Past Exam Questions on Section 7c

Past Exam Questions on Section 7c

1. A 10,000 par value 10-year bond with 8% annual coupons is bought at a premium to yield an annual
effective rate of 6%. Calculate the interest portion of the 7th coupon. [5/03 #42]
(A) 632 (B) 642 (C) 651 (D) 660 (E) 667
2. Among a company’s assets and accounting records, an actuary finds a 15-year bond that was
purchased at a premium. From the records, the actuary has determined the following:
(i) The bond pays semiannual interest.
(ii) The amount for amortization of the premium in the 2nd coupon payment was 977.19.
(iii) The amount for amortization of the premium in the 4th coupon payment was 1046.79.
What is the value of the premium? [11/00 #40]
(A) 17,365 (B) 24,784 (C) 26,549 (D) 48,739 (E) 50,445
3. A 1000 par value 5-year bond with 8.0% semiannual coupons was bought to yield 7.5% convertible
semiannually. Determine the amount of premium amortized in the 6th coupon payment. [5/00 #43]
(A) 2.00 (B) 2.08 (C) 2.15 (D) 2.25 (E) 2.34
4. Laura buys two bonds at time 0. Bond X is a 1000 par value 14-year bond with 10% annual coupons.
It is bought at a price to yield an annual effective rate of 8%. Bond Y is a 14-year par value bond
with 6.75% annual coupons and a face amount of F. Laura pays P for the bond to yield an annual
effective rate of 8%. During year 6, the writedown in premium (principal adjustment) on bond X is
equal to the writeup in discount (principal adjustment) on bond Y. Calculate P. [SAMPLE/00 #38]
(A) 1415 (B) 1425 (C) 1435 (D) 1445 (E) 1455
5. A 1000 par value 18-year bond with annual coupons is bought to yield an annual effective rate
of 5%. The amount for amortization of premium in the 10th year is 20. The book value of the bond
at the end of 10 is X. Calculate X. [SAMPLE/00 #39]
(A) 1180 (B) 1200 (C) 1220 (D) 1240 (E) 1260
6. Bryan buys a 2n-year 1000 par value bond with 7.2% annual coupons at a price of P. The price
assumes an annual effective yield of 12%. At the end of n years, the book value of the bond, X, is
n
45.24 greater than the purchase price, P. Assume v12% < 0.5. Calculate X. [SAMPLE/99 #11]
(A) 645 (B) 652 (C) 659 (D) 666 (E) 675
7. You are given:
(i) A 10-year 8% semiannual coupon bond is purchased at a discount of X.
(ii) A 10-year 9% semiannual coupon bond is purchased at a premium of Y .
(iii) A 10-year 10% semiannual coupon bond is purchased at a premium of 2X.
(iv) All bonds were purchased at the same yield rate and have par values of 1000.
Calculate Y . [SOA 11/93 #11]
(A) 31 X (B) 25 X (C) 21 X (D) 23 X (E) X
8. Becky buys an n-year 1,000 par value bond with 6.5% annual coupons at a price of 825.44. The
price assumes an annual effective yield rate of i. The total write-up in book value of the bond during
the first 2 years after purchase is 23.76. Calculate i. (i > 0) [SOA 5/93 #14]
(A) 8.50% (B) 8.75% (C) 9.00% (D) 9.25% (E) 9.50%
9. An n-year 1000 par value bond with 8% annual coupons has an annual effective yield of i, i > 0.
The book value of the bond at the end of the year 3 is 1099.84 and the book value at the end of year
5 is 1082.27. Calculate the purchase price of the bond. [SOA SAMPLE/93 #1]
(A) 1112 (B) 1122 (C) 1132 (D) 1142 (E) 1152

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section 7. Bonds

10. Dick purchases an n-year 1,000 par value bond with 12% annual coupons at an annual effective
yield of i, i > 0. The book value of the bond at the end of year 2 is 1479.65, and the book value at
the end of year 4 is 1439.57. Calculate the purchase price of the bond. [SOA 11/92 #16]
(A) 1510 (B) 1515 (C) 1519 (D) 1523 (E) 1527

