jack T 1600

name: ____________________________________

gary t 1600

Student no. : ____________________________

benjamin t 1700
gary t 1700
The University of New South Wales
david w 1500

1 april 2009

jack w 1500
david w 1600

ACTl 2001

jack w 1600

financial mathematics
q u i z

o n e

1.

Time allowed50 minutes

2.

total number of questions6

3.

Marks total 100

4.

Answer all questions

5.

aLL QUESTIONS ARE NOT OF EQUAL VALUE

6.

complete identification details above and circle your

tutorial group

7.

CANDIDATES MAY BRING THEIR OWN CALCULATORS OR HAND HELD

COMPUTERS. it must not have a qwerty keyboard.

8.

CANDIDATES MAY BRING THE text formul and tables for

actuarial examinations (any edition) into the examination. it
must be wholly unannotated.

9.

Candidates must cease writing immediately when instructed to

do so by the supervisor at the end of the examination. failure
to do so will result in a mark of zero.

ALL ANSWERS MUST BE WRITTEN IN INK. EXCEPT WHERE THEY ARE

EXPRESSLY REQUIRED, PENCILS MAY BE USED ONLY FOR DRAWING,
SKETCHING OR GRAPHICAL WORK.

Question 1
[24 marks]
You want to invest $1,000 for 5 years. You have the following options:
1. 5 years at a compound interest rate of 10% p.a.
2. 2 years at a compound discount rate of 9.5% p.a. and then 3 years at
a compound interest rate of 9.7% p.a.
3. 3 years at a nominal discount d(3) of 9% p.a. and 2 years at a nominal
interest rate of i(12) of 10.1% p.a.
4. 5 years at a constant force of interest of 9.5% p.a.
5. 5 years at a force of interest decreasing linearly from 10.1% p.a. to
9.1% p.a. over the 5 years.
You want to choose the option that maximizes your accumulated value after
5 years.
a. [9 marks] Calculate the accumulated value (at time t = 5) of these 5
options and determine the annual yield of the option you should choose.

b. [7.5 marks] Find the outstanding balance of your investment after 3

years for each of the 5 options above.

c. [7.5 marks] Calculate the amount of effective interest that is earned

during the first quarter of the fourth year for each of the 5 options
above.

Question 2
[8 marks]
A bond with a face value of $10,000 and semi-annual coupons of 500 is issued
today. The maturity is in 20 years. Calculate the price of the bond (today)
if the annual effective rate of discount is 8% p.a.

Question 3
[14 marks]
A short term security pays $10 in 7 days, $20 in 30 days and $30 in 90 days.
In the questions below, use the 365 days per year convention.
a. [6 marks] Find the price of this security using a simple interest rate of
5% p.a.

b. [8 marks] Assume that the price of this security is $58. Find the annual
rate of simple discount that leads to this price.

Question 4
[12 marks]
Find an expression for (I
a)
a. [8 marks] in terms of d;

b. [4 marks] in terms of i.

Question 5
[20 marks]
Interpret in words (and graphs if you wish so)
a. [10 marks] the following expression for an increasing annuity (arithmetic progression) with first payment P and increments of Q from time
2 to time n (the last payment is then P + (n 1)Q):
Present value = P an + Q

an nv n
;
i

b. [10 marks] the following identity:

1 = ian + v n .

Question 6
Let

[22 marks]

40s s2
, 0 < s < 40,
2000
be the force of interest at time s.
(s) =

a. [8 marks] Find an expression for v t .

b. [8 marks] Find the present value of a deferred (continuous) annuity

paying at a rate of $1 p.a. from time t = 10 to time t = 30.

c. [6 marks] Interpret your result in b.

End of paper

10

Formulas

Increasing/decreasing annuity functions:

(Ia)n =

a
n nv n
,
i

(Da)n =

n an
.
i

Accumulation factor for variable interest rates:

Z t2

A(t1 , t2 ) = exp
(t)dt .
t1

11

ADDITIONAL PAGE
Answer any unfinished questions here, or
use for rough working.

12

ADDITIONAL PAGE
Answer any unfinished questions here, or
use for rough working.

13