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Question
[20 marks]
[5 marks]
[10 marks]
[5 marks]
[10 marks]
Total
50
Page 2 of 4
1.
an + (I
a)n ,
k
an + (Ia)n1 = (k 1)
[5]
(b) A Company issues a 10 year annuity payable annually in arrear, with the following
features:
The first annuity payment is of $130, and subsequent annuity payments increase by 5% p.a. compound.
Each time the annuity is paid, the company incurs expenses as follows:
First year expense: 4% of the annuity amount, thereafter: 4% of the annuity
paid in the respective year, inflating at 4% p.a. compound.
Find the purchase price of the annuity at interest rate of 9.2% p.a. effective. [8]
(c) The force of interest is given by
0.08 + 0.0005t2 ,
(t) =
0.175 0.004t,
0.105,
0t<8
8 t < 14
t 14
Find a general expression for the accumulation factor a(0, t) from time 0 to time
t.
[7]
Page 3 of 4
[5]
3. An ordinary share pays annual dividends. The next dividend is due in exactly eight
months time. This dividend is expected to be $1.80 per share. Dividends are expected
to grow at a compound rate of 7% per annum from this level and are expected to
continue in perpetuity. Inflation is expected to be 2.5% per annum. The share price is
currently $35.
Calculate the expected effective annual real rate of return for an investor who purchases
the share.
[10]
4. An annuity certain with payments of $200 at the end of each fortnight is to be replaced by an annuity with the same term and present value, but with payments at the
beginning of each month instead.
Calculate the revised payments, assuming an annual force of interest of 8%.
[5]
5. A life insurance company offers an increasing term assurance that provides a benefit
payable at the end of the year of death of $12,000 in the first year, increasing by 150
on each policy anniversary. Calculate the single premium for a five year policy issued
to a life aged 50.
Basis:
Rate of interest 4% per annum
Mortality AM92
[10]
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