11. A bond with a par value of 1000 and 6% semiannual coupons is redeemable for 1100.
You are given:
(i) the bond is purchased at P to yield 8%, convertible semiannually; and
(ii) the amount of principal adjustment for the 16th semiannual period is 5.
Calculate P. [SOA 11/90 #11]
(A) 760 (B) 770 (C) 790 (D) 800 (E) 820

12. On May 1, 1985, a bond with par value 1000 and annual coupons at 5.375% was purchased to
yield an effective annual interest rate of 5%. On May 1, 2000, the bond is redeemable at 1100. The
book value of the bond is adjusted each year so that it equals the redemption value on May 1, 2000.
Calculate the amount of write-up or write-down in the book value in the year ending May 1, 1991.
[SOA 5/90 #13]
(A) 1.25 write-down (B) 0.81 write-down (C) 0.77 write-down (D) 0.81 write-up (E) 0.77 write-up

13. A ten-year bond with par value of $1,000 is purchased to yield 8% convertible semiannually. Par
value equals redemption value. The interest-paid portion of the first semiannual coupon is $44.50.
At what nominal rate of interest convertible semiannually are the coupons paid? [CAS 5/88 #13]
(A) Less than 7.75%
(B) At least 7.75%, but less than 8.50%
(C) At least 8.50%, but less than 9.25%
(D) At least 9.25%, but less than 10.00%
(E) 10.00% or more
14. A 30-year 10,000 bond that pays 3% annual coupons matures at par. It is purchased to yield 5% for
the first 15 years and 4% thereafter. Calculate the amount for accumulation of discount for year 8.
[SOA 11/87 #15]
(A) 78 (B) 83 (C) 88 (D) 93 (E) 98

15. A $1000 par value ten-year 8% bond has semiannual coupons. The redemption value equals the
par value. The bond is purchased at a premium to yield 6% convertible semiannually. What is the
amount for amortization of the premium in the tenth coupon? [CAS 5/87 #15]
(A) Less than $7.20
(B) At least $7.20, but less than $7.25
(C) At least $7.25, but less than $7.30
(D) At least $7.30, but less than $7.35
(E) $7.35 or more.
16. A ten-year 5% bond with semiannual coupons is purchased to yield 6% compounded semiannually.
The par value and redemption value are both $1,000. What is the book value of the bond six years
after issue of the bond? [CAS 5/86 #15]
(A) Less than $960
(B) At least $960, but less than $965
(C) At least $965, but less than $970
(D) At least $970, but less than $975
(E) At least $975

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 Past Exam Questions on Section 7c

17. A 15-year bond with semiannual coupons has a redemption value of $100. It is purchased at a
discount to yield 10% compounded semiannually. If the amount for accumulation of discount in the
27th coupon payment is $2.25, which of the following is closest to the total amount of discount in
the original purchase price? [CAS 5/85 #14]
(A) $39 (B) $40 (C) $41 (D) $42 (E) $43
18. A $1,000 par value bond bearing 4% annual coupons is purchased at a discount to yield an effective
annual rate of 5%. The write-up in value during the first year is $4.36. Which of the following is
closest to the purchase price? [CAS 5/83 #4]
(A) $857 (B) $867 (C) $877 (D) $887 (E) $897
19. A $1,000 par value bond with 4% annual coupons is purchased at a discount ten years prior to the
maturity date. The proceeds of the coupons are invested in a savings account with a 5% effective
annual rate of interest. The effective yield on the ten year investment—including the bond and the
savings account—is 6%. What is the book value of the bond one year after purchase? [CAS 5/83
#9]
(A) Less than $848
(B) At least $848 but less than $852
(C) At least $852 but less than $856
(D) At least $856 but less than $860
(E) $860 or more
20. A ten-year bond bears semiannual coupons of $4 each and has a redemption value of $100. The
bond is purchased to yield 10% compounded semiannually. To the nearest .02, find the amount of
increase in the book value at the time of the tenth coupon payment. [CAS 11/82 #11]
(A) .50 (B) .52 (C) .54 (D) .56 (E) .58

