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Tutorial 2a - 2021 With Solutions

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Tutorial 2a - 2021 With Solutions

Uploaded by

Anneliese Chen
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© © All Rights Reserved
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Department of Actuarial Mathematics and Statistics

F78AB - Actuarial and Financial Mathematics B


Tutorial 2 – Force of interest and continuously-paid cashflows
Question 1 An investment of £1000 has been made at time 0. The force of interest at time
t is δ(t) = 0.05 + 0.0001t, for all t > 0.

1. Calculate the accumulation of the investment at time 10.

2. Calculate the accumulation of the investment at time 20.

3. Calculate the yield on the investment if it is held until time 20. The yield should be
expressed as a constant, effective annual rate of interest.

Question 2 Suppose that A(0) = 1 and that the force of interest is

β
δ(t) = α + for all t > 0, for constants α, β > 0.
1 + βt

1. Find an expression for the accumulation function A(t) for t > 0.

2. For β = 1 and α = 0.05, calculate:

(a) the accumulation at time 5 of £100 paid at time 0.


(b) the present value at time 0 of £200 paid at time 10.
(c) the present value at time 5 of £500 paid at time 11.

Question 3 The force of interest is δ(t) = 0.04 − 0.002t + 0.0003t2 , for all t > 0.

1. Calculate the accumulation up to time 10 of £500 invested at time 0, plus a further £750
invested at time 5.

2. The investment is redeemed at time 10. Calculate the yield on this investment.

Question 4 The force of interest is given by



 0.04 for 0 ≤ t < 5
δ(t) = 0.05 for 5 ≤ t < 8
0.055 for 8 ≤ t

1. Derive expressions for the accumulation function A(t) given A(0) = 1.

2. Calculate the present value at time 0 of £700 due at time 10.

3. Calculate the present value at time 6 of £1 000 due at time 15.

Solutions: Q1.1. 1656.99; Q1.2. 2773.19; Q1.3. 5.232% p.a.; Q2.2.a. £770.42; Q2.2.b.
£11.03; Q2.2.c. £185.20; Q3.1. 1673.49; Q3.2. 4.1804% per time unit; Q4.2. 441.90; Q4.3.
615.70.

1
Department of Actuarial Mathematics and Statistics

F78AB - Actuarial and Financial Mathematics B


Solutions to Tutorial 2 – Force of interest and continuously-paid cashflows
Solution 1 Let C(t) = accumulated amount at time t.
Z t 
C(t) = 1000 exp δ(s)ds
0
Z t 
= 1000 exp (0.05 + 0.0001s)ds
0
= 1000 exp 0.05t + 0.00005t2


1. C(10) = 1000e0.505 = 1656.99

2. C(20) = 1000e1.02 = 2773.19

3. The effective annual yield i satisfies


 1/20
20 C(20) 2773.19 2773.19
(1 + i) = = ⇒ 1+i = ⇒ i = 5.232%.
C(0) 1000 1000

Solution 2

1. Z t Z t 
β
δ(s)ds = α+ ds = αt + [log(1 + βs)]s=t
s=0 = αt + log(1 + βt).
0 0 1 + βs
Hence
Z t   
β
A(t) = A(0) exp α+ ds = exp {αt + log(1 + βt)} = (1 + βt)eαt .
0 1 + βs

2. With β = 1 and α = 0.05, the accumulation function at time t is A(t) = (1 + t)e0.05t .

(a) 100A(5) = 600e0.05×5 = £770.42.


(b)
200 200
= = £11.03.
A(10) 11e0.05×10
(c)
A(5) 6e0.05×5
500 = 500 = £185.20.
A(11) 12e0.05×11

Solution 3

1.
Z T 
A(t, T ) = exp δ(s)ds
t
Z T 
2
= exp (0.04 − 0.002s + 0.0003s )ds
t
= exp 0.04(T − t) − 0.001(T 2 − t2 ) + 0.0001(T 3 − t3 )


1
Hence
AV (10) = 500A(0, 10) + 750A(5, 10)
= 500 exp 0.04(10 − 0) − 0.001(102 − 02 ) + 0.0001(103 − 03 )


+ 750 exp 0.04(10 − 5) − 0.001(102 − 52 ) + 0.0001(103 − 53 )




= 500 exp {0.4} + 750 exp {0.2125}


= 745.912 + 927.575
= 1673.49

2. The yield is the solution to the equation of value:

500 + 750v 5 = 1673.49v 10

Solving this as a quadratic equation in x = v 5 we find the two solutions x = 0.814836


and x = −0.366671. However, as v 5 must be positive, the only admissible solution is
v 5 = 0.814836. Hence, the yield is i = 0.041804.

Solution 4

1.  0.04t
 e for 0 < t < 5
0.2+0.05(t−5)
A(t) = e for 5 ≤ t < 8
 0.35+0.055(t−8)
e for 8 ≤ t
The discount function is V (t, T ) = A(t)/A(T ).

2. Hence the PV at time 0 of 700 due at time 10 is

700 A(0)/A(10) = 700 e−0.35−0.055×2 = 700 e−0.46 = 441.90

3. The PV at time 6 of 1 000 due at time 15 is

1 000 A(6)/A(15) = 1 000 e0.2+0.05 e−0.35−0.055×7 = 1 000 e0.25 e−0.735 = 1 000 e−0.485 = 615.70

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