101.

Cash flows are 40,000 at time 2 (in years), 25,000 at time 3, and 100,000 at time 4. The annual
effective yield rate is 7.0%.

Calculate the Macaulay duration.

(A) 2.2
(B) 2.3
(C) 3.1
(D) 3.3
(E) 3.4

102.
Rhonda purchases a perpetuity providing a payment of 1 at the beginning of each year. The
perpetuity’s Macaulay duration is 30 years.

Calculate the modified duration of this perpetuity.

(A) 28.97
(B) 29.00
(C) 29.03
(D) 29.07
(E) 29.10

52
103.
Which of the following statements regarding immunization are true?
I. If long-term interest rates are lower than short-term rates, the need for
immunization is reduced.
II. Either Macaulay or modified duration can be used to develop an immunization
strategy.
III. Both processes of matching the present values of the flows or the flows
themselves will produce exact matching.

(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).

104.
A company owes 500 and 1000 to be paid at the end of year one and year four, respectively. The
company will set up an investment program to match the duration and the present value of the
above obligation using an annual effective interest rate of 10%.

The investment program produces asset cash flows of X today and Y in three years.

Calculate X and determine whether the investment program satisfies the conditions for Redington
immunization.

(A) X = 75 and the Redington immunization conditions are not satisfied.

(B) X = 75 and the Redington immunization conditions are satisfied.
(C) X = 1138 and the Redington immunization conditions are not satisfied.
(D) X = 1138 and the Redington immunization conditions are satisfied.
(E) X = 1414 and the Redington immunization conditions are satisfied.

53
105.
An insurance company has a known liability of 1,000,000 that is due 8 years from now. The
technique of full immunization is to be employed. Asset I will provide a cash flow of 300,000
exactly 6 years from now. Asset II will provide a cash flow of X, exactly y years from now,
where y > 8.

The annual effective interest rate is 4%.

Calculate X.

(A) 697,100
(B) 698,600
(C) 700,000
(D) 701,500
(E) 702,900

106.
A company has liabilities of 573 due at the end of year 2 and 701 due at the end of year 5.

A portfolio comprises two zero-coupon bonds, Bond A and Bond B.

Determine which portfolio produces a Redington immunization of the liabilities using an annual
effective interest rate of 7.0%.

(A) Bond A: 1-year, current price 500; Bond B: 6-years, current price 500
(B) Bond A: 1-year, current price 572; Bond B: 6-years, current price 428
(C) Bond A: 3-years, current price 182; Bond B: 4-years, current price 1092
(D) Bond A: 3-years, current price 637; Bond B: 4-years, current price 637
(E) Bond A: 3.5 years, current price 1000; Bond B: Not used

54
107.
A company has liabilities of 402.11 due at the end of each of the next three years. The company
will invest 1000 today to fund these payouts. The only investments available are one-year and
three-year zero-coupon bonds, and the yield curve is flat at a 10% annual effective rate. The
company wishes to match the duration of its assets to the duration of its liabilities.

Determine how much the company should invest in each bond.

(A) 366 in the one-year bond and 634 in the three-year bond.
(B) 484 in the one-year bond and 516 in the three-year bond.
(C) 500 in the one-year bond and 500 in the three-year bond.
(D) 532 in the one-year bond and 468 in the three-year bond.
(E) 634 in the one-year bond and 366 in the three-year bond.

108.
You are given the following information about a company's liabilities:
• Present value: 9697
• Macaulay duration: 15.24
• Macaulay convexity: 242.47

The company decides to create an investment portfolio by making investments into two of the
following three zero-coupon bonds: 5-year, 15-year, and 20-year. The company would like its
position to be Redington immunized against small changes in yield rate.

The annual effective yield rate for each of the bonds is 7.5%.

Determine which of the following portfolios the company should create.

