Applied solutions

The time value of money: Chapter 2 questions

Solution 2.1. We determine the accumulation function/factor and use it as follows.
a. The accumulation factor is A(t) = 1.052t .
b. The accumulation is given by 500A(5) = 500 1.0525 = $644.24.
c. The accumulation is given by 1000A(5.4

4) = 1000 1.0521.4 = $1073.55.

d. The accumulation is given by 600A(10) + 400A(10

4.5)

700A(10

8) = $750.04

Solution 2.2. We determine the accumulation function/factor and use it as follows.

a. The accumulation factor is A(t, T ) = 1.037T

which leads to a discount factor of

1
= 1.037
A(t, T )
b. The present value is given by 8000 1.037

(T

t)

= $6917.91.

c. The present value is given by 17, 500 1.037

4.74

d. The present value is given by 18, 250 1.037

10

= $14, 731.49.

+ 15, 000 1.037

15.2

= $21, 325.24.

Solution 2.3. The accumulation function/factor is given by A(t, T ) = 1.034T

a. The accumulated value is given by

5000 (A(0, 20) + A(4, 20) + A(8, 20)) = 5000 1.03420 + 1.03416 + 1.03412 = $25, 763.53

b. The present value is given by

150

1
1
1
1
1
+
+
+
+
A(0, 1) A(0, 2) A(0, 3) A(0, 4) A(0, 5)

500
= $1088.30
A(0, 6)

c. The present value is given by

7000

1
1
1
1
1
1
1
+
+
+
+
+
+
A(0, 10) A(0, 20) A(0, 30) A(0, 40) A(0, 50) A(0, 60) A(0, 70)

1
1
1
+
+
+
= $17, 008.34
A(0, 80) A(0, 90) A(0, 100)

d. The accumulated value is given by

1
2
3
4
5
6
20 A
,1 + A
,1 + A
,1 + A
,1 + A
,1 + A
,1
12
12
12
12
12
12

7
8
9
10
11
+A
,1 + A
,1 + A
,1 + A
,1 + A
, 1 + A (1, 1) = $243.72
12
12
12
12
12
Solution 2.4. We have cashflows of

10, 000 at t = 0, +5000 at t = 2 and +7000 at t = 4.

a. The equation of value at t = 0 is obtained as

10, 000 =

5000
7000
+
2
(1 + i)
(1 + i)4

b. The net present value is given by

NPV(i) =

10, 000 +

5000
7000
+
(1 + i)2
(1 + i)4

which is such that

i. NPV(4%) = $606.41
ii. NPV(6%) =

$5.36

iii. NPV(8%) =

$568.10

c. The internal yield is given by the value of i that corresponds to a root of the equation of value.
This is a quadratic in 1/(1 + i)2 and can be solved to give i = 5.98% 6% per annum. Note that
the value must be positive as a total of $12,000 is obtained from a $10,000 investment. Note also
that the root of the EoV is also i such that NPV(i) = 0; i 6% is consistent with the results of
part b.
d. The investment yields only 6% per annum and the borrowing costs exceed this. The investment
should not then go ahead unless borrowing can be obtained at a rate lower than 6%.

Solution 2.5. The cash flows are given by

-$P at t = 0
$10 at t = 1
$20 at t = 2
$30 at t = 3
$100 at t = 5
a. The fair price is determined by the equation of value. That is,

P =

10
20
30
100
+
+
+
(1 + i) (1 + i)2
(1 + i)3
(1 + i)5

b. We therefore have P (5%) = $131.93

c. We need to solve
120 =

10
20
30
100
+
+
+
(1 + i) (1 + i)2
(1 + i)3
(1 + i)5

and can do this computationally to determine that i = 7.6% per annum.

d. Both investments are for the same term (5 years) and so the decision is determined by the expected
return only. Since 7.6% > 6% we should invest in the first asset at this price.

