Subject CT1: CMP Upgrade 2013/14

CT1: CMP Upgrade 2013/14
Page 1
Subject CT1
CMP Upgrade 2013/14
CMP Upgrade
This CMP Upgrade lists all significant changes to the Core Reading and the ActEd
material since last year so that you can manually amend your 2013 study material to
make it suitable for study for the 2014 exams. It includes replacement pages and
additional pages where appropriate. Alternatively, you can buy a full replacement set of
up-to-date Course Notes at a significantly reduced price if you have previously bought
the full price Course Notes in this subject. Please see our 2014 Student Brochure for
more details.
This CMP Upgrade contains:
All changes to the Syllabus objectives and Core Reading.

Changes to the ActEd Course Notes, Series X Assignments and Question and
Answer Bank that will make them suitable for study for the 2014 exams.
The Actuarial Education Company
IFE: 2014 Examinations
Page 2
Changes to the Syllabus objectives and Core Reading
1.1
Syllabus objectives
No changes have been made to the syllabus objectives.
1.2
Core Reading
No changes have been made to the Core Reading.
Page 3
Changes to the ActEd Course Notes

Chapter 2
Page 15
The description of the final formula on the page should refer to compound discount
not simple discount. So, it should read:
However, we could also use (3.3) and (3.2) to give an accumulation factor in terms of
compound discount:
A(n)
1
1
v(n) (1 d ) n
Replacement pages can be found at the end of this document.
Chapter 3
Page 14
In the sentence underneath the graph, should be replaced by e . It should read:
We can see that lim ei
p
( p)
e 1.05 which is the 1 i that we saw in equation (3.7).
Chapter 5
Page 22-24
Part (i) of the exam-style question has been rewritten to better reflect the current style of
exam questions.
Page 4
Chapter 10
Page 16
The solution to project E has been improved.
Page 19, 47-48
Question 10.9 has been changed to make clear that the DPP is defined to be the first
time the accumulated value becomes positive (regardless of the fact that it may become
negative again afterwards).
Page 5
Changes to the Q&A Bank

Part 1
Question and solution 1.36(i)
Part (i) of this question has been changed to:
(i)
Define the accumulation factor A(t1, t2 ) in terms of the force of interest d (t ) .
The solution has also been changed.

Page 6
Changes to the X Assignments

The solutions now include a reference to the appropriate chapter.
Assignment X3
Question X3.11
A new part has been added.

Question X3.12
This question has been replaced.

Replacement pages are included for those students who are submitting their
assignments for marking as the most up-to-date version of the assignments needs
to be used.
Page 7
Other tuition services

In addition to this CMP Upgrade you might find the following services helpful with
your study.
5.1
Study material
We offer the following study material in Subject CT1:
Mock Exam
Additional Mock Pack
ASET (ActEd Solutions with Exam Technique) and Mini-ASET
Revision Notes
Flashcards.
For further details on ActEds study materials, please refer to the 2014 Student
Brochure, which is available from the ActEd website at www.ActEd.co.uk.
5.2
Tutorials
We offer the following tutorials in Subject CT1:
a set of Regular Tutorials (usually lasting two or three full days)
a Block Tutorial (lasting two or three full days)
a Revision Day (lasting one full day)
an online classroom.
For further details on ActEds tutorials, please refer to our latest Tuition Bulletin, which
is available from the ActEd website at www.ActEd.co.uk.
Page 8
5.3
Marking
You can have your attempts at any of our assignments or mock exams marked by
ActEd. When marking your scripts, we aim to provide specific advice to improve your
chances of success in the exam and to return your scripts as quickly as possible.
For further details on ActEds marking services, please refer to the 2014 Student
Brochure, which is available from the ActEd website at www.ActEd.co.uk.
Page 9
Feedback on the study material

