151.

A company must pay liabilities of 4000 and 6000 at the end of years one and two, respectively.
The only investments available to the company are one-year zero-coupon bonds with an annual
effective yield of 8% and two-year zero-coupon bonds with an annual effective yield of 11%.

Determine how much the company must invest today to exactly match its liabilities.

(A) 8,473
(B) 8,573
(C) 8,848
(D) 9,109
(E) 10,000

152.
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 modified approximation, is X.

Calculate X.

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

78
153.
Krishna buys an n-year 1000 bond at par. The Macaulay duration is 7.959 years using an annual
effective interest rate of 7.2%.

Calculate the estimated price of the bond, using the first-order Macaulay approximation, if the
interest rate rises to 8.0%.

(A) 940.60
(B) 942.54
(C) 944.56
(D) 947.03
(E) 948.47

154.
A bond has a modified duration of 8 and a price of 112,955 calculated using an annual effective
interest rate of 6.4%.

EMAC is the estimated price of this bond at an interest rate of 7.0% using the first-order Macaulay
approximation.

EMOD is the estimated price of this bond at an interest rate of 7.0% using the first-order modified
approximation.

Calculate EMAC − EMOD .

(A) 91
(B) 102
(C) 116
(D) 127
(E) 143

79
155.
SOA Life Insurance Life Insurance Company has a portfolio of two bonds:
• Bond 1 is a bond with a Macaulay duration of 7.28 and a price of 35,000; and
• Bond 2 is a bond with a Macaulay duration of 12.74 and a price of 65,000.

The price and Macaulay duration for both bonds were calculated using an annual effective
interest rate of 4.32%.

Bailey estimates the value of this portfolio at an interest rate of i using the first-order Macaulay
approximation to be 105,000.

Determine i.

(A) 3.49%
(B) 3.62%
(C) 3.85%
(D) 3.92%
(E) 4.03%

156.
Graham is the beneficiary of an annuity due. At an annual effective interest rate of 5%, the
present value of payments is 123,000 and the modified duration is DMOD .

Tyler uses the first-order Macaulay approximation to estimate the present value of Graham’s
annuity due at an annual effective interest rate was 5.4%. Tyler estimates the present value to be
121,212.

Calculate DMOD , the modified duration of Graham’s annuity at 5%.

(A) 3.67
(B) 3.75
(C) 3.85
(D) 3.95
(E) 4.04

80
157.
A company owes 1000 one year from now and 1000 two years from now.
Which of the following demonstrates a strategy to use exact cash-flow matching between assets
and liabilities?

I. The company purchases a one-year zero-coupon bond and a two-year zero-coupon bond,
each with a face amount of 1000.
II. The company deposits 1859.41 into an account that currently earns an annual effective
interest rate of 5% that is subject to change in one year.
III. The company purchases an asset that has the same duration as the liabilities and a larger
convexity.

(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).

158.
Two 15-year par value bonds, X and Y, each pay an annual coupon of 200 at the end of the year.
The face amount of Bond X is one-half the face amount of Bond Y.

At an annual effective yield of i, the price of Bond X is 2695.39 and the price of Bond Y is
3490.78.

Calculate the coupon rate for Bond X.

(A) 6.3%
(B) 7.4%
(C) 8.8%
(D) 10.0%
(E) 11.4%

81
159.
Bank P offers a 3-year certificate of deposit that pays an annual effective interest rate of 4%. In
addition, a bonus of 2% of the initial investment is paid at the end of the 3-year period.

Bank Q offers a 3-year certificate of deposit without any bonus.

Calculate the annual effective interest rate that Bank Q would have to offer to produce the same
annual yield as the certificate from Bank P.

(A) 4.3%
(B) 4.4%
(C) 4.5%
(D) 4.6%
(E) 4.7%

160.
A 20-year arithmetically increasing annuity-due sells for 600,000 and provides annual payments.
The first payment is X, and each payment thereafter is X more than the previous payment.

A 25-year arithmetically increasing annuity-due provides annual payments. The first payment is
X, and each payment thereafter is X more than the previous payment.

The prices of the two annuities are calculated using a continuously compounded annual interest
rate of 6%.

Calculate the price of the 25-year annuity.

(A) 667,026
(B) 668,707
(C) 750,000
(D) 779,336
(E) 782,712

82
161.
A small business takes out a 10-year loan with level end-of-quarter payments. The payments are
based on an annual nominal interest rate of 12% convertible quarterly.