The force of interest: Chapter 3 questions

Solution 3.1. We are required to use the principle of consistency and partition the accumulation
function between periods with dierent i.
a. The present value is given by
10, 000
10, 000
10, 000
=
=
= $5850.67
A(0, 10)
A(0, 3)A(3, 5)A(5, 8)A(8, 1)
1.043 1.062 1.053 1.062
b. The accumulated value is given by
20, 000A(0, 8.5) =20, 000A(0, 3)A(3, 5)A(5, 8)A(8, 8.5) = 20, 000 1.043 1.062 1.053 1.080.5
=$30, 410.36

c. The accumulated value is given by

5000A(0, 9) + 5000A(4, 9) + 20, 000A(8, 9) =5000 {A(0, 3)A(3, 5) + A(4, 5)} A(5, 8)A(8, 9) + 20, 000A(8, 9)
=5000 1.044 1.062 + 1.061 1.053 1.081 + 20, 000 1.081
=$36, 443.12

d. The present value is given by

1000

1
1
1
+
+
A(0, 0) A(0, 5) A(0, 10)

=1000 1 +

1
1
+
A(0, 3)A(3, 5) A(0, 3)A(3, 5)A(5, 8)A(8, 10)

=$2376.27

Solution 3.2. In each case we begin by converting the nominal rate to an eective compounding rate.
a. 3% per annum converted half yearly is equivalent to 1.5% per 6 months. The accumulated value
is therefore 10 1.01525 = $11.61.
b. 4% per annum converted every 2 years is equivalent to 8% per 2 years. The present value is
therefore 100 1.08

= $73.50.

c. 6% per annum converted monthly is equivalent to 0.5% per month. The accumulated value is
therefore 5 1.0051012 + 7 1.005512 = $18.54.
d. 1% per annum converted half yearly is equivalent to 0.5% per 6 months. The required value is
therefore 1 1.0055

1 1.005

= 0.97.

Solution 3.3. Let the annual nominal rate converted over a period of length
rate over that time interval is the

i(p)
p .

1
p

be i(p) , the eective

The principle of consistency can then be used then demonstrate

that
1+i=

1+

i(p)
p

where i = 5.6%.
a. Our expression with p = 52 leads to i(52) = 5.452% per annum.
b. Our expression with p = 12 leads to i(12) = 5.461% per annum.

c. Our expression with p = 0.5 leads to i(0.5) = 5.757% per annum.

d. Here we use 1.056 = e and obtain

= 5.449% per annum.

We note that
i(0.5) > i > i(12) > i(52) >
which is consistent with the definition
Solution 3.4. We have

= lim i(p) .
p!1

= 3.2% per annum.

a. The accumulation factor is given by A(0, t) = e

= e0.032t .

b. The accumulation is given by 625A(0, 10) = 625e100.032 = $860.70.

c. The accumulation is given by 5000A(2, 7.2) = 5000e5.20.032 = $5905.23.
d. The net accumulation is given by

200A(0, 15) + 100A(2.5, 15)

300A(9, 15) =200e150.032 + 100e12.50.032

=$114.60

Solution 3.5. In each case we use the expression

(t) =

and perform the required derivative.

a. A(0, t) = e0.06t ) (t) = 0.06
b. A(0, t) = e0.02t
c. A(0, t) =

t2
100

0.01t

) (t) = 0.04t

) (t) =

0.01

2
t

d. A(0, t) = 0.04(1 + sin(t)) ) (t) =

cos t
1+sin t

d
ln A(0, t)
dt

300e60.032

Approximating price sensitivities: Chapter 4 questions

Solution 4.1. The eective duration D(i0 ) is such that

D(i0 ) =

1 dP (i0 )
P (i1 )
)
P (i0 ) di
i1

P (i0 )
'
i0

D(i0 )P (i0 )

where P (i0 ) is the price of the asset at the previous interest rate and i1 a new interest rate. Using the
data given to us, we see that

P (i1 ) ' P (i0 ) {1

(i1

i0 )D(i0 )} ) P (i1 ) ' 34.50 {1

8.2(i1

0.05)}

a. Using i1 = 5.2% we find P (i1 ) ' $33.92.

b. Using i1 = 4.65% per annum we find P (i1 ) ' $35.49.
c. Using i1 = 6.2% per annum we find P (i1 ) ' $31.10.
d. Using i1 = 3.455% per annum we find P (i1 ) ' $38.87.
We see that an increase in the desired yield reduces the price that should be paid - this makes sense as
the incomes are fixed. The accuracy of estimate decreases with increased |i1

0.05|. The smaller this

value the more accurate the price will be.