ActEd is always pleased to get feedback from students about any aspect of our study
programmes. Please let us know if you have any specific comments (eg about certain
sections of the notes or particular questions) or general suggestions about how we can
improve the study material. We will incorporate as many of your suggestions as we can
when we update the course material each year.
If you have any comments on this course please send them by email to CT1@bpp.com
or by fax to 01235 550085.
All study material produced by ActEd is copyright and is sold

for the exclusive use of the purchaser. The copyright is owned
by Institute and Faculty Education Limited, a subsidiary of
the Institute and Faculty of Actuaries.
Unless prior authority is granted by ActEd, you may not hire
out, lend, give out, sell, store or transmit electronically or
photocopy any part of the study material.
You must take care of your study material to ensure that it is
not used or copied by anybody else.
Legal action will be taken if these terms are infringed. In
addition, we may seek to take disciplinary action through the
profession or through your employer.
These conditions remain in force after you have finished using
the course.
CT1-02: The time value of money
Page 15
Which is:
10,000 0.953 = 8,573.75

This is the present value of 10,000 due in 3 years and is the formula C (1 - d )n .
3.3
Discount factors
In the same way that the accumulation factor A(n) gives the accumulation at time
n of an investment of 1 at time 0, we define v (n) to be the present value of a
payment of 1 due at time n . Hence:
v (n ) =
1
A(n )
(3.3)
So using equation (3.2) the discount factor for compound discount is:
v(n) = (1 - d )n
However, using equation (3.3) and equation (1.2) we could also give a discount factor in
terms of compound interest:
v ( n) =
1
1
=
A(n) (1 + i)n
(3.4)
However, we could also use (3.3) and (3.2) to give an accumulation factor in terms of
compound discount:
A(n) =
1
1
=
v(n) (1 - d )n
So regardless whether were given interest or discount rates we could calculate both
accumulations and present values. Of course this does mean that we will have to read
questions carefully to see what rates we are given and what we are asked to do with
them!
Page 16
CT1-02: The time value of money
Question 2.8
(i)
(ii)
Given an investment of 1,000 find the accumulation after 5 years using:

(a)
simple discount of 8% pa
(b)
compound discount of 8% pa
(c)
compound interest of 8% pa.
Given a payment of 2,000 due in 4 years time, calculate the present value
using:
(a)
simple interest of 3% pa
(b)
simple discount of 3% pa
(c)
compound interest of 3% pa.
Note that using the definition of v from (2.2) in (3.4) we get:
v ( n) =
1
1
=
= vn
n
A(n) (1 + i )
This was the discount factor that we were using in (2.3) to calculate the present value.
CT1-03: Interest rates
Page 13
We assume that for each value of i there is number, d , such that:

lim i ( p ) = d
d is the nominal rate of interest per unit time convertible continuously (or
momently). This is also referred to as the rate continuously compounded. We
call it the force of interest.
Whilst this is all very interesting it gives us no practical way of calculating the value
of d . So what were going to do now is derive a relationship between the force of
interest and the effective rate of interest.
Eulers rule states that:
n
lim 1 + = e x
n
n
Applying this to the right-hand-side of (3.1), which was:
i( p)
1 + i = 1 +
p
gives:
p
i ( p)
i ()
1 + i = lim 1 +
=e
p
p
But we defined i ( ) to be d . Hence:

1 + i = ed
(3.7)
This gives us our connection between the effective interest rate, i , and the force of
interest, d .
Page 14
CT1-03: Interest rates
Taking the exponential of the i ( p ) s that we calculated using an effective rate of interest
of 5% pa in our previous graph we obtain the following:
1.0514
1.0512
1.051
1.0508
exp(i(p)) 1.0506
1.0504
1.0502
1.05
1.0498
0
10
20
30
40
50
p
We can see that lim ei
( p)
= ed = 1.05 which is the 1 + i that we saw in equation (3.7).
The rearrangement of ed = 1 + i is:
d = ln(1 + i )
(3.8)
In our first graph the limit was d = ln1.05 0.048790 .