The amount of principal repaid in the 15th payment is 10,030.27.

Calculate the amount of interest paid in the 25th payment.

(A) 7,521
(B) 8,151
(C) 9,467
(D) 10,030
(E) 11,601

162.
Trish had a loan with a balance of 4000 at the beginning of month 1. Starting with month 1, and
every month thereafter, she made a payment of X in the middle of the month. At the beginning of
month 4, and every 6 months thereafter, she borrowed an additional 800.

Trish’s loan balance became 4000 again at the end of month 36.

The annual nominal interest rate for the loan is 26.4%, convertible quarterly.

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

6 36
800 X
(A) ∑ 2 n −1
=∑ n −0.5
n =1  0.2640  n =1
 0.2640 
1 +
3
 1 + 
 4   4 
6 36
800 X
(B) ∑ 6 n −3
=∑ n −0.5
n =1  0.2640   0.2640 
n =1
1 +  1 + 
 12   12 
6 36
800 4000 X
(C) 4000 + ∑ 6 n −2
= 12
+ ∑ n
n =1
 0.2640  3  0.2640  n =1
 0.2640 
1 +
3
1 +    1 + 
 4   4   4 
6 36
800 4000 X
(D) 4000 + ∑ 6 n −3
= 36
+∑ n −0.5
 0.2640 
n =1  0.2640  n =1  0.2640 
1 +  1 +  1 + 
 12   12   12 
6 36
800 4000 X
(E) 4000 + ∑ 2 n −1
= 12
+ ∑ n −0.5
n =1  0.2640   0.2640 
1 +  1 + 
n =1
 0.2640  3
4  4   1 + 
   4 

83
163.
A bank issues two 20-year bonds, A and B, each with annual coupons, an annual effective yield
rate of 10%, and a face amount of 1000. The total combined price of these two bonds is 1600.

Bond B's annual coupon rate is equal to Bond A's annual coupon rate plus 1 percentage point.

Calculate the annual coupon rate of Bond A.

(A) 6.46%
(B) 7.15%
(C) 7.29%
(D) 8.02%
(E) 8.90%

164.
An annuity provides level payments of 1000 every six months for a fixed period.

Using an annual effective interest rate of i, the future value of this annuity at the time of the last
payment is 19,549.25 and the present value of this annuity at the time of the first payment is
7,968.89.

Calculate i.

(A) 7.4%
(B) 8.5%
(C) 15.4%
(D) 17.0%
(E) 17.7%

84
165.
An annuity provides the following payments:
i) X at the beginning of each year for 20 years, starting today
ii) 4X at the beginning of each year for 30 years, starting 20 years from today

Calculate the Macaulay duration of this annuity using an annual effective interest rate of 2%.

(A) 27.32
(B) 27.87
(C) 28.30
(D) 33.53
(E) 35.41

166.
An investor deposits 100 into a bank account at time 0. The bank credits interest at an annual
nominal interest rate of i, compounded semi-annually.

The total amount of interest credited in the twelfth year is twice the amount of interest credited in
the fifth year.

Calculate i.

(A) 10.15%
(B) 10.24%
(C) 10.32%
(D) 10.41%
(E) 10.48%

85
 167.
Let A and B be bonds with semiannual coupons as described in the table below:

Annual Years to Annual nominal yield rate

Bond Price coupon rate Par redemption convertible semiannually
A X 8% 1000 5 6%
B X y 1000 5 7%

Calculate y.

(A) 8.45%
(B) 8.65%
(C) 8.85%
(D) 9.05%
(E) 9.25%

168.
A borrower takes out a 15-year loan at an annual effective interest rate of i with payments of 50
at the end of each year.

The borrower decides to pay off the loan early by making extra payments of 30 with each of the
sixth through tenth regularly scheduled payments. As a result, the loan will be paid off at the end
of 10 years (instead of 15).

Determine which of the following equations of value is correct.

(A) 50a15 = 50a10 + 30a5

(B) 50 s15 = 50 s10 + 30 s5
(C) 50v 5 s15 = 50 s10 + 30 s5
(D) 50 s15 = 50 s10 + 30v 5 s5
(E) 50 s15 = 50 s10 + 30(1 + i )5 s5

86
169.
A borrower takes out a loan to be repaid over 20 years. The first payment is 1102 payable at the
end of the first month. Each subsequent monthly payment is five more than the previous month’s
payment.

Calculate the accumulated value of the payments at the end of 15 years using an annual effective
interest rate of 6.5%.

