Feedback on Class Test Performance

1. Find the nominal rate of interest convertible monthly at which the accumulated
value of $12,000 at the end of 10 years is $2,000.

Feedback: This is a standard question in relation to nominal rate of

interest. Most got it right. Some made minor mistake when setting up
the equation of value.

2. A 5-year annuity has the following payments for calendar years 2005 through 2009:
$2,000 on each March 31, $4,000 on each June 30, $6,000 on each September 30,
and $8,000 on each December 31. Express the present value of this annuity on
(·)
January 1, 2005 in terms of the actuarial notation (I (·) a) · | .

(·)
Feedback: Many did not understand fully how the notation (I (·) a) · | can
be applied. The actuarial symbol is the present value of an increasing
annuity with payment pattern shown on page 15 of LN2 (item 6). One
has to find a coefficient attached to the symbol so that the resulting
payment pattern matches with the one described in the question. Some
(·)
did not know how to make use of the symbol (I (·) a) · | to represent the
discounted value (at the beginning of each year) of the payments made
within each year.

3. ”a” is the nominal rate of interest compounded ”p” times a year, equivalent to a
force of interest ”b”. If ”b” is treated as a nominal rate of discount compounded
”2p” times a year, it is equivalent to an effective rate of interest ”c”. Express ”c”
in terms of ”a” and ”p”.

Feedback: Some found it difficult to connect the two pieces of informa-

tion. Most get the relation between ”a” and ”b” correctly. As for ”b”
and ”c”, many made mistakes when formulating the accumulated value
using nominal rate of discount.

4. Given an annual effective interest rate of 5%, find the present value of a ten-year
annuity which pays $1,000 at the end of each month for the first 4 years and $2,000
at the end of each quarter for the last 6 years.

Feedback: This is very similar to Q2 of the sample class test. In general,

students performed well. Only a few made minor mistakes handling
different payment frequencies.

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5. An annuity-immediate is paid quarterly at a rate of $200,000 per annum for 20
years. The rate of interest is 6% per annum compounded monthly in the first
10 years and 6% per annum convertible semiannually for the remaining 10 years.
Calculate the accumulation of the annuity at the end of 20 years.

Feedback: This is very similar to Q1 of Assignment 2. Quite a number

of students made careless mistakes like wrongly using monthly payments
in the first 10 years and semiannual payments in the last 10 years.

6. A loan has been issued which is repaid by a 20-year increasing annuity-immediate.

The loan is calculated at a rate of interest of 5% per annum effective. The first
payment is $10,000 and payments increase by $1,000 per annum. Find the amount
of interest paid in years 5-10 inclusive.

Feedback: As was mentioned in my previous Moodle message, there is a

typo in Q6, and hence I did not really mark the question and decided to
give a full mark to everyone. For those who interpreted the question in
a sensible way and answered the question correctly, some bonus points
were given with the total mark of the test capped at 100.

7. A 3-year deferred continuous varying annuity is payable for 11 years. The rate of
payment at time t is t2 − 1 per annum and the force of interest at time t is (1 + t)−1 .
Calculate the value of the annuity at time t = 0.

Feedback: This is very similar to Example 16 on page 18 of LN2. On

page 17 of LN2, we see in item 9 that for general continuous annuity
with force of interest δt , we have
Z n Rt
Present value = g(t)e− 0 δs ds dt ,
0

where g(t) is the rate of payment at time t. We see that the exponential
function is the discounting factor that brings the payment made at time
t back to time 0. Note that the upper and lower limits of the second
integral are t and 0, respectively. We also note that the outside integral
has a lower limit of 3 (since payments start at time 3) and an upper
limit of 14 (since payments last for 11 years). Since the discounting
factor already gave us the discounted value at time 0, there is no need
to multiply the whole integral by another discounting factor that bring
the value at time 3 back to time 0.

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 8. A 10-year annuity-immediate has a present value of $120,000 with annual effective
rate of interest at 6% for the first 5 years and 5% for the remaining 5 years. An
investor buys this annuity at a price which yields 6% on his purchase price over
the entire period. It further allows him to replace his capital by means of a sinking
fund earning 4% for the first 5 years and 5% for the remaining 5 years. Calculate
the amount of the sinking fund deposit.

Feedback: This is very similar to the last example of LN4 (on page 9). I
have explained this example in details in one of the previous ZOOM lec-
tures. Unfortunately, many still misinterpreted the question. The first
sentence should be used to determine the amount of annuity payment.
The sentence ”It further allows him to replace his capital...” means that
the accumulated value of all the sinking fund deposits at the end of the
tenth years amounts to the purchase price of the annuity.

9. The force of interest δt is given by


 0.05, 0 < t ≤ 10,
δt = 0.005t, 10 < t ≤ 20,
0.003t + 0.0001t2 , t > 20.


(a) Calculate the present value of a unit sum of money due at t = 30.
(b) Calculate the effective rate of interest per unit time from t = 20 to time t = 21.
(c) A continuous payment stream is paid at the rate of e−0.03t per unit time
between time t = 0 and time t = 10, and at the rate of 50t between time
t = 10 and time t = 20. Calculate the present value of that payment stream.
Feedback: This is very similar to Q14 of Assignment 2. Most did parts
(a) and (b) correctly. The feedback for Q7 also applies to this question.
In the suggested solution, part (c) involves two integrals. Many did
the first integral right but only a few expressed and solved the second
integral correctly. Solving the second integral involves the technique of
substitution which should be taught in calculus course.

10. A business venture requires an initial investment of $2,500,000 and lasts for six
years. Expenses $3,000 are incurred at the end of each month. Income is received
monthly in arrears, at an initial annual rate of $500,000 per annum. It is assumed
that the income will increase by 5% biennially. Using linear interpolation in interest
tables, calculate the internal rate of return for the venture.

Feedback: Most can write the yield equation correctly. A few misin-
terpret the word ”biennially” which means once every two years. Quite
a number of students could not do the linear interpolation using values
extracted from interest tables. In one of the previous lectures, I said
you have to do linear approximation by using two consecutive interest
rates that can be found in interest tables. If the two interest rates are
too far apart, the approximation will not be good.