Note: Since we will only ever use natural log (ie ln = log e ) in our studies, the Core
Reading, the examiners and ActEd may use log e , log and ln interchangeably.
CT1-05: Discounting and accumulating
Page 21
Question 5.14
A woman deposits 200 in a special bank account. Interest is paid to the woman every
year on her birthday for five years. The capital is returned after exactly five years,
along with any interest accrued since her last birthday. Interest is calculated at an
effective rate of 6% pa. Calculate the present value of the interest received by the
woman.
So far we have described the difference between money returned at the end of
the term and the cash originally invested as interest. In practice, however, this
quantity may be divided into interest income and capital gains, the term capital
loss being used for a negative capital gain.
If you invest some capital then not only might you receive income but the value of your
capital may also increase (or decrease). Equities or shares are a good example of this.
These were introduced earlier in the course. If you buy some shares in a company then
you should receive dividends or interest from the company. However the capital value
that you receive back will depend upon the market price of the shares when you decide
to sell. We will consider this in more detail later in the course.
Question 5.15
A rich woman pays 2m and in return expects to receive a continuous cashflow for the
next six years with a constant rate of payment. Calculate the annual payment from this
cashflow and the accumulated amount of the cashflow after six years if the interest rate
is 9% pa effective.
Question 5.16
True or false:
A(0, t2 )
A(0, t1 )
(i)
A(t1 , t2 ) =
(ii)
A(0, t2 ) = A(0, t1 ) + A(t1, t2 )
(iii)
v(t2 ) = v(t1 )v(t2 - t1 )
(iv)
1
= A(0, t1 ) A(t1, t2 )
v(t2 )
Page 22
Exam-style question
This is a typical exam-style question on this chapter. Have a go at it before turning over
and having a look at the solution.
Question
The force of interest at any time t (measured in years) is given by:

0 < t 1
0.04
d (t ) = 0.05t - 0.01 1 < t 5

0.24
t >5
(i)
Derive and simplify as far as possible expressions for A(t ) , where A(t ) is the
total accumulated value at time t ( 0 ) of an investment of 1 at time 0.
(ii)
What is the present value at time 0 of a payment stream paid at a rate of

(t ) 5t 1 received between t 1 and t 5 ?
Page 23
Solution
(i)
We have to break down the times for when there is a payment or when the force
of interest changes. If we let A(t ) represent the accumulated value of the total
investments made to date at time t, then:
0 t 1:
A(t ) e 0.04t
1< t 5:
A(t ) = e
0.04
exp 0.05s - 0.01 ds

1
= e0.04 exp 0.025s 2 - 0.01s
= e0.04 e0.025t
= e0.025t
- 0.01t - 0.025+0.01
- 0.01t + 0.025
5<t:
A(t ) = e0.025 5
- 0.01 5 + 0.025
exp 0.24 ds
5
= e0.6e0.24t -1.2
= e0.24t - 0.6
Page 24
(ii)
It is easiest to calculate the present value at time 1 and then discount back to
time 0. The present value at time 1 is:
t
dt
(5
t
1)
exp
0.05
s
0.01
ds
1
5
= (5t - 1) exp - 0.025s 2 - 0.01s dt

1
= (5t - 1) exp[ -0.025t 2 + 0.01t + 0.025 - 0.01] dt

1
= (5t - 1) exp[ -0.025t 2 + 0.01t + 0.015] dt

1
= -100 exp -0.025t 2 + 0.01t + 0.015
= -100 e -0.625+0.05+ 0.015 - e -0.025+0.01+0.015

= -100 e -0.56 - 1
= 42.879
We then need to discount this back to time 0:

1
PV 42.879 exp 0.04 dt 42.879e0.04 41.20

0
CT1-10: Project appraisal
Page 15
Different interest rates for lending and borrowing

We have assumed so far that the investor may borrow or lend money at the same
rate of interest i1 . In practice, however, the investor will probably have to pay a
higher rate of interest ( j1 , say) on borrowings than the rate ( j 2 , say) he receives
on investments.
This is because banks make their money by borrowing money from savers at one rate
of interest and lending it out for mortgages, business loans etc at a higher rate.
The difference j1 j 2 between these rates of interest depends on various
factors, including the credit-worthiness of the investor and the expense of
raising a loan.
The concepts of net present value and yield are in general no longer meaningful
in these circumstances. We must calculate the accumulation of net cashflows
from first principles, the rate of interest depending on whether or not the
investors account is in credit. In many practical problems the balance in the
investors account (ie the accumulation of net cashflows) will be negative until a
certain time t1 and positive afterwards, except perhaps when the project ends.
In some cases the investor must finance his investment or business project by
means of a fixed-term loan without an early repayment option. In these
circumstances the investor cannot use a positive cashflow to repay the loan
gradually, but must accumulate this money at the rate of interest applicable on
lending, ie j 2 .
Example
The cashflows for Project C are:

Outlay
100,000
(initially)
Proceeds
140,000
(end of year 5)
(end of year 1)
The cashflows for Project E are:

Outlay
80,000
(initially)
Income
10,000
20,000
(start of year 2)
30,000
(end of year 2)
5,000
(start of year 3)
87,000
(end of year 3)
Page 16
A company must choose between Projects C and E, both of which would be financed by
a loan, repayable only at the end of the project. The company must pay 6.25% per
annum on money borrowed, but can earn only 4% on money invested in its deposit
account.
Calculate the accumulated profit at the end of 5 years for each project.
Solution
Project C
Since Project C does not generate any income, the company will be relying on the loan
throughout. The accumulated profit will be:
5
140,000 100,000 10625
.
4,592
Project E
Since Project E does generate income, we need to consider the companys net assets at the
end of each year to see whether there are any excess funds available to invest.
At the end of year 1, there will be an income payment of 10,000, but interest of
80,000 0.0625 5,000 is required and a further outlay of 20,000 must be made.
So further borrowing of 15,000 is required (taking the total borrowing to 95,000).
At the end of year 2, there will be an income payment of 30,000, but interest of
95,000 0.0625 5,937.5 is required and a further outlay of 5,000 must be made.
This leaves 30,000 5,937.5 5,000 19,062.5 available for investment.
At the end of year 3, the company receives an income of 87,000. It pays interest of
95,000 0.0625 5,937.5 , leaving 81,062.5. This, together with the proceeds from
year 2 (plus interest), will be used to pay off the loan.
To obtain the accumulated profit at time 5, we take the remaining money at time 3 and
accumulate it for 2 years to time 5:
(19,062.5 104
. 87,000 95,000 10625
.
) 104
. 2 6,368
Page 19
Question 10.9
The business plan for a new company that has obtained a 5 year lease for operating a
local bus service is shown in the table below. Items marked with an asterisk represent
continuous cashflows.
Cashflow item
Timing
Amount (000)
Initial set up costs
Immediate
250
Fees from advertising contracts
1 month
+200
Purchase of vehicles
3 months
2,000
Fares from passengers*
From 3 months onwards
+1,000 pa
Staff costs and other operating costs* From 3 months onwards
400 pa
Resale value of assets
+500
5 years
Determine the discounted payback period for this project assuming that it will be
financed by a flexible loan facility based on an effective annual interest rate of 10% per
annum.
The discounted payback period is often employed when considering a single
investment of C, say, in return for a series of payments each of R, say, payable
annually in arrears for n years. The discounted payback period t1 years is
clearly the smallest integer t such that A (t ) 0 , where:
A (t ) C (1 j1 )t Rst |
at rate j1
ie the smallest integer t such that:

Rat | C
at rate j1
The project is therefore viable if t1 n , in which case the accumulated profit

after n years is clearly:
P A (t1 )(1 j 2 )n t1 Rsn t |
1
at rate j 2
Page 20
Question 10.10
A speculator borrows 50,000 at an effective interest rate of 8% per annum to finance a
project that is expected to generate 7,500 at the end of each year for the next 15 years.
Find the discounted payback period for this investment.
Page 47
Solution 10.9
Remembering that the starred cashflows are continuous, we find that the accumulated
value to time t (where 3 months < t < 5 years ) is:
Acc.V (t ) = -250 1.10t + 200 1.10t -1/12 - 2,000 1.10t - 3/12
t
(1,000 - 400) 1.10t - s ds
3/12
Using the substitution u t s in the integral, we can write this equation in the form:
3/12
Acc.V (t ) = ( -250 1.10
+ 200 1.10
2/12
t - 3/12
- 2,000) 1.10
+ 600
t - 3/12
1.10u du
= -2,052.83 1.10t - 3/12 + 600 st - 3/12|
Using this formula, we find that Acc.V (3 12) = -2,052.83 and Acc.V (5) = 376.33 . So
the accumulated value will be zero for some value of t in the range
3 months < t < 5 years .
In fact, this will happen when:
-2,052.83 1.10t - 3 12 + 600 st - 3 12 = 0