(A) 442,031
(B) 443,525
(C) 445,578
(D) 447,287
(E) 448,547

170.
Fund J begins with a balance of 20,000 and earns an annual effective rate of 6.5%. At the end of
each year, the interest earned and an additional 1000 is withdrawn from the fund so that by the
end of the 20th year, the fund is depleted.

The annual withdrawals of interest and principal are deposited into Fund K, which earns an
annual effective rate of 8.25%. At the end of the 20th year, the accumulated value of Fund K is x.

Calculate x.

(A) 39,332
(B) 54,818
(C) 84,593
(D) 86,902
(E) 97,631

87
171.
Company Q invests X at the end of each year for 25 years at an annual effective interest rate of
9%. Company R invests 100 at the end of each year for 25 years at an annual effective interest
rate of 9%, but, at the end of each year, the interest earned is reinvested at an annual effective
interest rate of 8%.

Immediately after the 25th payment, Company R’s total investment, including the reinvested
interest, has the same value as Company Q’s investment.

Calculate X.

(A) 91.22
(B) 91.93
(C) 92.67
(D) 93.41
(E) 94.03

172.
Fund X receives a deposit of 1000 at time 0. Fund X accumulates at a nominal rate of interest k,
compounded semiannually.

Fund Y receives a deposit of 921.90 at time 0. Fund Y accumulates at a nominal rate of discount,
also equal to k, compounded semiannually.

At the end of 5 years, the accumulated amount in Fund X and the accumulated amount
in Fund Y are both equal to P.

Calculate P.

(A) 1820
(B) 1970
(C) 2100
(D) 2240
(E) 2370

88
173.
The present value of a perpetuity-due with payments of X at the beginning of each 3-year period
with an annual effective interest rate of 7% is 735.

Calculate X.

(A) 135
(B) 138
(C) 141
(D) 144
(E) 147

174.
The present value of a perpetuity-immediate with a first payment of P and successive annual
increases of 9 at an annual effective interest rate of 6% is 2600.

Calculate P.

(A) 5.50
(B) 6.00
(C) 6.50
(D) 7.00
(E) 7.50

89
175.
The following two annuities-immediate have the same present value at an annual effective
interest rate of i, i > 0.
i) A ten-year annuity with annual payments of 475.
ii) A perpetuity with annual payments of 400 in years 1-5, zero in years 6-10, and
400 in years 11 and beyond.

Calculate i.

(A) 10.65%
(B) 10.75%
(C) 10.85%
(D) 10.95%
(E) 11.05%

176.
A two-year loan of 100 is repaid with a payment of X at the end of the first year and 2X at the
end of the second year. The annual effective interest rate charged by the lender is 8% in the first
year and i in the second year. The annual effective yield rate for the lender is 10%.

Calculate i.

(A) 12.8%
(B) 12.9%
(C) 13.0%
(D) 13.1%
(E) 13.2%

90
177.
A ten-year loan will be repaid with payments at the end of each year. Each of the first five
payments is 1000 and each of the next five payments is 2000.

Interest on the loan is charged at an annual effective rate of 10%.

Calculate the total interest paid in the first five payments.

(A) 2418
(B) 2646
(C) 2978
(D) 4083
(E) 4249

178.
An investor will accumulate 10,000 at the end of ten years by making level deposits of X at the
beginning of each year. The deposits earn 12% simple interest at the end of every year but the
interest is reinvested at an annual effective rate of 8%.

Calculate X.

(A) 508.79
(B) 541.47
(C) 569.84
(D) 597.73
(E) 608.42

91
179.
An investment of 10,000 produces a series of 30 annual payments. The first payment of X is
made one year after the investment is made. Each successive payment decreases by 5 from the
previous payment.

At an annual effective interest rate of 5%, calculate X.

(A) 685
(B) 695
(C) 705
(D) 715
(E) 725

180.
A company is considering a project that will require an initial investment of 600 and additional
investments of 100 and 50 at the end of years one and two, respectively. It is expected that
revenue from this project will be 150 per year for five years, beginning one year from the initial
investment.

Assuming an annual effective rate of 15%, calculate the net present value of this project.

(A) –222
(B) –134
(C) 0
(D) 134
(E) 222

92
181.
Determine which of the following conditions are necessary for an immunization strategy.

I. The present value of the cash inflow from the assets is equal to the present value
of the cash outflow from the liabilities.
II. The price sensitivity to changes in interest rates is greater for assets than for
liabilities.
III. The convexity of assets is less than the convexity of liabilities.