Solution 4.2. The duration (i0 ) is such that

(i0 ) =

1 dP ( 0 )
P ( 1)
)
P ( 0) d
1

P ( 0)
0

'

( 0 )P ( 0 )

where P ( 0 ) is the price of the asset at the previous force of interest and

a new force of interest.

Using the data given to us, we see that

P ( 1 ) ' P ( 0 ) {1
a. Using i1 = 5.9% )
b. Using i1 = 6.12% )
c. Using

0 )D( 0 )}

) P ( 1 ) ' 50 {1

= 5.73% we find P ( 1 ) ' $51.65.

1

= 5.94% we find P ( 1 ) ' $50.37.

= 5.5% we find P ( 1 ) ' $53.08.

12.3(

0.06)}

d. Using

= 7.73% we find P ( 1 ) ' $39.36.

Solution 4.3. The cash flows are as follows.

-$P at t = 0
$10 at t = 1
$10 at t = 2
$110 at t = 3
a. The price of the asset is given by the equation of value

P (i) =

10
10
110
+
+
= 10e
1 + i (1 + i)2
(1 + i)3

+ 10e

+ 110e

which is evaluated as follows.

i. P (5%) = $113.62
ii. P (4.5%) = $115.12
b. The duration of the asset is given by

P0
10e
=
P
10e

+ 20e
+ 10e

2
2

+ 330e
+ 110e

3
3

and so (i = 0.05) = 2.75 years.

c. We use the expression in Question 2 to determine that

P ( 1 ) ' 113.62 {1

2.75(ln 1.045

ln 1.05)} = $115.11

This estimate is close to the actual value of $115.12 which reflects that there has been a very
small change in

and the approximation holds.

Solution 4.4. We consider $100 nominal of the bond. The cash flows are therefore
-$P at t = 0
$1.6 at t = 0.5

 $1.6 at t = 1
.
..
$1.6 at t = 4.5
$101.6 at t = 5
a. The equation of value for this system is

P (i) = 1.6

1
1
1
100
+
+ ... +
+
= 1.6 e
(1 + i)0.5
(1 + i)1
(1 + i)5
(1 + i)5

0.5

+e

+ ... + e

+100e

This is evaluated as follows.

i. P (5.2%) ' $91.57
ii. P (6.0%) ' $88.40
iii. P (7.4%) ' $83.20
We note that the price decreases with increasing desired yield. This is necessary as the income
cash flows are fixed and so an increased yield can only be obtained from a reduced price.
b. Using the equation in Question 2, we have

1.6 0.5e 0.5 + e + . . . + 5e 5 + 500e

1.6 (e 0.5 + e + . . . + e 5 ) + 100e 5

and so (i = 0.06) = 4.63.

c. We use the expression in Question 2 to determine that

P ( 1 ) ' 88.40 {1

4.63(ln(1 + i1 )

We therefore obtain
i. i1 = 5.2% )

= 5.07% and so P ( 1 ) ' $91.50.

ii. i1 = 6.3% )

= 6.11% and so P ( 1 ) ' $87.24.

iii. i1 = 7.4% )

= 7.14% and so P ( 1 ) ' $83.03.