Dividing through by 110
. t 3/12 and rearranging:
at - 3 12 =
ie
2,052.83
= 3.42138
600
1 - 1.10- (t - 3 12)
= 3.42138 t - 3 12 = 4.14 t = 4.39
ln1.10
So the discounted payback period is 4.39 years.
Page 48
Instead of working with accumulated values, you may find it easier to work with present
values, in which case we want the time t when NPVup to t = 0 . The equation will be:
NPV = -250 + 200v1 12 - 2,000v3 12 + 600v3 12 at - 3 12 = 0
This gives the same answer as before.
Solution 10.10
The accumulated profit at the end of year t will be:
Acc.Profit(t ) = 50,000(1 + i ) t 7,500st |
This will be positive when:
50,000(1 + i ) t 7,500st | 0
Dividing through by 7,500(1 + i ) t :
at |
50,000
6.6666
7,500
Looking at the Tables (at 8%), we see that a 9| 6.2469 and a10| 6.7101 .
So the discounted payback period is 10 years.
Solution 10.11
If the interest rate charged on borrowing was 18%, the profit from Investment 2 would
be 2,000 1,800 200 , which is almost the same as the profit of 199 on
Investment 1.
So the critical rate of interest is approximately 18%.
CT1: Q&A Bank Part 1 Questions
Page 11
Question 1.31
Calculate the present value of an annuity payable annually in advance for a term of 20
years such that the payment is 500 in year 1, 550 in year 2, 600 in year 3 etc.
Assume a rate of interest of 5% pa for the first twelve years and 7% pa thereafter.
[5]
Question 1.32
A 90-day government bill was bought by an investor for a price of 91 per 100
nominal. After 30 days the investor sold the bill to a second investor for a price of
93.90 per 100 nominal. The second investor held the bill to maturity when it was
redeemed at par.
Determine which investor obtained the higher annual effective rate of return.
[3]
Question 1.33
A series of 10 payments is received at times 5, 6, 7, . The first payment is $200.
Each of the next five payments is 5.7692% greater than the previous one, and the
remainder increase by 6.7961% each time. Find the value of these payments at time 0
using an interest rate of 10% pa effective.
[5]
Question 1.34
The force of interest (t ) is:
(t ) 0.005t 0.0001t 2 for all t

(i)
At t 8 , calculate the accumulated value of an investment of 100 made at time

t 0.
[3]
(ii)
Calculate the constant annual effective rate of interest over the eight year period.
[2]
[Total 5]
Page 12
CT1: Q&A Bank Part 1 Questions
Question 1.35
(i)
Calculate the combined present value of an immediate annuity payable monthly

in arrears such that payments are 1,000 pa for the first 6 years and 400 pa for
the next 4 years, together with a lump sum of 2,000 at the end of the 10 years.
[3]
(ii)
Calculate the amount of the level annuity payable continuously for 10 years
having the same present value as the payments in (i).
[3]
(iii)
Calculate the accumulated values of the first 7 years payments at the end of the
7th year for the payments in (i) and (ii).
[3]
Basis: Assume an interest rate of 12% pa convertible monthly.
[Total 9]
Question 1.36
(i)
Define the accumulation factor A(t1, t2 ) in terms of the force of interest d (t ) . [1]
(ii)
The force of interest d (t ) at time t (measured in years) is given by

d (t ) = 0.01t + 0.04 .
(a)
Calculate the corresponding nominal rate of interest for the period t = 1

to t = 2 .
(b)
If an investment of 1 is made at time t = 12 , calculate the value to which

it will have accumulated by time t = 6 .
(iii)
[6]
Calculate the accumulated value after 6 months of an investment of 100 at

time 0 at the following rates of interest:
(a)
a force of interest of 0.05 pa
(b)
a rate of interest of 5% pa convertible monthly
(c)
an effective rate of interest of 5% pa.
[3]
[Total 10]
CT1: Q&A Bank Part 1 Solutions
Page 19
Solution 1.36
(i)
The formula for A(t1, t2 ) in terms of the force of interest d (t ) is:

t2
A(t1, t2 ) exp (t ) dt
t
[1]
Note that this formula is given on page 31 of the Tables.

(ii)(a) The nominal rate of interest over a one year time period is the same as the
equivalent constant effective annual rate of interest, which can be found as
follows:
2
1 i exp (t )dt exp (0.01t 0.04)dt
exp 0.005t 2 0.04t

1
exp[(0.02 0.08) (0.005 0.04)] e0.055 1.05654
[3]
So the annual rate of interest is 5.65%.

