402.

You are given an interest rate i, a real rate of interest i′ , and an inflation rate r.
All rates are annual effective rates.

Determine i, in terms of i′ and r.

(A) i′ + r
(B) i′ + r + i′r
(C) i′ + r − i′r
(D) (1 + i′) − (1 + i′)(1 − r )
(E) i′ + r − 2i′r

403.
At the beginning of a year, Rachael invests 10,000 in Fund X earning an annual nominal interest
rate of 9% convertible quarterly.

At the end of the year and each successive year, she withdraws the accumulated interest from
Fund X and reinvests it into Fund Y, earning an annual effective interest rate of i.

The balance of Fund Y immediately after the fifth interest deposit is 5461.

Calculate i.

(A) 7.9%
(B) 8.0%
(C) 8.1%
(D) 8.2%
(E) 8.3%

191
404.
The following term structure of interest rates is based on available bond market data as of
01/01/2023:

Term to
Spot
maturity
Rate
(years)
1 3.0%
2 3.5%
3 4.0%

A three-year 1000 face amount bond with an annual coupon rate of 10% paid annually is issued
on 01/01/2023.

Calculate the yield to maturity for this bond.

(A) 3.82%
(B) 3.86%
(C) 3.90%
(D) 3.94%
(E) 3.98%

405.
A borrower plans to repay a loan of 12,000 with payments to be made at the end of each month
for five years. The loan payments are based on an annual nominal interest rate of 12%,
convertible monthly.

Each payment after the first will be 1% larger than the previous one.

Calculate the amount of principal repaid in the first payment.

(A) 82
(B) 120
(C) 147
(D) 202
(E) 223

192
406.
An investor purchases a Treasury bond for 100 today. The bond earns an annual effective rate of
interest of 9%. The annual rate of inflation is 5%.

Calculate the real annual effective rate of interest earned by the investor.

(A) −3.7%
(B) 3.8%
(C) 4.0%
(D) 14.0%
(E) 14.5%

407.
A person borrows 150,000 to purchase a house. The borrower makes interest-only payments at
the end of each month for five years, then makes payments of 1000 at the end of each month.

Interest accrues at a nominal annual rate of 4% convertible monthly for the first five years and
then at a nominal annual rate of 6% convertible monthly.

Determine the total number of payments it will take to repay the loan.

(A) 209
(B) 269
(C) 278
(D) 329
(E) 338

193
408.
You are given the following table of spot rates to calculate the present value of a level four-year
annuity-immediate:

Length of
investment Spot
in years rate
1 4.25%
2 4.50%
3 4.75%
4 5.00%

Calculate the annual effective interest rate for this annuity.

(A) 4.52%
(B) 4.63%
(C) 4.74%
(D) 4.85%
(E) 4.87%

409.
A ten-year mortgage is to be repaid with annual level payments at the end of the year. The
mortgage is paid assuming an annual effective interest rate of 6%.

Calculate the Macaulay duration of this mortgage.

(A) 4.74
(B) 5.02
(C) 7.36
(D) 10.00
(E) There is insufficient information to calculate the Macaulay duration.

410.
A student invested a math competition prize into a savings account. The account receives
interest quarterly, and the account balance increases by 4.5% each year.

Determine the correct term that the 4.5% figure represents.

(A) annual effective interest rate

(B) force of interest
(C) annual nominal interest rate, convertible quarterly
(D) annual discount rate
(E) annual simple interest rate

194
411.
Jeremy purchases a perpetuity providing a payment of 1 at the end of each year. The
perpetuity’s modified duration is 15 years.

Calculate the Macaulay duration of this perpetuity.

(A) 14.00
(B) 14.46
(C) 15.07
(D) 15.94
(E) 16.00

412.
A two-year annuity-immediate with level annual payments has a Macaulay duration of D using a
force of interest of δ .

Determine D.

