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CIN2122 Tutorial 3

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13 views2 pages

CIN2122 Tutorial 3

Uploaded by

tcze69
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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CIN2122 Tutorial 3

Question 1

Explain the following concepts, stating any necessary assumptions and/or conditions:

a. Spot rate [3]


b. Forward rate [3]
c. Effective duration [3]
d. Effective convexity [3]
e. Full immunization [3]

Question 2

You take out a loan for ZWL2000000 that will be disbursed to you in three payments. The first
payment of ZWL1000000 is made immediately and is followed six months later by a payment of
ZWL500000 and then six months after that by another payment of ZWL500000. The interest on
the payments is calculated at a nominal rate of interest of 26.66%, convertible semi-annually. After
two years, you replace the outstanding loan with a 30-year loan at a nominal rate of interest of
12%, convertible monthly. The amount of the monthly payments for the first five years on this
loan will be one-half of the monthly payment required after 5 years. Payments are to be made at
the beginning of each month.

Calculate the amount of the 12th repayment. [3]

Question 3 (Assignment)

An investor deposits 5000 at the beginning of each year for five years in a fund earning an annual
effective interest rate of 5%. The interest rate of 5%. The interest from this fund can be reinvested
at an annual effective interest rate of 4%. Prove that the future value of this investment at time t =
10 is equal to 6250(𝑠11|
̅̅̅̅̅4% − 𝑠6|
̅ 4% − 1). [5]

Question 4

a. If you have $10000 and are seeking a secure investment, your lecturer proposes borrowing
the $10000 from you and promises to repay you through 10 annual end-of-year payments
that decrease arithmetically. The agreed annual effective interest rate you will charge is
25%, and you have the ability to reinvest the repayments at a 10% rate. However, after 5
years, your lecturer absconds from the Zimbabwe, leaving you with no repayment. What
is your yield on this crazy investment? [5]
b. A loan is amortized over five years with monthly payments at a nominal rate of interest of
6%, convertible monthly. The first payment is 1000 and is to be paid one month after the
date of the loan. Each succeeding monthly payment will be 5% lower than the prior
payment. Calculate the outstanding loan balance immediately after the 40th payment is
made. [4]

Question 5

A loan is to be repaid by annual installments of P at the end of each year for 10 years. You are
given:

• The total principal repaid in the first 3 years is 290.35.


• The total principal repaid in the last 3 years is 408.55.

Determine the total amount of interest paid during the life of the loan. [5]

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