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    QUIZ 1: Theory of Interest

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    DSS
    1) An investment of $1 that doubles in 27.72 years at a force of interest of 2.5% will increase to $9.55 in 90 years at the same nominal rate of 2.5% compounded quarterly. 2) The equivalent annual effective interest rate compounded semi-annually for an annual effective rate of 8% compounded quarterly is 8.247%. 3) For a $1000 loan at 12% compounded semi-annually, with payments of $400 after 1 year, $800 after 4 years, and the balance of $548 after 10 years, the final payment is $548.

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    QUIZ 1: Theory of Interest

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    DSS
    118 views2 pages
    1) An investment of $1 that doubles in 27.72 years at a force of interest of 2.5% will increase to $9.55 in 90 years at the same nominal rate of 2.5% compounded quarterly. 2) The equivalent annual effective interest rate compounded semi-annually for an annual effective rate of 8% compounded quarterly is 8.247%. 3) For a $1000 loan at 12% compounded semi-annually, with payments of $400 after 1 year, $800 after 4 years, and the balance of $548 after 10 years, the final payment is $548.

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    STQM6654 2021/2022 Universiti Kebangsaan Malaysia

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    1) An investment of $1 that doubles in 27.72 years at a force of interest of 2.5% will increase to $9.55 in 90 years at the same nominal rate of 2.5% compounded quarterly. 2) The equivalent annual effective interest rate compounded semi-annually for an annual effective rate of 8% compounded quarterly is 8.247%. 3) For a $1000 loan at 12% compounded semi-annually, with payments of $400 after 1 year, $800 after 4 years, and the balance of $548 after 10 years, the final payment is $548.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    118 views2 pages

    QUIZ 1: Theory of Interest

    Uploaded by

    DSS
    1) An investment of $1 that doubles in 27.72 years at a force of interest of 2.5% will increase to $9.55 in 90 years at the same nominal rate of 2.5% compounded quarterly. 2) The equivalent annual effective interest rate compounded semi-annually for an annual effective rate of 8% compounded quarterly is 8.247%. 3) For a $1000 loan at 12% compounded semi-annually, with payments of $400 after 1 year, $800 after 4 years, and the balance of $548 after 10 years, the final payment is $548.

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    An investment of $1 will double in 27.72 years at a force of interest δ.

    An investment of $1 will
    increase to 9.55 in n years at a nominal rate of discount numerically equal to δ and convertible
    quarterly. Calculate n.

    𝐴(𝑡) = 𝐴(0)𝑒 𝛿𝑡

    (1 + 1) = 𝐴(0)𝑒 27.72𝛿

    2 = 𝐴(0)(1.093 × 1012 )𝛿

    𝛿 = 0.025
    𝑑 4 4𝑛
    𝑃𝑉 = 𝐹𝑉(1 − )
    4
    0.025 4𝑛
    9.55−1 = (1 − )
    4
    4𝑛 = 359.92
    𝑛 = 90

    The rate of discount per annum convertible quarterly is 8%. Calculate the equivalent rate of interest
    per annum convertible half-yearly.
    𝑖𝑚 𝑚 𝑑𝑛
    (1 + ) = (1 − )−𝑛
    𝑚 𝑛
    𝑖2 2 0.08 −4
    (1 + ) = (1 − )
    2 4
    𝑖2 2
    (1 + ) = 1.084
    2
    𝑖2
    1+ = 1.04
    2
    𝑖 2 = 0.08247 = 8.247%

    A loan of $1000 is made at a discount rate of 12% compounded semiannually. The loan is to be
    repaid with three payments: $400 at the end of the first year, $800 at the end of the fourth year and
    the balance at the end of the tenth year. Calculate the amount of the final payment.
    0.12 2×10
    1000 = 𝐹𝑉1 (1 − )
    2
    𝐹𝑉1 = 3447.01
    0.12 18
    400 = 𝐹𝑉2 (1 − )
    2
    𝐹𝑉2 = 1218.31
    0.12 12
    800 = 𝐹𝑉3 (1 − )
    2
    𝐹𝑉3 = 1680.95
    𝐵𝑎𝑙𝑎𝑛𝑐𝑒 = 𝐹𝑉1 − 𝐹𝑉2 − 𝐹𝑉3 = 3447.01 − 1218.31 − 1680.95 = 547.75 = 548

    0.04, 0 < 𝑡 ≤ 5
    The force of interest, δt is: 𝛿𝑡 = {{
    0.01(𝑡 2 − 𝑡), 𝑡 > 5

    Calculate the present value of a unit sum of money due at time t = 10.
    𝑡
    𝐴(𝑡) = 𝐴(0)𝑒 ∫0 𝛿𝑟 𝑑𝑡
    10
    (𝑡 2 −𝑡)𝑑𝑡
    1 = 𝐴(0)𝑒 0.01 ∫5
    1 3 1 2 10
    1 = 𝐴(0)𝑒 0.01[3𝑡 − 𝑒 ]5
    2

    𝐴(0) = 0.078

    0.078 = 𝐴′(0)𝑒 0.04×5


    𝐴′ (0) = 0.0645
    A payment of $3000 is due at time 15 years. Between times 0 to 4 years, the annual effective
    interest rate is 6%. Between times 4 to 8 years, the annual effective discount rate is 8% and between
    times 8 to 15 years, the force of interest is 4%.

    Calculate the present value of the payment at time 0.

    𝐴(𝑡) = 𝐴(0)𝑒 𝛿𝑡

    3000 = 𝐴(0)𝑒 0.04×7


    𝐴(0) = 2267.35
    𝑃𝑉 = 𝐹𝑉(1 − 𝑑)𝑡

    𝑃𝑉 = 2267.35(1 − 0.08)4

    𝑃𝑉 = 1624.31
    𝐹𝑉 = 𝑃𝑉(1 + 𝑖)𝑡

    1624.31 = 𝑃𝑉(1 + 0.06)4

    𝑃𝑉 = 1286.6 = 1287
    The effective rate of discount is 6%. Linda will receive $500 four years from today, $1,000 eight years
    from today, and $2,000 twelve years from today. Find the combined present value of her three
    future cash flows.

    𝑃𝑉1 = 500(1 − 0.06)4 = 390.37

    𝑃𝑉2 = 1000(1 − 0.06)8 = 609.57

    𝑃𝑉3 = 2000(1 − 0.06)12 = 951.84


    𝑃𝑉𝑡𝑜𝑡𝑎𝑙 = 390.37 + 609.57 + 951.84 = 1951.78

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