NG Wee Seng

Email: matnws@nus.edu.sg
Tel: 65164673








QF2101 Basic Financial Mathematics


ASSIGNMENT 1


Question Paper



INSTRUCTIONS

1. This paper contains a total of 5 questions and comprises 3 printed pages

2. Do NOT hand in this question paper.




NG Wee Seng
Email: matnws@nus.edu.sg
Tel: 65164673

2
Question 1 [ 5 marks]

The sum of the present value of $1 paid at t = 2k and the present value of $3
paid at t = 4k is $2.

Find the exact accumulated value of $2 at t = 3k.



Question 2 [ 5 marks]

It can be shown that for |y| < 1,
( )
4
2 3
1 i
i 3
y 1
y 4y y
y i

+ +
=

=
.

A perpetual annuity pays $ ( 3n
3
+ 2) at time t = 2n, n e Z
+
, with the first
payment made at t = 6. If the interest rate is 6% compounded monthly,
find the present value of this annuity, giving your answer to 3 decimal places.



Question 3 [5 marks]

Let N be a positive integer greater than 1.

Annuity A pays $1 at t = 11, 12, 13, . . . , 10 + N
$2 at t = 21, 22, 23, . . . , 20 + N
$3 at t = 31, 32, 33, . . . ., 30 + N

Annuity B pays $4 at t = 1, 2, , N


It is given that the interest rate is perpetually
|
.
|

\
|
R
1
ln compounded continuously,
where 0 < R < 1. If the present value of annuity A is $X and the present value of
annuity B is $Y, express
Y
X
as a polynomial in R. (Your answer should NOT
contain the unknown , N)


NG Wee Seng
Email: matnws@nus.edu.sg
Tel: 65164673

3
Question 4 [ 10 marks]
Investment fund A accumulates value at a force of interest, ( ) t given by
( )

s s
+
s s +
=
20 t 10
t 100
2t
10 t 0 10) (t
t
2
1000
1
.
Investment fund B accumulates value at a continuously compounded rate of
R%. It is given that at time t = 20, the accumulated value of $1 invested in fund A
equals 2.5 times the accumulated value of $1 invested in fund B.
(i) Find the exact value of R.
(ii) If $1 invested in fund A at t = 5 is worth $2 at t = T, find the exact value of
T, giving your answer in the form B Ae +

, where the integers A and B

and the real number are constants to be determined.


Question 5 [15 marks]
A bank has just launched a 10-year structured deposit that is designed as follows:
You will deposit $ X at t = 0, and t = 2, and receive regular payouts of $
5
X
at
t = 6 and t = 8. Upon maturity ( t = 10 ), you will be paid a maturity bonus of $Y.

(i) If the effective annual yield (i.e. IRR) of this plan is 4%, find the value of
X
Y
to 3 decimal places.
(ii) Suppose that Y = 5X and the annualized yield of the above plan is R.
(a) Obtain and simply an expression for P, the present value of the
entire cash flow stream generated by the structured deposit, in
terms of R and X.
(b) With the aid of Excel or any appropriate software, show a sketch of
the graph of P against R for X = 1000. Indicate clearly the limiting
behaviour of the graph as R tends to infinity and other important
features of the graph. You are not required to determine the
coordinates of turning points (if any).
(c) Use the Newton-Raphson method to obtain an approximation for
the value of R for which P = 0. Show sufficient working and give
your answer to 3 decimal places.

END OF PAPER