THE UNIVERSITY OF HONG KONG

DEPARTMENT OF STATISTICS AND ACTUARIAL SCIENCE

STAT2902 Financial Mathematics
Assignment 2

1. SOLUTION
(12) (4)
PV = 700 × 12a4| + 2400v 4 × 4a6|
1 − v4 4 1 − v6
= 700 × 12 × + 2400v × 4 ×
i(12) i(4)
= 71290

where    
1 1
i(12) = 12 × 1.05 12 − 1 , i(4) = 4 × 1.05 4 − 1

2. SOLUTION  4×10 !
10000 0.04
AV = s120|i 1 + + s120|j
12 4
(1 + i)n − 1
sn|i = , (1+i)12 = (1+0.05), i = 0.0041, (1+j)12 = (1+0.04/4)4 , j = 0.0033.
i
(1+i)120 −1 (1+j)120 −1
Then, s120|i = i
= 153.3889, ands120|j = j
= 148.1405. So AV =
313, 763

3. SOLUTION
 
1.06 1.06 9
PV = 1000 1 + + ... + ( )
1.05 1.05
1 − ( 1.06 )10
 
1.05
= 1000
1 − 1.06
1.05
= 10439.639

4. SOLUTIONLet the final payment and the ending date be P and n, respectively.
Based on the given condition, we have n > 7. The present value (PV) of all payments
except the final one at the ending time is given as
a6|i − 6v 6
P V (n) = 30000a6|i + 10000 + 90000v 6 · an−6|0.005
i
a7|i − 7v 7
= 30000a7|i + 10000 + 90000v 7 · an−7|0.005
i
= 410355.4754 + 90000v 7 · an−7|0.005

where i = 0.06/12, v = (1 + i)−1 . Plug-in the given value of i, we have

1 − 1.005−(n−7)
P V (n) = 90000(1.005)−7 + 410355.4754
0.005

1
 The above value PV shall be larger than the loan, i.e., PV (n) > 1000000, thus
n > 13.919. Then the ending date is n = 14, i.e., the corresponding time is Feb
28th, 2022 . The amount of the final payment is

P = [1000000 − P V (13)]v −14 = 77, 176.389 ∗ 1.072321131 = 82, 757.8729

5. SOLUTION The present value is

 
P V = (Ia)n| + nv n a4|| = i−1 än| − nv n + nv n = i−1 än|

There also exists another way to find the present value:

an| än|
 
n 1 1
P V = (Ia)∞| − v (Ia)∞| = + 2 (1 − v n ) = an| + =
i i i i

6. SOLUTION

AV = mP sn| + (m − 1)P sn| (1 + i)n + · · · + P sn| (1 + i)(m−1)n

= mP sn| + (m − 1)P (s2n| − sn| ) + (m − 2)P (s3n| − s2n| ) + · · · + P (smn| − s(m−1)n| )
= P sn| + P s2n| + · · · + P s(m−1)n| + P smn|
P
(1 + i)n − 1 + (1 + i)2n − 1 + · · · + (1 + i)(m−1)n − 1 + (1 + i)mn − 1


=
i
P
(1 + i)n + (1 + i)2n + · · · + (1 + i)(m−1)n + (1 + i)mn − m


=
i !
P snm|
= −m
i an|

7. SOLUTION The present value is given as

P V = 1 · v 4 + (1 + 4)v 4×2 + (1 + 4 × 2)v 4×3 + · · ·

Make simple transformation, we have

v4
v −4 − 1 P V = 1 + 5v 4 + 4v 4×2 + 4v 4×3 + · · · = 1 + 4


1 − v4
Therefore, the present value becomes
v4
 
−4

−1
PV = 1 + 4 v − 1 = 39
1 − v4
Or The effective rate of interest for a 4-year period,
1
(1 + i)−1 = 0.75 =⇒ i =
3
Then,
an| − v n n 1 4
lim P an| + Q = + 2 = 39
n→∞ i i i

2
 8. SOLUTION If i is the effective rate for per 3-month period, and j is the effective
rate for per 4-month period, then we can find below equation:

(1 + i)4 = (1 + j)3
1−vj36 1−(1+j)−36
Taken i as given, the PV of the annuity should equal to dj
= 1−(1+j)−1
=
1−(1+i)−48
4
1−(1+i)− 3

9. SOLUTION Note that

(2) (2) (2)
3an| = 2a2n| = 45s1|
3 (1 − v n ) 2 (1 − v 2n ) 45(1 + i − 1)
⇐⇒ (2)
= (2)
=
i i i(2)
n 2n


⇐⇒ 3 (1 − v ) = 2 1 − v = 45i

Consider the equation of the 1st and 2nd ones, we have

3 (1 − v n ) = 2 1 − v 2n

⇐⇒ 2v 2n − 3v n + 1 = 0
⇐⇒ (v n − 1) (2v n − 1) = 0
1
⇐⇒ v n = 1,
2
with v n = 1 rejected,and it follows that 45i = 3(1 − 1/2) ⇐⇒ i = 1/30, considering
the equation of the 1st and 3rd ones.

10. SOLUTION We can consider this question in this way: each year’s present value

(4)
can be expressed as 500 × 42 I (4) a 1| , and the present value of such a payment
for 5 years can be obtained by multiplying ä5| . Therefore, the present value of the
anmuity is

(4)
P V = 8000 I (4) a 1|
ä5|

Note that the principal here is 8000.

11. SOLUTION Draw a diagram and wre will see this perpetuity is equivalent to the
sum of the present value of perpetuities-due of ä∞| at time 5, 7, 9 and so on, therefore

= ä∞| v 5 + v 7 + v 9 + v 11 + . . .


PV
v5
1 + v2 + v4 + v6 + . . .


=
d
v5
=
d (1 − v 2 )
v4
=
i − vd

3
12. SOLUTION
¯
(Iā) ¯
∞| = lim (Iā)
n→∞ n|

ān| − nv n
= lim
R∞ t δ
n→∞

0
v dt − 0
=
δ
1/ ln (v −1 )
=
δ
1/ ln(1 + i)
=
δ
1
=
δ2
= 156.25

13. SOLUTION For all time t ∈ [0, 5),

Z t Z t
δs ds = (0.08 − 0.006s)ds = 0.08t − 0.003t2 .
0 0

For all time t ∈ [5, 10),

Z t Z 5 Z t
δs ds = δs ds + 0.05ds = 0.075 + 0.05t
0 0 5

For all time t ∈ [10, 15),

Z t Z 5 Z 10 Z t
δs ds = δs ds + 0.05ds + (0.07 − 0.004s)ds = 0.075 + 0.07t − 0.002t2
0 0 5 10

Using the above results, the present value is

Z 12 Rt
PV = (70 − 4t)e− 0 δs ds dt
Z5 10 Z 12
−0.075−0.05t 2
= (70 − 4t)e dt + (70 − 4t)e−0.075−0.07t+0.002t dt
5 10
Z 10 Z 12
−0.075−0.05t 2
= −20 (70 − 4t)de − 1000 de−0.075−0.07t+0.002t dt
5 10
−0.575 −0.325 −0.575
= −20[30e − 50e ] − 80[−20e + 20e−0.325 ] − 1000[e−0.627 − e−0.575 ]
= 157.7

14. SOLUTION
Z 7 R Z 12 R
t t
−(1+s)−1 ds 2 −(1+s)−1 ds
t3 − 2t dt


PV = e 0 (50 − t )dt + e 0

4 7
Z 20 R
12 Rt
−(1+s)−1 ds −(1+2s)−1 ds
t3 − 2t dt


+ e 0 e 12

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