annual effective interest rate of 6% has payments of 400 at the end of
each year. At the time of the fifth payment, the borrower pays an extra 1000 and then repays the
balance over five years with a revised annual payment of X.

Calculate X.

(A) 264.13
(B) 435.38
(C) 461.51
(D) 556.46
(E) 698.90

289.
A loan of1500 is to be repaid with payments made at the end of each year for 20 years. There
are two repayment options:

i) equal payments at an annual effective interest rate of 5%

ii) nonlevel payments of interest on the unpaid balance at an
annual effective interest rate of i, plus 75 of principal

The sum of the payments is the same under the two options.

Calculate i.

(A) 5.26%
(B) 5.51%
(C) 5.76%
(D) 6.01%
(E) 6.26%

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290.
A steel company issued a ten-year 1,000,000 face amount bond on March 1, 2002 with an annual
nominal coupon rate of 8% paid semiannually.

On September 2, 2004, Company X paid 1,100,000 for this bond to yield an annual nominal rate
of i convertible semiannually.

Calculate i.

(A) 4.0%
(B) 5.5%
(C) 6.3%
(D) 8.0%
(E) 9.7%

291.
An investor deposits 150 today and receives 100 one year from now and 80 two years from now.

Calculate the annual nominal rate of interest convertible quarterly that the investor earns.

(A) 12.8%
(B) 13.0%
(C) 13.2%
(D) 13.4%
(E) 13.6%

292.
An investor purchases a 30-year bond with a face amount of 1000 and annual coupon rate of 8%
paid semi-annually. The bond is callable at its face value any time following the coupon
payment occurring at the end of the 15th year.

The bond is bought at a premium based on an annual effective yield rate of 7%.

Calculate the purchase price of the bond.

(A) 1067
(B) 1104
(C) 1132
(D) 1141
(E) 1154

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293.
The present value of cash flows at an effective interest rate of i is given by the following
function:

P ( i ) = 100 + 500 (1 + i ) − 1000 (1 + i ) , for i > 0.

−3 −4

Determine which of the following expressions represents the modified duration of these cash
flows.

1500 (1 + i ) − 4000 (1 + i )
−4 −5

(A)
100 + 500 (1 + i ) − 1000 (1 + i )
−3 −4

1500 (1 + i ) − 4000 (1 + i )
−3 −4

(B)
100 + 500 (1 + i ) − 1000 (1 + i )
−3 −4

−1500 (1 + i ) + 4000 (1 + i )
−4 −5

(C)
100 + 500 (1 + i ) − 1000 (1 + i )
−3 −4

−1500 (1 + i ) + 4000 (1 + i )
−3 −4

(D)
100 + 500 (1 + i ) − 1000 (1 + i )
−3 −4

−6000 (1 + i ) + 20, 000 (1 + i )

−5 −6

(E)
100 + 500 (1 + i ) − 1000 (1 + i )
−3 −4

294.
The current yield rates for zero-coupon bonds are as follows:

Term Annual effective

(years) yield rate
1 3.5%
2 4.0%
3 4.0%
4 5.0%

Calculate the implied two-year spot rate at the end of year two.

(A) 1.0%
(B) 4.0%
(C) 4.5%
(D) 5.0%
(E) 6.0%

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295.
The table gives information about the assets and liabilities of three companies.

Assets Liabilities
Present Modified Convexity Present Modified Convexity
Company Value Duration Value Duration
U 200,000 10.2 150 200,000 9.3 148
V 300,000 8.6 85 300,000 8.6 80
W 400,000 15.8 300 400,000 15.8 305

Determine which of the following statements are true.

(I) Company U’s position is immunized against small interest rate changes.
(II) Company V’s position is immunized against small interest rate changes.
(III) Company W’s position is immunized against small interest rate changes.

(A) I only
(B) II only
(C) III only
(D) I, II, and III
(E) The correct answer is not given by (A), (B), (C), or (D).

296.
On the first of the month, Chuck took out a business loan for 50,000, with payments at the end of
each month based on an annual nominal interest rate compounded monthly. Each monthly
payment is equal to 800, except for a final drop payment.

Immediately after the first payment the balance owed was 49,800.

Calculate the number of payments that Chuck needed to pay off the loan.

(A) 115
(B) 117
(C) 119
(D) 121
(E) 123

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297.
A 27-year bond, with a price equal to 75% of its face value, offers annual coupons with the
21
coupon rate equal to of the annual effective yield rate.
37

An n-year zero-coupon bond has the same price, face value, and yield rate.

Calculate n.

(A) 5
(B) 7
(C) 9
(D) 11
(E) 13

298.
An annual perpetuity pays 1 one year from now. Payments will then increase by 4% per year for
5 years and 8% per year thereafter.

Calculate the present value of this perpetuity at an annual effective interest rate of 12%.

(A) 21.13
(B) 23.51
(C) 25.95
(D) 28.87
(E) 31.23

299.
An insurance company has a liability of 2662 that is due at the end of three years. The present
value of this liability is 2000. There are two investments available: a one-year zero-coupon bond
and a four-year zero-coupon bond.

The company wants to find an investment plan that satisfies Redington immunization.

Calculate the amount the company invests in the one-year zero-coupon bond.

(A) 400
(B) 667
(C) 858
(D) 1,000
(E) There is no investment plan that satisfies Redington immunization

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