(ii)(b) The accumulation factor from time to time 6 is:
6
A( 1 2 , 6) exp 0.005t 2 0.04t

1/ 2
exp[ 0.18 0.24 (0.00125 0.02)] e0.39875 1.4900

(iii)
[3]
The accumulated values are:

1
20.05
100 1.025315 102.53
(a)
100e
(b)
0.05
100 1
100 1.025262 102.53
12
(c)
100 1.05
[1]
100 1.024695 102.47
[1]
[1]
Page 20
CT1: Q&A Bank Part 1 Solutions
Solution 1.37
(i)
The present value of a continuous cashflow payable at rate r (t ) from t 0 to

t 10 is given by:
10
PV
A(t, 0)r (t )dt
[1]
The discount factor A(t , 0) is:

t
A(t , 0) exp ( s )ds exp (0.2 0.01s )ds
exp 0.2s 0.005s 2 exp(0.2t 0.005t 2 )

0

[2]
So the present value of the annuity is:

10
(200 10t )exp(0.2t 0.005t
)dt
10
1, 000exp(0.2t 0.005t 2 ) 1, 000(e1.5 1) 776.87
[2]
Reasonableness check: The force of interest decreases from 0.2 at t 0 to 0.1 at

t 10 and the payments decrease from 200 at t 0 to 100 at t 10 . Calculating
@15%
the present value based on averages gives 150a10
753 .
|
(ii)
The accumulated value at time 10 can be found by accumulating the present value
at time zero for 10 years (and using the accumulation factor calculated
previously):
776.87 A(0,10)
776.87
776.87e1.5 3, 482
A(10, 0)
[2]
@15%
Reasonableness check 150 s10
3, 046 .
|
CT1: Assignment X3 Questions
Page 3
Question X3.9
The British Government wishes to issue a new fixed-interest stock with a 25-year term,
which will pay half-yearly coupons (payable in arrears) and will be redeemable at par.
The Bank of England has advised the government that future interest rates (expressed as
nominal rates convertible half-yearly) can be assumed to be 7% pa over each of the next
5 years, 8% pa over each of the following 10 years and 8% pa thereafter.
(i)
Assuming the government wishes to issue the new bond at a price of 100%,
calculate the coupon rate that should be chosen for the bond. (Quote your
answer to the nearest %.)
[4]
(ii)
After the coupon has been fixed at this level, an investor agrees a forward
contract to buy the security in four years time, immediately after the coupon
payment then due. Calculate the forward price based on a risk-free rate of
return equal to the interest rates advised by the Bank of England. Assume there
is no arbitrage.
[5]
[Total 9]
Question X3.10
At time t 0 an investor purchased an annuity-certain which paid her 10,000 per
annum annually in arrear for three years. The purchase price paid by the investor was
25,000.
The value of the retail price index at various times was as shown in the table below:
t 0 t 1 t 2 t 3
Time t (years):
Retail price index: 170.7 183.3 191.0 200.9
(i)
(ii)
Calculate, to the nearest 0.1%, the following effective rates of return per annum
achieved by the investor from her investment in the annuity:
(a)
the real rate of return; and
(b)
the money rate of return.
[7]
By considering the average rate of inflation over the three-year period, explain
the relationship between your answers in (a) and (b) of (i).
[2]
[Total 9]
Page 4
Question X3.11
On 1 October 2004, the share price of Company X was 3.15. A 6-month forward
contract is written on that day, for the purchase of 1,000 shares in Company X.
(i)
(ii)
Calculate the forward price under each of the scenarios below. Assume that the
effective risk-free rate of interest is 4% pa and that there is no arbitrage.
(a)
There are no dividends due in the next 6 months.
(b)
A dividend of 10p per share is expected on 1 December 2004.
(c)
Dividends are payable continuously and are immediately reinvested in

the shares. The force of dividend is 3% pa.
(d)
Dividends of 3% per annum of the market price of the security at the

