UECM1404 Theory of Interest

Tutorial 10: Yield Rates and Practical Applications

1. A fund earned investment income of 9200 during 1999. The beginning and ending
balances of the fund were 100,000 and 129,200, respectively. A deposit was made at time
during the year. No other deposits or withdrawals were made. The fund earned 8% in
1999 using the dollar-weighted method. Determine . . . . . . . . . . . . . . . . . . .Ans: 1 April

2. On 1 January, 1999 Luciano deposits 90 into an investment account. On 1 April, 1999,

when the amount in Luciano's account is equal to , a withdrawal of is made. No
further deposits or withdrawals are made to Luciano's account for the remainder of the
year. On 31 December, 1999, the amount in Luciano's account is 85. The dollar-weighted
return over the 1-year period is 20%. The time-weighted return over the 1-year period is
16%. Calculate . . . . . . . . . . . …….. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Ans: 107.63

3. You are given the following information concerning the market values, contributions and
benefits paid by a certain fund which has a time-weighted rate of return for 1999 of
10.66%.
Date Amount
Trust market values: 1/1/1999 1,000,000
1/4/1999 820,000
1/7/1999 990,000
1/10/1999 1,100,000
Contributions received: 30/6/1999 100,000
30/9/1999 100,000
Benefits paid: 31/3/1999 200,000
What is the trust market value on 1/1/2000? . . . .. . . . . . . . . . . ……. . . . . .Ans: 1,088,501

4. (SOA May 2005) At the beginning of the year, an investment fund was established with
an initial deposit of 1000. A new deposit of 1000 was made at the end of 4 months.
Withdrawals of 200 and 500 were made at the end of 6 months and 8 months,
respectively. The amount in the fund at the end of the year is 1560. Calculate the dollar-
weighted yield rate earned by the fund during the year. . . . . ………... . . . . . . Ans: 0.1857

5. A pension fund begins the year with a balance of RM10,000,000. The fund balance on 31
March is RM10,500,000. On 1 April the fund receives a contribution of RM2,000,000.
The fund balance on 30 June is RM13,500,000. On 1 July the fund makes a benefit
payment of X. There are no other contributions of benefit payments during the year. The
fund balance on 31 December is RM8,760,000. The time-weighted rate of return for the
year is found to be half of the dollar-weighted rate of return for the year. Find the dollar-
weighted return for the year. . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ans: 0.0687

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UECM1404 Theory of Interest

6. The term structure of annual effective yield rates for zero coupon bonds is
Maturity 1 2 3 4
Yield 0.05 0.06 0.06 0.07
(a) Find the present value of a four year annuity immediate of 100 per year, and find
the present value of a four year annuity-due of 100 per year. What is / ?
. . . . . . . . . . . . . . . . .. . ….. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ans: 1.0688
(b) Find the purchase price of a bond with annual coupons of 10% and face and
redemption amount 100. Find the yield to maturity for the bond. . …. . . . .Ans: 6.84%

7. You are given the following information regarding a loan.

• Date of a loan: 1 January 1999
• Interest rate: 10.8% per year, compounded monthly
• Date of first repayment: 1 February 1999
• Frequency of repayments: Monthly
• Number of repayments: 360
What is the Macaulay duration of the loan in years? . . . . . . . . .. . . . . . . . . . . . . Ans: 8.1

8. (SOA May 2005) John purchased three bonds to form a portfolio as follows:
• Bond A has semi-annual coupons at 4%, a duration of 21.46 years, and was
purchase for 980.
• Bond B is a 15-year bond with a duration of 12.35 years and was purchase for
1015.
• Bond C has a duration of 16.67 years and was purchased for 1000.
Calculate the duration of the portfolio at the time of purchase. . . . . . . . . . . . Ans: 16.7733

9. (SOA May 2005) Yield rates to maturity for zero-coupon bonds are currently quoted at
8.5% for one-year maturity, 9.5% for two-year maturity, and 10.5% for three-year
maturity. Let be the one-year forward rate for year two implied by current yields of
these bonds. Calculate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ans: 0.105

10. Prices for 1-year, 2-year and 3-year bonds with face amount 100 and annual coupons at
rate 10% are: 1-year bond - 105.77, 2-year bond - 109.39, 3-year bond - 112.36. Find the
price and yield to maturity of a 3-year bond with face amount 100 and annual coupons at
rate 5%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ... . . . . . . . . . . . . Ans: 98.76; 5.46%