CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

CM1 – ACTUARIAL MATHEMATICS

INDEX

QUESTIONS
SECTION 1 ACTUARIAL MODELLING 1-8
SOLUTIONS TO PAST EXAM QUESTIONS 9-23
SECTION 2 DISCOUNTING, ACCUMULATING AND ANNUITIES 24-43
SECTION 3 EQUATIONS OF VALUE AND LOANS 44-52
SECTION 4 PROJECT APPRAISAL 53-67
SECTION 5 BONDS, EQUITY, AND PROPERTY 68-90
SECTION 6 TERM STRUCTURE OF INTEREST RATES 91-112
SECTION 7 LIFE TABLES, ASSURANCES ANDANNUITIES 113-132
SECTION 8 WITH-PROFITS POLICIES, GROSS PREMIUMS AND RESERVES 133-170
SECTION 9 JOINT LIVES 171-183
SECTION 10 MORTALITY PROFIT 184-199
SECTION 11 COMPETING RISKS AND MULTIPLE DECREMENTS 200-210
SECTION 12 PROFIT TESTING 211-221
SECTION 13 PROFIT TESTING 222-240

CA PRAVEEN PATWARI JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

CM1 – ACTUARIAL MATHEMATICS

SECTION –1
ACTUARIAL MODELLING

FOR THE
2021 EXAMS

COVERING
CHAPTER 1 PRINCIPLES OF ACTUARIAL MODELLING

CA PRAVEEN PATWARI 1 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

PAST EXAM QUESTIONS

This section contains all the relevant parts of the exam questions from 2010 to 2019, that are related to the
topics covered in this booklet.

Solutions are given later in this booklet. These give enough information for you to check your answer, in-
cluding working, and also show you what an adequate examination answer should look like. Further infor-
mation may be available in the Examiners' Report, ASET or Course Notes. (ASET can be ordered from
ActEd.)

We first provide you with a cross-reference grid of key words or phrases that indicate the main subject
areas of each exam question. You can use this, if you wish, to select the questions that relate just to those
aspects of the topic that you may be particularly interested in reviewing.

Alternatively, you can choose to ignore the grid, and instead attempt each question without having any
clues as to its content
Benefits and limitations
Steps in the modeling

Suitability of models
Deterministic and
stochastic models

Other aspects of

Scenario-based
attempted

Bookwork
Tick when

modelling
of models
process

Question

1  
2  
3  
4  
5  
6  
7    

CA PRAVEEN PATWARI 2 JAI SHREE SHYAM

 9
8

23
22
21
20
19
18
17
16
15
14
13
12
11
10
Question

CA PRAVEEN PATWARI
Tick when
CM1 ACTUARIAL MATHEMATICS

attempted

Steps in the modeling



process

Benefits and limitations




 of models

3
Deterministic and





stochastic models

Suitability of models






Other aspects of




modelling

Bookwork
















Scenario-based





JAI SHREE SHYAM

ACTUATORS EDUCATIONAL INSTITUTE
CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

1. Subject CT4 April 2010 Question 5

Ten years ago, a confectionery manufacturer launched a new product, the Scrummy Bar. The product
has been successful, with a rapid increase in consumption since the product was first sold. In order to
plan future investment in production capacity, the manufacturer wishes to forecast the future demand
for Scrummy Bars. It has data on age-specific consumption rates for the past ten years, together with
projections of the population by age over the next twenty year. It proposes the following modelling
strategy:

 extrapolate past age-specific consumption rates to forecast age-specific consumption rates for
the next 20 years.
 apply the forecast age-specific consumption rates to the projected population by age to obtain
estimated total consumption of the product by age for each of the next 20 years.
 sum the results to obtain the total demand for each year.
Describe the advantages and disadvantages of this strategy. [5]

2. Subject CT4 September 2010 Question 1

Following a review of the results of a stochastic model run, an actuary requests that a parameter is
changed. The change is not expected to alter the results significantly, but results on the final basis are
required in order to complete a report. Unfortunately, the actuarial student who produced the original
model run is away on study leave, and so the revised run is assigned to a different student.
When the revised results are produced, they are significantly different from the original results.
Discuss possible reasons why the results are different. [3]

3. Subject CT4 September 2010 Question 2

Compare the characteristics of deterministic and stochastic models, by considering the relationship
between inputs and outputs. [4]

4. Subject CT4 September 2010 Question 3

The government of a small island state intends to set up a model to analyse the mortality of the isl-
and's population over the past 50 years.
Describe the process that would be followed to carry out the analysis.

CA PRAVEEN PATWARI 4 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

5. Subject CT4 April 2011 Question 3

Describe the ways in which the design of a model used to protect over only a short time frame may
differ from one used to project over fifty years. [4]

6. Subject CT4 September 2011 Question 5(1)

(i) List the factors which should be considered in assessing the suitability of a model for a particular
exercise. [3]

7. Subject CT4 April 2012 Question 6

(i) List the advantages and disadvantages of using models in actuarial work
A new town is planned in a currently rural area. A model is to be developed to recommend the
number and size of schools required in the new town. The proposed modelling approach is as fol-
lows:
 The current age distribution of the population in the area is multiplied by the planned popu-
lation of the new town to produce an initial population distribution.
 Current national fertility and mortality rates by age are used to estimate births and deaths.
 The births and deaths are applied to the initial population distribution to generate a pro-
jected distribution of the town's population by age for each future year, and hence the num-
ber of school age children.
(ii) Discuss the appropriateness of the proposed modelling approach. [5]
[Total 9]
8. Subject CT4 September 2012 Question 1
Describe two benefits and two limitations of using models in actuarial work. [4]

9. Subject CT4 September 2012 Question 2

A large company wishes to construct a model of sickness rates among its employees to use in evaluat-
ing the present and future financial health of its sick pay scheme, Outline factors which the company
should take into consideration when developing the model. [5]

CA PRAVEEN PATWARI 5 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

10. Subject CT4 April 2013 Question 1

Describe the differences between deterministic and stochastic models. [4]

11. Subject CT4 September 2013 Question 4

(i) State what needs to be assessed when considering the suitability of a model for a particular pur-
pose. [5]

A city has care homes for the elderly. When an elderly person in the city is no longer able to cope
alone at home, they can move into a care home where they will be looked after until they die.

The city council runs some of the care homes and is reviewing the number of rooms it needs in all the
council-run care homes. The following model has been proposed.

The age distribution of the city population over the age of 60 is taken from the latest census. Statistics
from the National Health Service on the average age of entry into a care home and the proportion of
elderly who go into council-run care homes are applied to the current population to give the rate at
which people enter care homes. A recent national mortality table is then applied to give the rate at
which care home residents die.

(ii) Discuss the suitability of this model. [4]

[Total 9]
12. Subject CT4 April 2014 Question 1
State the benefits of modelling in actuarial work. [4]
13. Subject CT4 April 2014 Question 3
Explain what a stochastic model is and how it differs from a deterministic model. [4]

14. Subject CT4 September 2014 Question 2

(i) List eight factors which should be considered when assessing whether a model is suitable for a
particular application. [4]
(ii) State, giving reasons, a factor which would be particularly important in each of the following ap-
plications:
 Calculating the pension contribution for a medium-sized pension scheme.
CA PRAVEEN PATWARI 6 JAI SHREE SHYAM
CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

 Helping a friend construct a business case to secure a loan from a bank for his new ice cream
van venture.
 Working out how much it will cost to buy each member of your team their favourite cake on
your birthday in six months' time. [3]
[Total 7]
15. Subject CT4 April 2015 Question 4
(i) List the stages you would go through in creating a model. [4]
(ii) Discuss, for three of these stages, the specific issues that could arise when creating a model to
price a new sickness benefit product. [3]
[Total 7]
16. Subject CT4 September 2015 Question 2
Describe the differences between a stochastic and a deterministic model. [4]

17. Subject CT4 September 2015 Question 5(1)

(i) Describe why models are used in actuarial work. [4]

18. Subject CT4 April 2016 Question 2

List the advantages and disadvantages of using models in actuarial work. [4]

19. Subject CT4 September 2016 Question 7

(i) List EIGHT factors which should be considered when deciding whether a model is suitable for a
particular purpose. [4]

A colleague has been asked to present a model which might be used to determine the number of new
schools required throughout a country over the next 40 years. He forgot all about it until the last
minute when he was reading an article in a newspaper about immigration and education which pro-
vided some figures to back up the article. Your colleague has the following suggestion for a model:

 Start with the number of children in the education system over the last twenty years (as pro-
vided by the country's central statistical office). Project these forward using a straight line ap-
proach.

CA PRAVEEN PATWARI 7 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

 Use the number of immigrants predicted to arrive in each of the next fiveyears as given in the
newspaper article. Apply to this an estimate of ‘number and age of children for each immigrant'
also provided by thenewspaper. Project this forward also using a straight line approach.
 Add the two together to get the total number of children in the education system for the next 40
years.
(ii) Assess whether this model is suitable with regards to SIX of the factors which you listed in your
answer to part (i). [6]
[Total 10]
20. Subject CT4 September 2017 Question 5
(i) List the key steps involved in developing an actuarial model. [4]
(ii) Comment on considerations which would apply if you were developing a model of the spread of a
newly discovered disease. [3]
[Total 7]
21. Subject CT4 April 2018 Question 4 (part)
(i) Describe what is meant by the following terms:
(a) discrete state space
(b) stochastic model
(c) continuous-time model [3]
(ii) Describe the factors which should be considered when deciding whether to consider time in a dis-
crete or continuous way for a model. [3]
[Total 6]
22. Subject CT4 September 2018 Question 4
(i) Suggest three types of information source which could be used in recommending parameters to
use in an actuarial model. [3]
(ii) Comment on a practical difficulty which could arise with using each type of information source. [3]
[Total 6]
23. Subject CM1 April 2O1 Question 9
Describe four limitations of using models in actuarial work. [8]

CA PRAVEEN PATWARI 8 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

SOLUTIONS TO PAST EXAM QUESTIONS

The solutions presented here are just outline solutions for you to use to check your answers. See ASST for
full solutions.
1. Subject CT4 April 2010 Question 5
This method has the advantage that it uses a fairly simple model. However, it is a deterministic model
that doesn't allow for any possible (random) variation in the future.
It is good that the approach focuses on the underlying factors, re age, and it is probably true that con-
sumption of sweets is highly age-specific. But it may depend on other factors too,e.g. changes in eating
habits, health campaigns, the state of the economy.
The model should produce reliable results if the underlying variables exhibit clear trends that can be
extrapolated in an obvious way. However, the rapid increase cannot continue indefinitely and the
model needs to take account of this,
Unless birth rates (or migration rates) have been changing a lot recently, taking into account ages may
constitute spurious accuracy. A sufficiently accurate alternative may just be to project the total sales
directly without worrying about age. Factors such as advertising campaigns for the product or the
pricing strategy are likely to have far more impact than changes in the age profile.
In order to fit the model, it will be necessary to obtain data on the age of the consumers. This will be
difficult, especially since sweets for children, particularly very young children. are often bought by
older family members, not by the children themselves.
The accuracy of the model could be subject to statistical tests and as more data are obtained in the fu-
ture, the model could be improved.