Solution 4.5. The cash flows are

ln 1.06)}

 -$200 at t = 0
$100 at t = 2
$120 at t = 4
$x at t = 6
The price is given by the equation of value (at t = 0)

200 = 100e

+ 120e

+ xe

and the duration is such that

3.7 200 = 200e

+ 480e

+ 6xe

These represent two simultaneous equations that can be solved using Wolfram Alpha to give x 100.69
and

0.1226. The unknown yield is therefore i 13.04%.

Annuities (Chapter 5) questions

Solution 5.1. Recall that an =

1 (1+i)
i

is the present value of a unit payment made at the end of

each of n years.
a. $2 paid at the end of every year for 15 years has present value $2a15 = $23.88.
b. $340 paid at the start of every year for 25 years has present value $340a25 = $5920.47.
c. A 20-year payment stream with $50 paid at the end of the first 10 years and $100 paid at the end
of the second ten years can be considered as an immediate annuity and a deferred annuity. The

100
present value is given by $ 50 + (1+i)
a10 = $1061.24
10
d. We work in time units of 2-years and an eective interest rate of 1 + j = 1.032 . The present value
j%
of $100 paid at t = 2, 4, . . . , 20 is therefore given by $100aat
= $732.88.
10

Solution 5.2. The cash flows are

-$47.34 at t = 0

 $1 at t = 1
.
..
$1 at t = 20
$50 at t = 25
We identify the regular cash flow as an 20-year annuity.
a. The equation of value is given by

47.34 = a20 +

50
1
=
(1 + i)25

(1 + i)
i

20

50
(1 + i)25

b. Wolfram Alpha or Goal Seek can be used to determine that the equation of value is solved by
i 1.9% per annum. The keen reader may wish to implement their own numerical method to
solve this equation.
Solution 5.3. The cash flows of 2 every half-year mean that it is sensible to work in units of half
years. The dividend cash flow is then a perpetuity in arrears and the equation of value is

P (j) =

2
j

where j is the 6-month eective compounding rate.

a. We have i = 5% per annum and so 1 + j =

b. We have i = 1.2% per annum and so 1 + j =

1.05 which leads to 80.99.

1.012 which leads to 334.33.

c. We have i = j = 3% per 6-months which leads to 66.67.

d. We have i = 1.2% per quarter and so 1 + j = 1.0122 which leads to 82.84.
Solution 5.4. The cash flows are
-P at t = 0
x at t = 1
x(1 + r) at t = 2

.
..
x(1 + r)n

at t = n

a. The equation of value is given by

1
1+r
(1 + r)n 1
+x
+ ... + x
2
1+i
(1 + i)
(1 + i)n
"

n #
x
1+r
1+r
1+r
=
+
+ ... +
1+r 1+i
1+i
1+i

P =x

where 1 + j =

x at j%
a
1+r n

1+i
1+r .

b. We evaluate the above expression at n = 10, x = $2, r = 3% and i = 4% per annum and obtain
P = $18.42.
c. We evaluate the above expression at n = 10, x = $2, r = 3% and i = 2% per annum and
obtain P = $20.50. Note that j is negative. This reflects that the discount rate i is less than the
inflation rate r. Each additional cash flow (as t increases) therefore adds an increasing amount
to the overall present value.
Solution 5.5. The cash flows are
-P at t = 0
x at t = 1
x + a at t = 2
.
..
x + (n

1)a at t = n

a. After some work, we find that the equation of value is given by

x
x+a
x + (n 1)a
+
+ ... +
1 + i (1 + i)2
(1 + i)2

(1 + i)an n(1 + i) n
=(x a)an + a
i

P =

b. We evaluate the above expression at n = 10, x = $2, a = $1 and i = 4% per annum and obtain
P = $50.10.

The force of interest as a function of time: Chapter 7 questions

Solution 7.1. In each case we use the expression

A(0, t) = exp

(s)ds
0

a. Using (t) = 0.001t we find

A(0, t) = exp

b. Using (t) = 0.0001t2

c. Using (t) = 0.002 t3 + t2

A(0, t) = exp

1
t
10 e

0.001sds
0

= exp 0.0005t2

= exp

0.01t we find

A(0, t) = exp

d. Using (t) =

(0.0001s2

0.01s)ds

0.0001 3
t
3

0.005t2

2 we find

0.002 s3 + s2

2 ds

4
t
t3
= exp 0.002
+
4
3

2t

we find

A(0, t) = exp

t
0

1
e
10

ds

= exp

1
1
10

Solution 7.2. The accumultion factor between times t1 and t2 is given by

A(t1 , t2 ) = exp

t2
t1

1
(2
100

cos t) ds

= e 100 (2(t2

t1 )+sin(t1 ) sin(t2 ))

a. The accumulated value at t = 5 of $100 deposited at t = 0 is given by $100A(0, 5) = $111.58

b. The present value of $500 due at t = is given by

$500
A(0,)

