ACTL 1001

Actuarial Studies and Commerce

Class Test 2
Monday, 22 September 2008
Time Allowed: 55 minutes
Total Mark: 100 points
Total Assessment credit: 11%
Name:_____________________________

Student ID:___________________________

Tutor :___Gary___/___ Nina___/___Laura___

Tutorial Time:_________________________

Read through the following information carefully. You can only go to the next
pages when told to do so.
This class test consists of 6 problems requiring short-written answers.
Marks allocated for each problem are as indicated. You may use your
own calculator for this exam.
You can only start writing down your solutions and answers when told
to do so
Answer the problems you are most condent with rst.
Anyone writing after time has expired will be given a mark of
zero.
GOOD LUCK!

1. [25 marks]
(a) [5 marks] Determine the annual eective interest rate corresponding
to a nominal rate of 5% p.a. (monthly compounding).
(b) [5 marks] Determine the continuously compounding rate of interest
equivalent to an eective interest rate of 6% p.a.
(c) [5 marks] Determine the continuously compounding rate of interest
equivalent to a nominal rate of 6% p.a. (quarterly compounding).

(d) [10 marks] A coupon bond pays $110 face value at the maturity (in
8 years). Coupons of $6 are paid at the end of every half year. Find
the value of this bond, assuming that the yield to maturity is 10%
p.a., semiannual compounding.

2. [11 marks]
The Esscher Premium of a claim X is dened mathematically as
E

ehX
X
E [ehX ]

Assume that a company has sold a policy under which the probability
of a claim is 0:05, and the amount of a claim is $6; 000 if a claim occurs.
Suppose h = 0:0002.
(a) [5 marks] Show that E ehX = 1:1160
(b) [6 marks] Hence nd the Esscher premium.

3. [13 marks]
Laura has borrowed $64; 490 from the bank to purchase a sports-car.
Equal repayments are made in arrears every year for 6 years. The interest
rate for the loan is 10% p.a. eective. Laura decides to repay the loan
using equal repayments of $14; 807:38 per year.
(a) [4 marks] Find the loan outstanding at the end of the 1st year, after
the payment due has been made.

(b) [9 marks] At the end of the 1st year, after the payment due has
been paid, the bank noties Laura that the interest to be charged
for the loan for years 2 to 6 will be reduced to 9% p.a. eective.
Laura decides to alter her annual repayments to take account of the
lowered interest rates. Specically, she wishes to make an annual
repayment of $K at the end of years 2 to 6 so that the loan is still
repaid at the end of the 6th year. Find K.(Hint: Use your answer
in (a))

4. [16 marks]
Gary makes decisions according to the utility function
u (w) = ln (w)
He currently has $2; 500. His investment advisor noties him that there
is currently a nancial security that, for the price of $K, provides
A sum of $1; 000 with probability 0:4,
A sum of $0 with probability 0:6.
Discuss why the maximum price Gary will be willing to pay for this
security is K = 354:80. (Hint: You may wish to compare what happens
if he does not purchase the security, against what happens if he does
purchases the security at $K)

5. [18 marks]
Consider the following life annuity policy (with a maximum of 6 claim
payments). Under this policy:
The policyholder pays a single premium of $34; 971:60 at the beginning of the rst year. (This is the principle of equivalence premium)
At the end of each year the insurance company makes a claim payment of $7; 500, as long as the policy holder is alive.
Initial acquisition expenses are $300.
The interest rate is assumed to be 8% p.a. eective.
Ignore mortality.
Calculate the prot in the second year. Show all working, carefully
identifying each component in the prot and loss statement.

10

6. [17 marks]
Nina currently has wealth $50; 000. The market interest rate is 6% p.a.
eective and consumption can take place only at times 0 and 1, with
time 1 being one year from now.
Ninas utility function for her consumption plan c0 and c1 is
e

kc0

kc1

where k = 0:002
(a) [4 marks] Briey explain why Ninas budget constraint for her consumption plan c0 and c1 is
50000 = c0 +

c1
1:05

(b) [13 marks] Hence nd her optimal consumption plan c0 and c1 .

Show all working.

11

12

Formulas for ACTL1001 examinations

2. Force of mortality
(x) =

1. Distribution Properties
P oisson ()
e x
x = 0, 1, 2 . . .
x!
E [X] = , V ar [X] =

Pr (X = x) =

Binomial (n, p)

n x
nx
Pr (X = x) =
x = 0, 1, 2 . . .
p (1 p)
x

d
s (x)
dx
s (x)

3. Laws of Mortality
De Moivres Law
Gompertz Law

s (x) = 1

0x<

(x) = Bcx B > 0, c > 1, x 0

E [X] = np; V ar [X] = np (1 p)

Geometric (p)
Pr (X = x) = (1 p)x1 p
E [X] =

1
p

x = 1, 2 . . .

1 1
V ar [X] =
1
p p

4. Series
Exponential Function
x2 x3
+
+ ..
2!
3!

ex = 1 + x +

Exponential ()
x

e
x 0 and 0 otherwise

Z x
x
F (x) =
f (t)dt = 1 e x 0

f (x) =

Binomial Expansion
(a + b)n = an +

n n1
n n2 2
a
b+
a
b + ... + bn
1
2

E [X] = , V ar [X] = 2
5. Compound Interest

N ormal(, )
1
1
f (x) = e 2 (
2

x 2

for < x <

E [X] = , V ar [X] =

an =

1
1+i

Log normal (, )

6. Life Contingencies

1 ln x 2
1
e 2 ( ) for 0 < x <
f (x) =
x 2
i
h 2
2
1 2
E [X] = e+ 2 , V ar [X] = e2+ e 1

a
x =

k=x1
X
k=0

k px

[1 + i]k