(A) Invest 3077 for the 5-year bond and 6620 for the 20-year bond.
(B) Invest 6620 for the 5-year bond and 3077 for the 20-year bond.
(C) Invest 465 for the 15-year bond and 9232 for the 20-year bond.
(D) Invest 4156 for the 15-year bond and 5541 for the 20-year bond.
(E) Invest 9232 for the 15-year bond and 465 for the 20-year bond.

55
109.
A bank accepts a 20,000 deposit from a customer on which it guarantees to pay an annual
effective interest rate of 10% for two years. The customer needs to withdraw half of the
accumulated value at the end of the first year. The customer will withdraw the remaining value at
the end of the second year.

The bank has the following investment options available, which may be purchased in any
quantity:
Bond H: A one-year zero-coupon bond yielding 10% annually
Bond I: A two-year zero-coupon bond yielding 11% annually
Bond J: A two-year bond that sells at par with 12% annual coupons

Any portion of the 20,000 deposit that is not needed to be invested in bonds is retained by the
bank as profit.

Determine which of the following investment strategies produces the highest profit for the bank
and is guaranteed to meet the customer’s withdrawal needs.

(A) 9,091 in Bond H, 8,264 in Bond I, 2,145 in Bond J

(B) 10,000 in Bond H, 10,000 in Bond I
(C) 10,000 in Bond H, 9,821 in Bond I
(D) 8,910 in Bond H, 731 in Bond I, 10,000 in Bond J
(E) 8,821 in Bond H, 10,804 in Bond J

56
110.
An insurance company wants to match liabilities of 25,000 payable in one year and 20,000
payable in two years with specific assets. The following assets are currently available:
i) One-year bond with an annual coupon of 6.75% at par
ii) Two-year bond with annual coupons of 4.50% at par
iii) Two-year zero-coupon bond yielding 5.00% annual effective

Calculate the smallest amount the company needs to disburse today to purchase assets that will
exactly match these liabilities.

(A) 41,220
(B) 41,390
(C) 41,560
(D) 41,660
(E) 41,750

111.
Martha leaves an estate of 500,000. Interest on this estate is paid to John for the first X years at
the end of each year. Karen receives annual interest payments from the end of year X+1 forever.
At an annual effective interest rate of 5%, the present value of Karen’s interest payments is 1.59
times the present value of John’s.

Calculate X.

(A) 6
(B) 7
(C) 8
(D) 9
(E) 10

57
112.
At time 0, Cheryl deposits X into a bank account that credits interest at an annual effective rate of
7%. At time 3, Gomer deposits 1000 into a different bank account that credits simple interest at
an annual rate of y%. At time 5, the annual forces of interest on the two accounts are equal, and
Gomer’s account has accumulated to Z.

Calculate Z.

(A) 1160
(B) 1200
(C) 1390
(D) 1400
(E) 1510

113.
Which of the following is an expression for the present value of a perpetuity with annual
payments of 1, 2, 3, …, where the first payment will be made at the end of n years, using an
annual effective interest rate of i?

an − nv n
(A)
i
n − an
(B)
i
n
v
(C)
d
vn
(D)
d2
vn
(E)
di

58
114.
Jennifer establishes an investment account to pay for college expenses for her daughter. She
plans to invest X at the beginning of each month for the next 21 years. Beginning at the end of
the 18th year, she will withdraw 20,000 annually. The final withdrawal at the end of the 21st
year will exhaust the account. She anticipates earning an annual effective yield of 8% on the
investment.

Calculate X.

(A) 137.90
(B) 142.80
(C) 146.40
(D) 150.60
(E) 154.30

115.
For a given interest rate i > 0, the present value of a 20-year continuous annuity of one dollar per
year is equal to 1.5 times the present value of a 10-year continuous annuity of one dollar per
year.

Calculate the accumulated value of a 7-year continuous annuity of one dollar per year.

(A) 5.36
(B) 5.55
(C) 8.70
(D) 9.01
(E) 9.33

59
116.
An annuity having n payments of 1 has a present value of X. The first payment is made at the end
of three years and the remaining payments are made at seven-year intervals thereafter.