= $469.55.

c. The accumulated value at t = 10 of $200 deposited at t = 2 and $300 deposited at t = 6 is given

by $200A(2, 10) + $300A(6, 10) = $563.99.

d. The value at t = 2 of $1000 due at t = 5, t = 10 and t = 15 is given by

$1000

1
1
1
+
+
A(2, 5) A(2, 10) A(2, 15)

= $2533.24

Solution 7.3. The force of interest is the piecewise function

(t) =

8
>
< 0.05,

>
: 0.05 + 0.003(t

0t<5
5),

t>5

and so the accumulation factor will also be a piecewise function. Using the principle of consistency, we
write
A(0, t) =

and so
A(0, t) =

8
>
< A(0, t),

>
: A(0, 5)A(5, t),

0t<5
t>5

8
>
< e0.05t ,

0t<5

3
>
+0.0015t2 +0.035t
: e 80
,

t>5

Solution 7.4. The piecewise force of interest

8
>
>
0.05,
>
>
<
(t) =
0.07,
>
>
>
>
: at + bt2 ,

0t<2
2t<6
t

leads to a piecewise accumulation factor

8
>
>
A(0, t) = e0.05t
>
>
<
A(0, t) =
A(0, 2)A(2, t) = e0.1 e0.07(t 2) = e0.07t 0.04
>
>
>
>
: A(0, 2)A(2, 6)A(6, t) = e0.38 e 12 a(t2 36)+ 13 b(t3

0t<2
2t<6
216)

We have two accumulations that can be used to form two simultaneous equations
1

36)+ 13 b(103 216)

36)+ 13 b(153 216)

200 =100e0.38 e 2 a(10

300 =100e0.38 e 2 a(15

These can be solved (using Wolfram Alpha, say) to obtain a 0.01577 and b

0.00073.

Solution 7.5. The accumulation factor is given by

A(0, t) = exp

t
2

0.001s ds
0

= exp

0.001 3
t
3

The payment stream is received continuously at rate (t). Consider a small element of time dt placed
at time t, the amount of cash received in this element is (t)dt and this has present value

0.001 3
3 t

t2 dt

These elements exist between t = 5 and t = 6, leading to an overall present value of

Z

t2 e

0.001 3
3 t

dt = $28.66

Mortality: Chapter 9 questions

Solution 9.1. We use the standard notation t px and t qx .
a. The probability that a newborn lives to at least age 50 is denoted

50 p0 .

b. The probability that an 18 year old does not survive to retirement at age 65 is denoted
c. The probability that a 25 year old dies before his 90th birthday is denoted
d. The probability that a 30 year old lives to her 100th birthday is denoted

47 q18 .

65 q25 .

70 p30 .

Solution 9.2. We use the standard notation t px and t qx .

a. The probability that a newborn dies between his 50th and 55th birthday is denoted
b. The probability that a 18 year old will die aged 38 is denoted

50 p0 .5 q55 .

20 p18 .q38

c. The probability that a 25 year old will die between her 70th and 80th birthday is denoted
45 p25 .10 q70 .

d. The probability that a 30 year old will die aged either 40, 50 or 60 is denoted 10 p30 .q40 + 20 p30 .q50 +
30 p30 .q60 .