(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).

182.
Four annual tuition payments of 25,000 are to be paid at a future date.

The payments will be funded by investing 1000 at the beginning of each month. The last deposit
will be made six months before the first tuition payment. Interest is payable at a nominal interest
rate of 6% convertible monthly.

Calculate the minimum number of monthly deposits required to fund the total tuition.

(A) 70
(B) 71
(C) 73
(D) 74
(E) There is not enough information to calculate the minimum number of monthly deposits.

93
183.
Consider a 7-year loan to be repaid with equal payments made at the end of each year. The
annual effective interest rate is 10%.

Calculate the Macaulay duration of the loan payments.

(A) 3.15
(B) 3.29
(C) 3.40
(D) 3.50
(E) 3.62

184.
A company has liabilities of 402.11 due at the end of each of the next three years.

The company will match the duration of its liabilities by investing a total of 1000 in one-year and
three-year zero-coupon bonds. The annual effective yield of both bonds is 10%.

Calculate the amount the company will invest in one-year bonds.

(A) 366
(B) 402
(C) 442
(D) 500
(E) 532

94
185.
A trucking company with assets and liabilities needs to choose between various ten-year par
value bonds each with 8% annual effective yield rate and annual coupons. The bonds have
varying face values and varying coupon rates.

The company wants to analyze the effects of face value and coupon rate changes on Macaulay
duration of these bonds, in order to choose an investment strategy that immunizes its position.

Determine which of the following statements is true about the separate effects of face value and
coupon rate changes on the duration of these bonds.

(A) Macaulay duration increases as face value increases, and increases as coupon rate
increases.
(B) Macaulay duration increases as face value increases, and decreases as coupon rate
increases.
(C) Macaulay duration remains constant as face value increases, and increases as coupon rate
increases.
(D) Macaulay duration remains constant as face value increases, and remains constant as
coupon rate increases.
(E) Macaulay duration remains constant as face value increases, and decreases as coupon rate
increases.

95
186.
A corporation makes a payment at the end of each month into a savings account that offers an
annual nominal interest rate of 8% compounded quarterly.

Determine the equivalent effective rate of interest per payment period.

1/3
 8% 
(A) 1 +  −1
 4 
 8% 
(B) 1 +  −1
 12 
3
 8% 
(C) 1 +  −1
 12 
12
 8% 
(D) 1 +  −1
 12 
4
 8% 
(E) 1 +  −1
 4 

187.
A mortgage for 125,000 has level payments at the end of each month and an annual nominal
interest rate compounded monthly. The balances owed immediately after the first and second
payments were 124,750 and 124,498, respectively.

Calculate the number of payments needed to pay off the mortgage.

(A) 198
(B) 199
(C) 200
(D) 201
(E) 202

96
188.
A company is required to pay 500,000 ten years from now and 500,000 fifteen years from now.
The company needs to create an investment portfolio using 5-year and 20-year zero-coupon
bonds, so that, using a 7% annual force of interest, the present value and Macaulay duration of its
assets match those of its liabilities.

Calculate the amount invested today in each bond.

(A) 211,631 for the 5-year bond and 211,631 for the 20-year bond
(B) 217,699 for the 5-year bond and 217,699 for the 20-year bond
(C) 223,852 for the 5-year bond and 199,410 for the 20-year bond
(D) 229,857 for the 5-year bond and 205,540 for the 20-year bond
(E) 248,293 for the 5-year bond and 174,969 for the 20-year bond

189.
A bond with a face value of 1000 and a redemption value of 1080 has an annual coupon rate of
8% payable semiannually. The bond is bought to yield an annual nominal rate of 10%
convertible semiannually.

At this yield rate, the present value of the redemption value is 601 on the purchase date.

Calculate the purchase price of the bond.

(A) 911
(B) 923
(C) 956
(D) 974
(E) 984

97
190.
A loan of 10,000 is being repaid by payments of 1,000 at the end of each quarter for as long as
necessary, plus a drop payment.

The annual nominal rate of interest on the loan is 16% convertible quarterly.

Calculate the amount of interest in the tenth payment.

(A) 112
(B) 146
(C) 179
(D) 233
(E) 281

191.
A five-year loan has an annual nominal interest rate of 30%, convertible monthly. The loan is
scheduled to be repaid with level monthly payments of 500, beginning one month after the date
of the loan.

The borrower misses the thirteenth through the eighteenth payments, but increases the next six
payments to X so that the final 36 payments of 500 will repay the loan.