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Solutions to Past Exam Questions on Section 7c

1. Compute the book value at the end of 6 years (B6) and multiply by 6%:

B6 = 800a 4 + 10,000v4 = 10,693.02

I7 = (.06)(10,693.02) = 641.58 ANS. (B)

2. The write-downs are in geometric progression with common ratio (1 + i): 1,046.79 2
977.19 = (1 + i) , where
1
i is the effective rate per 2 -year. ∴ i = 3.5%. The premium = sum of the write-downs
! " # $
= 977.19 v + 1 + (1 + i) + . . . + (1 + i)28 = 977.19 a 1 + s 29 = 48,739.29

ANS. (D)

3. In general, the amount of principal repaid (write-down) in t th coupon Pt = (Fr − Ci)vn−t+1. In this
question,

P6 = (40 − 37.50)v10−6+1 = 2.50v5 = 2.08 ANS. (B)

Note: As an alternative, B5 = 40a 5 + 1,000v5 = 1,011.21. I6 = .0375B5 = 37.92. P6 = Fr − I6 =

40 − 37.92 = 2.08.
4. Write-down in 6th year on Bond X = (100 − 80)v9 = 20v9. Write-up in 6th year on Bond Y (where
F = face amount) = (.08F − .0675F)v9 = .0125Fv9 = 20v9.
20
F= = 1,600 and P = 108a 14 + 1,600v14
.0125
= 1,435 ANS. (C)

5. P10 = 20 = (Fr − 50)v18−10+1 = (Fr − 50)v9

Fr = 20(1.05)9 + 50 = 81.03
X = B10 = 81.03a 8 + 1,000v8 = 1,200.55 ANS. (B)

6. P = 72a 2n + 1,000v2n at 12%

Bn = X = P + 45.24 = 72a n + 1,000vn

72a 2n + 1,000v2n + 45.24 = 72a n + 1,000vn

% & % &
1 − v2n 1 − vn
72 + 1,000v2n + 45.24 = 72 + 1,000vn
.12 .12

This simplifies to the following quadratic in vn: 400v2n − 400vn + 45.24 = 0. The positive root is
vn = .13.
X = 72a n + 1,000vn
% &
1 − .13
= 72 + 1,000(.13) = 652 ANS. (B)
.12

7. X = (1,000i − 40)a 20 , Y = (45 − 1,000i)a 20 , Z = (50 − 1,000i)a 20 . Given that Z = 2X, i = 4 31 %,

so Z = 6 23 a 20 and Y = 1 23 a 20 , ∴ Y = 41 Z = 21 X ANS. (C)

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 Solutions to Past Exam Questions on Section 7c

8. The book value at the end of the 2nd year = 825.44(1 + i)2 − 65s 2 (retrospectively) = 825.44(1 +
i)2 − 65(2 + i). The total write up is the excess of the book value over the purchase price
= 825.44(1 + i)2 − 65(2 + i) − 825.44 = 23.76. This is a quadratic in (1 + i) : 825.44(1 + i)2 −
65(1 + i) − 914.20 = 0. The solution gives i = 9.25%. ANS. (D)
9. Retrospectively, B5 = B3(1 + i)2 − 80s 2 . Thus 1,082.27 = 1,099.84(1 + i)2 − 80(2 + i). This is
the following quadratic in (1 + i): 1,099.84(1 + i)2 − 80(1 + i) − 1,162.27 = 0. 1 + i solves to
1.065002 and i = 6.5%. The original price can be computed as 80a 3 + (PV of book value end
of 3rd year) = 80a 3 + 1,099.84v3 = 1,122.38 ANS. (B)
(Just enter 3 N 6.5 I/Y 80 PMT 1,099.84 FV CPT PV .)
10. This is the same type of question as the previous one. 1,439.57 = 1,479.65(1 + i)2 − 120s 2 , which
reduces to the quadratic 1,479.65(1 + i)2 − 120(1 + i) − 1,559.57 = 0, so i = 6.800187%.

