ACTUARIAL SOCIETY OF INDIA

9, Jeevan Udyog, 278, Dr. D N Road, Fort, Mumbai – 400 001

Examinations – November 2001

Subject 102 - Mathematics of Finance

Time allowed: 3 Hours Maximum marks 100

Instruction to the Candidates

1. Write your Candidates number in the space provided.

2. Do not write your name anywhere in the answer sheets.
3. Mark allocations are shown in brackets.
4. Attempt all questions. Begin your answer to each question on a new page.
5. Actuarial Tables and graph paper will be available on request.
6. You may use simple electronic calculators, but not programmable ones or those
capable of storing prior data.

Q1. Calculate
i) a&&15
(4)

;
(2)
ii) Da10 
.
Given the interest rate is 10% p.a. payable monthly (6)

Q2. Gopal has invested the following amounts in his bank account:
On 1 st Jan 1999 Rs. 1000
On 1 st July 2000 Rs. 2000
On 31st Oct. 2000 Rs. 1500

The bank has declared the following the compound interest rates for its
accounts:
1st Jan 99 to 31st Dec 99 6% p.a. payable half yearly
st st
1 Jan 00 to 31 Dec 00 4% p.a. payable monthly
1st Jan 01 to till date 5% p.a.

Page 1 of 3
 102 – November 2001

Gopal wants to close his accounts as on 3oth Sept. 01. What money will
he get back? (7)

Q3. Prove by general reasoning:

&&sn  − n
Isn  =
i (5)

Q4. Priya wants to purchase a 15 year bond which pays interest in arrears of
10% p.a. convertible half yearly. She will have an option to redeem the
bond at par any time between the 10th year and the 15th year. Priya paid a
price of Rs. 102 to purchase the bond, what would be the maximum
effective yield that she can get out of this bond? (6)

Q5. Write short notes on

i) Futures; (3)
ii) Margins, in the context of derivatives; (3)
iii) Swaps; (3)
iv) Discrete time forward rates (3)
[Total 12]

Q6. A loan has an interest rate of 12% p.a. payable half yearly in arrears and
will be redeemed at 120% in ten years time. An investor who is subject to
income tax at 30% and capital gains tax at 40%, wants to purchase the
loan. What price does he have to pay to get a net yield of atleast 10%? (6)

Q7. A fund has to make payments of Rs. 100,000 at the end of sixth year and
Rs. 120,000 at the end of the ninth year. Show that, if interest rates are
currently 9% at all durations, immunization to small changes in interest
rates can be achieved by holding an appropriately chosen combination of
a five year zero coupon bond and a twelve year zero coupon bond. (8)

Q8. A project has an initial outlay of Rs. 150,000, expenses of Rs. 20,000 at
the end of 1st Year and Rs. 15,000 at the end of 2nd year. The income
from the project are Rs. 20,000 at the end of each of the first 4 years and
Rs. 200,000 at the end of the 5th year. Calculate the IRR (upto 1 decimal
place) for this project? (7)

Q9. What is the accumulated value of a 5 year annuity of 1 per annum in

arrears payable monthly increasing at 10% p.a. each year. The interest
rate assumed is 8% p.a. convertible half yearly? (6)

Q10. The table below shows the progress of the investment portfolio of a
Pension Fund for the period 1 Jan 1998 to 31st Dec 2000.
Date Fund Value Cash flow
1 Jan 98 20,00,000
1 Jan 99 23,00,000
 102 – November 2001

1 Jan 00 27,00,000
1 July 00 27,00,000 4,00,000
31Dec 00 34,00,000

Calculate (upto 1 decimal) for the period 1 Jan 98 to 31 Dec 2000

i) The money weighted rate of return
ii) The time weighted rate of return
iii) The linked annual rate of return (using equal year long linking
periods)
(3, 3, 4)
[Total 10]

Q11. The force of interest at time t (where t is measured in years) is given by:
δ (t ) = 0.05 0 ≤ t < 5
0.06 5 ≤ t < 8
0.07 8 ≤ t < 20
i) Derive expression for v(t), the present value of 1 due at time t; (6)
ii) Calculate accumulated value at time 18 of an investment of Rs. 50,000
made at time 4; (3)
iii) What constant force of interest would produce the same accumulation as
in (ii) for an investment of Rs. 50,000 over 14 year; (3)
iv) What effective level annual rate of interest applying over the 20 year
period would have the same effect as the varying force of interest? (3)
[Total 15]

Q12. Mr. Aditya buys a car using a Rs.300,000 loan with monthly repayments
payable at the end of each of the next 24 months, calculated using a flat
rate of interest of 12.5% per annum. Calculate the APR for the loan. (6)

Q13. A Life Insurance Company sells index-linked annuity certain contracts. In

return for the purchase price of Rs. 100,000 the policyholder will receive
ten annual payments starting one year from now. The first payment will
be Rs. 12470 and future payments will be increased in line with the price
inflation. If the insurance company assumes a constant nominal interest
rate of 8% p.a. in its premium basis, find the constant rate of inflation
assumed. (6)