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McGILL UNIVERSITY FACULTY OF SCIENCE

DEPARTMENT OF MATHEMATICS AND STATISTICS

MATH 329 2009 01 THEORY OF INTEREST

Information for Students (Winter Term, 2008/2009)

Pages 1 - 9 of these notes may be considered the Course Outline for this course.

W. G. Brown April 14, 2009

Information for Students in MATH 329 2009 01

Contents

1 General Information

 

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1.1 Instructor and Times

 

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1.2 Course Description

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1.2.1 Calendar Description .

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1.2.2 Syllabus (in terms of sec- tions of the text-book)

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1.2.3 “Verbal” arguments

 

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1.3 Evaluation of Your Progress

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1.3.1 Term Mark

 

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1.3.2 Assignments.

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1.3.3 Class Test .

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1.3.4 Final Examination .

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1.3.5 Supplemental Assessments

 

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1.3.6 Machine Scoring

 

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1.3.7 Plagiarism

 

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1.4 Published Materials

 

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1.4.1 Required Text-Book .

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1.4.2 Website

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1.4.3 Reference Books

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1.5 Other information

 

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1.5.1 Prerequisites

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1.5.2 Calculators

 

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1.5.3 Self-Supervision

 

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1.5.4 Escape Routes

 

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1.5.5 Showing your work; good mathematical form; sim- plifying answers

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2 Timetable

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3 First Problem Assignment

 

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4 Second Problem Assignment

 

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5 Solutions, First Problem Assign- ment

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6 Third Problem Assignment

 

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7 Solutions, Second Problem As- signment

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8 Solutions, Third Problem Assign- ment

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9 Fourth Problem Assignment

 

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10 Class Tests

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10.1 Class Test, Version 1

 

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10.2 Class Test, Version 2

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10.3 Class Test, Version 3

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10.4 Class Test, Version 4

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11 Draft Solutions to Problems on the Class Tests

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11.1 Version 1

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11.2 Version 2

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11.3 Version 3

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11.4 Version 4

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12 Fifth Problem Assignment

 

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13 Draft Solutions, Fourth Problem Assignment

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14 Draft Solutions, Fifth Problem As- signment

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15 References

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A Supplementary Lecture Notes 2001

A.1

Supplementary Notes for the Lec-

 

ture of January 05th, 2009 .

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2001

A.1.1

These notes

2001

A.1.2

§1.1 INTRODUCTION 2001

A.1.3

§1.2 THE ACCUMULA-

 

TION AND AMOUNT FUNCTIONS

2002

A.2

Supplementary Notes for the Lec-

ture of January 07th, 2009

2003

A.3

Supplementary Notes for the Lec-

ture of January 09th, 2009

2009

A.3.1 §1.3 THE EFFECTIVE

A.3.2

RATE OF INTEREST 2009 §1.4 SIMPLE INTEREST 2011

Information for Students in MATH 329 2009 01

 

A.3.3 §1.5 COMPOUND INTER-

A.9.1

§2.3 EQUATIONS OF VALUE

 

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2012

(conclusion)

2038

A.4

A.9.2

§2.4 UNKNOWN TIME 2039

Supplementary Notes for the Lec- ture of January 12th, 2009

2016

A.10 Supplementary Notes for the Lec-

 

A.4.1

§1.5 COMPOUND INTER-

2016

§1.6 PRESENT VALUE 2016

EST (conclusion)

ture of January 26th, 2009

2043

 

A.10.1 §2.5 UNKNOWN RATE

 

A.4.2

OF INTEREST

2043

A.10.2 §2.6 DETERMINING TIME

A.4.3 §1.7 THE EFFECTIVE RATE OF DISCOUNT 2018

ture of January 14th, 2009

2021

2021

PERIODS

AMPLES

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2044

A.5

Supplementary Notes for the Lec-

A.5.1 §1.7 THE EFFECTIVE RATE OF DISCOUNT

A.10.3 §2.7 PRACTICAL EX-

A.11 Supplementary Notes for the Lec- ture of January 28th, 2009

2046

2050

(conclusion)

A.11.1 §2.8 MISCELLANEOUS

A.5.2

§1.8 NOMINAL RATES

OF INTEREST AND DIS-

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COUNT .

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PROBLEMS

2050

. A.11.2 §3.1 INTRODUCTION 2052 A.11.3 §3.2 ANNUITY-IMMEDIATE 2052

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A.6

. Supplementary Notes for the Lec- ture of January 16th, 2009

2025

A.12 Supplementary Notes for the Lec- ture of January 30th, 2009

2054

A.6.1

§1.8 NOMINAL RATES

A.12.1 §3.2 ANNUITY-IMMEDIATE

 

(conclusion)

2054

 

A.6.2

OF INTEREST AND DIS- COUNT (conclusion) 2025 §1.9 FORCES OF INTER- EST AND DISCOUNT 2027

A.13 Supplementary Notes for the Lec- ture of February 02nd, 2009 . 2056

A.7

Supplementary Notes for the Lec- ture of January 19th, 2009

2029

A.13.1 §3.3 ANNUITY-DUE 2056 A.14 Supplementary Notes for the Lec- ture of February 04th, 2009 . 2058

A.7.1

 
 

§1.9 FORCES OF INTER- EST AND DISCOUNT (conclusion)

2029

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2032

SULTS

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A.14.1 §3.4 ANNUITY VALUES ON ANY DATE

2058

A.15 Supplementary Notes for the Lec-

A.16 Supplementary Notes for the Lec-

 

A.7.2

§1.10 VARYING INTER-

ture of February 06th, 2009 . 2064

A.7.3

§1.11 SUMMARY OF RE-

A.15.1 §3.5 PERPETUITIES 2064

A.8

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ture of February 09th, 2009 . 2067 A.16.1 §3.6 UNKNOWN TIME 2067

ture of January 21st, 2009

2034

A.8.1

2034

A.17 Supplementary Notes for the Lec- ture of February 11th, 2009 . 2071

A.8.2

§2.1 INTRODUCTION §2.2 THE BASIC PROB-

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A.17.1 §3.6 UNKNOWN TIME

 

A.8.3

(conclusion)

§2.3 EQUATIONS OF VALUE 2036

2071

A.9

Supplementary Notes for the Lec- ture of January 23rd, 2009

2038

A.17.2 §3.7 UNKNOWN RATE OF INTEREST A.18 Supplementary Notes for the Lec-

2072

ture of February 13th, 2009 . 2076

Information for Students in MATH 329 2009 01

A.18.1 §3.7 UNKNOWN RATE OF INTEREST (conclu-

sion)

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2076

A.23.1 §4.6 PAYMENTS VARY- ING IN ARITHMETIC PROGRESSION (contin-

 

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ued)

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A.24 Supplementary Notes for the Lec- ture of March 06th, 2009 A.24.1 §4.6 PAYMENTS VARY-

2098

INTEREST

ING IN ARITHMETIC

A.18.4 §3.10 MISCELLANEOUS

PROGRESSION (conclu-

PROBLEMS

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2078

sion) .

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2098

A.18.5 APPENDIX 3 A.19 Supplementary Notes for the Lec-

2079

A.24.2 §4.7 PAYMENTS VARY- ING IN GEOMETRIC PRO-

ture of February 16th, 2009 .

2080

GRESSION

 

2102

A.19.1 §4.1 INTRODUCTION 2080 A.19.2 §4.2 ANNUITIES PAYABLE

A.24.3 §4.8 MORE GENERAL VARYING ANNUITIES 2105

AT A DIFFERENT FRE-

A.24.4 §4.10 MISCELLANEOUS

 

QUENCY THAN INTER-

PROBLEMS

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2105

EST IS CONVERTIBLE 2080 A.20 Supplementary Notes for the Lec-

A.25 Supplementary Notes for the Lec- ture of March 09th, 2009

2108

ture of February 18th, 2009 .

2084

A.25.1 §5.1 INTRODUCTION 2108

A.20.1 §4.3 ANNUITIES PAYABLE

LESS FREQUENTLY THAN

A.25.2 §5.2 FINDING THE OUT- STANDING LOAN BAL-

INTEREST IS CONVERT-

ANCE

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2108

IBLE

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A.26 Supplementary Notes for the Lec- ture of March 11th, 2009

2113

ture of February 20th, 2009 .

2089

A.26.1 §5.3 AMORTIZATION SCHED-

A.21.1 §4.4 FURTHER ANAL- YSIS OF ANNUITIES PAYABLE

MORE FREQUENTLY

ULES

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2120

THAN INTEREST IS CON-

A.27.1 §5.4 SINKING FUNDS 2120

VERTIBLE

2089

A.28 Supplementary Notes for the Lec-

 

A.22 Supplementary Notes for the Lec-

ture of March 18th, 2009

2122

ture of March 02nd, 2009

2093

A.28.1 §5.4 SINKING FUNDS

A.22.1 §4.5 CONTINUOUS AN-

(conclusion)

2122

NUITIES A.22.2 §4.6 PAYMENTS VARY- ING IN ARITHMETIC

2093

A.28.2 §5.5 DIFFERING PAY- MENT PERIODS AND INTEREST CONVERSION

PROGRESSION A.23 Supplementary Notes for the Lec-

2095

PERIODS A.28.3 §5.6 VARYING SERIES

2126

ture of March 04th, 2009

2096

. A.28.4 §5.7 AMORTIZATION WITH

2127

OF PAYMENTS

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CONTINUOUS PAYMENTS 2127

Information for Students in MATH 329 2009 01

A.28.5 §5.8 STEP-RATE AMOUNTS

A.34.3 §7.6 TIME-WEIGHTED

 

OF PRINCIPAL

2127

RATES OF INTEREST

A.29 Supplementary Notes for the Lec- ture of March 20th, 2009

2128

(Omit) .

2146

. A.34.4 §7.7 PORTFOLIO METH-

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A.29.1 §6.1 INTRODUCTION 2128 A.29.2 §6.2 TYPES OF SECU-

ODS AND INVESTMENT YEAR METHODS (Omit) 2146

RITIES

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2128

2131

A.30.1 §6.3 PRICE OF A BOND 2131

A.31 Supplementary Notes for the Lec- ture of March 25th, 2009

2134

A.34.5 §7.8 SHORT SALES (Omit) 2146 A.34.6 §7.9 CAPITAL BUDGET- ING - BASIC TECHNIQUES

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A.34.7 §7.10 CAPITAL BUDGET- ING - OTHER TECH-

(Omit) .

2146

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A.31.1 §6.4 PREMIUM AND DIS-

COUNT .

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2134

ture of March 27th, 2009

 

2136

A.32.1 §6.4 PREMIUM AND DIS-

COUNT (conclusion)

2136

A.32.2 §6.5 VALUATION BE- TWEEN COUPON PAY- MENT DATES (Omit)

2137

A.32.3 §6.6 DETERMINATION OF YIELD RATES (omit) 2137 A.32.4 §6.7 CALLABLE AND

NIQUES (Omit)

. A.34.8 Appendix 7 (Omit)

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ture of April 03rd, 2009

2146

2146

A.35 Supplementary Notes for the Lec-

2147

A.36 Supplementary Notes for the Lec- ture of April 06th, 2009

2147

A.37 Supplementary Notes for the Lec- ture of April 08th, 2009

2147

A.38 Supplementary Notes for the Lec- ture of April 14th, 2009

2147

B Problem Assignments, Tests, and

PUTABLE BONDS

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2137

ture of March 30th, 2009 A.33.1 §6.7 CALLABLE AND PUTABLE BONDS (con-

2139

tinued)

2139

. A.33.2 §7.1 INTRODUCTION (omit) 2142 A.33.3 §7.2 DISCOUNTED CASH FLOW ANALYSIS (omit) 2142 A.33.4 §7.3 UNIQUENESS OF

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THE YIELD RATE (part) 2142

A.34 Supplementary Notes for the Lec- ture of April 01st, 2009

2143

A.34.1 §7.4 REINVESTMENT

. A.34.2 §7.5 INTEREST MEA- SUREMENT OF A FUND

RATES

2143

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Examinations from Previous Years 3001

B.1

2002/2003

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3001

B.1.1

First 2002/2003 Problem Assignment, with Solu-

tions .

3001

B.1.2

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lem Assignment, with So-

lutions .

3006

B.1.3

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lem Assignment, with So-

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3011

B.1.4

Fourth 2002/2003 Prob- lem Assignment, with So-

lutions .

3018

B.1.5

. Fifth 2002/2003 Problem Assignment, with Solu-

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tions .

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3027

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2146

Information for Students in MATH 329 2009 01

 

B.1.6

2002/2003 Class Tests, with

B.3.5

Fifth Problem Assignment,

 

Solutions

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3035

with Solutions

3126

 

B.1.7

Final Examination, 2002/2003 3040

B.3.6

Solutions to Problems on

B.2

2003/2004

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3043

the Class Test

3134

B.2.1

First 2003/2004 Problem

tions

3043

B.3.7

B.3.8

Final Examination 2005/2005 3145

 

Assignment, with Solu-

Supplemental/Deferred Ex- amination 2004/2005 . 3149

 

B.2.2

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B.2.3 Third 2003/2004 Prob- lem Assignment, with So-

lutions

3055

 

B.2.4

. Fourth 2003/2004 Prob- lem Assignment, with So-

lutions

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B.2.5

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tions

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B.2.6

2003/2004 Class Test, Ver-

 

sion 1

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3075

 

B.2.7

2003/2004 Class Test, Ver-

 

sion 2

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3077

 

B.2.8

2003/2004 Class Test, Ver-

B.2.9

. 2003/2004 Class Test, Ver-

sion 3

3078

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sion 4

3079

. B.2.10 Solutions to Problems on the 2003/2004 Class Tests 3081 B.2.11 Final Examination, 2003/2004 3090 B.2.12 Supplemental/Deferred Ex- amination, 2003/2004 3092

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B.3

2004/2005

B.3.1

3095

. First Problem Assignment,

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with Solutions

3095

 

B.3.2

Second Problem Assign- ment, with Solutions . 3101

B.3.3

Third Problem Assignment,

 

with Solutions

3109

3118

 

B.3.4

Fourth Problem Assign-

 

ment, with Solutions .

Information for Students in MATH 329 2009 01

1

1 General Information

Distribution Date: Friday, January 05th, 2009 subject to correction

(All information is subject to change , either by announcements at lectures, on WebCT, or in print.) An updated version will be accessible via a link from WebCT.) The Course Outline for MATH 329 2009 01 can be considered to be pages 1 through 9 of these notes.

1.1 Instructor and Times

CRN:

610

INSTRUCTOR:

Prof. W. G. Brown BURN 1224 W 13:1514:15 h.; F 10:3011:30 h.; and by appointment

398–3836

OFFICE:

OFFICE HRS. (subject to change) TELEPHONE:

E-MAIL:

BROWN@MATH.MCGILL.CA BURN 1B23 MWF 14:35–15:25 h.

CLASSROOM:

CLASS HOURS:

Table 1: Instructor and Times

1.2 Course Description

1.2.1 Calendar Description

THEORY OF INTEREST. (3 credits) (Prerequisite: MATH 141.) Simple and com- pound interest, annuities certain, amortization schedules, bonds, depreciation.

1.2.2 Syllabus (in terms of sections of the text-book)

The central part of the course consists of many of the topics in the first eight chapters of the textbook [4] 1 ; section numbers, where shown, refer to that book. In the list below I show the chapters and appendices of the textbook. Following each is a description as of the date of this revision, of the sections to be excluded. This list could be updated

1 [n] refers to item n in the bibliography, page 901.

Information for Students in MATH 329 2009 01

2

during the semester, as it becomes apparent that certain sections are not appropriate to the level of the course or the lecture time available.

Chapter 1. The Measurement of Interest §§1.1–1.11. Appendix 1. 2 For the present, please omit the discussion of force of discount on [4, §1.9, p. 30].

Chapter 2. Solution of Problems in Interest

time, p. 55 and Appendix 2. Students should peruse §2.6, but will not be expected to memorize the definitions contained therein.

§§2.1–2.7. Omit method of equated

Chapter 3. Basic Annuities §§3.1–3.6. In §3.7 students should know how to de- rive and use the approximation formulæ from Appendix 3, but need not memorize the formulæ. Omit §3.8, with the exception of the definitions of the Portfolio and Yield Methods. Only one example from §3.9 will be considered. Appendix 3 is included in connection with §3.7.

Chapter 4. More General Annuities

§§4.1-4.7. Appendix 4. Omit §§4.8, 4.9.

Chapter 5. Amortization schedules and sinking funds §§5.1–5.4. Omit §§5.5, 5.6, 5.7, 5.8.

Chapter 6. Bonds and other securities 6.11 and Appendix 6.

§§6.1–6.4, and 6.7. Omit §§6.5, 6.6, 6.8–

Chapter 7. Yield rates

§7.3 (part), §7.4. Omit §§7.1–7.2, 7.5–7.10, Appendix 7.

Chapter 8. Practical applications

§8.6. Omit the remainder of this chapter.

Chapter 9. More advanced financial analysis

Omit this chapter.

Chapter 10. The term structure of interest rates

Omit this chapter.

Chapter 11. Duration, convexity and immunization

Omit this chapter.

Chapter 12. Stochastic approaches to interest

2 Added on 16 January, 2009

Omit this chapter.

Information for Students in MATH 329 2009 01

3

Chapter 13. Options and other derivatives

Omit this chapter.

Appendix A. Table numbering the days of the year

Omit.