time of payment are made annually in arrear and are immediately
reinvested in the shares.
[7]
Calculate the value of the forward contract on 1 February 2005 under each of the
scenarios given in (a), (b) and (c) only if the share price of Company X is then
3.50.
[6]
[Total 13]
Page 5
Question X3.12
A government issued a number of index-linked bonds on 1 June 2000 which were
redeemed on 1 June 2002. Each bond had a nominal coupon rate of 3% per annum,
payable half-yearly in arrears, and a nominal redemption price of 100. The actual
coupon and redemption payments were indexed according to the increase in the retail
price index between 6 months before the bond issue date and 6 months before the
coupon or redemption payment dates.
The values of the retail price index in the relevant months were:
Date
Retail price index
December 1999
June 2000
December 2000
June 2001
December 2001
June 2002
(i)
100
102
107
111
113
118
An investor purchased 100,000 nominal at the issue date, and held it until it
was redeemed.
The issue price was 94 per 100 nominal.
Calculate all the investors cash flows from this investment, before tax.
(ii)
[3]
The investor is subject to income tax at a rate of 25% and capital gains tax at a
rate of 35%. When calculating the amount of capital gain which is subject to
tax, the price paid for the investment is indexed in line with the increase in the
retail price index between the month in which the investment was purchased and
the month in which it was redeemed.
(a)
Calculate the investors capital gains tax liability in respect of this

investment.
(b)
Calculate the net effective yield per annum obtained by the investor on
these bonds.
[6]
[Total 9]
Page 6
Question X3.13
(i)
Show that ( Ia ) n|
an| nv n
i
[4]
(ii)(a) Calculate the present value, at a rate of interest of 3% pa effective, of an annuity

where 10 is paid at the end of the first year, 12 is paid at the end of the second
year, 14 is paid at the end of the third year and so on, with payments increasing
by 2 pa until the payment series ends at time 20.
(ii)(b) Calculate the capital outstanding in the above annuity at the end of the 15th year,
after the payment then due has been received.
(ii)(c) Determine the interest and capital components in the 16th payment.
[8]
[Total 12]
Question X3.14
One year ago, a loan was issued bearing interest at the rate of 14% pa, payable half
yearly in arrears. The loan will be redeemed at 110% in nine years time.
(i)
The loan was issued at a price such that an investor subject to income tax at
35%, but not subject to capital gains tax, would obtain a net yield of 9% pa.
Calculate the issue price for 100 nominal.
[3]
Interest rates have now fallen. The investor has decided to sell and has found a
potential buyer, who is subject to income tax at 25% and capital gains tax at 35%, and
who is prepared to buy the stock provided that he obtains a net yield of at least 10% pa.
(ii)
Calculate the best price (per 100 nominal) the original investor can expect to
obtain from the potential buyer.
[5]
(iii)
Calculate the net running yield obtained by the buyer.
(iv)
Calculate the net yield that will be obtained by the original investor if the loan is
sold to the buyer at the price determined in (ii).
[4]
[Total 14]
[2]
END OF ASSIGNMENT

Subject CT1: CMP Upgrade 2013/14

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CT1: CMP Upgrade 2013/14

This CMP Upgrade contains:

All changes to the Syllabus objectives and Core Reading.

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CT1: CMP Upgrade 2013/14

Changes to the Syllabus objectives and Core Reading

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CT1: CMP Upgrade 2013/14

Changes to the ActEd Course Notes

Replacement pages can be found at the end of this document.

e 1.05 which is the 1 i that we saw in equation (3.7).

Replacement pages can be found at the end of this document.

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CT1: CMP Upgrade 2013/14

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CT1: CMP Upgrade 2013/14

Changes to the Q&A Bank

Define the accumulation factor A(t1, t2 ) in terms of the force of interest d (t ) .

The solution has also been changed.

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Changes to the X Assignments

A new part has been added.

This question has been replaced.

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ASET (ActEd Solutions with Exam Technique) and Mini-ASET

a set of Regular Tutorials (usually lasting two or three full days)

a Block Tutorial (lasting two or three full days)

a Revision Day (lasting one full day)

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CT1-02: The time value of money

10,000 0.953 = 8,573.75

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CT1-02: The time value of money

Given an investment of 1,000 find the accumulation after 5 years using:

compound interest of 8% pa.

compound interest of 3% pa.

Note that using the definition of v from (2.2) in (3.4) we get:

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CT1-03: Interest rates

We assume that for each value of i there is number, d , such that: