351.

Bank A lends a certain sum of money at an annual effective interest rate of 7%. The loan is to be
repaid by 16 annual payments of 1000, with the first payment due after one year.

Immediately after receiving the 8th payment, Bank A sells the right to receive the remaining 8
payments to Bank B. Bank A’s yield on the entire transaction is an annual effective interest rate
of 6%.

Calculate the amount that Bank B paid to assume the loan.

(A) 5159
(B) 5541
(C) 5655
(D) 5971
(E) 6210

352.
A zero-coupon bond with a face amount of 1000 sells for a price of 640 and matures in n years,
where n is a whole number.

A second bond has the same price, same time until maturity, and same annual effective yield. It
pays annual coupons at an annual rate equal to 50% of the annual effective yield rate.

Calculate the face value of the second bond.

(A) 780
(B) 805
(C) 830
(D) 855
(E) 880

353.
A bond is priced at 950, giving an annual effective yield to maturity of 9%. At 9%, the
derivative of the price of the bond with respect to the yield rate is − 4750 .

Calculate the Macaulay duration of the bond in years.

(A) 4.59
(B) 4.62
(C) 5.00
(D) 5.41
(E) 5.45

169
354.
An investor purchases a portfolio consisting of three bonds. Bond A has annual coupons of 6%
and matures for its face amount of 1000 in ten years. It is purchased for 1000. Bonds B and C
are zero-coupon bonds, maturing for 1000 each in five and ten years, respectively. All three
bonds have the same yield rate.

Calculate the Macaulay duration in years at the time of purchase of the portfolio with respect to
the common yield rate.

(A) 7.23
(B) 7.43
(C) 7.60
(D) 8.33
(E) 8.38

355.
An individual is to receive 1,000,000 today and 1,000,000 five years from today.

These payments are to be converted to an increasing annual perpetuity, with the first payment, X,
paid today and each succeeding payment 1000 more than the previous payment.

At an annual effective interest rate of 4%, the present value of the two payments is equal to the
present value of the perpetuity.

Calculate X.

(A) 45,074
(B) 47,877
(C) 51,923
(D) 55,000
(E) 66,795

170
356.
0.5
At a force of interest δ t = , 0 ≤ t ≤ 6 an investment of 1000 at time t = 2 will accumulate
5 + 0.5t
to X at time t = 6. At an annual nominal rate of discount of 8% convertible quarterly, an
investment of Y will accumulate to X at the end of two years.

Calculate Y.

(A) 1124
(B) 1129
(C) 1134
(D) 1138
(E) 1143

357.
An annuity has payments of 1000 at the beginning of every three months for six years. Another
annuity has payments of X at the end of the first, third, and fifth years.

At an annual effective rate of 8%, the present values of the two annuities are equal.

Calculate X.

(A) 7931
(B) 7981
(C) 8033
(D) 8085
(E) 8137

171
358.
A retailer offers two payment plans:

i) A 2% discount if paid within 10 calendar days after purchase

ii) Pay the full amount on the 30th day after purchase

Assume a 365-day year.

The implied annual effective yield the buyer is charged for delaying payment from day 1 to day
30 is i.

Calculate i.

(A) 24.3%
(B) 26.8%
(C) 27.9%
(D) 36.5%
(E) 44.6%

359.
A perpetuity pays X at the end of the third year, 2X at the end of the sixth year, 3X at the end of
the ninth year, etc.

At a 6% annual effective interest rate, the present value of the perpetuity is 655.56.

Calculate X.

(A) 2
(B) 17
(C) 20
(D) 33
(E) 39

172
360.
A perpetuity-immediate has monthly payments that increase by 5% every 12 payments. The
initial 12 payments are 500 each.

The present value of this perpetuity-immediate, using an annual effective interest rate of 8% is X.

Calculate X.

(A) 191,881
(B) 197,637
(C) 200,009
(D) 207,231
(E) 209,546

361.
A level monthly contribution of X is required to purchase an annual perpetuity of 5000 that
commences five years from today.

The contributions are made at the end of each month for 60 months. The last contribution is
made at the same time as the first payment from the perpetuity.

The annual nominal interest rate is 12% compounded monthly.

Calculate X.

(A) 402
(B) 483
(C) 510
(D) 544
(E) 581

173
362.
A payment of 55,400 made today returns payments of 10,000 at the beginning of each year for
ten years. These payments are deposited into an account that earns interest at an annual effective
rate of 6% payable at the end of each year. The interest is immediately reinvested at an annual
effective interest rate of 4%. The original payment earns an annual effective yield rate of i over
the ten-year period.

Calculate i.

(A) 9.0%
(B) 9.5%
(C) 10.0%
(D) 10.5%
(E) 11.0%

363.
An investor deposits 1000 at the beginning of each year for five years in a fund earning a 5%
annual effective interest rate. The interest from this fund can be reinvested at a 4% annual
effective interest rate.

Calculate the total accumulated value at the end of five years.

(A) 5058
(B) 5227
(C) 5436
(D) 5641
(E) 5791

364.
Consider an amortization schedule for a loan at interest rate i per period, i > 0, being repaid with
payments of 1 at the end of each period for n periods.

Determine which of the following statements about this schedule is true.

(A) The total interest paid equals n − an .

(B) The total interest paid equals ian .
(C) The total principal repaid equals n − ian .
(D) The principal repaid in payment t equals v n −t .
(E) The total payment amount equals an .

174
365.
A loan of 100 is to have all principal and accrued interest paid at the end of five years. Interest
accrues at an annual effective rate of 5% for the first two years and at a force of interest at time t
1
in years (t > 2) of δ t = .
1+ t

Calculate the equivalent annual effective rate of discount for the five-year period.

(A) 10.9%
(B) 13.0%
(C) 14.6%
(D) 15.4%
(E) 17.1%

366.
The following deposits are made into a fund at the beginning of each year:

Year Deposit
1 100
2 100
3 150
4 150
5 150

The fund earns an annual effective interest rate of 13%.

At the end of the tenth year, the fund is used to purchase a perpetuity-immediate with semiannual
payments of X. The perpetuity earns an annual effective interest rate of 12%.

Calculate X.

(A) 99
(B) 102
(C) 105
(D) 180
(E) 204

175
367.
An investor deposits 225 into a bank at the beginning of each month for 20 years. The bank pays
interest at an annual effective rate of 8%.

At the end of 20 years, the investor uses the money in the bank to buy a 30-year annuity-due with
annual payments of X. These annual payments are based on an annual effective interest rate of
7%.

Calculate X.

(A) 9,642
(B) 9,704
(C) 9,981
(D) 10,317
(E) 10,383

368.
Harry borrows 10,000 from Sally and agrees to repay the five-year loan with equal payments at
the end of each quarter. Interest on the loan is charged at an annual nominal rate of 6%
convertible quarterly.

Immediately after the fourth payment, Harry and Sally get married and Sally forgives the
remaining debt.

Calculate the total interest payments that Sally forgoes receiving by having forgiven the
remaining debt.

(A) 582
(B) 951
(C) 1,088
(D) 1,270
(E) 1,769

176
369.
A loan of 100,000 at an annual effective rate of 9.12% is repaid with level payments at the end of
each month over 15 years. Immediately after the 59th payment is made, the outstanding balance
is refinanced at an annual effective rate of 5.76%. The term of the refinanced loan is 20 years
with level payments at the end of each month.

Calculate the interest portion of the first payment of the refinanced loan.

(A) 375
(B) 378
(C) 381
(D) 384
(E) 387

370.
5000 is borrowed at an annual nominal rate of interest of j convertible monthly. The loan is
repaid with payments of 291.23 at the end of each quarter for 5 years.

Calculate j.

(A) 5.97%
(B) 6.00%
(C) 6.04%
(D) 6.09%
(E) 6.14%

177
371.
The prices for four 1000 face amount zero-coupon bonds are as follows:

Term
Price
(in years)

943.40 1
747.26 5
558.39 10
311.80 20
Determine which of the following statements describes the yield curve underlying these prices.

(A) The yield curve is increasing with constant slope.

(B) The yield curve is flat.
(C) The yield curve is inverted with constant slope.
(D) The yield curve is concave upward.
(E) The yield curve is concave downward.

372.
A five-year 1000 face amount bond with 10% annual coupons is purchased at time of issue for
1216.47 based on an annual effective interest rate of 5%.

Calculate the Macaulay duration.

(A) 2.9
(B) 3.2
(C) 3.7
(D) 4.1
(E) 4.3

178
373.
A loan is originally scheduled to be paid in installments of 1000 payable at the end of each
month for three years. The amortization is calculated with an annual nominal interest rate of 9%
convertible monthly. After paying one full year of scheduled installments, the borrower
increases monthly payments to 2000, resulting in a final drop payment.

Calculate the number of months after the first year that it takes for the borrower to pay
off the loan.

(A) 10
(B) 11
(C) 12
(D) 13
(E) 14

374.
A car dealership offers a 120-month loan for a blue car costing 30,000, with an annual nominal
interest rate of 9% compounded monthly and level end-of-month payments.

The dealership also offers a loan for a red car costing 33,000, with the same interest rate and end-
of-month payments as for the loan for the blue car.

Calculate the number of months needed to pay off the loan for the red car.

(A) 132
(B) 135
(C) 138
(D) 140
(E) 141

375.
Two bonds have the same annual effective yield rate, r, where r > 0. The bonds have Macaulay
duration of 5 years and 6 years with respect to r. One of the bonds has modified duration of 5.76
years while the other bond has modified duration of d years.

Calculate d.

(A) 4.760
(B) 4.800
(C) 5.208
(D) 5.240
(E) 6.912

179
376.
The modified duration of a ten-year zero-coupon bond with an annual effective yield rate of i is
9.26 years.

Based on an annual effective interest rate of i, the Macaulay duration of a ten-year annuity-
immediate with level annual payments is D.

Calculate D.

(A) 4.05
(B) 4.37
(C) 4.51
(D) 4.87
(E) 4.96

377.
A bank offers a loan to each of two borrowers with different credit scores. Both loans are for the
same amount.

The first borrower is charged a monthly effective interest rate of 1% and makes level end-of-
month payments of X for n months to pay off the loan.

The second borrower is charged a monthly effective interest rate of 2.01% and makes level end-
of-month payments of 2.01X for 200 months to pay off the loan.

Calculate n.

(A) 200
(B) 250
(C) 300
(D) 350
(E) 400

180
378.
A 20-year non-callable bond that pays coupons annually has a face amount of 2000. The bond
was bought at a price of 2300 and has an annual effective yield rate of 7%.

A 20-year callable bond with the same annual coupon rate and face amount is callable for 2000
at the end of the 18th or 19th year.

Calculate the maximum price of the callable bond that guarantees an annual effective yield of at
least 7%.

(A) 2268
(B) 2276
(C) 2285
(D) 2293
(E) 2300

379.
An investor deposits 50,000 into a new savings account, which earns an annual effective
discount rate of 3.2%. The investor then withdraws an amount X at the end of every two-year
period. The balance at the end of 12 years, just after the withdrawal, is 45,000.

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

7
45, 000 1
(A)
(1.032)12
+ X ∑
k =1 (1.032)
2( k −1)
= 50, 000
6
45, 000 1
(B)
(1.032)12
+ X ∑
k =1 (1.032)
2k
= 50, 000
6
(C) 45, 000(0.968)12 + X ∑ (0.968) 2 k = 50, 000
k =1
6
45, 000
(D) + X ∑ (0.968) 2 k = 50, 000
(1.032 )
12
k =1

6
1
45, 000 ( 0.968 ) + X ∑
12
(E) 2k
= 50, 000
k =1 (1.032)

181
380.
Annual payments of 240 are made at the end of each year to repay a loan of 3400. The payments
are based on an annual effective interest rate of 4.5%. The loan is settled with a drop payment of
X.

Calculate X.

(A) 1.61
(B) 4.53
(C) 8.83
(D) 12.48
(E) 13.04

381.
You have decided to invest in a newly issued 20-year bond with annual coupons and the
following characteristics:

i) The price at issue is 1321.

ii) The face amount is 1111.
iii) The annual coupon rate is 10%.
iv) The bond is callable for 1111 immediately after the payment of either the 18th or 19th
coupon.

Calculate the minimum possible annual effective yield rate that you can earn.

(A) 7.881%
(B) 7.937%
(C) 7.985%
(D) 8.028%
(E) 8.065%

182
382.
A company would to be protected from large interest rate changes. It has a liability of 5000 due
at time 3, and three possible sets of asset cash flows:

I. A1 = 1511.72 , A4 = 3500.00
II. A2 = 3481.00 , A4 = 1412.20
III. A1 = 2580.95 , A4 = 2625.00

where At is the asset cash flow at time t.

