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Institute of Actuaries
EXAMINATIONS
April 2001
Subject 102 Financial Mathematics
EXAMINERS REPORT
Faculty of Actuaries
Institute of Actuaries
460
500
650
X
(1.11)3 =
= (1.11)3 710
= 715.50
(i)
0.08
= 1
2
4
i(2)
1 +
1
1 2 = 0.08247
i(2) =
4
(0.98)
(ii)
d(12)
1
12
(12)
0.08
= 1
4
12
= 1 (0.98) 12
= 0.080539
8.0539% p.a. convertible monthly
(i)
Page 2
(ii)
Forward price =
3
(0.050.03)
12
150e
1
0.05
12
30e
= 120.63
(i)
d1
(1 +
4
i )12
d1 (1 +
(1 +
1
g )2
10
i )12
d1 (1 + g )
(1 +
16
i )12
d1 (1 +
3
g )2
22
(1 + i )12
= d1
4
v12
= d1
4
12
v
1 + g 2
1
1+i
d1
4
12
v
(1 +
1
i)2
(ii)
1
3
1
2
2
g
g
g
1
+
1
+
1
+
1 +
+
+
+ ...
1+i
i
i
1
1
+
+
(1 +
6
12
i)
(1 +
d1 (1 +
1
g )2
2
12
i)
1
(1 + i ) 2 (1 + g ) 2
Price =
d1 (1 + i )12
1
(1 + i ) 2 (1 + g ) 2
Hence
18
0.5 (1 +
(1 +
1
i) 2
4
12
i)
1
(1.04) 2
Page 3
(i)
A(t) = exp
t
0
For 0 t < 8,
(r )dr
t
0
(r )dr =
t
0
(0.04 + 0.01r ) dr
t
8
0.07dr
Present values =
100
A(10)
100
exp(0.78)
= 45.84
i = 6.09% p.a.
Page 4
7
12
v
6.09%
= 3.4492m
10v10
a
v 0.2a10 + 0.1 10
1 v10
1 v10
10v10
v 0.2
+
0.1
@ 6.09%
ln1.0609
d . ln1.0609 ln1.0609
4.9922m
(i)
We can find forward rates f1,1 and f2,1 using the spot rates y1 , y2 and y3 :
(1 + y2)2 = (1 + y1) (1 + f1,1) and
(1 + y3)3 = (1 + y2)2 (1 + f2,1)
(ii)
f1,1 = 4.30%
and
f2,1 = 4.50%
(a)
2
3
3
3 v4.1% + v4.2%
+ v4.3%
+ 110v4.3%
105.24
Page 5
2
2
+ v4.2%
1 = yc2 v4.1% + v4.2%
(i)
yc2 = 0.04198
2
1 + j = exp +
= 1.0757305
2
j = 0.0757305
We require
20,000 E(X10) + 150,000 E(S10)
=
1.075730510 1
10
20,000
+ 150,000 (1.0757305)
0.0757305
595,183.99
Now
Page 6
600,000
Pr S10
= 0.99
Z
log S10 10
10
~ N (0,1)
600,000
10
log
= 0.01
So we want
10
600,000
log
10
Z
So
600,000
= exp 2.326 10 + 10
Z
= 1.139112
10
(i)
DMT =
= 526,726.25
( Ia )10
a10
a10 10v10
i
a10
= 4.946 as required
(ii)
VA = VL
VA = a10 + Xvn at 7%
= 7.0236 + Xvn
VL = 7v5 + 8v8 at 7%
= 9.64698
Xvn = 2.62338
(a)
Page 7
(2)
VA = VL where VA =
dVA
dVL
and VL =
d
d
= 34.7393 + n . Xvn
VL = 5 7v5 + 8 8v8
= 62.20310
n . Xvn = 27.46380
(b)
VA > VL
VA =
10
. vt + n2 . Xvn
t =1
= 422.761
Condition (3) satisfied
Thus, X = 5.32692m and n = 10.46886 years will achieve
immunisation.
11
(i)
(a)
80,000
at 8%
(12)
a25
80,000
= 7,232.77 p.a.
1.036157 10.6748
Page 8
= 514.72
= 602.73 514.72
= 88.01
(b)
(c)
(ii)
If repayments are made less frequently than monthly, the total annual
repayment increases since the borrower makes interest payments less
frequently.
The amount of capital outstanding after 19 years will be unaltered.
Therefore, the total interest repaid during the last 6 years (being the
difference between the total payments and total capital repaid in the last
6 years) will increase.
12
(i)
1.5
126.7
= 1.72 per 100 nominal
110.5
Page 9
(1 + r ) 6
1.5
110.5
1.5 Q(0)
Q(0)
4
t 3
(1 + r )
110.5
This payment will be received at time t, when the value of the index will
be Q(t).
Redemption proceeds will be paid at time 5 with the final coupon
payment.
The redemption proceeds will be
100Q(0) (1 + r )
110.5
5 3
Page 10
111.0 =
1.72
.v +
(1 + r )
i.e.
111.0 =
t =2
4
t 3
1.5Q(0) (1 + r )
110.5 (1 + r )t
4
5 3
100Q(0) (1 + r )
110.5 (1 + r )5
vt
v5
(*)
4 5
1.72
127.4
(1 + r ) 3
. v + 1.5
(1 + r )
110.5
t =2
+ 100
127.4
(1 + r ) 3 v5
110.5
0.005
Linear interpolation: i ; 0.020
112.32 109.67
= 0.01749
(iii)
From equation (*), if the retail price index had been greater than 110.5,
the right hand side would be less than 111.0 with i = 1.749% per half year.
Hence, the real yield, i, would need to be less than 1.749% per half year
for the right hand side to equal 111.0.
Page 11