Determine X.

a7 n +3 − a3
(A)
s3
a7 n +3 − a3
(B)
a7
a7 n +3 − a7
(C)
a3
a7 n +3 − a7
(D)
a7
a7 n +3 − a7
(E)
s3

117.
At an annual effective interest rate of 10.9%, each of the following are equal to X:
• The accumulated value at the end of n years of an n-year annuity-immediate paying 21.80 per
year.
• The present value of a perpetuity-immediate paying 19,208 at the end of each n-year period.

Calculate X.

(A) 1555
(B) 1750
(C) 1960
(D) 2174
(E) There is not enough information given to calculate X.

60
118.
An investor decides to purchase a five-year annuity with an annual nominal interest rate of 12%
convertible monthly for a price of X.

Under the terms of the annuity, the investor is to receive 2 at the end of the first month. The
payments increase by 2 each month thereafter.

Calculate X.

(A) 2015
(B) 2386
(C) 2475
(D) 2500
(E) 2524

119.
A perpetuity-due with semi-annual payments consists of two level payments of 300, followed by
a series of increasing payments. Beginning with the third payment, each payment is 200 larger
than the preceding payment.

Using an annual effective interest rate of i, the present value of the perpetuity is 475,000.

Calculate i.

(A) 4.05%
(B) 4.09%
(C) 4.13%
(D) 4.17%
(E) 4.21%

61
120.
At an annual effective interest rate of 6%, the present value of a perpetuity immediate with
successive annual payments of 6, 8, 10, 12, ..., is equal to X.

Calculate X.

(A) 100
(B) 656
(C) 695
(D) 1767
(E) 2222

121.
A company is considering investing in a particular project. The project requires an investment of
X today. Additional investments are required at the beginning of each of the next five years, with
each year’s investment 5% greater than the previous year’s investment.

The investment is expected to produce an income of 100 per year at the end of each year forever,
with the first payment expected at the end of the first year.

At an annual effective interest rate of 10.25%, the project has a net present value of zero.

Calculate X.

(A) 183
(B) 192
(C) 205
(D) 215
(E) 225

62
122.
A perpetuity-due with annual payments consists of ten level payments of X followed by a series
of increasing payments. Beginning with the eleventh payment, each payment is 1.5% larger than
the preceding payment.

Using an annual effective interest rate of 5%, the present value of the perpetuity is 45,000.

Calculate X.

(A) 1,679
(B) 1,696
(C) 1,737
(D) 1,763
(E) 1,781

123.
A family purchases a perpetuity-immediate that provides annual payments that decrease by 0.4%
each year. The price of the perpetuity is 10,000 at an annual force of interest of 0.06.

Calculate the amount of the perpetuity’s first payment.

(A) 604
(B) 620
(C) 640
(D) 658
(E) 678

63
124.
Company X received the approval to start no more than two projects in the current calendar year.

Three different projects were recommended, each of which requires an investment of 800 to be
made at the beginning of the year.

The cash flows for each of the three projects are as follows:

End of year Project A Project B Project C

1 500 500 500
2 500 300 250
3 –175 –175 –175
4 100 150 200
5 0 200 200

The company uses an annual effective interest rate of 10% to discount its cash flows.

Determine which combination of projects the company should select.

(A) Projects A and B

(B) Projects B and C
(C) Projects A and C
(D) Project A only
(E) Project B only

64
125.
A borrower took out a loan of 100,000 and promised to repay it with a payment at the end of
each year for 30 years.

The amount of each of the first ten payments equals the amount of interest due. The amount of
each of the next ten payments equals 150% of the amount of interest due. The amount of each of
the last ten payments is X.

The lender charges interest at an annual effective rate of 10%.

Calculate X.

(A) 3,204
(B) 5,675
(C) 7,073
(D) 9,744
(E) 11,746

126.
A borrower takes out a loan of 4000 at an annual effective interest rate of 6%.

Starting at the end of the fifth year, the loan is repaid by annual payments, each of which equals
600 except for a final balloon payment that is less than 1000.