1  2e
(A)
1  e
1  2e2
(B)
1  e
1  e2
(C)
1  e
1  e
(D)
1  e2
1  2e
(E)
1  e2

195
413.
A graduate takes out a 60-month car loan at an annual nominal interest rate of 3% convertible
monthly. The loan provides for a payment of 359.37 at the end of each month. The graduate
failed to make the 25th and 26th payments. Beginning with the 27th month the graduate resumes
payments of 359.37 at the end of each month, with a final balloon payment at the end of the 60th
month made necessary by the two missed payments.

Calculate the outstanding loan balance immediately following the payment at the end of the 36th
month.

(A) 8298
(B) 8361
(C) 8723
(D) 9036
(E) 9099

414.
At the beginning of the year, an entrepreneur deposited money into a savings account. At the
end of the year, the entrepreneur had earned a total of 400 in interest and had an account balance
of 8000.

Determine which annual quantity exactly equals 5%.

(A) Nominal discount rate

(B) Discount factor
(C) Effective discount rate
(D) Effective interest rate
(E) Force of interest

196
415.
Loan A is a 96-month loan with an annual nominal interest rate of 7.2% compounded monthly.
This loan is repaid with equal payments of m at the end of each of the first 48 months followed
by payments of 1.5m at the end of each of the last 48 months.

Loan B is also a 96-month loan with the same annual nominal interest rate compounded monthly.
This loan is repaid with equal payments of 1.2m at the beginning of each of the first 48 months
followed by payments of 0.9m at the beginning of each of the last 48 months.

Calculate the ratio of the amount of Loan A to the amount of Loan B.

(A) 1.127
(B) 1.133
(C) 1.145
(D) 1.152
(E) 1.190

416.
Bond A and bond B are both annual-coupon bonds.

Bond A is an m-year bond with face amount 1000 and price 800, where m is a whole number.
The coupon rate is half of the yield rate.

Bond B is a 3m-year bond with the same face amount, coupon rate, and yield rate as bond A.

Calculate the price for bond B.

(A) 400
(B) 512
(C) 608
(D) 671
(E) 716

197
417.
A non-callable n-year 5000 face amount annual-coupon bond has a price of 4361, an annual
coupon rate of 5%, and an annual effective yield rate of 6%.

Another n-year 5000 face amount annual-coupon bond, with an annual coupon rate of 5%, is
callable at par at the end of any year from the (n – 10)th year to the nth year, inclusive.

Calculate the maximum price that an investor should be willing to pay for the callable bond, to
guarantee at least a 6% annual effective yield rate.

(A) 3944
(B) 3948
(C) 3967
(D) 4361
(E) 4514

418.
A credit card charges an annual continuously compounded interest rate of 18%, plus a fee of 20
at the end of each year. These fees accrue interest once they are charged.

A borrower, upon receiving the credit card, immediately purchased a piano for 1500 with the
card.

The borrower then made a payment of X at the end of every month. At the beginning of the third
year, the borrower’s credit card balance was 200.

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

24
(A) 1500 + 20e −0.18 + 20e −0.36 − X ∑ e −0.015 k = 200e −0.36
k =1
24
(B) 1500 + 20e −0.18 + 20e −0.36 − X ∑ e −0.015 k = 200
k =1
24
(C) 1500 + 20e0.18 + 20e0.36 − X ∑ e 0.015 k
= 200e0.36
k =1
24
20 20 20 200
(D) 1500 + + − X∑ k
=
1.18 (1.18) 2 k =1 (1.18) 2
(1.18) 12

24
20 20 20
(E) 1500 + + − X∑ k
= 200
1.18 (1.18) 2 k =1
(1.18) 12

198
419.
A bank issues two bonds with the same annual effective yield rate. The first bond is a 10-year
zero-coupon bond with a price of 3000 and a face amount of 5000. The second bond is a 15-year
bond providing quarterly coupons, with a price of 1000 and a face amount of 950.

Calculate the annual coupon rate for the second bond.

(A) 5.24%
(B) 5.36%
(C) 5.58%
(D) 5.65%
(E) 5.76%

420.
A perpetuity-due with annual payments is priced at X based on an annual effective interest rate of
7%. The amount of the first payment is 350. Each payment, from the second through the fifth,
is 3% larger than the previous payment. Each of the sixth and subsequent payments is equal to
the fifth payment.

Calculate X.

(A) 5249
(B) 5530
(C) 5617
(D) 5917
(E) 6046

421.
A 15-year bond is purchased at a premium. The bond has an annual effective yield rate of 7.4%
and pays semi-annual coupons.

Determine which of the following statements about this bond must be true.

(A) The face amount is greater than the purchase price.

(B) The redemption value is greater than the purchase price.
(C) The redemption value is greater than the face amount.
(D) The face amount is greater than the redemption value.
(E) The purchase price is greater than the redemption value.

199
422.
A home buyer borrows 225,000 and has two options to repay the loan, both at an annual nominal
interest rate of i, convertible monthly:

Option 1: Level payments of 1960 at the end of each month for 180
months.

Option 2: Level payments of X at the beginning of each month for 360

months.

Calculate X.

(A) 1415
(B) 1418
(C) 1422
(D) 1427
(E) 1435

423.
Bond A pays 1 at the end of each year in perpetuity. Bond B is a zero coupon bond that matures
in ten years. The Macaulay duration of bond A is twice that of bond B.

Calculate the modified duration of bond A.

(A) 19.0
(B) 19.5
(C) 20.0
(D) 21.0
(E) ∞

200
424.
An insurance company plans to sell an annual perpetuity-immediate, where each payment after the
first payment is 2% less than the previous payment. The company has chosen a price for this
annuity and needs to calculate the amount of the first payment.

The annual effective yield rate is 7.8%, but the company mistakenly uses 8.7% and therefore
incorrectly calculates 1500 for the first payment.

Calculate the correct first payment.

(A) 1299
(B) 1309
(C) 1345
(D) 1374
(E) 1385

425.
A company has liabilities of 1000 and 750 due at the end of years two and four, respectively.
The company creates an investment portfolio that produces asset cash flows of X immediately
and Y at the end of year three. The portfolio is constructed to match the present value and
duration of the company’s payment obligations, using an annual effective interest rate of 6%.

Calculate Y.

(A) 1000
(B) 1385
(C) 1650
(D) 1667
(E) 1768

426.
Company XYZ has a liability of 10,000 due in nine months. To pay this liability, they have an
asset portfolio generating cash flows of X in six months and Y in one year. The portfolio is
Redington immunized.

The annual effective interest rate is 2%.

Calculate X.

(A) 4926
(B) 4975
(C) 5000
(D) 5025
(E) 5074

201
427.
An investor has purchased an 18-year 7000 face amount bond with an annual coupon rate of 6%
paid annually. The redemption value of the bond is 7500. The purchase price, P, results in an
annual effective yield of i.

Upon receipt, each coupon payment is immediately reinvested in an account earning an annual
effective rate of 5.70%. Immediately following the receipt of the last payment from the 18-year
bond, the investor has earned an annual effective yield of 5.18% on the original investment of P.

Calculate i.

(A) 4.54%
(B) 4.56%
(C) 4.79%
(D) 4.91%
(E) 5.13%

428.
You are given the following information regarding two perpetuities:

i) Perpetuity X provides payments of 3000 every six months with the first payment
due immediately.
ii) Perpetuity Y provides payments of k every two years with the first payment due
one year from now.
iii) Based on an annual effective interest rate of 4.94%, Perpetuity X and Perpetuity
Y have the same present value.

Calculate k.

(A) 12,150
(B) 12,450
(C) 12,750
(D) 13,050
(E) 13,380

202
429.
A bond with an annual coupon rate of 9% paid annually matures in ten years. The annual
effective yield rate is 10%.

Calculate the modified duration of this bond.

(A) 6.27
(B) 6.32
(C) 6.47
(D) 6.89
(E) 7.58

430.
A zero-coupon 1000 face amount bond sells for a price of 890 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) 938
(B) 942
(C) 945
(D) 948
(E) 951

431.
A ten-year 1000 face amount bond has an annual coupon rate of 6% paid semiannually. The
bond is purchased at a premium, to yield an annual effective interest rate of 5%.

Calculate the amount of the amortization of premium in the 12th coupon.

(A) 3.85
(B) 3.95
(C) 4.00
(D) 4.10
(E) 4.26

203
432.
Determine which of the following statements about Redington immunization is true.

(A) A difference between Redington immunization and full immunization is that the
duration condition does not need to be satisfied for Redington immunization.
(B) A portfolio that satisfies the Redington immunization conditions requires less
rebalancing than a cash-flow matched portfolio.
(C) Redington immunization requires that the convexity of the liabilities is greater than the
convexity of the assets.
(D) A Redington-immunized portfolio has a duration of zero and a convexity smaller than
zero.
(E) Redington immunization is designed to provide surplus protection for small, parallel
changes in interest rates.

433.
Interest on a 20-year loan is charged based on an annual effective rate of 10.1%.

The loan is repaid by payments of 100 at the end of each of the years 1 through 5 and each of the
years 11 through 20. During years 6 through 10 no payments are made.

Calculate the absolute value of the difference between the outstanding balance immediately after
the payment in year 5 and the outstanding balance immediately after the payment in year 15.

(A) 0
(B) 142
(C) 144
(D) 234
(E) 378

204
434.
You are given the following information about two 30-year 1000 face amount bonds, A and B,
each yielding an annual nominal interest rate of i % convertible semiannually.

i) Bond A has an annual coupon rate of 9% paid semiannually and has a price of
1249.45.
ii) Bond B has an annual coupon rate of 8% for the first 15 years and 10% for the
last 15 years, all paid semiannually.

Calculate the price of Bond B.

(A) 1150
(B) 1160
(C) 1170
(D) 1180
(E) 1190

435.
A 20-year 1000 face amount bond has an annual coupon rate of 6%, payable semiannually.

The bond is callable for 1060 at the end of the 10th year and for 1030 at the end of the
15th year.

Calculate the highest price for the bond that guarantees an annual nominal yield rate of 5%,
convertible semiannually.

(A) 1115
(B) 1119
(C) 1126
(D) 1135
(E) 1144

205
436.
Elinor is receiving her lottery winnings in the form of a perpetuity so that she will have money to
leave to her heirs. You are given the following information:

i) Payments are annual and began on January 1, 2000.

ii) Payments increase by 1,000 each year after the first year.
iii) The present value of her lottery winnings on January 1, 2000 was 1,000,000,
immediately before the first payment, based on an annual effective interest rate of
10%.

Calculate the present value of Elinor’s lottery winnings on January 1, 2020, immediately after
the payment at that time, using an annual effective interest rate of 10%.

(A) 1,008,181
(B) 1,119,091
(C) 1,200,000
(D) 1,210,000
(E) 1,219,999

437.
Kelly purchases a 25-year annual coupon bond for 20,000 with an annual effective yield rate of i.
The amount for the accumulation of discount in the first coupon is 50.

The bond's book value is 20,491.51 just after the 8th coupon payment and 21,263.74 just after the
16 th coupon payment.

Calculate the bond's redemption value.

(A) 22,135
(B) 22,170
(C) 22,234
(D) 22,671
(E) 23,660

206
438.
The full price of orthodontic treatment is X. The patient must pay at least a portion of the
balance by Day 15 (fifteen days following the beginning of the work). The two payment options
are:

i) Pay the full balance, less a 2.5% discount, on Day 15.

ii) Pay 250 on Day 15 and the remaining balance, without interest, on Day 60.

Assume a 365-day year.

The implied effective annual yield rate the patient is charged for delaying full payment from Day
15 to Day 60 is 24.2%.

Calculate X.

(A) 697
(B) 875
(C) 1675
(D) 3295
(E) 4827

439.
Wendy borrows 20,000 based on an annual effective interest rate of 8% and agrees to repay the
loan with level end-of-year payments for 40 years. Immediately after the 20th payment, Wendy
repays the remaining balance by taking out a new loan with an annual effective interest rate of
6% and level annual end-of-year payments for 20 years.

Calculate the sum of the 40 payments made by Wendy.

(A) 50,011
(B) 58,147
(C) 60,007
(D) 62,257
(E) 67,088

207
440.
David purchases a level perpetuity-due, which provides annual payments of 1 and is priced to
yield an annual effective rate of 6.25%.

Immediately before the second payment, the annual effective yield rate is 5.75%, and the price is
estimated to be X using the first-order modified approximation. The actual price of the
perpetuity at this time is Y.

X −Y
Calculate .
Y

(A) –0.76%
(B) –0.64%
(C) –0.61%
(D) –0.32%
(E) –0.17%

441.
At Jack’s death, his estate of 298,000 is to be divided between Charity A and Charity B.

Charity A will receive 198,000 and use it to purchase a perpetuity-due that makes a payment of
X every month.

Charity B will receive 100,000 and use it to purchase a perpetuity-due that makes a payment of
X every two months.

The payments of X for each charity are based on an annual effective interest rate of i.

Calculate i.

(A) 21.5%
(B) 24.0%
(C) 24.5%
(D) 26.8%
(E) 27.4%

208
442.
1
An asset earns an annual force of interest given by δ ( t ) = , where t is the time in years
20 + t
since January 1, 2020. The equivalent annual effective rate of interest for the year 2024 is i.

Calculate i.

(A) 4.00%
(B) 4.08%
(C) 4.17%
(D) 4.35%
(E) 5.00%

443.
Kelly sets up a savings account and makes a deposit at the beginning of each month starting
today. The following information is known about the account:

i) Within each year, the amounts of monthly deposits are all equal.
ii) For any given year, the monthly deposits are 10% greater than the monthly
deposits of the previous year.
iii) The savings account earns an annual nominal interest rate of 2.4% compounded
monthly.
iv) The accumulated amount of the savings account at the end of year 10 is
21,234.05.
v) The amount of the monthly deposit in year 5 is K.

Calculate K.

(A) 133.02
(B) 144.68
(C) 146.41
(D) 146.70
(E) 147.12

209
444.
Bond X, Bond Y, and Bond Z are each n-year bonds with face amount 1000. All three bonds are
priced to yield a nominal annual interest rate of 6.5% convertible semiannually.

Bond X provides annual coupons of R, Bond Y provides quarterly coupons of 20.00, and Bond Z
provides semiannual coupons of 32.50.

The price of Bond Y exceeds the price of Bond X by 401.50 and the price of Bond Y exceeds the
price of Bond Z by 169.30.

Calculate R.

(A) 41.79
(B) 42.03
(C) 43.78
(D) 44.25
(E) 45.52

445.
An investor owns two bonds, Bond 1 and Bond 2. At today’s annual effective interest rate, the
bonds have the following characteristics:

Bond 1 Bond 2
Present Value 20,400 20,400
Modified Duration
11.735 13.101
(in years)

If the annual effective interest rate decreases by 50 basis points today, the first-order Macaulay
approximations of the present value for Bond 1 and Bond 2 are 21,635.83 and X, respectively.

Calculate X.

(A) 21,503.55
(B) 21,596.97
(C) 21,736.30
(D) 21,779.69
(E) 21,784.47

210
446.
A special arithmetically increasing annuity-due will make 84 monthly payments. It provides
payments of 100 today, 100 one month from now, 105 two months from now, 105 three months
from now, and so on until the 83rd and 84th payments of 305 each are made.

The present value of this annuity based on an annual nominal rate interest rate of 4.8%
compounded monthly is P.

Calculate P.

(A) 13,950
(B) 13,978
(C) 14,008
(D) 14,062
(E) 14,117

447.
A perpetuity-immediate with level annual payments of k has a Macaulay duration of 32.25 years
based on an annual effective interest rate of i. At the same annual effective interest rate, a
perpetuity-due with level annual payments of 1.02k has a modified duration of X years.

Calculate X.

(A) 30.28
(B) 30.89
(C) 31.25
(D) 31.88
(E) 32.22

448.
A twelve-year 2500 face amount bond has an annual coupon rate of 4.84% paid quarterly and is
redeemable for C. The book values of the bond following the 4th and 19th coupons are 2092.88
and 2316.30, respectively.

Calculate the amount for accumulation of discount in the last coupon.

(A) 7.77
(B) 13.10
(C) 22.97
(D) 30.91
(E) 31.55

211
449.
A 30-year 1000 face amount bond has an annual coupon rate of 7% paid semiannually for the
first 15 years, and an annual coupon rate of 9% paid semiannually for the last 15 years. The
bond is purchased to yield an annual nominal interest rate of 8% convertible semiannually.

At the time the 20th coupon is paid, the bond has an annual nominal yield rate of 6% convertible
semiannually.

Calculate the bond’s book value immediately after the 20th coupon is paid.

(A) 901
(B) 940
(C) 1018
(D) 1261
(E) 1270

450.
An electric company faces liabilities with present values 24,000 and 1,000, due 7.5 years from
now and 20 years from now, respectively.

The company will purchase an n-year zero-coupon bond and a 2n-year zero-coupon bond.

Determine which of the following expressions describes the set of all values of n for which the
company can achieve Redington immunization.

(A) 4≤n≤8
(B) 5<n<7
(C) n = 5 or n = 7
(D) 0 < n < 5 or n > 7
(E) 4 ≤ n < 5 or 7 < n ≤ 8

212
451.
Paul makes level deposits of 1000 into a fund at the beginning of each quarter for five years.
The first deposit occurs at t = 0, where t is in years.

Starting at t = 5, the amount of each quarterly deposit is 2% greater than the preceding deposit.
The last such deposit occurs at t = 19.75.

Calculate the accumulated value of Paul’s deposits at t = 20 based on an annual nominal interest
rate of 5% compounded quarterly.

(A) 124,847
(B) 152,717
(C) 184,484
(D) 206,608
(E) 209,778

452.
An investment project involves an outlay of 30 at time 0 and 40 at time 1, where time is
measured in years. In return the investor will receive 60 at time 2 and 90 at time , where .

Determine which one of the following statements about the annual effective yield rate is true.

(A) There is a unique yield rate, which is higher than 50%.

(B) There is a unique yield rate, which is lower than 50%.
(C) There are multiple yield rates, but all are higher than 50%.
(D) There are multiple yield rates, but all are lower than 50%.
(E) There are multiple yield rates with at least one lower than 50% and at least one higher
than 50%.

453.
Kelly purchases a 25-year annual coupon bond for 20,000 with an annual effective yield rate of i.
The amount for the accumulation of discount in the first coupon is 50.

The bond's book value is 20,491.51 just after the 8th coupon payment and 21,263.74 just after
the 16 th coupon payment.

Calculate the bond's redemption value.

(A) 22,135
(B) 22,170
(C) 22,234
(D) 22,671
(E) 23,660

213
454.
An investor purchases a ten-year 5000 bond with annual coupons, bought to yield an annual
effective rate of i.

The bond's book value is 4478 just after the eighth coupon payment and 4730 just after the ninth
coupon payment.

Calculate i.

(A) 0.0563
(B) 0.0567
(C) 0.0571
(D) 0.0690
(E) 0.0714

455.
Bond X, Bond Y, and Bond Z are each n-year bonds with face amount 1000. All three bonds are
priced to yield a nominal annual rate of 6.0% convertible quarterly.

Bond X pays annual coupons of R, Bond Y pays semiannual coupons of 34.00, and Bond Z pays
quarterly coupons of 15.00.

The price of Bond Y exceeds the prices of Bond X and Bond Z by 138.88 and 73.78,
respectively.

Calculate R.

(A) 52.05
(B) 52.23
(C) 53.20
(D) 53.92
(E) 54.60

214
456.
A 20-year bond has an annual coupon rate of 3% paid semiannually. The bond is priced using an
annual nominal yield rate of 2% convertible semiannually. The cumulative amount of premium
amortization exceeds 50% of the premium at purchase, for the first time, immediately after the
n th coupon is paid.

Calculate n.

(A) 18
(B) 19
(C) 20
(D) 21
(E) 22

457.
An n-year 100 face amount bond has an annual coupon rate of r paid semiannually. The price of
the bond is 91.8243 based on an annual yield rate of 4% compounded semiannually.
The book value of the bond immediately after the nth coupon payment is 95.5087.

Calculate n.

(A) 5
(B) 10
(C) 15
(D) 20
(E) 25

458.
Investment A provides cash flows of 1000, 3000, and X at the end of years two, three, and five,
respectively.

Investment B provides cash flows of 1000, 3000, and X at the end of years three, four, and seven,
respectively.

The modified durations of Investment A and Investment B are 4 years and Y years, respectively,
each based on an annual effective interest rate of 10%.

Calculate Y.

(A) 5.48
(B) 5.52
(C) 5.56
(D) 5.58
(E) 5.60

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459.
A perpetuity pays 10,000 at the beginning of each year. The present value of the payments
calculated using an annual effective interest rate of 7% is L.

The annual effective interest rate decreases to 5% immediately after the perpetuity is purchased.
Using the first-order modified duration approximation, the estimated present value of the
payments is M.

Calculate M – L.

(A) 40,816
(B) 43,673
(C) 43,791
(D) 47,290
(E) 57,143

460.
A geometric perpetuity-immediate provides annual payments. The first payment is 1, and each
subsequent payment is 0.5% less than the previous payment. Let M be the price of this
perpetuity using an annual effective interest rate of 6.5%.

The price should have been calculated using an annual effective interest rate of 5.5%. Let P be
the correct price of this perpetuity and let E be the estimate of P based on the initial price, M,
using the first-order modified approximation.

E−P
Calculate , the percentage error of the estimate.
P

(A) –2.78%
(B) –2.04%
(C) –1.92%
(D) –1.24%
(E) –1.06%

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461.
A geometric perpetuity-due provides annual payments. The first payment is 1, and each
subsequent payment is 2% less than the previous payment. Let M be the price of this perpetuity
using an annual effective interest rate of 8%.

The price should have been calculated using an annual effective interest rate of 7%. Let P be the
correct price of this perpetuity and let E be the estimate of P based on the initial price, M, using
the first-order Macaulay approximation.

E−P
Calculate , the percentage error of the estimate.
P

(A) –1.48%
(B) –1.16%
(C) –0.92%
(D) –0.49%
(E) –0.26%

462.
Wilma takes out a loan of 5,000,000 to start a new business. She will repay the loan with
level semiannual payments of 303,244.53, with the first payment due in six months.

The loan payments are based on an annual nominal interest rate of 6.5% convertible
semiannually.

Immediately after the tenth payment, the outstanding loan balance is X.

Calculate X.

(A) 1,483,350
(B) 2,350,407
(C) 2,916,667
(D) 3,367,821
(E) 4,330,426

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