Price = 120a 2 + 1,479.65v2 at i

= 1,514.79 ANS. (B)

11. P16 = [30 − (1,100)(.04)]vn−16+1 = −14vn−15 = −5. (The principal adjustment is a write-up, since
30
g = 1,100 , i = .04 and g < i.)

5 5
vn−15 = , vn = v15 = .198309
14 14
The price can be found without explicitly solving for n, etc.:
% &
n 1 − .198309
P = 30a n + 1,100v = 30 + 1,100(.198309)
.04
= 601.27 + 218.14 = 819.41 ANS. (E)

53.75
12. g = 1,100 = 4.886%, so g < i and the principal adjustments are write-ups. Write-up in the t th period
Pt = (Ci − Fr)vn−t+1. ∴ P6 = [1,100(.05) − 53.75]v15−6+1 = 1.25v10 = .77 ANS. (E)
13. Price = P = 1,000ra 20 + 1,000v20 at 4%

I1 = .04P = 40ra 20 + 40v20 = 44.50

44.50 − 40v20
r= = 4.8278%
40a 20

This is the effective semiannual coupon rate. Nominal annual rate = 2r = 9.66% ANS. (D)
14. Determine the book values at the end of 7 and 8 years. The write-up = B8 − B7.
! "
8 15
B7 = 300a 8 .05 + v.05 300a 15 .04 + v.04 (10,000)

= 1,938.96 + (.676839)(8,888.16)
= 7,954.81
B8 = B7(1.05) − 300 = 8,052.55
Write-up = B8 − B7 = 8,052.55 − 7,954.81 = 97.74 ANS. (E)

15. Pt = (Fr − Ci)vn−t+1

P10 = (40 − 30)v20−10+1 = 10v11 = 7.22 ANS. (B)

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16. Six years after issue, there are 8 coupons remaining. B12 = 25a 8 + 1,000v8 at 3% = 964.90
ANS. (B)
17. The write-ups are in geometric progression with common ratio (1 + i). The total discount is equal
to the sum of the write-ups. If the 27th write-up = 2.25, the sum of the write-ups from# the 1st to$the
' (
30th = 2.25 v26 + v25 + . . . + v + 1 + (1 + i) + (1 + i)2 + (1 + i)3 at 5% = 2.25 a 26 + s 4 =
42.04 ANS. (D)
18. Let P = purchase price. The interest in the 1st coupon = I1 = .05P. The write-up is the excess of the
interest over the coupon = .05P − 40 = 4.36.
44.36
P= = 887.20 ANS. (D)
.05

19. The AV of the coupons = 40s 10 .05 = 503.12. The total received at the end of 10 years = 1,503.12.
If P was the purchase price, P = 1,503.12v10 at 6%, so P = 839.33. B1 = P(1 + i) − 40 =
839.33(1.06) − 40 = 849.69 ANS. (B)
Note: This question is somewhat ambigious, because it doesn’t say whether book values are based
on the overall yield rate of 6% (which takes into account the reinvestment of the coupons at 5%),
or whether they are based on the yield rate ignoring the reinvestment of coupons.
Ignoring the reinvestment of coupons, the yield rate is the solution of 839.33 = 40a 10 + 1,000v10
at i. The calculator gives i = 6.204154%, so B1 = (839.33)(1.06204154) − 40 = 851.40. This an-
swer is in the same range as (B).
20. Write-up in t th coupon = (Ci − Fr)vn−t+1. Write-up in 10th coupon = (5 − 4)v20−10+1 = v11 = .5847
ANS. (E)

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