Calculate X.

(A) 1070
(B) 1075
(C) 1080
(D) 1150
(E) 1160

98
192.
A construction firm is facing three liabilities of 1000, due at times 1, 2, and 3 in years. There are
three bonds available to match these liabilities, as follows:
Bond I A bond due at the end of period 1 with a coupon rate of 1% per year, valued at a
annual effective yield rate of 14%.
Bond II A bond due at the end of period 2 with a coupon rate of 2% per year, valued at a
annual effective yield rate of 15%.
Bond III A zero-coupon bond due at time 3 valued at a periodic effective yield rate of 18%.

Calculate the face value of each bond that should be purchased to exactly match the liabilities.

Bond I Bond II Bond III

(A) 970.68 980.39 1000.00
(B) 970.68 1000.00 980.39
(C) 980.39 970.68 1000.00
(D) 1000.00 980.39 970.68
(E) 1000.00 1000.00 1000.00

193.
An institute has provided an early retirement incentive package to a 60-year-old retiree that pays
12,000 per year at the end of each year up to and including age 65, plus a lump sum payment of
150,000 at age 65. All payments are guaranteed whether or not the retiree is alive at age 65.
The institute will create a portfolio of two five-year bonds to exactly match the payments under
this package.
The first bond has a face amount of 100,000 and an annual coupon rate of 10%.

Determine which of the following second bonds will exactly match the liability.

(A) A bond with a price of 42,015, an annual coupon rate of 4% and annual effective yield of
8%.
(B) A bond with a price of 50,000, an annual coupon rate of 4% and annual effective yield of
8%.
(C) A bond with a price of 41,588, an annual coupon rate of 8% and annual effective yield of
10%.
(D) A bond with a price of 50,000, an annual coupon rate of 8% and annual effective yield of
10%.
(E) A bond with a price of 55,451, an annual coupon rate of 8% and annual effective yield of
10%.

99
194.
You are given the following information about a 30-year bond:
i) The par value is 2000.
ii) The redemption value is 2250.
iii) Coupons are paid annually.
iv) The annual coupon rate is twice the annual yield rate.
v) The purchase price is 3609.29.
vi) Based on the yield rate, the Macaulay duration of the bond is 14.41 years.

Calculate the modified duration of the bond, based on the yield rate.

(A) 12.40 years

(B) 13.07 years
(C) 13.71 years
(D) 14.41 years
(E) 15.15 years

195.
A company’s preferred stock will pay level annual dividends forever starting five years from
now.

Using an annual effective interest rate of 10%, the modified duration of the stock is D.

Calculate D.

(A) 13.64
(B) 14.55
(C) 15.00
(D) 16.00
(E) 16.50

100
196.
A three-year bond with a face value of 1000 pays coupons semiannually. The bond is redeemable
at face value. It is bought at issue at a price to produce an annual yield rate of 10% convertible
semiannually. If the term of the bond is doubled and the yield rate remains the same, the
purchase price would decrease by 49.

Calculate the amount of a coupon.

(A) 37
(B) 46
(C) 54
(D) 63
(E) 74

197.
Three asset-liability cash flows are given in the following table where a positive amount is an
asset cash flow and a negative amount is a liability due at the corresponding time.

t (in years) 0 1 2 3
X 102,400 −192,000 0 100,000
Y 158,400 −342,000 100,000 100,000
Z −89,600 288,000 100,000 -300,000

Determine which set of cash flows is Redington immunized for an annual effective interest rate
of i = 25%.

(A) X only
(B) Y only
(C) Z only
(D) X, Y, and Z
(E) The correct answer is not given by (A), (B), (C) or (D).

101
198.
A ten-year 1000 par value bond with coupons paid annually at an annual rate of r is callable at
par at the end of the 6th, 7th, 8th, or 9th year.
The price of the bond is 1023.

If the bond is called in the worst-case scenario for the bond investor, the resulting annual
effective yield rate, i, is 96% of r.

Calculate i.

(A) 4.41%
(B) 7.46%
(C) 8.36%
(D) 10.56%
(E) 14.32%

199.
Determine which of the following statements regarding the Redington immunization technique is
false.

(A) This technique assumes that the yield curve is flat.

(B) This technique assumes that only parallel shifts in the yield curve are allowed.
(C) This technique is designed to work only for small changes in the interest rate.
(D) The modified duration of the assets must equal the modified duration of the liabilities.
(E) The convexity of the assets must equal the convexity of the liabilities.

102