Solution 9.3. We use the life table as directed. Recall that

t px

lx+t
lx

and

t qx

lx

lx+t
lx

leading to

10 p30 .q40

l40 l40 l41

l50 l50 l51
l60 l60 l61
+
+
l30 l40
l30 l50
l30 l60
1
=
(l40 l41 + l50 l51 + l60 l61 )
l30

+ 20 p30 .q50 + 30 p30 .q60 =

=1.85%

Solution 9.4. The required probability is expressed in terms of 1-year quantities as

p0 .p1 .p2 .p3 .q4 =p0 .p1 .p2 .p3 .(1

=e

.e

.e

.e

p4 )
3

. 1

=0.24%

Solution 9.5. The required probability is expressed as

5 p0 . 2 q 5

=p0 .p1 .p2 .p3 .p4 .(1

2 p5 )

=p0 .p1 .p2 .p3 .p4 .(1 p5 .p6 )

1 1 1 1 1
1 1
= . . . . . 1
.
1 2 3 4 5
6 7
=81.3%

Markov chains: Chapter 10 questions

Solution 10.1. We have

6 0.1
6
P =6
6 0.1
4
0

0.8
0.5
0.6

3
0.1 7
7
0.4 7
7
5
0.4

and note that the n-step transition matrix is given by P (n) = P n .

a. The 2-step transition matrix is

P (2)

6 0.1
6
=6
6 0.1
4
0

0.8
0.5
0.6

32
0.1 7 6 0.1
76
6
0.4 7
7 6 0.1
54
0.4
0

0.8
0.5
0.6

3 2
0.1 7 6 0.09
7 6
6
0.4 7
7 = 6 0.06
5 4
0.4
0.06

0.54
0.57
0.54

3
0.37 7
7
0.37 7
7
5
0.4

b. The 3-step transition matrix is

(3)

6 0.063 0.564
6
=P =P P =6
6 0.063 0.555
4
0.06 0.558
3

0.373 7
7
0.382 7
7
5
0.382

c. The 4-step transition matrix is

P (4)

6 0.0627
6
4
3
=P =P P =6
6 0.0618
4
0.0618

0.5562
0.5571
0.5562

3
0.3811 7
7
0.3811 7
7
5
0.382

d. The 5-step transition matrix is

P (5)

6 0.06189
6
= P5 = P4 P = 6
6 0.06189
4
0.0618

0.55692
0.55665
0.55674

3
0.38119 7
7
0.38146 7
7
5
0.38146

Note that the n-step matrices appear to be converging towards a stationary structure. That is,
additional time steps will eventually make no dierence to the transition probabilities.
Solution 10.2. We refer to the no-claims discount model has 4 states and associated 1-step transition
probabilities shown in Figure 10.2.
a. The 1-step transition matrix is given by
2

6
6
6 0.5
6
P =6
6
6 0
4
0

0.5

0.5

7
7
0 7
7
7
7
0.5 7
5
1

b. The 2-step transition matrix is given by

2

P (2)

6
6
6 0.5
6
2
=P =6
6
6 0.25
4
0

0.25

0.25

7
7
0.25 7
7
7
7
0.5 7
5
1

c. The 3-step transition matrix is given by

2

P (3)

6
6
6 0.625
0
6
3
=P =6
6
6 0.25 0.125
4
0
0

0.125
0
0

7
7
0.25 7
7
7
7
0.625 7
5
1

Solution 10.3. The probability that a policyholder currently in State 2 will be in State 2 after 3 time
(3)

steps is given by element p22 = 0. That is there is zero probability. The reader should also convince
himself of this by looking at all possible groups of 3 movements from State 2.
Solution 10.4. A stationary distribution is such that it is unaected by a further time step. That is,
we require {ni } such that

2
n1

n2

n3

n4

6
6
6 0.5
6
6
6
6 0
4
0

0.5

0.5

7
7
0 7
7
7 = n1
7
0.5 7
5
1

n2

n3

n4

This leads to the simultaneous equations

8
>
>
>
n1 + 0.5n2 = n1
>
>
>
>
>
>
>
<0.5n = n
3

>
>
>
0.5n2 = n3
>
>
>
>
>
>
>
:0.5n3 + n4 = n4

This system is solved by any values of n1 and n4 as long as n2 = 0 = n3 . This is to be expected as the

end states (States 1 and 4) are absorbing.

