Krzys Ostaszewski, http://math.illinoisstate.edu/krzysio/krzys.

html
http://smartURL.it/krzysioFM (paper) or http://smartURL.it/krzysioFMe (electronic)
Instructor for online seminar for exam FM: http://smartURL.it/onlineactuary
If you find these exercises valuable, please consider buying the manual or attending our
seminar, and if you cant, please consider making a donation to the Actuarial Program at
Illinois State University: http://smartURL.it/ISUactuarydonate. Donations will be used
for scholarships for actuarial students. Donations are tax-deductible to the extent allowed
by law. Questions about these exercises or the FM Manual written by Dr. Ostaszewski?
E-mail: krzysio@krzysio.net
Dr. Ostaszewskis online exercise No. 5 posted June 18, 2005
You are analyzing a unit five-year annuity due. The following spot yield curve prevails at
time 0:
1 year
7.00%
2 years
8.00%
3 years
8.75%
4 years
9.25%
5 years
9.50%
Your boss tells you to value the annuity using the above yield curve, but to also assume
that every year from now on the entire yield curve shifts down 25 basis points in a
parallel fashion. Find the accumulated value of this annuity at time 5.
A. 6.3084

B. 6.4646

C. 6.6268

D. 6.7579

E. 6.8125

Solution.
The first payment is invested at the five-year spot rate, and it will accumulate to
1.095 5 1.57423874. The second payment will be accumulated at the four-year spot rate
applicable then and it will accumulate to 1.09 4 1.41158161. The third payment will
earn then three-year spot rate and will accumulate to 1.0825 3 1.26848027. The fourth
payment will earn then two-year spot and accumulate to 1.0725 2 1.15025625. The fifth
payment is invested for one year and it accumulates to 1.06. The total of all
accumulations is approximately 6.4646.
Answer B.
Copyright 2005 by Krzysztof Ostaszewski.
All rights reserved. Reproduction in whole or in part without express written
permission from the author is strictly prohibited.