Math Finance Assignment

Name : Fani Masturina

NIM : 2001573676

Session 17
Problem 17.2

The right one is the number (v). Because from the picture above we can see that it
questioned what the current value which arrowed to the number 3. Because the value
stops in year 6 (or any periodic parameter). So, the total annuity last for 6 years. The
actual formula from this case is from e-book page 184:

We can apply it to,

(1 + 𝑖)2 𝑎̈ ̅6| = 𝑠̈ 2|
̅ + 𝑎̈ ̅̅̅̅̅̅
6−2|

𝑠̈ 2|
̅ + 𝑎̈ 6−2
̅̅̅̅̅̅| = = 𝑠̈ 2|
̅ + 𝑎̈ 4|
̅

Remember So,
𝑠̈ ̅2| + 𝑎̈ ̅4|

̅ + (𝟏 + 𝒊)𝒂𝟒
𝒔̈ 𝟐| ̅|

So, the answer is (v)

Answer key: (v)
Problem 17.4
Calculate the current value at the end of 5 years of an annuity due paying annual
payments of $1200 for 12 years. The annual effective interest rate is 6%.
From formula in e-book page 184. We can calculate the equation
= 1200 ∗ (1 + 𝑖)5 𝑎12
̅̅̅̅|

= 1200 ∗ (𝑠5|
̅ + 𝑎7|
̅)

(1 + 0.06)5 − 1 1 − (1 + 0.06)−7
= 1200 ∗ (( ) + ( ))
1 − (1 + 0.06)−1 1 − (1 + 0.06)−1

= 1200 ∗ 11.89264286
= 14271.17143
≈ 𝟏𝟒𝟐𝟕𝟏. 𝟏𝟕
Answer key: 14271.17
Problem 17.6
A monthly annuity immediate pays 100 per month for 12 months. Calculate the
accumulated value 12 months after the last payment using a nominal rate of 4%
compounded monthly.
Known:
Annuity: $100/month
Annuity Period (m): 12 months
Accumulated Period (n): 12 months after the last payment.
Rate: 4% compounded monthly
From e-book we know how to find accumulated value of annuity immediate using this
formula (source: page 182)

From that formula we can write that:

0.04 12
= 100 ∗ (1 + ) 𝑆12|0.04
12 12

= 100 ∗ 𝑆24| − 𝑆12|

 0.04 24 0.04 12
(1 + 12 ) − 1 (1 + 12 ) − 1
= 100 ∗ ( − )
0.04 0.04
( 12 ) ( 12 )

= 100 ∗ 12.72042487
= 1272.042487
≈ 𝟏𝟐𝟕𝟐. 𝟎𝟒
Answer key: $1272.04
Problem 17.9
Find the current value to the nearest dollar on January 1 of an annuity which pays $2,000
every six months for five years. The first payment is due on the next April 1 and the rate
of interest is 9% convertible semi-annually.
Known:
Annuity: $2,000/6 months.
Period: 5 years.
Rate of Interest: 9% semi-annually.

To make this easier, calculate by first finding the present value as of the just-past October
1, then accumulate the value up to the present (January 1). That way your annuity
immediate formula will work like usual, using 4.5% interest per period and 10 payment
periods (and of course payments of 2000).

𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑉𝑎𝑙𝑢𝑒 (𝑂𝑐𝑡) = 2000 ∗ 𝑎10

1 − (1 + 0.045)−10
𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑉𝑎𝑙𝑢𝑒 (𝑂𝑐𝑡) = 2000 ∗
0.045
𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑉𝑎𝑙𝑢𝑒 (𝑂𝑐𝑡) = 15825.43635

And then we accumulate up to January:

𝐴𝑐𝑐𝑢𝑚𝑢𝑙𝑎𝑡𝑒𝑑 𝑉𝑎𝑙𝑢𝑒 (𝐽𝑎𝑛) = 15825.43635 ∗ (1 + 0.045)1/2
Note: The 0.5 because accumulating for 3 months, or half of the compounding period
𝐴𝑐𝑐𝑢𝑚𝑢𝑙𝑎𝑡𝑒𝑑 𝑉𝑎𝑙𝑢𝑒 (𝐽𝑎𝑛) = 16177.590531736951018721363699918
𝑨𝒄𝒄𝒖𝒎𝒖𝒍𝒂𝒕𝒆𝒅 𝑽𝒂𝒍𝒖𝒆 (𝑱𝒂𝒏) ≈ 𝟏𝟔𝟏𝟕𝟕. 𝟓𝟗
Answer Key: $16177.59
Problem 17.11
(i)
𝑎̈ 10|
̅̅̅̅̅ − 𝑎̈ 3|
̅ = 𝑎9| ̅ − 𝑎2|̅
𝑎̈ ̅̅̅̅̅̅̅
3+7| − 𝑎̈ 3| ̅ = 𝑎̅̅̅̅̅̅̅
2+7| − 𝑎2̅|
3 2
𝑣 𝑎̈ 7| ̅ = 𝑣 𝑎7| ̅
7
3
1 − 𝑣 2
1 − 𝑣7
𝑣 ( ) = 𝑣 (𝑣 )
1−𝑣 1−𝑣
3
1 − 𝑣7 3
1 − 𝑣7
𝑣 ( )= 𝑣 ( )
1−𝑣 1−𝑣
So, the answer of (i) is true.

(ii)
𝑣 3 𝑎̈ 3̅| = 𝑣 2 𝑎3|
̅
3
3
1−𝑣 2
1 − 𝑣3
𝑣 ( ) = 𝑣 (𝑣 )
1−𝑣 1−𝑣
1 − 𝑣3 1 − 𝑣3
𝑣3 ( ) = 𝑣3 ( )
1−𝑣 1−𝑣
So, the answer of (ii) is true.

(iii) Persamaannya salah karena current value itu tidak equal terhadap annuity due dan
annuity immediate.

Problem 17.15

From that e-book theorem page 184 we know that

If we apply that to upper equation from fraction is 𝑎7̅ = 𝑎3̅ + 𝑠𝑥̅ , we know that the
value of n is 7, and m is 3. To get the value of x we just need to calculate n – m.
So, 7 – 3 = 4. The answer for x =4.
Because the lower equation was 𝑎̅̅̅̅ 11 = 𝑎𝑦̅ + 𝑠𝑧̅ , The value of the equation must have the

same exact value. Consider the upper equation the s having value of year 4. So, the z = 4
too. Apply the equation above that n – m. The value of n is 11 and the value of z is 4, so,
11 – 4 = 7. So, y = 7.

Answer Key: x = z = 4 and y = 7

Session 18

Problem 18.1
What would you be willing to pay for an infinite stream of $37 annual payments (cash
inflows) beginning one year from today if the interest rate is 8%?
Considering this formula,

, so, the payment could be count with that and it will be like this
𝑃𝑎𝑦𝑚𝑒𝑛𝑡 = 37𝑎̅̅̅̅
∞|

1
𝑃𝑎𝑦𝑚𝑒𝑛𝑡 = 37 ∗
0.08
𝑷𝒂𝒚𝒎𝒆𝒏𝒕 = 𝟒𝟔𝟐. 𝟓0
Answer key: 462.50
Problem 18.2

(i)
2 𝑛
𝑎̅̅̅
𝑛| = 𝑣 + 𝑣 + ⋯ + 𝑣
𝟐 𝟑
𝒂𝟑|̅ =𝒗+𝒗 +𝒗

(ii)
2 𝑛−1
𝑎̈ ̅̅̅
𝑛| = 1 + 𝑣 + 𝑣 + ⋯ + 𝑣

𝑎̈ ̅̅̅
𝑛| = 1 + 𝑎̅̅̅̅̅̅̅
𝑛−1|

𝒂̅̅̅̅̅̅̅
𝒏−𝟏| = 𝒂̈ ̅̅̅
𝒏| − 𝟏

(iii)
1
𝑎3|
̅ = 𝑎̈ 4|
̅ − 𝑎̅̅̅̅
∞| =
𝑖
1 − 𝑣3 1
𝑎3|
̅ = = . (1 − 𝑣 3 )
𝑖 𝑖
(𝟏 𝟑)
𝒂𝟑|
̅ = 𝒂̅̅̅̅
∞| − 𝒗

= all answers are true.

Problem 18.3
An annuity−due pays 100 at the beginning of each year forever. The effective annual
rate of interest is 25%. What is the present value of the annuity?
𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑉𝑎𝑙𝑢𝑒 = 𝑎̈ ̅̅̅
𝑛|

𝐶𝑎𝑙𝑐𝑢𝑙𝑎𝑡𝑖𝑛𝑔 𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑉𝑎𝑙𝑢𝑒 = 100 ∗ 𝑎̈ ̅̅̅̅

∞|

1
𝐶𝑎𝑙𝑐𝑢𝑙𝑎𝑡𝑖𝑛𝑔 𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑉𝑎𝑙𝑢𝑒 = 100 ∗
25 25 −1
(1 + )
100 100
𝐶𝑎𝑙𝑐𝑢𝑙𝑎𝑡𝑖𝑛𝑔 𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑉𝑎𝑙𝑢𝑒 = 𝟓𝟎𝟎
Answer key: 500
Problem 18.4
A special perpetuity pays $200 at the end of each year for the first 10 years and $100 at
the end of each year thereafter. If the effective annual rate of interest is 10%, find the
present value of the perpetuity.
Based on the scene, we can determine the period of the value that the first 10 years we
get $200 and the rest of that we get $100. It will be the combination of 2 formulas, that
looking for the present value. We use present value of annuity-immediate AND present
value more than one period before the first period date of perpetuity-immediate.
Present value of Annuity immediate using this formula (page 157):

Present value of perpetuity-immediate:

and
So, the calculation will be like:
10
𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑉𝑎𝑙𝑢𝑒 = (200 ∗ 𝑎10
̅̅̅̅| ) + (100 ∗ 𝑣 𝑎∞|
̅̅̅̅ )

1 − (1 + 10%)−10 1
𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑉𝑎𝑙𝑢𝑒 = (200 ∗ ( )) + (100 ∗ (1 + 10%)−10 )
10% 10%

𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑉𝑎𝑙𝑢𝑒 =1228.913421+385.5432894

𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑉𝑎𝑙𝑢𝑒 =1614.45671
𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑉𝑎𝑙𝑢𝑒 ≈𝟏𝟔𝟏𝟒. 𝟒𝟔
Answer key: 1614.46
Problem 18.5 ‡
A perpetuity−immediate pays X per year. Brian receives the first n payments, Colleen
receives the next n payments, and Jeff receives the remaining payments. Brian’s share of
the present value of the original perpetuity is 40%, and Jeff’s share is K. Calculate K.
𝑋
𝐵𝑟𝑖𝑎𝑛 = 𝑋 𝑎̅̅̅
𝑛| = 0.4 ∗
𝑖
𝐶𝑜𝑙𝑙𝑒𝑒𝑛 = 𝑣 𝑛 𝑋𝑎̅̅̅
𝑛|

𝑋
𝐽𝑒𝑓𝑓 = 𝑣 2𝑛
𝑖
0.4
𝑎𝑛̅ = → 𝑣 𝑛 = 0.6
𝑖
𝑋
𝐽𝑒𝑓𝑓 = 0.36
𝑖
Perpetuity = 0.36 = 36%
Answer key: 36% of the original perpetuity.
Problem 18.6
A sum P is used to buy a deferred perpetuity−due of 1 payable annually. The annual
effective interest rate is i > 0. Find an expression for the deferred period.
𝑃(𝑖 + 1)𝑡 = 1. 𝑎̈ ∞|
̅̅̅̅
1 1+𝑖
𝑃(𝑖 + 1)𝑡 = =
𝑑 𝑖
1 + 𝑖
(𝑖 + 1)𝑡 =
𝑖𝑃
1
(𝑖 + 1)𝑡−1 =
𝑖𝑃
1
(𝑡 − 1) ln(𝑖 + 1) = ln ( )
𝑖𝑃
ln(1) − ln(𝑖𝑃)
(𝑡 − 1) =
ln(𝑖 + 1)
ln (𝑖𝑃)
𝑡 =1−
ln (𝑖 + 1)
𝐥𝐧 (𝒊𝑷)
𝒕=𝟏−
𝛅
ln (𝑖𝑃)
Answer key: 1 − δ
Problem 18.7
Deposits of $1,000 are placed in a fund at the beginning of each year for the next 20
years. After 30 years annual payments commence and continue forever, with the first
payment at the end of the 30th year. Find an expression for the amount of each
payment.
𝑃𝑎𝑦𝑚𝑒𝑛𝑡 = 𝑋 ∗ 𝑎̈ ∞
̅|

10
𝐷𝑒𝑝𝑜𝑠𝑖𝑡𝑠 = 1000 ∗ (𝑠̈ 30 ̅̅̅̅| ) = 1000 ∗ (1 − 𝑖) 𝑠̈ 20
̅̅̅̅| − 𝑠̈ 20 ̅̅̅̅|

10
∞| = 1000 ∗ (1 − 𝑖) 𝑠̈ ̅̅̅̅
𝑋 ∗ 𝑎̈ ̅̅̅̅ 20|

1 10
(1 + 𝑖)20 − 1
(1
𝑋 ∗ = 1000 ∗ + 𝑖) ( )
𝑑 𝑑

𝑿 = 𝟏𝟎𝟎𝟎 ∗ (𝟏 + 𝒊) 𝟏𝟎 ((𝟏 + 𝒊)𝟐𝟎 − 𝟏 )

Answer key: 𝑋 = 1000 ∗ (1 + 𝑖) 10 ((1 + 𝑖)20 − 1 )
Problem 18.8
A benefactor leaves an inheritance to four charities, A, B, C, and D. The total inheritance
is a series of level payments at the end of each year forever. During the first n years A, B,
and C share each payment equally. All payments after n years revert to D. If the present
values of the shares of A, B, C, and D are all equal, find (1 + i) n.

Problem 18.9
A level perpetuity−immediate is to be shared by A, B, C, and D. A receives the first n
payments. B the second n payments, C the third n payments, and D all payments
thereafter. It is known that the ratio of the present value of C 0 s share to A0 s share is
0.49. Find the ratio of the present value of B0 s share to D0 s share.
𝐴 = 𝑋(𝑎∞ − 𝑣 𝑛 𝑎∞ )
𝐵 = 𝑋(𝑎∞ − 𝑣 𝑛 𝑎∞ )𝑣 𝑛
𝐶 = 𝑋(𝑎∞ − 𝑣 𝑛 𝑎∞ )𝑣 2𝑛
𝐷 = 𝑋𝑎∞ 𝑣 3𝑛
𝐶 𝑋(𝑎∞ − 𝑣 𝑛 𝑎∞ )𝑣 2𝑛
=
𝐴 𝑋(𝑎∞ − 𝑣 𝑛 𝑎∞ )
0.49 = 𝑣 2𝑛
𝑣 𝑛 = 0.7
𝐵 𝑋(𝑎∞ − 𝑣 𝑛 𝑎∞ )𝑣 𝑛
=
𝐷 𝑋𝑎∞ 𝑣 3𝑛
𝐵 (1 − 𝑣 𝑛 )
=
𝐷 𝑣 3𝑛
𝐵 (1 − 0.7)
=
𝐷 0.49
𝐵 𝟑𝟎
=
𝐷 𝟒𝟗
30
Answer key: 49

Problem 18.10
Adam buys a perpetuity due of 1,000 per month for 100,000. Calculate the annual
effective rate of interest used to calculate the price of this perpetuity.
100.000 = 1.000𝑎̈ ∞|
̅̅̅̅

𝑖 (12)
1 + 12
100 =
𝑖 (12)
12
𝑖 (12) 𝑖 (12)
100 = 1+
12 12
100𝑖 (12) = 12 + 𝑖 (12)
99𝑖 (12) = 12

𝑖 (12) = 0,121212
12
𝑖 (12)
(1 + 𝑖) = (1 + )
12
0,1212 … 12
(1 + 𝑖) = (1 + )
12
𝑖 = 0,128178
𝒊 = 𝟏𝟐, 𝟖%
Answer Key: 12.8%
Problem 18.11
Problem 18.11 The present value of a perpetuity immediate where the payment is P is
1,000 less than the present value of a perpetuity due where the payment is P. Calculate
P.
𝑎∞ + 1000 = 𝑎̈ ∞
1 1
𝑃 + 1000 = 𝑃
𝑖 𝑑
𝑃 𝑃
− = 1000
𝑑 𝑖
(1 + 𝑖) 𝑃
𝑃 − = 1000
𝑖 𝑖
𝑃 = 1000
Problem 18.12
A trust has been established such that RJ will receive a perpetuity of 1000 a year with
the first payment at the end of 5 years. Calculate the present value of the perpetuity at a
discount rate of d = 8%.
1
1000(1 + 𝑖)−4 𝑎∞ = 1000(1 − 0.08)5 = 𝟖𝟐𝟑𝟖. 𝟓𝟏𝟗𝟎𝟒 ≈ 𝟖𝟐𝟖𝟑. 𝟓𝟐
0.08
Answer key: 8283.52
Problem 18.13
Julie, Chris, and Allen will share an annual perpetuity immediate of 1200. Julie will
receive the first 9 payments. Chris will receive the next 16 payments. Allen will receive
all remaining payments. At an annual effective interest rate of 5%, order the value of
each person’s share of the perpetuity.
𝐽 = 1200 𝑎9
𝐽 = 1200 (𝑎∞ − 𝑣 9 𝑎∞ )

1 1 9 1
𝐽 = 1200 (( ) − ( ) ( ))
5% 5% 5%

𝐽 = 8529.386
𝐶 = 1200 𝑣 9 𝑎16
𝐶 = 1200 (𝑎∞ − 𝑣 16 𝑎∞ )𝑣 9

1 1 16 1 1 9
𝐶 = 1200 (( ) − ( ) ( )) ( )
5% 5% 5% 5%

𝐶 = 8383.348
𝐴 = 1200 𝑣 25 𝑎∞

1 25 1
𝐴 = 1200 ( ) ( )
5% 5%
𝐴 = 7087.266
𝟕𝟎𝟖𝟕. 𝟐𝟔𝟔 < 𝟖𝟑𝟖𝟑. 𝟑𝟒𝟖 < 𝟖𝟓𝟐𝟗. 𝟑𝟖𝟔
Allen’s share < Chris’s share < Julie’s share
Answer key: Allen’s share < Chris’s share < Julie’s share
Problem 18.14
John is receiving annual payments from a perpetuity immediate of 12,000. Krista is
receiving annual payments from a perpetuity due of 10,000. If the present value of each
perpetuity is equal, calculate i.
12.000𝑎∞|
̅̅̅̅
𝐽𝑜ℎ𝑛: 𝑃𝑉(1 + 𝑖) = 12.000𝑎̅̅̅̅
∞| → 𝑃𝑉 =
1+𝑖
10.000𝑎̈ ∞|
̅̅̅̅
𝐾𝑟𝑖𝑠𝑡𝑎: 𝑃𝑉(1 + 𝑖) = 10.000𝑎̈ ̅̅̅̅
∞| → 𝑃𝑉 =
1+𝑖
𝑃𝑉 = 𝑃𝑉
12.000𝑎̅̅̅̅
∞| 10.000𝑎̈ ̅̅̅̅
∞|
=
1+𝑖 1+𝑖
1 1 1+𝑖
6. = 5. = 5.
𝑖 𝑑 𝑖
6 = 5 + 5𝑖
5𝑖 = 1
𝒊 = 𝟎, 𝟐 = 𝟐𝟎%
Answer key: 20%
Problem 18.15
The present value of an annual perpetuity immediate of 150 is equal to the present
value of an annual perpetuity immediate that pays 100 at the end of the first 20 years
and 200 at the end of year 21 and each year thereafter. Calculate i.
150 100 100
= + (1 + 𝑖)−20
𝑖 𝑖 𝑖
150 = 100 + 100(1 + 𝑖)−20
50 = 100(1 + 𝑖)−20
0.5 = (1 + 𝑖)−20
2 = (1 + 𝑖)20
𝑖 = 𝟎. 𝟎𝟑𝟓
Answer key: 0.035