Appendix B. Illustrative mortgage loan amortization schedule This is an ex- ample of a schedule, but much longer than any that you might be expected to be able to generate manually. The type of schedule that you could be asked to generate, in connection with chapters 5 and 6 could show more columns than this example.

Appendix C. Basic mathematical review Mostly definitions and a few formulæ that should be known to all mathematics undergraduates. Sections E, F are from Cal- culus 3, and may be discussed in the course.

Appendix D. Statistical background

Omit.

Appendix E. Iteration methods

sively will be successive bisection [4, §B].

The only method which will be discussed exten-

1.2.3 “Verbal” arguments

An essential feature of investment and insurance mathematics is the need to be able to understand and to formulate “verbal” arguments; that is, explanations of the truth of an identity presented verbally i.e., in words, rather then as an algebraic proof. In a verbal argument we seek more than mathematically correctness: we wish to see an explanation that could be presented to a layman who is not competent in the mathematical bases of this subject, but is still possessed of reason, and needs to be assured that he is not being exploited. When the skill has been mastered it can be used to verify the correctness of statements proved mathematically. Verbal arguments require some care with the underlying language; students who have difficulty with expression in English are reminded that McGill students have the right to submit any written materials in either English or French. 3

3 For a lexicon of actuarial terms in English/French, see The Canadian Institute of Actuaries English- French lexicon [10], at

http://www.actuaries.ca/publications/lexicon/

Information for Students in MATH 329 2009 01

4

1.3 Evaluation of Your Progress

1.3.1 Term Mark

The Term Mark will be computed one-third from the assignment grades, and two-thirds from the class test. The Term Mark will count for 30 of the 100 marks in the final grade, but only if it exceeds 30% of the final examination percentage; otherwise the final examination will be used exclusively in the computation of the final grade.

1.3.2 Assignments.

A total of about 5 assignments will together be worth 10 of the 30 marks assigned to Term Work.

1.3.3 Class Test

A class test will be held on Friday, March 13th, 2009 4 , at the regular class time, counting for 20 of the 30 marks in the Term Mark. Before the date was revised, students had been advised that ‘This date may be changed, after discussion with the class at any scheduled lecture date. Students who don’t come to class should ensure that they are aware of any changes in the date of the test. There will be no “make-up” test for persons who miss the test.’

1.3.4 Final Examination

Written examinations form an important part of the tradition of actuarial mathematics. The final examination in MATH 329 2009 01 will count for either 70% or 100% of the numerical grade from which the submitted final letter grade will be computed. Where a student’s Final Examination percentage is superior to her Term Mark percentage, the Final Examination grade will replace the Term Mark grade in the calculations. A 3-hour-long final examination will be scheduled during the regular examination period for the winter term (April 15th, 2009 through April 30th, 2009). You are advised not to make any travel arrangements that would prevent you from being present on cam- pus at any time during this period. Students who have religious or other constraints that could affect their ability to write examinations at particular times should watch for the Preliminary Examination Timetable, as their rights to apply for special consideration at their faculty may have expired by the time the Final Examination Timetable is published.

4 Date revised in consultation with the students present at the class of 02 March, 2009

UPDATED TO April 14, 2009

Information for Students in MATH 329 2009 01

5

1.3.5 Supplemental Assessments

Supplemental Examination. For eligible students who obtain a Final Grade of F or D in the course there will be a supplemental examination. (For information about Supplemental Examinations, see the McGill Calendar, [7].)

There is No Additional Work Option. “Will students with marks of D, F, or J have the option of doing additional work to upgrade their mark?” No. (“Additional Work” refers to an option available in certain Arts and Science courses, but not available in this course.)

1.3.6 Machine Scoring

“Will the final examination be machine scored?” While there could be Multiple Choice questions on the Class Test and/or the Final Examination, such questions will not be machine scored.

1.3.7 Plagiarism

While students are not discouraged from discussing assignment problems with their col- leagues, the work that you submit — whether through homework, the class test, or on tutorial quizzes or the final examination should be your own. The Handbook on Student Rights and Responsibilities states in 15(a) 5 that

“No student shall, with intent to deceive, represent the work of another person as his or her own in any academic writing, essay, thesis, research report, project or assignment submitted in a course or program of study or represent as his or her own an entire essay or work of another, whether the material so represented constitutes a part or the entirety of the work submitted.”

You are also referred to the following URL:

http://www.mcgill.ca/integrity/studentguide/

1.4 Published Materials

1.4.1 Required Text-Book

The textbook for the course this semester is [4] Stephen G. Kellison, The Theory of

Interest, Third Edition. McGraw-Hill/Irwin, Boston, etc. (2009), ISBN 978-0-07-338244-

9.

5 http://upload.mcgill.ca/secretariat/greenbookenglish.pdf

Information for Students in MATH 329 2009 01

6

1.4.2 Website

These notes, and other materials distributed to students in this course, will be accessible via myCourses (=WebCT) at the following URL:

http://www.math.mcgill.ca/brown/math329b.html

The notes will be in “pdf” (.pdf) form, and can be read using the Adobe Acrobat reader, which many users have on their computers. This free software may be downloaded from the following URL:

http://www.adobe.com/prodindex/acrobat/readstep.html 6

Where revisions are made to distributed printed materials — for example these informa- tion sheets — it is expected that the last version will be posted on the Web. The notes will also be available via a link from the WebCT URL:

http://mycourses.mcgill.ca

but not all features of WebCT will be implemented.

1.4.3 Reference Books

The textbooks used in the course in previous years may be used as references.

1.5 Other information

1.5.1 Prerequisites

It is your responsibility as a student to verify that you have the prescribed calculus prerequisites. It would be foolish to attempt to take the course without them.

1.5.2 Calculators

It is intended that the use of non-programmable, non-graphing calculators only will be permitted in homework, tests, or the final examination in this course. Students may be required to convince examiners and invigilators that all memories have been cleared. The use of calculators that are either graphing, programmable will not be permitted during test or examinations, in order to “level the playing field”. It is not intended that students should be permitted to use financial calculators.

6 At the time of this writing the current version is Version 9.

Information for Students in MATH 329 2009 01

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1.5.3 Self-Supervision

This is not a high-school course, and McGill is not a high school. The monitoring of your progress before the final examination is largely your own responsibility. While the instructor is available to help you, he cannot do so unless and until you identify the need for help. While the significance of the homework assignments and class test in the computation of your grade is minimal, these are important learning experiences, and can assist you in gauging your progress in the course. This is not a course that can be crammed for: you must work steadily through the term if you wish to develop the facilities needed for a strong performance on the final examination.

Working Problems on Your Own. You are advised to work large numbers of prob- lems from your textbook. The skills you acquire in solving textbook problems could have much more influence on your final grade than either the homework or the class test.

1.5.4 Escape Routes

At any time, even after the last date for dropping the course, students who are experi- encing medical or personal difficulties should not hesitate to consult their advisors or the Student Affairs office of their faculty. Don’t allow yourself to be overwhelmed by such problems; the University has resource persons who may be able to help you.

1.5.5 Showing your work; good mathematical form; simplifying answers

When, in a test or examination problem, you are explicitly instructed to show all your work, failure to do so could result in a substantial loss of marks — possibly even all of the marks; this is the default. The guiding principle should be that you want to be able to communicate your precise reasoning to others and to yourself. You are always expected to “simplify” any algebraic or numerical expressions that arise in your solutions or calculations. Verbal proofs are expected to be “convincing”: it will not be sufficient to simply describe mathematical expressions verbally.

Information for Students in MATH 329 2009 01

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2

Timetable

Distribution Date: (original version) Monday, January 5th, 2009 this revision as of April 14, 2009 (Subject to correction and change.) Section numbers refer to the text-book. 7

MONDAY

WEDNESDAY

FRIDAY

 

JANUARY

05

§§1.1-1.2

07

§§1.1-1.2

09

§§1.3-1.5

12

§§1.5-1.6

14

§1.7-1.8

16

§§1.8-1.9

 

Course changes must be completed on MINERVA by Tuesday, Jan. 20, 2009

19

§§1.9-1.10

21

§§2.1-2.2

23

§§2.3-2.4

 

Deadline for withdrawal with fee refund = Jan. 25, 2009 Verification Period: January 26 – 30, 2009

26

§§2.5-2.7

1

28

§2.8, SS3.1-3.2

30

§§3.1-3.2

 

FEBRUARY

02

§3.3

04

§3.4

06

§3.5

09

§3.6

2

11

§3.7

13

§§3.8-3.9

 

Deadline for web withdrawal (with W) from course via MINERVA = Feb. 15, 2009

16

§§4.1-4.2

18

§§4.3

20

§4.4

 

Study Break: February 22 – 28, 2009 No lectures, no regular office hours!

 

23

NO LECTURE

25

NO LECTURE

27

NO LECTURE

7

Notation:

R

X

n

=

Assignment #n due today

=

Read Only

=

reserved for eXpansion or review

Information for Students in MATH 329 2009 01

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MONDAY

Section numbers refer to the text-book. WEDNESDAY

FRIDAY

 

MARCH

02

§§4.5, 4.6

3

04

§4.6

06

§§4.6, 4.7, 4.8

09

§5.1, §5.2

11

§5.3

13

CLASS

TEST(revised

   

date)

16

§5.4

18

§5.4

20

§§6.1, 6.2

23

§6.3

4

25

§6.4

27

§6.7

30

§6.7

5

   
 

APRIL

 

01

§§7.3,7.4

03

§7.4

06

X

08

X

10

NO LECTURE

13

NO LECTURE

14

(Tuesday, to replace 13 April) X

 

Information for Students in MATH 329 2009 01

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3 First Problem Assignment

Distribution Date: Monday, January 05th, 2009 Solutions are to be submitted by Monday, January 26th, 2009

These problems are to be solved with full solutions, modelled either on the solutions to problems in the textbook, presented in class, or in the notes on the Web for this or previous years. The essence is that the reader should be able to reconstruct every step of the proof from what you have written:

getting the right answer is never enough. You are not being graded for elegance, but simply for the proof being logical, without serious gaps. While the data given may sometimes not justify a large number of decimal places, you should show your intermediate calculations in sufficient detail that the grader can determine that your calculations are correct.

1. Find the accumulated value of 1000 at the end of 4 years

(a)

if the nominal annual rate of discount is 8%, convertible quarterly;

(b)

if the nominal annual rate of interest is 8%, convertible quarterly;

(c)

if the nominal annual rate of interest is 100%, convertible annually;

(d)

if the nominal annual rate of discount is 50%, convertible annually.

2. Find the nominal rate of discount convertible every 3 months which is equivalent to a nominal rate of interest of 8% converted every 2 years.

3. A treasury bill which costs 99.00 matures after 6 months at 100.00

(a)

What is the effective annual rate of discount?

(b)

What is the effective annual rate of interest?

(c)

What is the nominal annual rate of discount compounded half-yearly?

(d)

What is the nominal annual rate of interest compounded every 4 months?

(e)

If interest is interpreted as being simple, what is the annual rate of simple interest?

4. (a) Find the length of time for 10,000 to accumulate at compound interest to 25,000, if invested at 6.00% per annum, accumulated monthly.

(b) Find the length of time for 10,000 to accumulate to 25,000, if interest is compounded monthly for full months, but is simple 6% annual interest for proper fractions of a month. (In this part of the problem it is important that you show all your work carefully, as the grader may be unable to reconstruct the reasoning from the computations alone.)

Information for Students in MATH 329 2009 01

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5. (cf. [4, Example 1.16, p. 35]) Suppose that money accumulates at an increasing force of interest δ t = 0.04 + 0.005t for 0 t 20.

(a)

Find the value at time t = t = 0, 1, 2.

2 of three payments of 50 to be paid at times

(b)

Find the constant rate of interest compounded annually which would produce the same accumulation at time t = 2.

(Note: Since the force of interest is not constant, this is not compound interest, and you must not use results like δ = ln(1 + i), which was proved on the assumption of compound interest.)

Information for Students in MATH 329 2009 01

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4 Second Problem Assignment

Distribution Date: Thursday, January 22nd, 2009 Solutions are to be submitted by Monday, February 09th, 2009

These problems are to be solved with full solutions, modelled either on the solutions to problems in the textbook, presented in class, or in the notes on the Web for this or previous years. The essence is that the reader should be able to reconstruct every step of the proof from what you have written:

getting the right answer is never enough. You are not being graded for elegance, but simply for the proof being logical, without serious gaps. While the data given may sometimes not justify a large number of decimal places, you should show your intermediate calculations in sufficient detail that the grader can determine that your calculations are correct.

1. K has 3,000 in a bank account that pays interest monthly at the nominal annual rate i (12) = 1.8%. She needs to withdraw 5,000 a year from now to pay her tuition, but plans to make equal deposits 3 months from now and 9 months from now.

(a)

Showing all your work, and using an equation of value, determine what the size of these equal deposits should be in order that the balance in the account 13 months from now will be 1,000.

(b)

Repeat the calculations if the interest rate for the account is now an effective annual rate of 1.8%; there is no change in the timing of the payments or the compounding of interest.

(Since the interest rate is very low here, it is important that you not round your computations too early.)

2. Funds A and B have not been receiving contributions for the past 10 years, and will receive no future contributions. Fund A has been accumulating, and will accumulate at an effective annual rate of 7%; Fund B has been accumulating and will accumulate at a nominal annual rate of 8% compounded semi-annually. At the end of 30 years the total of the two funds will be 50,000. At the end of 12 years Fund A will be 90% the size of Fund B.

(a)

Determine the values of each of the funds as of 4 years ago.

(b)

Determine when the two funds will be equal.

Information for Students in MATH 329 2009 01

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20

years from now. If he assumes that the fund will need to contain 1,000,000 in

20

years, how much should he invest semi-annually now? He plans to deposit the

same fixed amount at the end of every half-year for 7 years, and wishes to base his

computations on an effective annual interest rate of 6%; the first deposit will be 6 months from now.

4. Mary purchases a high definition flat-screen TV worth 500 by paying an immediate “down” payment and monthly payments of 25 for 15 months.

(a)

If the monthly payments begin one month after the purchase, and the nominal annual interest rate compounded monthly is 20%, determine the amount of the down payment.

(b)

The store offers customers the option of delaying the first payment until 1 year from the date of purchase. If Mary elects to accept this option, and wishes to pay the same down payment now as previously, what should be the amount of each of her 15 equal regular payments? (Hint: One way to approach this problem — not the only way — is to express the [deferred] payment annuity as the difference of two annuities, both with first payment 1 month from now.)

Information for Students in MATH 329 2009 01

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5 Solutions, First Problem Assignment

Distribution Date: Thursday, January 29th, 2009 Solutions were to be submitted by Monday, January 26th, 2009

These problems were to be solved with full solutions, modelled either on the solutions to problems in the textbook, presented in class, or in the notes on the Web for this or previous years. The essence is that the reader should be able to reconstruct every step of the proof from what you have written: getting the right answer is never enough. Students were advised that they were “not being graded for elegance, but simply for the proof being logical, without serious gaps. While the data given may sometimes not justify a large number of decimal places, you should show your intermediate calculations in sufficient detail that the grader can determine that your calculations are correct.”

1. Find the accumulated value of 1000 at the end of 4 years

(a)

if the nominal annual rate of discount is 8%, convertible quarterly;

(b)

if the nominal annual rate of interest is 8%, convertible quarterly;

(c)

if the nominal annual rate of interest is 100%, convertible annually;

(d)

if the nominal annual rate of discount is 50%, convertible annually.

Solution:

(a)

The accumulated value is 1000(1 0.02) 4×4 = 13861.60248 or 1,381.60.

(b)

The accumulated value is 1000(1.02) 4×4 = 1372.7857 or 1,372.79.

(c)

The accumulated value is 1000(1 + 1) 4 = 16, 000.

(d)

The accumulated value is 1000(0.5) 4 = 16, 000.

2. Find the nominal rate of discount convertible every 3 months which is equivalent to a nominal rate of interest of 8% converted every 2 years.

Solution: An equation of value is (cf. [4, equation (1.23a)])

which implies that

1

1

d

(4)

4

d

(4)

4

4 = 1 + i (

2 )

1

1

2

1

2

= 1 + 0.08

1

2

1

8

1

= 1.16 8

,

Information for Students in MATH 329 2009 01

15

implying that

or 7.35%.

d (4) = 4 1 1.16 8 = 0.0735258496

1

3. A treasury bill which costs 99.00 matures after 6 months at 100.00

(a)

What is the effective annual rate of discount?

(b)

What is the effective annual rate of interest?

(c)

What is the nominal annual rate of discount compounded half-yearly?

(d)

What is the nominal annual rate of interest compounded every 4 months?

(e)

If interest is interpreted as being simple, what is the annual rate of simple interest?

Solution:

(a)

(b)

(c)

(d)

If d is the effective annual rate of discount, then an equation of value is

1

99 = (1 d) 2 100 ,

hence d = 1 (0.99) 2 = 1.99%.

If i is the effective annual rate of interest, then an equation of value is

1

100 = (1 + i) 2 99 ,

hence i = 100

99

2

1 = 0.020304050 or 2.03%.

An equation of value is

hence d (2) = 2.00%.

An equation of value is

hence i (3) = 3 100

99

99 = 1

d

(2)

100 ,

2

100 = 1 + i (3)

3

6

4

99 ,

2 3 1 = 0.020168163 or 2.017%.

Information for Students in MATH 329 2009 01

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(e) If i is the rate of simple interest, then 1 +

0.020202020 or 2.02%.

2 i

= 100

99

i = 2 100

99

1 =

4. (a) Find the length of time for 10,000 to accumulate at compound interest to 25,000, if invested at 6.00% per annum, accumulated monthly.

(b) Find the length of time for 10,000 to accumulate to 25,000, if interest is compounded monthly for full months, but is simple 6% annual interest for proper fractions of a month. (In this part of the problem it is important that you show all your work carefully, as the grader may be unable to reconstruct the reasoning from the computations alone.)

Solution:

(a)

(b)

If n denotes the number of years, then an equation of value is

1 + 0.06

12

12n

10000 = 25000 ,

so (1.005) 12n = 2.5000, and n = ln 2.5

ln

1.005 = 15.30965924 or 15.31 years.

We have proved in the preceding part that the number of months required is approximately 15.30965924 × 12 = 183.7, so the time will be 183 full months

plus a fraction of a month. In 183 full months 10000 accumulates at compound

interest to 1 + 0.06

183

12

10000 = 24910.89 .

Let t denote the fraction of a month needed to this amount to accumulate at simple interest to 25000. Then an equation of value is

1 + 0.06

12

183 1 + 0.06 · 12 10000 ,

t

yielding

t =

25000

10000(1.005)

183

1

0.005

= 0.7154036000

or 0.72 months. Thus the total time required for the accumulation is 183.72

months, or 15 + 3.72

= 15.31 years. The condition that interest be simple

has not been strong enough to affect the final answer (because of the low rate

of interest, and the short time involved).

12

Information for Students in MATH 329 2009 01

17

5. (cf. [4, Example 1.16, p. 35]) Suppose that money accumulates at an increasing force of interest δ t = 0.04 + 0.005t for 0 t 20.

(a)

Find the value at time t = t = 0, 1, 2.

2 of three payments of 50 to be paid at times

(b)

Find the constant rate of interest compounded annually which would produce the same accumulation at time t = 2.

(Note: Since the force of interest is not constant, this is not compound interest, and you must not use results like δ = ln(1 + i), which was proved on the assumption of compound interest.)

Solution:

(a)

Using formula [4, (1.27), p. 29]), which states that a(t) = e accumulation at time t = 2 to be

t

0

δ r dr , we

50 e

2

0

δ r dr + e

2

1

δ r dr + e

2

2

δ r dr

50 e

2

(0.04+0.005r) dr + e
=

0

2

1

(0.04+0.005r) dr + e

2

2

(0.04+0.005r) dr

= 50 e [ 0.04r+0.0025r 2 ] 0

2

+

e [ 0.04r+0.0025r 2 ] 2

1

+

2

e [ 0.04r+0.0025r 2 ] 2

find the

= 50 e 0.09 + e 0.0475 + e 0

= 50(1.094174284 + 1.048646201 + 1) = 157.1410242 .

(b)

Suppose the annual rate of compound interest is i. Then an equation of value is

50 (1 + i) 2 + (1 + i) 1 + 1 = 156.8795170 .

This is a quadratic equation, equivalent to (1 + i) 2 + (1 + i) 2.13759034 =

= ± 2.38759034 =

±1.545182947, implying that 0 = 0.045182947 or i = 3.045182947. The second root is absurd, and extraneous. Hence the equivalent constant rate of compound interest for this particular configuration of payments is 4.52%.

0 . Solving by completion of the square yields i + 3

2

Information for Students in MATH 329 2009 01

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6 Third Problem Assignment

Distribution Date: Saturday, February 07th, 2009 Solutions are to be submitted by Monday, March 02nd, 2009

1. X borrows 20,000 and starts repaying it with semi-annual payments of 1,200, at an effective annual rate of 6%. After he makes 10 payments he is laid off from his job, and asks the lenders to permit him to delay repayment. The lenders permit him to skip just one payment, but tell him that interest rates have risen, and that they will agree to the delay only if X agrees to accept the new rates as of the last payment made. X counters that he can’t pay more than 1,200 per half-year, and agrees that, when he resumes payments after the one missed payment, the payments will be at a constant level of not more than 1,200 per half year at a nominal annual rate of 8%, compounded semi-annually.

(a)

Determine, as of the date of the last payment made at the effective annual rate of 6%, the amount of loan still outstanding.

(b)

Determine, as of the date of the missed payment, the amount L of loan still outstanding.

(c)

By solving an inequality for the smallest value of n such that 1200 · a n

By solving an inequality for the smallest value of n such that 1200 · a n

L,

determine the minimum number n of payments that X will still have to make.

(d)

For the minimum number of payments n that you have determined above, find the exact amount of each of the equal payments.

(e)

Suppose that X had had the foresight to know, at the time he was borrow- ing 20,000, that he would not be able to make the projected 11th payment. Determine, as of the original date of the loan, the number m of payments he would have to make after the missed payment, if all except the last of the 10 + m payments are to be equal to 1,200, and the last “drop” payment could be smaller.

(f)

Continuing the discussion in the previous item, suppose that, knowing that he was going to have to make 10 + 0 + m payments not to exceed 1200, X contracted at the time of the loan to make all of these payments equal (except for the payment of 0 five and one-half years into the loan). What would be the amount of these equal payments? (Hint: There are different ways of approaching this problem. One method would be to proceed as above:

Assume the first 10 payments are at the full amount of 1,200, and deter- mine the amount L outstanding at the time of the missed payment.

Determine the smallest m such that 1200 · a m

L outstanding at the time of the missed payment. • Determine the smallest m such that

L.

Information for Students in MATH 329 2009 01

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Then determine the exact level amount of the 10 + 0 + m payments (re- membering that there is a hiatus between the 10th payment and the next).)

i = X, and

i = Y . Use your (algebraic) knowledge of the values of the annuity functions

to determine a formula which expresses i in terms of X, Y . Verify your work by selecting values of i and n and computing X and Y , and checking that the formula is correct in that special case.

3. George has just begun working at the type of job he has dreamed of, where he would work for 20 years and then retire for life. He plans to invest 1,000 at the beginning of every month that he works. When he retires he will spend 150,000 to purchase a chalet in the mountains, and will begin to draw fixed monthly payments from the balance. The first payment he receives will be one month after he retires — i.e., 1 month after he draws the capital for his chalet. The fixed payments he receives will begin a perpetuity, which will continue to his estate, forever (unless his executors negotiate a termination with the trust company that holds the account). Suppose that the interest rate during the years when he is working is 6%, compounded monthly, and that the interest rate for the perpetuity-immediate is 7% annual, effective. Determine, to the nearest unit, the constant amount of his perpetuity payments.

2. Suppose that you know that, for some n and for some interest rate i, a¨ n

that, for some n and for some interest rate i , a ¨ n s n+1

s

n+1
n+1

4. Juliette was born on February 29th, 1980, and has always felt sorry for people born on that day, because of the paucity of their birthdays. After making her first billion, she decided to endow the Leap Year Foundation, with the purpose of making awards to persons with 29 February as their birthday. Awards totalling 20,000 will be made on New Year’s Day of every leap year — assume that a leap year is one divisible by 4, excluding years divisible by 100 except those divisible by 400, which are leap years. If the Foundation makes its first awards in 2012, determine how much money Juliette needs to contribute on April 1st, 2009 to fund the Foundation, if the effective annual rate of interest is taken to be i = 5%.

5. The owner of a perpetuity-immediate which pays 10,000 per year wishes to adjust the payments so that he receives 12 equal monthly payments through the year. If the monthly payments work out to 825 each, what is the effective annual interest rate? (It is intended that you determine this rate by first “trapping” the correct rate in an interval between two interest rates, and then repeatedly cut the interval in half by testing the midpoint. Finding the ends of the first interval you work with is easy, particularly if you don’t demand that it be small. For example, see what happens if you take an interest rate of 0%. Apply this “bisection” method

Information for Students in MATH 329 2009 01

20

10 times, and use the result to obtain an approximation to the effective annual interest rate the question requests. The validity of this procedure derives from the Intermediate Value Theorem, based on the continuity of the inverse function of s n

i.e., of i as a function of s n

, i
,
i
, based on the continuity of the inverse function of s n i.e., of i as

i for fixed n.)

Information for Students in MATH 329 2009 01

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7 Solutions, Second Problem Assignment

Distribution Date: Sunday, February 15th, 2009 Solutions were to be submitted by Monday, February 09th, 2009.

These problems are to be solved with full solutions, modelled either on the solutions to problems in the textbook, presented in class, or in the notes on the Web for this or previous years. The essence is that the reader should be able to reconstruct every step of the proof from what you have written:

getting the right answer is never enough. You are not being graded for elegance, but simply for the proof being logical, without serious gaps. While the data given may sometimes not justify a large number of decimal places, you should show your intermediate calculations in sufficient detail that the grader can determine that your calculations are correct.

1. K has 3,000 in a bank account that pays interest monthly at the nominal annual rate i (12) = 1.8%. She needs to withdraw 5,000 a year from now to pay her tuition, but plans to make equal deposits 3 months from now and 9 months from now.

(a)

Showing all your work, and using an equation of value, determine what the size of these equal deposits should be in order that the balance in the account 13 months from now will be 1,000.

(b)

Repeat the calculations if the interest rate for the account is now an effective annual rate of 1.8%; there is no change in the timing of the payments or the compounding of interest.

(Since the interest rate is very low here, it is important that you not round your computations too early.)

Solution:

(a) Denote the payment that must be made 3 months from now, and again 9

= 0.15%.

months from now by X . The effective interest rate per month is i (12)

12

An equation of value as of a comparison date 13 months from now is

3000 1 + i (12) 13 +X 1 + i (12) 10 +X 1 + i (12) 4 5000 1 + i (12)

12

12

12

12

1

= 1000

3000(1.0015) 13 + X(1.0015) 10 + X(1.0015) 4 5000(1.0015) = 1000

X = 1000 3000(1.0015) 13 + 5000(1.0015) (1.0015) 10 + (1.0015) 4

= 1458.833537

Information for Students in MATH 329 2009 01

22

(b)

so the amount to be deposited at each of the two given times is 1,458.83.

Since 1 + i (12) 12 = 1 + i = 1.018,

12

1 +

i (12)

12

1

= 1.018 12 = 1.001487765 ,

so the amount of each of the equal payments will be

X = 1000 3000(1.001487765) 13 + 5000(1.001487765) 1.001487765 10 + 1.001487765 4

or 1,459.17.

= 1459.168645

2. Funds A and B have not been receiving contributions for the past 10 years, and will receive no future contributions. Fund A has been accumulating, and will accumulate at an effective annual rate of 7%; Fund B has been accumulating and will accumulate at a nominal annual rate of 8% compounded semi-annually. At the end of 30 years the total of the two funds will be 50,000. At the end of 12 years Fund A will be 90% the size of Fund B.

(a)

Determine the values of each of the funds as of 4 years ago.

(b)

Determine when the two funds will be equal.

Solution: Denote the respective values of Funds A and B now by A and B. Then the two hypotheses give rise to the following equations:

A(1.07) 30 + B(1.04) 60

=

50000

A(1.07) 12

=

0.9B(1.04) 24

We can solve these two linear equations in two unknowns by eliminating one vari- able between them and thereby determine first one variable, then the other. The solutions thereby obtained by these (pre-college) operations are

0.9(50000)

A 0.9(1.07) 30 + (1.04)

=

36 · (1.07) 12 = 2796.095323

50000

B 0.9(1.04) 24 · (1.07)

=

18 + (1.04) 60 = 2729.698321

so we may take A = 2, 796.10, B = 2, 729.70.

(a) As of 4 years ago Fund A had value 2, 796