Solution 10.5. We refer to the no-claims discount model has 4 states and associated 1-step transition
probabilities shown in Figure 10.3 and begin by stating the 1-step transition matrix.
2

0.9

6
6
6 0.5
6
P =6
6
6 0
4
0

0.1

0.5

0.8

7
7
0 7
7
7
7
0.2 7
5
0

The steady annual revenue is determined by the stationary distribution obtained from

2
n1

n2

n3

n4

0.9

6
6
6 0.5
6
6
6
6 0
4
0

0.1

0.5

0.8

7
7
0 7
7
7 = n1
7
0.2 7
5
0

n2

n3

n4

Some eort leads to the solution

n2 =

n1
5

n3 =

n1
8

n1
40

which is subject to n1 + n2 + n3 + n4 = 100, 000. Therefore

2,000,000
27

400,000
27

policyholders pay $900 per annum

250,000
27

policyholders pay $600 per annum

50,000
27

policyholders pay $1000 per annum

policyholders pay $300 per annum

leading to a stationary revenue of $93,518,518.52 per annum.

Continuous probability distributions: Chapter 13 questions

These questions all require the evaluation of difficult integrals to a reasonable degree of accuracy. The
choice of the numerical scheme is left to the reader, however, given that accuracy is important, we use

Simpsons rule of order 6 in all that follows. That is,

Z

b
a

f (x)dx '

h
(f (a = x0 ) + 4f (x1 ) + 2f (x2 ) + 4f (x3 ) + 2f (x4 ) + 4f (x5 ) + f (b = x6 ))
3

Solution 13.1. We have

P (a < X < b) =

fX (x)dx =
a

b
a

1
p e
2

1 2
2x

dx

and so each probability can be evaluated as required to obtain the following. Note that we can approximate 1 by some finite number, say x = 10.
a. P (X < 0.5) = P ( 1 < X < 0.5) ' 69.56%
b. P (X > 1.2) = P (1 > X > 1.2) ' 11.45%
c. P (0.2 < X < 0.5) ' 11.22%
d. P (0.5 < X < 1.2) ' 19.35%
Solution 13.2. We are required to show that

E[X] =

1
1

1
xp e
2

1 2
2x

dx = 0

Of course this is true as the function is odd. However, we can evaluate it numerically to obtain

E[X] '

Solution 13.3. We work with

hY (y) =
p
for y 2 (0, 2 5).

10

1
xp e
2
10

1
1

cos

1 2
2x

dx = 0

y2
10

p
a. We require hY (y) > 0 for y 2 (0, 2 5), which is true if > 0. Also, we require
Z

p
2 5
0

1
1

cos

y 2 dy = 1
10

and this fixes . In particular

p
2 5
0

b. We note that
P (0 < Y < 1) =

cos

y 2 dy ' 3.38125
10

1
1
3.38125

1
0

cos

y 2 dy ' 0.291%
10

c. Using the same approach to part b., we find that P (0 < Y <

5) ' 14.56%.

p
p
d. Using the same approach to part b., we find that P ( 5 < Y < 2 5) ' 85.42%.
Solution 13.4. We have
fX (x) = xe

(x 1)2

for x 2 [0, 5].

a. We note that fX (x)

0 for all x 2 [0, 5] when

Z

That is,

xe

> 0. The value of

(x 1)2

dx = 1

= 0.5505.

b. We require P (0 < X < 1) and this is obtained from

Z

0.5505xe

(x 1)2

dx ' 23.71%

c. We require P (1 < X < 5) and this is obtained from

Z

0.5505xe

(x 1)2

d. We obtain
E[X] =

0.5505x2 e

dx ' 76.34%

(x 1)2

Solution 13.5. We have

fY (y) = !y 3 e
for y 2 [8, 16].

(y 12)2

dx ' 1.45

is obtained from

0 for all y 2 [8, 16] when ! > 0. The value of ! is obtained from

a. We note that fY (y)

16

!y 3 e

(y 12)2

dy = 1

That is, ! ' 0.000324.

b. We obtain
E[Y ] =
c. We obtain
var[Y ] =

16

0.000324y 4 e

(y 12)2

16

0.000324(y
8

12.13)2 y 3 e

dy ' 12.13

(y 12)2

dy ' 0.508