Calculate the final balloon payment.

(A) 616
(B) 639
(C) 642
(D) 688
(E) 696

65
127.
A loan of 20,000 is repaid by a payment of X at the end of each year for 10 years. The loan has
an annual effective interest rate of 11% for the first five years and 12% thereafter.

Calculate X.

(A) 2739.5
(B) 3078.5
(C) 3427.5
(D) 3467.5
(E) 3484.5

128.
A 16-year loan of L is repaid with a payment at the end of each year. During the first eight years,
the payment is 100. During the final eight years, the payment is 300. Interest is charged on the
loan at an annual effective rate of i, such that 1/ (1 + i )8 > 0.3.

After the first payment of 100 is made, the outstanding principal is L + 25.

Calculate the outstanding balance on the loan immediately after the eighth annual payment of
100 has been made.

(A) 1660
(B) 1760
(C) 1870
(D) 1970
(E) 2080

66
129.
An entrepreneur takes out a business loan for 60,000 with a nominal annual interest rate
compounded monthly. The loan is scheduled to be paid off with level monthly payments, plus a
final drop payment. All payments will be made at the end of the month.

The principal portion of the payment is 1,400 for the first month and 1,414 for the second month.

Calculate the drop payment.

(A) 780
(B) 788
(C) 1183
(D) 1676
(E) 1692

130.
A student borrows money to pay for university tuition. He borrows 1000 at the end of each
month for four years. No payments are made to repay the loan until the end of five years.

The loan accumulates interest at a 6% nominal interest rate convertible monthly for the first two
years and at an 8% nominal interest rate convertible monthly for the following two years.

Calculate the loan balance at the end of four years immediately following the receipt of the final
1000.

(A) 54,098
(B) 55,224
(C) 55,762
(D) 56,134
(E) 56,350

67
131.
A loan is amortized with level monthly payments at an annual effective interest rate of 10%. The
amount of principal repaid in the 6th month is 500.

Calculate the principal repaid in the 30th month.

(A) 500
(B) 555
(C) 605
(D) 705
(E) 805

132.
Seth repays a 30-year loan with a payment at the end of each year. Each of the first 20 payments
is 1200, and each of the last 10 payments is 900. Interest on the loan is at an annual effective rate
of i, i > 0. The interest portion of the 11th payment is twice the interest portion of the 21st
payment.

Calculate the interest portion of the 21st payment.

(A) 250
(B) 275
(C) 300
(D) 325
(E) There is not enough information to calculate the interest portion of the 21st payment.

68
133.
John took out a 20-year loan of 85,000 on July 1, 2005 at an annual nominal interest rate of 6%
compounded monthly. The loan was to be paid by level monthly payments at the end of each
month with the first payment on July 31, 2005.

Right after the regular monthly payment on June 30, 2009, John refinanced the loan at a new
annual nominal rate of 5.40% compounded monthly, and the remaining balance will be paid with
monthly payments beginning July 31, 2009. The amount of each payment is 500 except for a
final drop payment.

Calculate the date of John’s last payment.

(A) July 31, 2022

(B) April 30, 2030
(C) May 31, 2030
(D) April 30, 2031
(E) May 31, 2031

134.
A 25-year loan is being repaid with annual payments of 1300 at an annual effective rate of
interest of 7%. The borrower pays an additional 2600 at the time of the 5th payment and wants to
repay the remaining balance over 15 years.

Calculate the revised annual payment.

(A) 1054.58
(B) 1226.65
(C) 1300.00
(D) 1369.38
(E) 1512.12

69
135.
A 1000-par value 30-year bond has an annual coupon rate of 7% paid semiannually. After an
initial 10-year period of call protection, the bond is callable immediately following the payment
of any of the 20th through the 59th coupons.
i) If the bond is called before payment of the 40th coupon, the redemption value is
1250.
ii) If the bond is called immediately after the payment of any of the 40th through the
59th coupons, the redemption value is 1125.
iii) If the bond is not called, it will be redeemed at par.

To ensure that the bond will provide at least an annual nominal yield rate of 5% convertible
semiannually, it must be assumed that the bond will be called or redeemed immediately after the
payment of the nth coupon.

Calculate n.

(A) 20
(B) 39
(C) 40
(D) 59
(E) 60

136.
Bond X is a 20-year bond with annual coupons and the following characteristics:
i) Par value is 1000.
ii) The annual coupon rate is 10%.
iii) Bond X is callable at par on any of the last five coupon dates.

Calculate the maximum purchase price for Bond X that will guarantee an annual effective yield
rate of at least 5%.

(A) 1519
(B) 1542
(C) 1570
(D) 1596
(E) 1623

70
137.
A life insurance company invests two million in a 10-year zero-coupon bond and four million in
a 30-year zero-coupon bond. The annual effective yield rate for both bonds is 8%.

When the 10-year bond matures, the company reinvests the proceeds in another 10-year zero-
coupon bond. At that time the bond yield rate is 12% annual effective.

After 20 years from the initial investment, the 30-year bond is sold to yield an annual effective
rate of 10% to the buyer. The maturity of the second 10-year bond and the sale of the 30-year
bond result in a gain of X on the company’s initial investment of six million.

Calculate X.

(A) 23 million
(B) 29 million
(C) 32 million
(D) 34 million
(E) 42 million

138.
You are given the following information about a 20-year bond with face amount 7500:
i) The bond has an annual coupon rate of 7.4% paid semiannually.
ii) The purchase price results in an annual nominal yield rate to the investor of 5.3%
convertible semiannually.
iii) The amount for amortization of premium in the fourth coupon payment is 28.31.

Calculate the redemption value of the bond.

(A) 7660
(B) 7733
(C) 7795
(D) 7879
(E) 7953

71
139.
Claire purchases an eight-year callable bond with a 10% annual coupon rate payable
semiannually. The bond has a face value of 3000 and a redemption value of 2800.

The purchase price assumes the bond is called at the end of the fourth year for 2900, and
provides an annual effective yield of 10.0%.

Immediately after the first coupon payment is received, the bond is called for 2960. Claire’s
annual effective yield rate is i.

Calculate i.

(A) 9.8%
(B) 10.1%
(C) 10.8%
(D) 11.1%
(E) 11.8%

140.
You are given the following information about a 20-year bond with face amount 1000:
i) The bond has an annual coupon rate of r payable semiannually and is redeemable
at par.
ii) The nominal annual yield rate convertible semiannually is 7.2%.
iii) The amount for accumulation of discount in the seventh coupon payment is 4.36.

Calculate r.

(A) 2.1%
(B) 4.0%
(C) 4.3%
(D) 6.0%
(E) 6.9%

72
141.
Bond A and Bond B are both annual coupon, five-year, 10,000 par value bonds bought to yield
an annual effective rate of 4%.
i) Bond A has an annual coupon rate of r%, a redemption value that is 10% below
par, and a price of P.
ii) Bond B has an annual coupon rate of (r+1)%, a redemption value that is 10%
above par, and a price of 1.2P.

Calculate r %.

(A) 5.85%
(B) 6.85%
(C) 7.85%
(D) 8.85%
(E) 9.85%

142.
You are given the following information about an n-year bond, where n > 10:
i) The bond pays 8% semiannual coupons and has face amount 1000.
ii) The bond is redeemable at par.
iii) The bond is callable at par 5 years after issue or 10 years after issue.
iv) P is the price to guarantee a yield of 6.8% convertible semiannually and Q is the
price to guarantee a yield of 8.8% convertible semiannually.
v) |P – Q| = 123.36.

Calculate n.

(A) 11
(B) 15
(C) 19
(D) 22
(E) 26

73
143.
An insurer enters into a four-year contract today. The contract requires the insured to deposit 500
into a fund that earns an annual effective rate of 5.0%, and from which all claims will be paid.
The insurer expects that 100 in claims will be paid at the end of each year, for the next four
years. At the end of the fourth year, after all claims are paid, the insurer is required to return 75%
of the remaining fund balance to the insured.

To issue this policy, the insurer incurs 100 in expenses today. It also collects a fee of 125 at the
end of two years.

Calculate the insurer’s yield rate.

(A) 9%
(B) 24%
(C) 39%
(D) 54%
(E) 69%

144.
An investor buys a perpetuity-immediate providing annual payments of 1, with an annual
effective interest rate of i and Macaulay duration of 17.6 years.

Calculate the Macaulay duration in years using an annual effective interest rate of 2i instead of i.

(A) 8.8
(B) 9.3
(C) 9.8
(D) 34.2
(E) 35.2

74
145.
An investor purchases two bonds. The bonds have the same annual effective yield rate i, with
i > 0.

With respect to the annual effective yield rate, their modified durations are a years and b years,
with 0 < a < b.

One of these two bonds has a Macaulay duration of c years, with a < c < b.

Determine which of the following is an expression, in years, for the Macaulay duration of the
other bond.

(A) bc/a
(B) ac/b
(C) ab/c
(D) b+c–a
(E) a+c–b

146.
A 20-year bond priced to have an annual effective yield of 10% has a Macaulay duration of 11.
Immediately after the bond is priced, the market yield rate increases by 0.25%. The bond's
approximate percentage price change, using a first-order Macaulay approximation, is X.

Calculate X.

(A) –2.22%
(B) –2.47%
(C) –2.50%
(D) –2.62%
(E) –2.75%

75
147.
Determine which of the following statements regarding asset-liability management techniques is
true.

(A) Redington immunization requires that the convexity of the liabilities is greater than the
convexity of the assets.
(B) An advantage of the Redington immunization technique over the cash-flow matching
technique is that the portfolio manager has more investment choices available.
(C) Both Redington immunization and full immunization are based on the assumption that
the yield curve has higher yields for longer term investments.
(D) A fully immunized portfolio ensures that the present value of assets will exceed the
present value of liabilities with non-parallel shifts in the yield curve.
(E) A cash-flow matched portfolio requires less rebalancing than a Redington immunized
portfolio, but more rebalancing than a fully immunized portfolio.

148.
A company has liabilities that require it to make payments of 1000 at the end of each of the next
five years. The only investments available to the company are as follows:

Investment Price Subsequent Cash Flows

J 1500 500 at the end of each year for 5 years
K 500 1000 at the end of year 5
L 1000 500 at the end of each year for 4 years
M 4000 1000 at the end of each year for 5 years

The company is able to purchase as many of each investment as it wants, but only in whole units.
The company’s investment objective is to be fully immunized over the next five years.

Calculate the lowest possible cost to achieve this objective.

(A) 1500
(B) 2000
(C) 2500
(D) 3000
(E) 4000

76
149.
A railroad company is required to pay 79,860, which is due three years from now. The company
invests 15,000 in a bond with modified duration 1.80, and 45,000 in a bond with modified
duration Dmod, to Redington immunize its position against small changes in the yield rate.

The annual effective yield rate for each of the bonds is 10%.

Calculate Dmod.

(A) 2.73
(B) 3.04
(C) 3.34
(D) 3.40
(E) 3.65

150.
A company must pay liabilities of 1000 at the end of year 1 and X at the end of year 2.
The only investments available are:
i) One-year zero-coupon bonds with an annual effective yield of 5%
ii) Two-year bonds with a par value of 1000 and 10% annual coupons, with
an annual effective yield of 6%

The company constructed a portfolio that creates an exact cash flow matching strategy for these
liabilities. The total purchase price of this portfolio is 1783.76.

Calculate the amount invested in the one-year zero-coupon bonds.

(A) 784
(B) 831
(C) 871
(D) 915
(E) 935

77