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UNIVERSITY OF ILLINOIS AT URBANA-CHAMPAIGN Actuarial Science Program DEPARTMENT OF MATHEMATICS

Math 210 Theory of Interest Prof. Rick Gorvett Fall, 2011

Homework Assignment # 1 (max. points = 10) Due at the beginning of class on Thursday, September 1, 2011 You are encouraged to work on these problems in groups of no more than 3 or 4. However, each student must hand in her/his own answer sheet. Please show your work enough to show that you understand how to do the problem and circle your final answer. Full credit can only be given if the answer and approach are appropriate. Please give answers to two decimal places e.g., xx.xx% and \$xx,xxx.xx . Suppose that the accumulation function for an account is a(t ) (1 0.125t ) . At time 0, you invest \$1,000 in this account. At time t, the value in your account is \$1,800. Find the value of t.

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You invest \$10,000 now, at an annual simple interest rate of 8%. What is the effective rate of interest during the 4th year of your investment? At time 0, you invest some money into an account earning 5% annual simple interest. How many years will it take to double your money? At time 0, you invest some money into an account earning 5% annual compound interest. How many years will it take to double your money? (Express the answer in years, to two decimal places.) At what annual compound interest rate will you quadruple your money in 12 years? Suppose that a(t ) 1 0.015 t 2 . The only investment made is \$1,000 at time 0. Find the accumulated value of this investment at time 4. Suppose that the accumulation function for an account is a(t ) (1 0.02t 2 ) . The only investment made is \$1,000 at time 3. Find the accumulated value of this investment at time 5. Suppose that A(t ) t 2 100 . If \$1,000 invested at time 0 accumulates to \$1,100 at time 2, find A(5) . (Hint: use the accumulated values at times 0 and 2 to determine the values of and .)

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On October 1, 2011, you invest \$5,000 into an account earning 10% annual compound effective interest rate. On April 1, 2013, you deposit an additional \$10,000 into the account. What is the accumulated value of your account on July 1, 2014? On April 1, 2015, you will need \$100,000. Assuming an 8% annual compound effective rate of interest, what would you have to invest on January 1, 2012, in order for you to fulfill that need?

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