The effective interest rate is 5% per time period.

Determine which set(s) of asset cash flows fully immunize the liability.

(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).

383.
A company's liabilities are 20,000 today and 100,000 five years from today. The Macaulay
duration of the company's liabilities with respect to the market annual effective yield rate is 3.70
years.

Calculate the modified duration of the company's liabilities, in years.

(A) 3.26
(B) 3.31
(E) 3.52
(D) 3.65
(E) 4.14

183
384.
A 15-year bond with a face amount of 5000, a redemption value of C, and an annual coupon rate
of 7% paid quarterly is purchased at a price that yields an annual nominal rate of 5.6%
convertible quarterly.

The amount for amortization of premium in the third coupon payment is 6.88.

Calculate C.

(A) 5150
(B) 5165
(C) 5190
(D) 5235
(E) 5275

385.
A three-year 1000 face amount bond pays coupons of X quarterly. It is bought at a price to yield
an annual nominal rate of 8% convertible quarterly. If the amount of each coupon were doubled,
the purchase price would have to increase by 500 for the bond to maintain the same yield rate.

Calculate X.

(A) 20
(B) 24
(C) 31
(D) 40
(E) 47

386.
An annuity has the first monthly payment of 750 occurring in five years. Each payment
thereafter is 1.0% greater than the preceding payment. The final payment occurs exactly 15
years after the first payment.

The annuity has a present value of P based on an annual nominal interest rate of 7.2%
compounded monthly.

Calculate P.

(A) 136,551
(B) 137,370
(C) 138,440
(D) 189,523
(E) 198,217

184
387.
An investor purchases a geometrically decreasing perpetuity-due that provides annual payments.
The first payment is 1, and each subsequent payment is 1% less than the previous payment.

At the time of purchase, the Macaulay duration of the perpetuity-due is 12.00 years.

Calculate the modified duration of the perpetuity-due, in years, at the time of purchase.

(A) 10.97
(B) 11.11
(C) 11.19
(D) 12.81
(E) 12.88

388.
A restaurant owner takes out a 120-month loan of 10,000 today. To pay off the loan, the owner
will make end-of-month payments of P for each of the first 30 months, 1.1P for each of the
next 40 months, and 1.2P for each of the final 50 months.

The monthly payments are based on an annual nominal interest rate of 6% compounded monthly.

Determine which one of the following is an equation of value that can be used to calculate P.

(A) 10, 000 = Pa30 0.005 + 1.1Pa40 0.005 + 1.2 Pa50 0.005
(B) 10, 000 = Pa30 0.005 + 1.1Pa40 0.005 + 1.2 Pa50 0.005
(C) 10, 000 = Pa30 0.005 + (1.005 )
−30
(1.1Pa 40 0.005 ) + (1.005) (1.2Pa
−40
50 0.005 )
(D) 10, 000 = Pa30 0.005 + (1.005 )
−30
(1.1Pa
40 0.005 ) + (1.005) (1.2Pa
−70
50 0.005 )
(E) 10, 000 = Pa30 0.005 + (1.005 )
−30
(1.1Pa 40 0.005 ) + (1.005) (1.2Pa
−70
50 0.005 )

185
389.
An asset provides equal annual payments, with the first payment occurring one year from today.
Based on an annual effective interest rate of j, the present value of the payments provided by the
asset is 10 and the modified duration is 4 years.

If all payments were deferred six years so that payments began at the end of the seventh year, the
modified duration at interest rate j would be 9 years.

If the original set of cash flows is altered by adding a single payment of 3 today, the Macaulay
duration of the altered cash flows is X years, at interest rate j.

Calculate X.

(A) 3.08
(B) 3.42
(C) 3.69
(D) 3.75
(E) 4.04

390.
Company ABC is considering the following three investments:

i) Investment X is a 50-year zero-coupon bond

ii) Investment Y is a perpetuity with annual payments
iii) Investment Z is a geometrically increasing perpetuity with annual payments that
increase at a rate of 3% per year

For both perpetuities, the first payment will occur one year from now.

The convexities of Investments X, Y, and Z are x, y, and z, respectively, based on an annual

effective interest rate of 5%.

Determine which expression represents the relationship between the convexity of the three
investments.

(A) x<z<y
(B) y<x<z
(C) y<z<x
(D) z<x<y
(E) z<y<x

186
391.
A company is considering a project where it expects to pay and receive the following cash flows:

End of
year Cash flow
2 Receives X
4 Pays Y
6 Receives X

When calculated using an annual effective rate of i (i > 0), the present value of this project is
equal to 0.

Determine i.

Y ± Y 2 − 4X 2
(A)
2X
Y ± Y 2 − 4X 2
(B) −1
2X
−Y ± Y 2 − 4 X 2
(C) −1
2X
2X
(D) −1
−Y ± Y − 4 X
2 2

2X
(E) −1
Y ± Y − 4X
2 2

392.
Payments of 200 are invested at the beginning of each year for five years. The payments earn
interest at an annual effective interest rate of i. The interest is reinvested at the end of each year
at an annual effective rate of 6.00%. At the end of the five-year period, the value of the fund
including both the sum of the annual payments and the accumulated value of the interest is 1260.

Calculate i.

(A) 8.00%
(B) 8.75%
(C) 10.00%
(D) 11.25%
(E) 12.25%

187
393.
An annual perpetuity-due pays 20,000 for the first five years and 50,000 thereafter.

At an annual effective interest rate of 3% for the first five years and i thereafter, the present value of the
perpetuity is 1,000,000.

Calculate i.

(A) 4.50%
(B) 4.75%
(C) 5.00%
(D) 5.50%
(E) 5.85%

394.
1
Given a force of interest δ t = , where t is measured in years, calculate the effective rate of
t +8
interest during the 5th year.

(A) 7.4%
(B) 7.7%
(C) 8.0%
(D) 8.3%
(E) 8.7%

395.
At an annual effective interest rate of 5%, the present value of an increasing perpetuity-due with
annual payments of 1, 2, 3, etc., is equal to X.

Calculate X.

(A) 400
(B) 420
(C) 440
(D) 441
(E) ∞

188
396.
The present value of a series of payments of 1 made every six months forever, with the first
payment made immediately, is equal to 23.

Calculate the annual effective rate of interest.

(A) 4.3%
(B) 4.5%
(C) 8.9%
(D) 9.1%
(E) 9.3%

397.
An annuity-immediate has quarterly payments of 100, 200, 300, and 400 each year for ten years.
At a nominal annual rate of 12% convertible quarterly, the present value of the annuity is P.

Determine the equation of value.

(A) P = 100 ( Ia )4 3% a10 12%

(B) P = 100 ( Ia )4 3% a10 12%
(C) P = 100 ( Ia)4 3% a10 12.55%
(D) P = 100 ( Ia)4 3% a10 12%
(E) P = 100 ( Ia )4 3% a 10 12.55%

398.
A perpetuity-immediate has annual payments starting at 1, increasing by 1 each year until it
reaches 10, then decreasing by 1 each year until it reaches 5, and remaining at 5 thereafter.

The present value of this perpetuity at an annual effective interest rate of 9% is X.

Calculate X.

(A) 51
(B) 53
(C) 55
(D) 58
(E) 61

189
399.
Jennifer paid X for a ten-year 10,000 face amount bond at issue with an annual coupon rate of
5% paid annually. She immediately reinvests the coupons at an annual effective interest rate of
8%. The annual effective yield on her investment of X is 8.5% over the ten-year period.

Calculate X.

(A) 7626
(B) 7704
(C) 7987
(D) 8068
(E) 8155

400.
A ten-year loan of 1000 is repaid by level payments at the end of each month at an annual
nominal interest rate of 8%, compounded monthly. The lender invests the repayments at an
annual nominal interest rate of 6%, compounded monthly.

Calculate the lender’s annual effective yield rate.

(A) 6.8%
(B) 6.9%
(C) 7.0%
(D) 7.1%
(E) 7.2%

401.
An investor borrows 13,650 at an annual effective interest rate of 7%. Level payments are made
at the end of each year. The interest paid in the last payment is 65.42.

Calculate the principal repaid in the first payment.

(A) 44.50
(B) 45.00
(C) 45.50
(D) 46.00
(E) 46.50

190