2. Subject CT4 September 2010 Question 1

Reasons why the results might be different include the following:
 the assumption that changing the parameter value will not significantly alter the results may be
wrong
 the inputs to the model may have changed, e.g. one of the inputs might be a current share price
or interest rate, or a different set of random numbers may have been used by the second student

CA PRAVEEN PATWARI 9 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

 the model may be time-dependent in some way

 one (or both) of the runs of the model may contain errors, possibly because the second student
did not fully understand the process
 the model may not have been robust, i.e. it might only give valid results over a very narrow range
of parameter values,

3. Subject CT4 September 2010 Question 2

A stochastic model is a model where at least one of the inputs is a randomvariable. Since the input
contains a random component, the output of a stochastic model is also random. Each run of a stochas-
tic model gives an estimate of the feature of interest, and several independent runs are carried out for
each set of inputs. Because of the random nature of the model, each run will produce a different result.
So, if we repeat the process several times with the same set of inputs (but a different set of random
numbers), we get a sample of different outputs. The distribution of the output can then be analysed
statistically. (Note that a stochastic model can reproduce the same output if the same random num-
bers are re-used.)
In contrast, the inputs to a deterministic model are all fixed quantities. So, for a deterministic model,
the output is determined once the fixed set of inputs and the relationships between them have been
specified, in other words, repeated runs of a deterministic model with the same set of inputs will give
exactly the same output. The output of a deterministic model is only a snap-shot or an estimate of the
characteristics of the model for a given set of inputs.
A deterministic model is really just a special (simplified) case of a stochastic model.

4. Subject CT4 September 2010 Question 3

See Core Reading paragraph 7.
Specific to this case, we could also mention:
 For step 1: This involves considering what aspects of mortality are to be analysed,e.g. average
mortality rates, split of males/females, trends in mortality over the last 50 years.
 For step 3: We would need data on the numbers of deaths over the last 50 years and any availa-
ble census data. Problems may arise as some of the data may be missing or inaccurate, and re-
cording practices may have changed over the last 50 years.
CA PRAVEEN PATWARI 10 JAI SHREE SHYAM
CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

 For step 5: This entails identifying the main features of mortality.

 For step 6: Suitable experts might come from a national census office, government department,
or the medical profession.
 For step 10: We could check that the model is a good fit to the actual mortality experience of the
island over subsets of the last 50 years.

5. Subject CT4 April 2011 Question 3

For 4 marks, you would only need to come up with 4 of the ideas or examples.
The short-term model may need to produce more accurate results than the50-year model. For exam-
ple, the short-term model may be required for budgeting purposes, whereas the 50-year model may
only be needed to gauge the possible effects of general trends.
More detailed output may be required from the short-term model, e.g. a breakdown of population
numbers by age, rather than just the overall numbers.
Different variables may be used in the short-term and long-term models. For example, in the short-
term model it may be acceptable to ignore inflation, mortality, company defaults and general trends. It
may also be possible to ignore interactions between variables in the short-term model for simplicity.
The same variables may be modelled differently in the short term,e.g. using different statistical distri-
butions or using different approximations. For example, exponential growth is approximately linear
over short time scales.
The short-term model may need to incorporate realistic current values for parameters such as inter-
est rates and mortality rates, whereas it might be sufficient to assume average long-term values for
these parameters in the 50-year model.
Similarly, more detailed data might be required for the short-term model, e.g. current asset values or
individuals' salaries, current state of health and marital status.
In a short-term model it may be acceptable to ignore possible changes in the overall framework, such
as new legislation, changes in tax rules, the emergence of new diseases, changes in the general eco-
nomic climate, the effects of wars or new technology.
In a short-term model, it may be acceptable to ignore the possibility of extreme events that occur only
rarely, e.g. earthquakes or severe stock market crashes.

CA PRAVEEN PATWARI 11 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

We might select a different time step for projections in the short-term model (e.g. daily or monthly),
compared to a yearly time step in the 50-year model.
A short-term stochastic model is likely to produce a fairly 'tight spread of results and the output may
only need to show best estimates, whereas the output from the long-term model may need to show
confidence bands or worst case/best case scenarios.
Sensitivity testing and stress testing may be less important for the short-terra model. as there is less
time for the results to diverge because of stochastic effects.

6. Subject CT4 September 2011 Question 5(1)

(i) Factors in assessing the suitability of a model
Factors to be considered when assessing the suitability include:
 the objectives of the modelling exercise
 the validity of the model for the purpose to which it is to be put
 the validity of the data to be used
 the validity of the assumptions
 the possible errors associated with the model or parameters used not being a perfect repre-
sentation of the real-world situation being modelled
 the impact of correlations between the random variables that 'drive' the model
 the extent of correlations between the various results produced from the model
 the current relevance of models written and used in the past
 the credibility of the data input
 the credibility of the results output
 the dangers of spurious accuracy
 the ease with which the model and its results can be communicated
 regulatory requirements

7. Subject CT4 April 2012 Question 6

(i) Advantages/disadvantages of using models in actuarial work
Advantages
Models allow you to investigate the future behaviour of a process in compressed time.
Models allow you to vary the input parameters to see what effect this will have.

CA PRAVEEN PATWARI 12 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Models allow you to compare a large number of different scenarios (in a short space of time) to
determine the best strategy.
Models allow you to consider scenarios that would not be feasible in practice, e.g. because of cost
or other business considerations.
Models allow you to study the stochastic nature of the results, e.g. using Monte Carlo simulation.
Disadvantages
Models can be time-consuming and expensive to set up.
Models may not capture sufficiently accurately the real-world situation.
Models require simplifying assumptions that might turn out to be wrong, e.g. they may ignore cer-
tain features (e.g. inflation) or certain types of events that could occur (e.g. catastrophes).
Models can give an impression of greater accuracy and reliability than they actually have, and so
may create a sense of false security.
Some models may be difficult to explain to clients.
Stochastic models require a large number of simulations to be carried out to get accurate results,
Users of the model may not understand fully how it works and its limitations.
The results from models are dependent on the data used, which may be inaccurate or unreliable.
(ii) Appropriateness of the proposed modelling approach
The model uses an established method that is straightforward to understand. If the rural area is in
a developed country, mortality will probably have little effect (since the mortality of children and
those of child-bearing age will be relatively low) and so the model could be simplified by ignoring
this factor
The results will probably be accurate over the short term (i.e. for the next few years), but may be-
come less reliable if applied over longer periods.
The model makes no allowance for migration, i.e. people moving in or out of the town. This could
be an important factor (particularly in the currentdifficult economic climate) that could increase
or reduce the size of the population.
It should be possible to obtain sufficiently accurate data about the currentage distribution. How-
ever, the model assumes that the initial population profile of the town will be the same as for the
rural area in which it is located, which may not be true for a new town. It will depend on the type

CA PRAVEEN PATWARI 13 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

of housing (e.g. family homes, bungalows for the elderly) and the type of employment opportuni-
ties available in the town.
It should be possible to obtain reliable estimates for fertility rates and modality rates, but these
may change in the future, e.g. people may have fewer children during an economic recession. Also,
the rates may be different in different areas, so that the national rates would not be appropriate.
There could be changes to government education policy that would affect the number of school
places required. For example, the ages when school attendance is compulsory could be changed or
new types of school could be introduced (e.g. boarding schools, where children are schooled out-
side the area).

8. Subject CT4 September 2012 Question

See Core Reading paragraphs 8 and 9. Core Reading paragraphs 10. 11. 12 and 13 are also possible
answers.

9. Subject CT4 September 2012 Question 2

The nature of the existing sickness data the company possesses since the model can only be as com-
plex as the data will allow it to be.
Whether the company has made any previous attempts to model sickness rates among its employees,
and how successful they were.
The complexity of the model. More complex models will be costlier to prepare and run, but eventually
there may be diminishing returns to additional complexity.
General trends in sickness at the national level may need to be built in.
Whether the company plans to change the characteristics of its employees. For example, it may plan to
recruit more mature staff.
The ease of communication of the model.
The budget and resources available for the construction of the model. The capability of its staff and
whether outside consultants are required.
Who the model will be used by and whether they are capable of understanding and using it.

CA PRAVEEN PATWARI 14 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Consider if the model needs to interface with models of other aspects of the company's business (e.g.
taking data from other systems).

10. Subject CT4 April 2013 Question I

A stochastic model is one that recognises the random nature of the variables in the model. A determi-
nistic model is one that does not include a random component.
With a deterministic model, once the input values have been set. the output values can be determined.
A stochastic model uses random numbers to do the calculations and the outputs will be random in na-
ture.
A deterministic model will give a single set of results (based on a given set of input parameters), whe-
reas a stochastic model will produce a distribution of possible results.
The results of a deterministic model can often be determined by directcalculation, whereas stochastic
models tend to be more complicated and often need to use Monte Carlo simulation.
Deterministic models can be considered to be a special case of stochastic models, where the random
component is set to zero.

11. Subject CT4 September 2013 Question 4

(i) Factors in assessing the suitability of a model
See Core Reading paragraph 30.
(ii) Assess the suitability of the model

The model should be able to meet the objective of determining the number of rooms required.

Reliable data should be available about the current population numbers. The model makes a number
of assumptions.

In particular:

 the population numbers and age distribution of the city may change
 the rooms may not always be fully occupied. E.g. while a room is being reallocated to a new resi-
dent

CA PRAVEEN PATWARI 15 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

 different types of rooms may be needed for different types of occupants (e.g. severely disabled
people)

 economic factors and new government schemes may be introduced that could significantly affect
the take-up rates

 mortality rates have improved in recent years and may continue to do so in the future.
Other similar models used previously by other town councils may be able to be adapted and used
here.
The model should be quite easy and cheap to set up.
It can probably be set up on a spreadsheet so that it won't need specially trained staff to use it.
The results of the mod& should be quite easy to present and explain.

12. Subject CT4 April 2014 Question 1

See Core Reading paragraph 8

13. Subject CT4 April 2014 Question 3

A stochastic model is one that recognises the random nature of the variables in the model. A determi-
nistic model is one that does not include a random component.
With a deterministic model, once the input values have been set. the output values can be determined.
A stochastic model uses random numbers to do the calculations and the outputs will be random in na-
ture.
A deterministic model will give a single set of results (based on a given set of input parameters), whe-
reas a stochastic model will produce a distribution of possible results.
The results of a deterministic model can often be determined by directcalculation, whereas stochastic
models tend to be more complicated and often need to use Monte Carlo simulation.
Deterministic models can be considered to be a special case of stochastic models, where the random
component is set to zero.

CA PRAVEEN PATWARI 16 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

14. Subject CT4 September 2014 Question 2

(i) Factors in assessing the suitability of a model
See Core Reading paragraph 30.
(ii) Factors that are particularly important
Calculating pension contributions
A point that would be of particular importance here would be:
 the possible errors associated with the model or parameters used notbeing a perfect representa-
tion of the real-world situation being modelled.
When carrying out a pension scheme valuation it is important to use realistic values for parameters
such as the investment return, the rate of salary increases and the rate of price inflation that will apply
to benefit payments.
Ice cream van venture
A point that would be of particular importance here would be:
 the ease with which the model and its results can be communicated.
It is important that your friend will be able to understand the model and can present it clearly to the
business loans manager at the bank.
Birthday cakes
A point that would be of particular importance here would be:
 the dangers of spurious accuracy.
The cost is relatively small and staff will come and go. So, there's no point trying to be too precise
about the cost.
15. Subject CT 4 April 2015 Question 4
(i) Stages in creating a model
See Core Reading paragraph 7.
(ii) Specific issues for 3 stages
Step 3 — Data
We will need past data for sickness and recovery rates. If we do not havethese from other similar poli-
cies, we may need to use industry data or national statistics.

CA PRAVEEN PATWARI 17 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Step 5 — Define the model

A jump process may be suitable with transition rates depending on age and duration. It will be impor-
tant to specify precise definitions of sickness and recovery.
Step 10 — Reasonableness
One of the outputs of the model would be the premium rates for differentages. We should compare
these with the rates for any similar policies available in the market to ensure that they are not un-
competitive and don't appear to be too low.
There were many other possible answers here. For example:
Step 11 — Sensitivity testing
We could make small changes to each important parameter (sickness rate& recovery rates, expenses)
to ensure that the impact on the premium rates is not huge. If it is, we may need to review the product
design.
Step 13 — Professional guidance (and regulatory environment)
Could Solvency 11 have an impact on the cost of capital, making the product uncompetitive or uneco-
nomic?

16. Subject CT 4 September 2015 Question 2

See Core Reading paragraphs 14 to 16.

17. Subject CT4 September 2015 Question 5(1)

(i) Why models are used in actuarial work

Models are an imitation of a real-world system or process. Models allow us to make predictions about
the real world. Many actuarial activities are suitable for modelling. Models allow systems to be studied
in compressed time.

Stochastic models allow us to see the range of possible outcomes that might arise.

It is usually cheaper and quicker to use a model than to try things out in real life.

Models avoid the risks involved with trying things out in real life.

Models allow us to study the impact of changes before they have happened.
CA PRAVEEN PATWARI 18 JAI SHREE SHYAM
CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

18. Subject CT4 April 2016 Question 2

See Core Reading paragraphs 8 to 13.

19. Subject C T4 September 2016 Question 7

(i) Factors for deciding whether a model is suitable
See Core Reading paragraph 30.
(ii) Assess the suitability of the model
Any six of the following points are suitable here.
Objectives of the modelling exercise
The model will produce overall estimates for the number of schools required, but will not give an ac-
curate geographical breakdown of where they are required, which would be essential information.
Validity of the model for the purpose to which it is to be put
This is too simplistic an approach for a model that might be used for planning the number of schools
required. Incorrect estimates could prove very expensive.
Validity of the data to be used
The historical data from the central statistical office should be reliable, but the predictions in the
newspaper relating to immigrants may not be trustworthy.
Possible errors associated with the model or parameters used not being a perfect representation of
the real-world situation being modeled.
The model does not allow for people leaving the country. Nor does it take into account the geographi-
cal distribution of the immigrants (e.g. more may come to big cities such as London). The straight line
approach does not allow for 'baby booms' or sudden influxes of immigrants at particular times (e.g.
due to economic conditions).
Credibility of the results output
The results of this model are unlikely to be reliable — especially over a 40- year period, which would
span two generations of children.

CA PRAVEEN PATWARI 19 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Dangers of spurious accuracy

As this is a grossly oversimplified model. it would be important to treat the results only as very rough
estimates.
Ease with which the model and its results can be communicated
This model would be relatively easy to explain — but also easy to criticize!
Cost of buying or construction, and of running the model
This model would be very cheap to set up and maintain, as it requires very little data and does not
need any special software. However, the government probably has much better models set up al-
ready.

20. Subject C T4 September 2017 Question 5

(i) Key steps
See Core Reading paragraph 7.
(ii) Considerations for a model of a newly discovered disease
There will be very little past data here, although it may be possible to use data from other similar
diseases.
It will be particularly important to get the views from medical experts, e.g. when setting the as-
sumptions.
Sensitivity testing and continuous monitoring will be important to ensure thatthe model reflects
the way the disease is spreading and that the model incorporates appropriately all the latest in-
formation.

The model could include parameters for:

 how many people are already infected
 the probabilities for different outcomes for an infected person
 the probability of an infected person passing it on

 the average time that people are contagious (which might be indefinite)

 the effectiveness of the treatments being used

CA PRAVEEN PATWARI 20 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

21. Subject CT4 April 2018 Question 4 (part)

(i) (a) Discrete state space
The state space is the set of values that a process can take If these values are distinct,e.g. ex-
hibit step changes in time, then the process has a discrete state space.
(i)(b) Stochastic model
A stochastic model is one in which at least one of the inputs is random in nature, so that the
output from the model is also random in nature. A stochastic model aims to capture the in-
herent randomness in the real-world process being modelled.
(i)(c) Continuous-time model
A continuous-time model is one in which the value of the variable of interest can change at
any time rather than only at specific points in time.
(ii) Modelling time in a discrete or a continuous way
When deciding whether to model time in a discrete or continuous way, we should consider:
 the nature of the underlying real-world process being modelled: can changes in state occur at
any time, or only at particular points in time(e.g. at the end of a year)?
 the objectives of the modelling exercise: do we require outputs for allfuture times or only at
particular points in time?
 whether Monte Carlo simulation is to be used as part of the modelling process = if so, it is ne-
cessary to use a discrete time step.
 whether other similar models we are aware of use a discrete or continuous time set.
 the resources available (e.g. expertise, time, IT infrastructure) and whether these favour one
type of model over the other.
 whether there are any regulatory requirements or professional standards to be satisfied.

22. Subject CT4 September 2018 Question 4

(i) Information sources
Possible information sources to use when recommending parameter values for an actuarial
model:
1. Internal company data from its administration system, e.g. claims made on policies in recent
years.

CA PRAVEEN PATWARI 21 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

2. Industry-wide data, e.g. a mortality table created based on the experience of a number of dif-
ferent insurers.
3. Financial market data,e.g. the current rate of inflation.
(ii) Practical difficulties
A practical difficulty associated with using each type of information source:
1. Internal company data: there may be some errors in the recorded values or missing entries.
2. Industry-wide data: may not be directly relevant to the particular situation being modelled,
due to different underwriting procedures. for example.
3. Financial market data current values may need to be adjusted to be appropriate for the fu-
ture period being modelled.

23. Subject CM1 April 2019 Question 9

Requirements for money, time and expertise
Model development requires a considerable investment of time and expertise.
The financial costs of development can be quite large given the need to check the validity of the mod-
el's assumptions, computer code, reasonableness of results and the way in which results can be inter-
preted in plain language by the target audience
Multiple runs needed for meaningful results
In a stochastic model, for any given set of inputs each run only gives estimates of a model's outputs.
So, to study the outputs for any given set of inputs, several independent runs of the model are needed.
Input vs output
As a rule, models are more useful for comparing the results of input variations than for optimising
outputs (i.e. it's easier to use a model to predict what might happen than it is to determine what in-
puts would be required to obtain a particular outcome).
Results not relevant to the real world
Models can look impressive when run on a computer so that there is a danger that one gets lulled into
a false sense of confidence.
If a model has not passed the tests of validity and verification, its impressive output is a poor substi-
tute for its ability to imitate its corresponding real-world system.

CA PRAVEEN PATWARI 22 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Requirement for good quality data Models rely heavily on the data input.
If the data quality is poor or lacks credibility (e it is unreliable), then the output from the model is like-
ly to be flawed.
Danger of 'black box effect"
Users of the model must understand the model and the uses to which it can safely be put.
There is a danger of using the model as a 'black box' from which it is assumed that all results are valid
without considering the appropriateness of using that model for the data input and the output ex-
pected.
Inability to predict future events
It is not possible to include all future events in a model.
For example, a change in legislation could invalidate the results of a model, but may be impossible to
predict when the model is constructed.
Interpretation of results
It may be difficult to interpret some of the outputs of the model.
They may only be valid in relative rather than absolute terms, as when, for example, comparing the
level of risk of the outputs associated with different inputs.

CA PRAVEEN PATWARI 23 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

CM1 – ACTUARIAL MATHEMATICS

SECTION –2
DISCOUNTING, ACCUMULATING AND
ANNUITIES

FOR THE
2021 EXAMS

COVERING
CHAPTER 2 CASHFLOW MODELS

CHAPTER 3 THE TIME VALUE OF MONEY

CHAPTER 4 INTEREST RATES

CHAPTER 6 DISCOUNTING AND ACCUMULATING

CHAPTER 7 LEVEL ANNUITIES

CHAPTER 8 INCREASING ANNUITIES

CA PRAVEEN PATWARI 24 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

PAST EXAM QUESTIONS

This section contains all the relevant parts of the exam questions from 2010 to 2019, that are related to the
topics covered in this booklet.

Solutions are given later in this booklet. These give enough information for you to check your answer, in-
cluding working, and also show you what an adequate examination answer should look like. Further infor-
mation may be available in the Examiners' Report, ASET or Course Notes, (ASET can be ordered from
ActEd.)

We first provide you with a cross-reference grid that indicates the main subject areas of each exam ques-
tion. You can use this, if you wish, to select the questions that relate just to those aspects of the topic that
you may be particularly interested in reviewing.

Alternatively, you can choose to ignore the grid, and instead attempt each question without having any
clues as to its content.

Variable force of
Basic interest Annuities
interest
Tick when attempted

Level annuities
General A(t) I v(I)
Cashflow Method

Payment streams
interest discount

Accumulation/
Accumulation/

Increasing
Treasury bill

annuities
Converting

expression
discount

discount
Nominal

Question

1   
2    
3   
4  
5 
6 
7  

CA PRAVEEN PATWARI 25 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Variable force of
Basic interest Annuities
interest
Tick when attempted

Level annuities
General A(t) I v(I)
Cashflow Method

Payment streams
interest discount

Accumulation/
Accumulation/

Increasing
Treasury bill

annuities
Converting

expression
discount

discount
Nominal
Question

8  
9  
10    
11  
12  
13   ()
14  ()
15  
16   
17 
18 
19   
20   
21  
22  
23  
24 
25 
26 
27   

CA PRAVEEN PATWARI 26 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Variable force of
Basic interest Annuities
interest
Tick when attempted

Level annuities
General A(t) I v(I)
Cashflow Method

Payment streams
interest discount

Accumulation/
Accumulation/

Increasing
Treasury bill

annuities
Converting

expression
discount

discount
Nominal
Question

28
29 
30 
31  
32  
33  
34 
35 
36   
37   
38  
39  
40  
41  
42 
43 
44 
45  
46  
47  

CA PRAVEEN PATWARI 27 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

1. Subject CT1 April 2010 Question 11

The force of interest   t  is a function of time and at any time t measured in years, is given by the

formula:

0.04  0.02t 0  t  5
 t   
0.05 5 t

(i) Derive and simplify as far as possible expressions for v(t), where v(t) is the present value of a
unit sum of money due at time t. [5]
(ii) (a) Calculate the present value of £1,000 due at the end of 17 years.

(b) Calculate the rate of interest per annum convertible monthly impliedby the transaction
in part (ii)(a). [4] A continuous pay-

ment stream is received at a rate of 10e0.01t units per annum between t = 6 and t =10

(iii) Calculate the present value of the payment stream. [4]

[Total 13]
2. Subject CT1 September 2010 Question 8

The force of interest,   t  , is a function of time and at any time t, measured in years, is given by the

formula:

0.05  0.001t 0  t  20
 t   
0.05 t  20

(i) Derive and simplify as far as possible expressions for v(t), where v(t) is the present value of a
unit sum of money due at time t. [5]
(ii) (a) Calculate the present value of £100 due at the end of 25 years.

(b) Calculate the rate of discount per annum convertible quarterly implied by the transaction
in part (ii)(a). [4]

(iii) A continuous payment stream is received at rate 30e0.015t units per annum between t = 20 and t
= 25. Calculate the accumulated value of the payment stream at time t = 25 [4]
[Total 13]

CA PRAVEEN PATWARI 28 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

3. Subject CT1 April 2011 Question 1

The force of interest,   t  , is a function of time and at any time t, measured in years, is given by the
formula:

0.04  0.003t 2
 for 0  t  5
t  
0.01  0.03t
 for 5  t

(i) Calculate the amount to which £1,000 will have accumulated at t = 7 if it is invested at t =3 [4]
(ii) Calculate the constant rate of discount per annum, convertible monthly, which would lead to the
same accumulation as that in (i) being obtained. [3]
[Total 7]
4. Subject CT1 September 2011 Question 1

A 91-day treasury bill is issued by the government at a simple rate of discount of 8% per annum,

Calculate the annual effective rate of return obtained by an investor who purchases the bill at issue.

[3]

5. Subject CT1 September 2011 Question 3

An individual intends to retire on his 65th birthday in exactly four years' time. The government will
pay a pension to the individual from age 68 of £5,000 per annum monthly in advance. The individual
would like to purchase an annuity certain so that his income, including the government pension, is
£8,000 per annum paid monthly in advance from age 65 until his 78th birthday. He is to purchase the
annuity by a series of payments made over four years quarterly in advance starting immediately.

Calculate the quarterly payments the individual has to make, if the presentvalue of these payments is
equal to the present value of the annuity, he wishes to purchase at a rate of interest of 5% per annum
effective. Mortality should be ignored. [6]

6. Subject CT1 September 2011 Question 6

The force of interest,   t  , is a function of time and at any time t measuredin years, is a + bt where a

and b are constants. An amount of £45 invested at time t= 0 accumulates to £55 at time t =5 and £120
at timet = 10

CA PRAVEEN PATWARI 29 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

(i) Calculate the values of a and b [5]

(ii) Calculate the constant force of interest per annum that would give rise to the same accumulation
from time t = 0 to time t = 10 [2]
[Total 7]
7. Subject CT1 April 2012 Question 8

The force of interest,   t  , at time t is given by:

0.04  0.003t 2 for 0  t  5


  t   0.01  0.03t for 5  t  8

0.02 for t  8

(i) Calculate the present value (at time t =0) of an investment of £1,000 due at time t =10. [4]
(ii) Calculate the constant rate of discount per annum convertible quarterly, which would lead to the
same present value as that in part (i) being obtained. [2]
(iii) Calculate the present value (at time t = 0) of a continuous payment stream payable at the rate of

100e0.01t from time t = 10 to t = 18 [4]

[Total 10]
8. Subject CT1 September 2012 Question 1

An investor is considering two investments. One is a 91-day deposit which pays a rate of interest of
4% per annum effective. The second is a treasury bill.

Calculate the annual simple rate of discount from the treasury bill if both investments are to provide
the same effective rate of return. [3]

9. Subject CT1 September 2012 Question 2

The nominal rate of discount per annum convertible quarterly is 8%.

(i) Calculate the equivalent force of interest. [1]

(ii) Calculate the equivalent effective rate of interest per annum. [1]
(iii) Calculate the equivalent nominal rate of discount per annum convertible monthly. [2]
[Total 4]
CA PRAVEEN PATWARI 30 JAI SHREE SHYAM
CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

10. Subject CT1 September 2012 Question 8

The force of interest,   t  , is a function of time and at any time t, measured in years, is given by the

formula

0.03  0.01t for 0  t  9

 t   
0.06 for 9  t

(i) Derive, and simplify as far as possible, expressions for v(t) where v(t) is the present value of a
unit sum of money due at time t [5]
(ii) (a) Calculate the present value of £5,000 due at the end of 15 years.

(b) Calculate the constant force of interest implied by the transaction inpart (a). [4]

A continuous payment stream is received at rate 100e0.02t units per annum between t = 11 and t = 15.

(iii) Calculate the present value of the payment stream. 11

[Total 13]
11. Subject CT1 April 2013 Question 5

The force of interest per unit time at time t,   t  , is given by:

0.1  0.005t for t  6

 t   
0.07 for t  6

(i) Calculate the total accumulation at time 10 of an investment of £100made at time 0 and a further
investment of £50 made at time 7. [4]

(ii) Calculate the present value at time 0 of a continuous payment stream at the rate £50e0.05t per
unit time received between time 12 and time 15. [5]
[Total 9]
12. Subject CT1 September 2013 Question 1

The rate of interest is 4.5% per annum effective.

(i) Calculate:
(a) the annual effective rate of discount
(b) the nominal rate of discount per annum convertible monthly.
CA PRAVEEN PATWARI 31 JAI SHREE SHYAM
CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

(c) the nominal rate of interest per annum convertible quarterly.

(d) the effective rate of interest over a five-year period. 15]
(ii) Explain why your answer to part (i)(b) is higher than your answer to part (i)(a), [2]
[Total 7]
13. Subject CT1 September 2013 Question 10 (part)

The force of interest,   t  , is a function of time and at any time t, measured in years, is given by the
formula:

  t  = 0.05 + 0.002t

Calculate the accumulated value of a unit sum of money:

(i) (a) accumulated from time t = 0 to time t = 7

(b) accumulated from time t = 0 to time t = 6
(c) accumulated from time t =6 to time t = 7 [5]
2
(ii) Calculate the present value of an annuity that is paid continuously at arate of 30e 0.01t  0.001t
units per annum from t = 3 to t = 10. [5]

[Total 10]

14. Subject CT1 April 2014 Question 3

£900 accumulates to £925 in four months.
Calculate the following:
(i) the nominal rate of interest per annum convertible half-yearly [2]
(ii) the nominal rate of discount per annum convertible quarterly [2]
(iii) the simple rate of interest per annum. [2]
[Total 6]
15. Subject CT1 April 2014 Question 11

An individual can obtain a force of interest per annum at time t, measured in years, as given by the
formula:

0.03  0.01t 0  t  4

  t   0.07 4t 6
0.09 6t


CA PRAVEEN PATWARI 32 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

(i) Calculate the amount the individual would need to invest at time t = 0 in order to receive a conti-
nuous payment stream of $3,000 per annum from time t = 4 to t = 10. [6]
(ii) Calculate the equivalent constant annual effective rate of interestearned by the individual in part
(i). [3]
[Total 9]
16. Subject CT1 September 2014 Question 3

A 91-day treasury bill is bought for £98.83 and is redeemed at £100.

(i) Calculate the annual effective rate of interest from the bill. [3]
(ii) Calculate the annual equivalent simple rate of interest. [2]
[Total 5]
17. Subject CT1 September 2014 Question 5

Calculate, at a rate of interest of 5% per annum effective

(i) a (12)
5

(ii) 4 a15

(iii)  la 10
(iv)  la 10
(v) the present value of an annuity that is paid annually in advance for 10 years with a payment of
12 in the first year, 11 in the second year and thereafter reducing by 1 each year. [2]
[Total 6]
18. Subject CT1 September 2014 Question 7

The force of interest,   t  , is a function of time and at any time t, measured in years, is given by the

formula:

0.03 for 0  t  10

  t   0.003t for 10  t  20
 2 for t  20
0.0001t
CA PRAVEEN PATWARI 33 JAI SHREE SHYAM
CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

(i) Calculate the present value of a unit sum of money due at time t = 28. [7]
(ii) (a) Calculate the equivalent constant force of interest from t = 0 to t = 28.

(b) Calculate the equivalent annual effective rate of discount fromt = 0 to t = 28. [3]

A continuous payment stream is paid at the rate of e0.04t per unit time between t = 3 and t = 7.

(iii) Calculate the present value of the payment stream. [4]

[Total 14]
19. Subject CT1 April 2015 Question 2

Calculate the time in days for £3,000 to accumulate to £3,800 at:

(a) a simple rate of interest of 4% per annum.

(b) a compound rate of interest of 4% per annum effective. [4]

20. Subject CT1 April 2015 Question 3

A 182-day treasury bill, redeemable at $100, was purchased for $96.50 at the time of issue and later
sold to another investor for $98 who held the bill to maturity. The rate of return received by the initial
purchaser was 4% per annum effective.

(i) Calculate the length of time in days for which the initial purchaser held the bill. [2]
(ii) Calculate the annual simple rate of return achieved by the second investor. [2]
(iii) Calculate the annual effective rate of return achieved by the second investor. [2]
[Total 6]
21. Subject CT1 April 2015 Question 5

An investor pays £120 per annum into a savings account for 12 years. Inthe first four years, the pay-
ments are made annually in advance. In the second four years, the payments are made quarterly in
advance. In the final four years, the payments are made monthly in advance.

The investor achieves a yield of 6% per annum convertible half-yearly on the investment.

Calculate the accumulated amount in the savings account at the end of 12 years. [7]

CA PRAVEEN PATWARI 34 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

22. Subject CT1 April 2015 Question 10

The force of interest,   t  , is a function of time and at any time t (measured in years) is given by

0.08 for 0  t  4

  t   0.12  0.01t for 4  t  9
0.05 for t  9


(i) Determine the discount factor, v(t), that applies at time t for all t  0 [5]
(ii) Calculate the present value at t = 0 of a payment stream, paid continuously from t = 10 to t = 12,
0.03t
under which the rate of payment at time t is 100e . [4]
(iii) Calculate the present value of an annuity of £1,000 paid at the end of each year for the first three
years. [3]
[Total 12]
23. Subject CTI September 2015 Question 1

An investor wishes to obtain a rate of interest of 3% per annum effective from a 91-day treasury bill.

Calculate:

(a) the price that the investor must pay per £100 nominal.
(b) the annual simple rate of discount from the treasury bill. [3]

24. Subject CT1 September 2015 Question 2

The nominal rate of discount per annum convertible monthly is 5.5%.

(i) Calculate, giving all your answers as a percentage to three decimal places:
(a) the equivalent force of interest.
(b) the equivalent effective rate of interest per annum.
(c) the equivalent nominal rate of interest per annum convertible monthly. [3]
(ii) Explain why the nominal rate of interest per annum convertible monthly calculated in part (i)(c)
is less than the equivalent annual effective rate of interest calculated in part (i)(13). [1]
(iii) Calculate, as a percentage to three decimal places, the effective annual rate of discount offered by
an investment that pays £159 in eight years' time in return for 100 invested now. [1]

CA PRAVEEN PATWARI 35 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

(iv) Calculate, as a percentage to three decimal places, the effective annual rate of interest from an
investment that pays 12% interest at the end of each two-year period. [1]
[Total 6]
25. Subject CT1 September 2015 Question 5

An individual can obtain a force of interest per annum at time t, measured in years, as given by the
formula:

0.03  0.005t 0  t  3
 t   
0.005 t 3

(i) Determine the amount the individual would need to invest at time t = 0 in order to receive a con-
tinuous payment stream of £5,000 per annum from time t = 3 to time t = 6 [5]
(ii) Determine the equivalent constant annual effective rate of interest earned by the individual in
part (i). [3]
(iii) Determine the amount an individual would accumulate from the investment of £300 from time t
= 0 to time t = 50 [2]
[Total 10]
26. Subject CT1 April 2016 Question 6

The force of interest,   t  , is a function of time and at any time t measured in years, is given by the

formula:

0.06 0t 4

  t   0.10  0.01t 4  t  7
0.01t  0.04 7  t


(i) Calculate, showing all working, the value at time t = 5 of £10,000 due for payment at time t =10.
[5]
(ii) Calculate the constant rate of discount per annum convertible monthly which leads to the same
result as in part (i). [2]
[Total 7]

CA PRAVEEN PATWARI 36 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

27. Subject CT1 September 2016 Question 1

The nominal rate of interest per annum convertible quarterly is 5%.

Calculate, giving all the answers as a percentage to three decimal places:

(i) the equivalent annual force of interest. [1]

(ii) the equivalent effective rate of interest per annum. [11
(iii) the equivalent nominal rate of discount per annum convertible monthly. [2]
[Total 4]
28. Subject CT1 September 2016 Question 2

The nominal rate of interest per annum convertible quarterly is 2%.

Calculate the present value of a payment stream paid at a rate of €100 per annum, monthly in advance
for 12 years. [4]

29. September 2016 Question 3

Describe the characteristics of a repayment loan (or repayment mortgage). [3]

30. Subject CT1 September 2016 Question 6

At the beginning of 2015, a 182-day commercial bill, redeemable at £100, was purchased for £96 at
the time of issue and later sold to a second investor for £97.50. The initial purchaser obtained a simple
rate of interest of 3.5% per annum before selling the bill.

(i) Calculate the annual simple rate of return which the initial purchaser would have received if
they had held the bill to maturity. [2]
(ii) Calculate the length of time in days for which the initial purchaser held the bill. [2]

The second investor held the bill to maturity.

(iii) Calculate the annual effective rate of return achieved by the second investor. [2]
[Total 6]

CA PRAVEEN PATWARI 37 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

31. Subject CT1 September 2016 Question 12

The force of interest,   t  , is a function of time and at any time t (measured in years) is given by

0.03 for 0  t  10

  t   at for 10  t  20
bt for t  20


where a and b are constants.

The present value of £100 due at time 20 is 50.

(i) Calculate a [5]

The present value of £100 due at time 28 is 40.
(ii) Calculate b. [4]
(iii) Calculate the equivalent annual effective rate of discount from time 0 to time 28. [2]

A continuous payment stream is paid at the rate of e0.04t per annum between t = 3 and t = 7.

(iv) (a) Calculate, showing all workings, the present value of the payment stream.

(b) Determine the level continuous payment stream per annum fromtime t = 3 to time t = 7
that would provide the same present valueas the answer in part (iv)(a) above. [8]

[Total 19]

32. Subject CT1 April 2017 Question 1

Calculate the nominal rate of discount per annum convertible monthly which is equivalent to:

(i) an effective rate of interest of 1% per quarter, [2]

(ii) a force of interest of 5% per annum. [2]
(iii) a nominal rate of discount of 4% per annum convertible every three months. [2]
[Total 6]
33. Subject CT1 September 2017 Question 1
(i) Calculate the time in days for £6,000 to accumulate to £7,600 at:
(a) a simple rate of interest of 3% per annum.
(b) a compound rate of interest of 3% per annum effective.

CA PRAVEEN PATWARI 38 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

(c) a force of interest of 3% per annum. [6]

Note: You should assume there are 365 days in a year.
(ii) Calculate the effective rate of interest per half-year which is equivalent to a force of interest of
3% per annum. [1]

[Total 7]

34. Subject CT1 September 2017 Question 3

An investor is considering two investments. One is a 91-day deposit which pays a compound rate of
interest of 3% per annum effective. The second is a government bill.

Calculate the annual simple rate of discount from the government bill if both investments are to pro-
vide the same effective rate of return. [3]

35. Subject CT1 September 2017 Question 6

An investor has a choice of two 15-year savings plans, A and B, issued by a company. In both plans, the
investor pays contributions of $100 at the start of each month and the contributions accumulate at an
effective rate of interest of 4% per annum before any allowance is made for expenses.

In plan A, the company charges for expenses by deducting 1% from the annual effective rate of return.

In plan B, the company charges for expenses by deducting $15 from each of the first year's monthly
contributions before they are invested. In addition, it deducts 0.3% from the annual effective rate of
return.

Calculate the percentage by which the accumulated amount in Plan B is greater than the accumulated
amount in Plan A, at the end of the 15 years. [6]

36. Subject CTI September 2017 Question 9

The force of interest,   t  , is a function of time and at any time t. measured in years. is given by the
formula

0.09  0.003t 0  t  10
 t   
0.06 t  10

CA PRAVEEN PATWARI 39 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

(i) Calculate the corresponding constant effective annual rate of interest for the period from t = 0 to
t =10 [4]
(ii) Express the rate of interest in part (i) as a nominal rate of discount per annum convertible half-
yearly. [1]
(iii) Calculate the accumulation at time t =15 of £1,500 invested at time t = 5. [3]
(iv) Calculate the corresponding constant effective annual rate of discount for the period t =5 to t =
15. [1]
(v) Calculate the present value at time t = 0 of a continuous payment stream payable at a rate of

10e0.01t from time t =11 to time t =15. [6]

[Total 15]
37. Subject CT1 April 2018 Question 3

An investor pays £80 at the start of each month into a 25-year savings plan.

The contributions accumulate at an effective rate of interest of 3% per half-year for the first 10 years,
and at a force of interest of 6% per annum for the final 15 years.

Calculate the accumulated amount in the savings plan at the end of 25 years. [6]

38. Subject CT1 April 2018 Question 10

The force of interest,   t  is a function of time, and at any time t, measured in years. is given by the

formula:

0.24  0.02t 0  t  6
 t   
0.12 6t

(i) Derive, and simplify as far as possible, expressions in terms of t for the present value of a unit in-
vestment made at any time, t. You should derive separate expressions for each time interval 0 < t
6 and6<t. [5]
(ii) Determine the discounted value at time t = 4 of an investment of £1,000 due at time t = 10. [2]

CA PRAVEEN PATWARI 40 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

(iii) Calculate the constant nominal annual interest rate convertible monthly implied by the transac-
tion in part (ii). [2]
(iv) Calculate the present value of a continuous payment stream invested from time t =6 to t =10 at a

rate of (t)  20e0.360.32t per annum. [4]

[Total 13]
39. Subject CT1 September 2018 Question 1

An investor is considering two investments. One investment is a 91-day bond issued by a bank which
pays a rate of interest of 4% per annum effective. The second is a 91-day treasury bill which pays out
€100.

(i) Calculate the price of the treasury bill and the annual simple rate of discount from the treasury
bill if both investments are to provide the same effective rate of return. [3]
(ii) Suggest one factor, other than the rate of return, which might determine which investment is
chosen. [1]
[Total 4]
40. Subject CT1 September 2018 Question 2

The effective rate of discount per annum is 5%.

Calculate:

(i) the equivalent force of interest [1]

(ii) the equivalent rate of interest per annum convertible monthly [2]
(iii) the equivalent rate of discount per annum convertible monthly. [1]
[Total 4]
41. Subject CT1 September 2018 Question 7

The force of interest,   t  , is a function of time and at any time t measured in years, is given by the

formula:

0.03 0  t  10
 t   
0.003t t  10

CA PRAVEEN PATWARI 41 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

(i) Calculate the present value of a unit sum of money due at timet = 20 [4]
(ii) Calculate the equivalent constant force of interest from t = 0 tot = 20 [2]
(iii) Calculate the present value at time t = 0 of a continuous paymentstream payable at a rate of

e0.06t from time t = 4to time t = 8. [4]

[Total 10]
42. Subject CT1 September 2018 Question 9 (part)
(i) Describe the cashflows which are paid and received in respect of an index-linked security. [2]

43. Subject CT1 September 2018 Question 10 (part)

(i) Describe the characteristics of a repayment mortgage. [3]

44. Subject CM1 April 2019 Question 3

Describe the main features of an endowment assurance contract. [3]

45. Subject CM1 April 2019 Question 5

Calculate, as a percentage to four decimal places, the nominal rate of interest per annum convertible
half-yearly which is equivalent to:

(i) an effective rate of discount of 0.5% per month. [2]

(ii) a nominal rate of discount of 6% per annum convertible every two years. [2]
(iii) a nominal rate of interest of 6% per annum convertible quarterly. [2]
[Total 6]
46. Subject CM1 April 2019 Question 8

The force of interest,   t  , is a function of time and at any time t, measured in years, is given by the

formula:

0.03  0.005t 0t 2


  t   0.045  0.0025t 2  t  10
0.02 t  10


CA PRAVEEN PATWARI 42 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

(i) Calculate the accumulated amount at time t = 9 of an investment of £15,000 made at time t = 1. [4]
(ii) Calculate the present value at time t = 0 of a payment stream paid continuously from time t = 10

to time t = 12, under which the rate ofpayment at time t is (t)  60e0.02t . [6]

[Total 10]

47. Subject CM1 September 2019 Question 10

The force of interest,   t  , is a function of time and at any time t measured in years. is given by the

formula:

0.03  0.01t 0  t  4

  t   0.07 4t 6
0.09 t6


(i) Calculate the accumulated amount at time t=6 of a lump sum of 10 units invested at time t =0. [3]
(ii) Calculate the present value at time t = 0 of a deferred annuity-certain of 5 units per year payable
continuously from time t = 4 to t = 10. [6]
(iii) Determine, to the nearest 0.1%, the constant annual effective rate of interest earned by an inves-
tor who invests the present value calculatedin part (ii) at time t=0 to obtain the payment stream
described in part (ii). [3]
[Total 12]

CA PRAVEEN PATWARI 43 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

CM1 – ACTUARIAL MATHEMATICS

SECTION –3
EQUATIONS OF VALUE AND LOANS

FOR THE
2021 EXAMS

COVERING
CHAPTER 9 EQUATIONS OF VALUE

CHAPTER 10 LOAN SCHEDULES

CA PRAVEEN PATWARI 44 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

PAST EXAM QUESTIONS

This section contains all the relevant parts of the exam questions from 2010 to 2019, that are related to the
topics covered in this booklet.

Solutions are given later in this booklet. These give enough information for you to check your answer, in-
cluding working, and also show you what an adequate examination answer should look like. Further infor-
mation may be available in the Examiners" Report ASET or Course Notes. (ABET can be ordered from
ActEd.)

We first provide you with a cross-reference grid that indicates the main subject areas of each exam ques-
tion. You can use this, if you wish, to select the questions that relate just to those aspects of the topic that
you may be particularly interested in reviewing.

Alternatively, you can choose to ignore the grid, and instead attempt each question without having any
clues as to its content.

Type Calculations
Interest capital
circumstances

Loan schedule
Repayments

outstanding
Increasing/
decreasing
Tick when
attempted

Change in

elements

Other
loan size
Original

APR
Level

Loan

Question

1   
2    
3    () 
4    () 
5     ()  
6    () 
7    

CA PRAVEEN PATWARI 45 JAI SHREE SHYAM

 9
8

13
12
11
10
Question
Tick when
attempted

CA PRAVEEN PATWARI
Level



CM1 ACTUARIAL MATHEMATICS

Increasing/





decreasing
Type

Change in



 circumstances
Original





loan size

46
Repayments





Loan




()

outstanding

Interest capital




elements
Calculations

Loan schedule

APR


Other


JAI SHREE SHYAM

ACTUATORS EDUCATIONAL INSTITUTE
CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

1. Subject CT1 April 2010 Question 8

A loan is repayable by annual instalments paid in arrear for 20 years. The first instalment is £4,650
and each subsequent instalment is £150 greater than the previous instalment.

Calculate the following, using an interest rate of 9% per annum effective:

(i) the amount of the original loan [3]

(ii) the capital repayment in the tenth instalment [4]
(iii) the interest element in the last instalment [2]
(iv) the total interest paid over the whole 20 years. [2]
[Total 11]
2. Subject CT1 April 2011 Question 7

A loan of £60,000 was granted on 1 July 1998.

The loan is repayable by an annuity payable quarterly in arrear for 20 years. The amount of the quar-
terly repayment increases by £100 alter every four years. The repayments were calculated using a
rate of interest of 8% per annum convertible quarterly.

(i) Show that the initial quarterly repayment is £1,370.41. [5]

(ii) Calculate the amount of capital repaid that was included in the payment made on 1 January
1999. [3]
(iii) Calculate the amount of capital outstanding after the quarterly repayment due on 1 July 2011
has been made. [4]
[Total 12]
3. Subject CT1 April 2012 Question 3

A company has borrowed £500,000 from a bank. The loan is to be repaid by level instalments, payable
annually in arrear for ten years from the date the loan is made. The annual instalments are calculated
at an effective rate of interest of 9% per annum.

(i) Calculate:
(a) the amount of the level annual instalments.
(b) the total amount of interest which will be paid over the ten-year term. [3]

CA PRAVEEN PATWARI 47 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

At the beginning of the eighth year, immediately after the seventh instalment has been made, the
company asks for the loan to be rescheduled over a further four years from that date. The bank
agrees to do this on condition that the rate of interest is increased to an effective rate of 12% per an-
num for the term of the rescheduled instalments and that repayments are made quarterly in arrear.

(ii) (a) Calculate the amount of the new quarterly instalment.

(b) Calculate the interest content of the second quarterly instalment of the rescheduled loan
repayments. [5]

[Total 8]

4. Subject CT1 September 2012 Question 6

A loan is to be repaid by an increasing annuity. The first repayment will be £200 and the repayments
will increase by £100 per annum. Repayments will be made annually in arrear for ten years. The re-
payments are calculated using a rate of interest of 6% per annum effective.

(i) Calculate the amount of the loan [2]

(ii) (a) Calculate the interest component of the seventh repayment.
(b) Calculate the capital component of the seventh repayment. [4]
(iii) Immediately after the seventh repayment, the borrower asks to have the original term of the
loan extended to fifteen years and wishes to repay the outstanding loan using level annual re-
payments. The lender agrees but changes the interest rate at the time of the alteration to 8% per
annum effective.
Calculate the revised annual repayment. [3]
[Total 9]
5. Subject CT1 April 2013 Question 10

A loan is repayable by annual instalments in arrear for 20 years. The initial instalment is £5,000, with
each subsequent instalment decreasing by £200.

The effective rate of interest over the period of the loan is 4% per annum.

(i) Calculate the amount of the original loan. [3]

(ii) Calculate the capital repayment in the 12thinstalment. [3]

CA PRAVEEN PATWARI 48 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

After the 12thinstalment is paid, the borrower and lender agree to a restructuring of the debt.
The £200 reduction per year will no longer continue. Instead, future instalments will remain at the
level of the 12thinstalment and the remaining term of the debt will be shortened. The final payment
will then be a reduced amount which will clear the debt.
(iii) (a) Calculate the remaining term of the revised loan.
(b) Calculate the amount of the final reduced payment.
(c) Calculate the total interest paid during the term of the loan. [8]
[Total 14]
6. Subject CT1 September 2013 Question 9

A bank makes a loan to be repaid by instalments paid annually in arrear., The first instalment is £400,
the second is £380 with the payments reducingby £20 per annum until the end of the 15th year, after
which there are no further repayments. The rate of interest charged is 4% per annum effective.

(i) Calculate the amount of the loan. [3]

(ii) Calculate the capital and interest components of the first payment. [2]

At the beginning of the ninth year, the borrower can no longer make the scheduled repayments. The
bank agrees to reduce the capital by 50 per cent of the loan outstanding after the eighth repayment.
The bank requiresthat the remaining capital is repaid by a 10-year annuity paid annually in arrear, in-
creasing by £2 per annum. The bank changes the rate of interest to 8% per annum effective.

(iii) Calculate the first repayment under the revised loan. [5]
[Total 10]
7. Subject CT1 April 2014 Question 10

A loan of £20,000 is repayable by an annuity payable annually in arrear for 25 years. The annual re-
payment is calculated at an effective interest rate of 8% per annum and increases by £50 each year.

(i) Calculate the amount of the first payment. [3]

(ii) Calculate the capital outstanding after the first three payments have been made [2]
(iii) Explain your answer to part (ii). [2]

CA PRAVEEN PATWARI 49 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

(iv) Calculate the total amount of interest paid over the term of the loan. [3]
[Total 10]
8. Subject CT1 April 2015 Question 11

On 1 January 2016, a student plans to take out a five-year bank loan for £30,000 that will be repayable
by instalments at the end of each month. Under this repayment schedule, the instalment at the end of
January 2016 will be X, the instalment at the end of February 2016 will be 2X and so on,until the final
instalment at the end of December 2020 will be 60X. The bank charges a rate of interest of 15% per
annum convertible monthly.

a n  nvn

(i) Prove that  la n 
i
(ii) Show that X = £26.62. [4]

The student is concerned that she will not be able to afford the later repayments and so she suggests a
revised repayment schedule. Thestudent would borrow £30,000 on 1 January 2016 as before. She
would now repay the loan by 60 level monthly instalments of 36X = £958.32 but the first repayment
would not be made until the end of January 2019 and hence the final instalment is paid at the end of
December 2023.

(iii) Calculate the APR on the revised loan schedule and hence determine whether you believe the
bank should accept the student's suggestion. [5]
(iv) Explain the difference in the total repayments made under the two arrangements. [2]
[Total 14]
9. Subject CT1 April 2016 Question 5

A loan is to be repaid by a series of instalments payable annually in arrear for 15 years. The first in-
stalment is £1,200 and payments increase thereafter by £250 per annum.

Repayments are calculated using a rate of interest of 6% per annum effective.

Determine:

(i) the amount of the loan. [3]

CA PRAVEEN PATWARI 50 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

(ii) the capital outstanding immediately after the 9thinstalment has been made. [2]

(iii) the capital and interest components of the final instalment. [2]

[Total 7]

10. Subject CT1 April 2017 Question 2

A bank offers two repayment alternatives for a loan that is to be repaid over sixteen years:

Option 1: the borrower pays £7,800 per annum quarterly in arrear.

Option 2: the borrower makes payments at an annual rate of £8,200 every second year in arrear.

Determine which option would provide the better deal for the borrower at a rate of interest of 5% per

annum effective. [5]

11. Subject CT1 September 2017 Question 8

A loan is to be repaid by an increasing annuity. The first payment will be £100 and the payments will

increase by £50 per annum. Payments will be made annually in arrear for ten years. The repayments

are calculated using a rate of interest of 5% per annum effective.

(i) Calculate the amount of the loan. [2]

(ii) Calculate:

(a) the interest component of the sixth instalment.

(b) the capital component of the sixth instalment. [4]

Immediately after the sixth instalment, the borrower asks to repay the remaining loan using level an-

nual instalments. The lender agrees, but changes the interest rate at the time of the alteration to 6%

per annum effective.

(iii) Calculate the revised instalment. [3]

[Total 9]

CA PRAVEEN PATWARI 51 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

12. Subject CT1 April 2018 Question 11

An n -year decreasing annuity is payable annually in arrear, where the payment at the end of the first
year is n, the payment at the end of the second year is (n –1) and so on until the final payment at the
end of year nis 1.
n  an
(i) Show that the present value of this annuity is . [3]
i
A loan is to be repaid over 25 years by means of annual instalments payable in arrear.
The amount of the first instalment is £8,000 and each subsequent instalment reduces by £200.
The effective rate of interest charged by the lender is 5.5% per annum.
(ii) Calculate the initial amount of the roan, [3]
(iii) Determine the interest and capital components of the 10thinstalment. [6]
(iv) Calculate the total amount of interest payable over the whole term of the loan. [2]
[Total 14]
Subject CT1 September 2018 Question 10 is about loans, but since it also relates to immunisation it
has been included in a later booklet.

13. Subject CM1 April 2019 Question 12

A loan of £80,000 was taken out on 1 January 2016. The loan was to be repaid over 10 years in level
instalments payable monthly in arrears.
(i) Calculate the level monthly instalment using an effective rate of interestof 8% per annum. [2]
(ii) Calculate the amount of the loan outstanding on 1 November 2018 immediately after payment of
the instalment then due. [3]
On 1 November 2018, immediately after payment of the instalment, the borrower asked that the
monthly instalment be reduced to £900 and the remaining term extended as required to clear the out-
standing loan amount. The final payment would be equal to the outstanding loan at the time, if less
than £900.
The lender agreed to this change, subject to the following conditions:
 the interest rate applied in future is increased to 9% per annum convertible monthly: and
 an administration fee of £250 is added to the loan outstanding at 1 November 2018.
(iii) (a) Determine the new date on which the loan will be repaid.
(b) Calculate the final instalment paid. [6]
[Total 11]

CA PRAVEEN PATWARI 52 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

CM1 – ACTUARIAL MATHEMATICS

SECTION –4
PROJECT APPRAISAL

FOR THE
2021 EXAMS

COVERING
CHAPTER 11 PROJECT APPRAISAL

CA PRAVEEN PATWARI 53 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

PAST EXAM QUESTIONS

This section contains all the relevant parts of the exam questions from 2010 to 2019, that are related to the
topics covered in this booklet.

Solutions are given later in this booklet. These give enough information for you to check your answer, in-
cluding working. and also show you what an adequate examination answer should look like. Further infor-
mation may be available in the Examiners" Report ASET or Course Notes. (ABET can be ordered from
ActEd.)

We first provide you with a cross-reference grid that indicates the main subject areas of each exam ques-
tion. You can use this, if you wish, to select the questions that relate just to those aspects of the topic that
you may be particularly interested in reviewing.

Alternatively, you can choose to ignore the grid, and instead attempt each question without having any
clues as to its content.
Accumulated
Tick when
attempted

profit
NPV

DPP

Question
IRR

PP

1   
2  
3  
4  
5 
6  
7 
8  

CA PRAVEEN PATWARI 54 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Accumulated
Tick when
attempted

profit
NPV

DPP
Question

IRR

PP
9 
10   
11 
12  
13 
14 
15 
16 
17  

CA PRAVEEN PATWARI 55 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

1. Subject CT1 April 2010 Question 9

A company is undertaking a new project. The project requires an investment of £5m at the outset, fol-
lowed by £3m three months later.

It is expected that the investment will provide income over a 15-year period starting from the begin-
ning of the third year. Net income from the project will be received continuously at a rate of £1.7m per
annum. At the end of this 15-year period, there will be no further income from the investment.

Calculate at an effective rate of interest of 10% per annum:

(i) the net present value of the project [3]

(ii) the discounted payback period [4]

A bank has offered to loan the funds required to the company at an effective rate of interest of 10%
per annum. Funds will be drawn from the bank when required and the loan can be repaid at any time.
Once the loan is paid off, the company can earn interest on funds from the venture at an effective rate
of interest of 7% per annum.

(iii) Calculate the accumulated profit at the end of the 17 years. [4]
[Total 11]
2. Subject CT1 September 2010 Question 6

On 1 January 2001, the government of a particular country bought 200million shares in a particular
bank for a total price of £2,000 million. The shares paid no dividends for three years. On 30 June 2004
the shares paid dividends of 10 pence per share. On 31 December 2004, they paid dividends of 20
pence per share. Each year, until the end of 2009, the dividend payable every 30 June rose by 10% per
annum compound and the dividend payable every 31 December rose by 10% per annum compound.
On 1 January 2010, the shares were sold for their market price of £3,500 million.

(i) Calculate the net present value on 1 January 2001 of the government's investment in the bank at
a rate of interest of 8% per annumeffective. [5]
(ii) Calculate the accumulated profit from the government's investment inthe bank on the date the
shares are sold using a rate of interest of 8%per annum effective. [1]
[Total 6]

CA PRAVEEN PATWARI 56 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

3. Subject CT1 April 2011 Question 9

A company is considering investing in a project. The project requires an initial investment of three
payments, each of £105,000. The first is due at the start of the project, the second six months later,
and the third payment is due one year after the start of the project.

After 15 years, it is assumed that a major refurbishment of the infrastructure will be required, costing
£200,000.

The project is expected to provide a continuous income stream as follows:

 £20,000 in the second year

 £23,000 in the third year

 £26,000 in the fourth year

 £29,000 in the fifth year.

Thereafter the continuous income stream is expected to increase by 3% per annum (compound) at the
start of each year. The income stream is expected to cease at the end of the 30 thyear from the start of
the project.

(i) Show that the net present value of the project at a rate of interest of 8% per annum effective is
£4,000 (to the nearest £1,000). [7]
(ii) Calculate the discounted payback period for the project, assuming a rate of interest of 8% per
annum effective. [5]
[Total 12]
4. Subject CT1 September 2011 Question 10 (corrected)

A country's football association is considering whether to bid to host the World Cup in 2026. Several
countries aspiring to host the World Cup will be making bids. Regardless of whether the bid is suc-
cessful, the association will incur various costs. For two years, starting on 1 January 2012, the associa-
tion will incur costs at a rate of £2m per annum, assumed to be paid continuously, to prepare the bid.

CA PRAVEEN PATWARI 57 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

If the football association is successful, the following costs will be incurred from 1 January 2016 until
31 December 2026:

 One stadium will be built each year for ten years. The first stadium will be built in 2016 and is ex-
pected to cost £200m, the stadium built in 2017 is expected to cost £210m, and so on, with the
cost of each stadium rising by 5% each year. The costs of building each stadium are assumed to be
incurred halfway through the relevant year.
 Administration costs at a rate of £100m per annum will be incurred, payable monthly in advance
from 1 January 2025 until 31 December 2026.
 Revenues from television, ticket receipts, advertising and so on are expected to be £3,300m and
are assumed to be received continuously throughout 2026.
(i) Explain why the payback period is not a good indicator of whether this project is worthwhile. [3]

The football association decides to judge whether to go ahead with the bid by calculating the net
present value of the costs and revenues from a successful bid on 1 January 2012 at a rate of interest of
4% per annum effective.

(ii) Determine whether the association should make the bid. [13]

The football association is discussing how it might factor into its calculations the fact that it is not cer-
tain to win the right to host the World Cup because other countries are also bidding.

(iii) Explain how you might adjust the above calculations if the probability of winning the right to
host the World Cup is 0.1 and whether this adjustment would make it more likely or less likely
that the bid will go ahead. [3]

[Total 19]

5. Subject CT1 April 2012 Question 5

An investor is considering two projects, Project A and Project B. Project Ainvolves the investment of
£1,309,500 in a retail outlet. Rent is received quarterly in arrear for 25 years, at an initial rate of
£100,000 per annum. It is assumed that the rent will increase at a rate of 5% per annum com-
pound,but with increases taking place every five years. Maintenance and other expenses are incurred
quarterly in arrear, at a rate of £12,000 per annum. The retail outlet reverts to its original owner after
25 years for no payment.
CA PRAVEEN PATWARI 58 JAI SHREE SHYAM
CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Project B involves the purchase of an office building for £1,000,000. The rent is to be received quarter-
ly in advance at an initial rate of £85,000 per annum. It is assumed that the rent will increase to
£90,000 per annum after 20 years. There are no maintenance or other expenses. After 25 years the
property reverts to its original owner for no payment.

(i) Show that the internal rate of return for Project A is 9% per annum effective. [5]
(ii) Calculate the annual effective internal rate of return for Project B. Show your working. [4]
(iii) Discuss the extent to which the answers to parts (i) and (ii) above will influence the investor's
decision over which project to choose, [3]
[Total 12]
6. Subject CT1 April 2013 Question 8

A car manufacturer is to develop a new model to be produced from 1 January 2016 for six years until
31 December 2021. The development costswill be £19 million on 1 January 2014, £9 million on 1 July
2014 and £5 million on 1 January 2015.

It is assumed that 6,000 cars will be produced each year from 2016 onwards and that all will be sold.

The production cost per car will be £9,500 during 2016 and will increase by 4% each year with the
first increase occurring in 2017. All production costs are assumed to be incurred at the beginning of
each calendar year.

The sale price of each car will be £12,600 during 2016 and will also increase by 4% each year with the
first increase occurring in 2017. All revenue from sales is assumed to be received at the end of each
calendar year.

(i) Calculate the discounted payback period at an effective rate of interest of 9% per annum [9]
(ii) Without doing any further calculations. explain whether the discounted payback period would
be greater than, equal to, or less than the period calculated in part (i) if the effective rate of in-
terest were substantially less than 9% per annum. [2]
[Total 11]

CA PRAVEEN PATWARI 59 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

7. Subject CT1 September 2013 Question 6

A pension fund is considering investing in a major infrastructure project. The fund has been asked to
make an investment of £2m for a 1% share in revenues from building a road. No other costs will be in-
curred by the pension fund. The following revenues are expected to arise from the project:

 In the first year, 40,000 vehicles a day will use. The road, each paying a toll of £1.
 In the second year, 50,000 vehicles a day will use the road, each paying a toll of £1.10.
 In the third year, both the number of vehicles using the road and the level of tolls will rise by 1%
from their level in the second year. They will both continue to rise by 1% per annum compound
until the end of the 20th year.

At the end of the 20thyear, it is assumed that the road has no value as it will have to be completely re-
built.

You should assume that all revenue is received continuously throughout the year and that there are
365 days in all years.

Calculate the net present value of the investment in the road at a rate of interest of 8% per annum ef-
fective. [10]

8. Subject CT1 April 2014 Question 8

An insurance company borrows £50 million at an effective interest rate of 9% per annum. The insur-
ance company uses the money to invest in a capital project that pays £6 million per annum payable
half-yearly in arrear for 20 years. The income from the project is used to repay the loan. Once the
loanhas been repaid, the insurance company can earn interest at an effective interest rate of 7% per
annum.

(i) Calculate the discounted payback period for this investment. [4]
(ii) Calculate the accumulated profit the insurance company will have made at the end of the term of
the capital project. [5]
[Total 9]

CA PRAVEEN PATWARI 60 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

9. Subject CT1April 2015 Question 9

A property development company has just purchased a retail outlet for$4,000,000. A further $900,000
will be spent refurbishing the outlet in six months' time.

An agreement has been made with a prospective tenant who will occupy the outlet beginning one year
after the purchase date. The tenant will pay rent to the owner for five years and will then immediately
purchase the outlet from the property development company for $6,800,000. The initial rent will be
$360,000 per annum and this will be increased by the same percentage compound rate at the begin-
ning of each successive year. The rental income is received quarterly in advance.

Calculate the compound percentage increase in the annual rent required to earn the company an in-
ternal rate of return of 12% per annum effective. [9]

10. Subject CT1 September 2015 Question 9

A student has inherited £1m and is considering investing the money in two projects, A and B.

Project A requires the investment of the whole sum in properties that are to be let out to tenants. The
details are:

 The student expects to receive an income from rents at an annual rate of £60,000 a year for four
years after an initial period of one year in which no income will be received.
 Rents are expected to rise thereafter at the start of each year at a rate of 0.5% per annum.
 The income will be received monthly in advance.
 The project involves costs of £10,000 per annum in the first year, rising at a constant rate of 0.5%
per annum.
 The costs will be incurred at the beginning of each year.
 At the end of 20 years, the student expects to be able to sell the properties for £2m after which
there will be no further revenue or costs.
Project B involves the investment of the whole sum in an investment fund. The fund is expected to pay
an income of £60,000 per annum annually in advance and return the whole invested sum at the end of
20 years.
CA PRAVEEN PATWARI 61 JAI SHREE SHYAM
CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

(i) (a) Calculate the payback period for Protect B.

(b) Show, by general reasoning or otherwise, that the payback period from Project A is longer
than that from Project B. [5]
(ii) (a) Define the discounted payback period.
(b) Determine the discounted payback period from Project B at a rate of interest of 1% per an-
num effective.
(c) Show, by general reasoning or otherwise, that the discounted payback period from Project
A is longer than that from Project B. [5]
(iii) Determine the internal rate of return from Project B expressed as an annual effective return. [3]
(iv) Show that the internal rate of return from Project A is higher than that from Project B. [10]
(v) Discuss which project is the better project given your answers to parts (i)—(iv) above. [3]
[Total 26]
11. Subject CT1 April 2016 Question 12
(i) Show that:

an  nvn
 la  
n 
[4]

A company is considering the purchase of a gold mine which has recently ceased production.
The company forecasts that:
 the cost of re-opening the mine will be $900,000, which will be incurred continuously over the
first twelve months.
 additional costs are expected to be constant throughout the term of the project at $200,000 per
annum, excluding the first year. These are also incurred continuously.
 after the first twelve months, the rate of revenue will grow continuously and linearly from zero
per annum to $3,600,000 per annum at a constant rate of $300,000 per annum.
 when the rate of revenue reaches $3,600,000 per annum it will then decline continuously and li-
nearly at a constant rate of $150,000 per annum until it reaches $600,000 per annum.
 when the rate of revenue declines to $600,000 per annum production will stop and the mine will
have zero value.
(ii) Determine the overall term of the project [2]
CA PRAVEEN PATWARI 62 JAI SHREE SHYAM
CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

(iii) Calculate, showing all working, the price that the company should pay in order to earn an inter-
nal rate of return (IRR) of 25% per annumeffective. [12]
[Total 18]
12. Subject CT1 September 2016 Question 10
A particular charity invests its assets in a fund on which it has a target rate of return of 8% per annum
effective. From time-to-time, the charity also invests in projects that help achieve its charitable objec-
tives whilst providing a rate of return. Projects that are accepted by the charity must fulfil each of the
following criteria:
1. a minimum annual effective internal rate of return of 2% less than the target return on the in-
vestment fund.
2. a payback period of no more than ten years.
3. a positive cash flow during the fifth year or earlier.
The charity is considering investing in a social enterprise project thatinvolves providing loans to far-
mers in low-income countries to help them develop better resilience against poor weather conditions.
The details are as follows:
 The project involves making loans of £1m at the start of each year for three years, the first loan be-
ing made at the beginning of 2017.
 The loans will be paid back from the extra income obtained by the farmers from the beginning of
2020.
 The repayments in each year will be through level monthly instalments paid in advance with the
rate of payment of the instalments increasing by 1% per year for 10 years after which the pay-
ments stop.
 The annual rate of repayment in 2020 will be £495,000.
 The charity will also incur costs at the end of each of the years in which income is received of
£50,000 per annum.
(i) Explain why, in general, the payback period is not an appropriate decision criterion for an in-
vestment project. [2]
(ii) Determine which of the three criteria used by the charity are met in this case. [12]
[Total 14]
CA PRAVEEN PATWARI 63 JAI SHREE SHYAM
CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

13. Subject CT1 April 2017 Question 4

An investor borrows money from a bank in order to invest in a business venture. The initial loan is

£500,000, with further loans of £250,000 made in 6 months' time and £250,000 made in 12 months'

time.

The business venture will provide the investor with an income of £2 million in exactly 10 years' time

and £3 million in exactly 15 years' time.

The bank offers a force of interest.   t  , as a function of time t (measured in years) which is given by:

0.04 for 0  t  2
 t   
0.02  kt for t  2

(i) Derive expressions for v(t) which cover all values of t [5]

(ii) Determine the minimum value of k that would ensure that thediscounted payback period is ex-

actly 10 years. [4]

[Total 9]

14. Subject CT1 April 2017 Question 6

Exactly three months ago an investor purchased an office building for £5.8 million with the intention

of renting it out. In three months' time the investor will spend £850,000 on necessary refurbishments

and improvements.

A tenant has agreed to lease the building in six months' time for 35 years. The tenant will pay an initial

rent of £1.250 million per annum payable monthly in arrear. The rent will be increased at five-yearly

intervals at a rate of 4.2% per annum compound. It has further been agreed that at the end of the lease

period the tenant will buy the building from the investor for£11.5 million.

The investor pays income tax at a rate of 35% and is expecting a net effective rate of return of 8% per

annum.

Calculate, showing all workings, the net present value of the project to the investor at the time of pur-

chase. [11]

CA PRAVEEN PATWARI 64 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

15. Subject CT1 September 2017 Question 8

A university offers its students three financing options for a degree course that lasts exactly three

years.

Option A
Fees are paid during the term of the course monthly in advance. The fees are £10,000 per annum in
the first year and rise by 5% on the first and second anniversaries of the start of the course.
Option B
The university makes a loan to the students which is repaid in instalmentsafter the end of the course.
The instalments are determined as follows.
 No payments are made until three years after the end of the course.
 Over the following 15 years, students pay the university £1,300 per year, quarterly in advance.
 After 15 years of payments, the quarterly instalments are increased to £1,500 per year, quarterly
in advance.
 After a further 15 years of payments, the quarterly instalments are increased to £1,800 per year,
quarterly in advance, for a further 15- year period after which there are no more payments.
Option C
Students pay to the university 3% of all their future earnings from work, with the payments made an-
nually in arrears.
A particular student wishes to attend the university. He expects to leave university at the end of the
three-year course and immediately obtainemployment. The student expects that his earnings will rise
by 3% per annum compound at the end of each year for 10 years and then he will take a five-year ca-
reer break.
After the career break, he expects to restart work on the salary he was earning when the career break
started. He then expects to receive salary increases of 1% per annum compound at the end of each
year until retiring 45 years after graduating.
The student wishes to take the financing option with the lowest net present value at a rate of interest
of 3% per annum effective.
(i) Calculate the present value of the payments due under Option A. [4]
(ii) Calculate the present value of the payments due under Option B. [5]

CA PRAVEEN PATWARI 65 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

(iii) Calculate the initial level of salary that will lead the payments under Option C to have the lowest
present value of the three options, [8]
(iv) Comment on whether the student should use the same interest rate to evaluate all three options.
[2]

The university is concerned that this scheme exposes it to considerable financial risk.

(v) Explain three risks which the university faces. [4]

[Total 23]
16. Subject CT1 April 2018 Question 7
A retailer is considering opening a new store as a business venture. The purchase price of the store
will be £2 million and there will be a further investment required of £0.5 million 6 months after pur-
chase.
The store will open 12 months after purchase. Revenues less running costs are expected to occur con-
tinuously and will be £0.2 million in the first year of operation, £0.25 million in the second year of op-
eration and thereafter increasing at yearly intervals by 4% per annum compound.
Eight years after purchase. a major refit costing £0.8 million will be required. Fifteen years after pur-
chase, it is assumed that the store will be dosed and sold for £6.4 million.
The retailer requires a rate of return on its investment of 10% per annum effective.
(i) Calculate the net present value of the venture. [8]
It is now assumed that the revenue less running costs will be received mid-way through each
year, rather than continuously.
(ii) Explain how your answer to part (i) would change. [2]
[Total 10]
17. Subject CT1 September 2018 Question 8
Two countries have recently signed a free-trade treaty and an insurance company in one of the coun-
tries is considering establishing a subsidiary in the other. The country in which the investment will
take place currently has a small insurance market, but it is expected to grow slowly over the next ten
years and then rapidly thereafter.
The company expects the make investments of £15m in each of the next five years to establish the
subsidiary. These costs are assumed to be incurred at the end of each year.

CA PRAVEEN PATWARI 66 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

The subsidiary will start business immediately. Upon starting business, the following costs and reve-
nues are expected.
 Costs at a rate of £3m per year will be incurred continuously throughout the first 30 years of the
subsidiary's life.
 Revenues of £3.1m per year will be received continuously throughout the first 10 years of the sub-
sidiary's life.
 In the 11th year, revenues will be received continuously at a rate of £3.2m. The rate at which rev-
enues will be received is then expected to increase at a rate of 5% per annum from the end of the
11thyear to the end of the 30th year with increases occurring at the end of each year from the end
of the 11th year.
At the end of the 30th year, the company assumes that it will sell the subsidiary.
(i) (a) Define the term ‘payback period’
(b) State two reasons why the payback period is a poor decision-making criterion in the above
circumstances. [4]
(ii) Calculate the amount for which the company will have to sell the subsidiary at the end of 30
years so that the project breaks even at a rate of interest of 6% per annum effective.
Some directors are concerned that the project is too risky.
(iii) Suggest two ways in which risk could be taken into account when appraising the project. [2]
[Total 15]

CA PRAVEEN PATWARI 67 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

CM1 – ACTUARIAL MATHEMATICS

SECTION –5
BONDS, EQUITY, AND PROPERTY

FOR THE
2021 EXAMS

COVERING
CHAPTER 5 REAL AND MONEY INTEREST RATES

CHAPTER 12 BONDS, EQUITY AND PROPERTY

CA PRAVEEN PATWARI 68 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

PAST EXAM QUESTIONS

This section contains all the relevant parts of the exam questions from 2010 to 2019, that are related to the
topics covered in this booklet.

Solutions are given later in this booklet. These give enough information for you to check your answer, in-
cluding working, and also show you what an adequate examination answer should look like. Further infor-
mation may be available in the Examiners' Report ASET or Course Notes. (ABET can be ordered from
ActEd.)

We first provide you with a cross-reference grid that indicates the main subject areas of each exam ques-
tion. You can use this, if you wish. to select the questions that relate just to those aspects of the topic that
you may be particularly interested in reviewing.

Alternatively, you can choose to ignore the grid, and instead attempt each question without having any
clues as to its content.

Bonds
Income/CG tax

Index-linked
redemption

Price/yield
Tick when
attempted

Real yield
Optional

Equity
Price

Yield

Question

1  
2  
3   ()
4 
5  
6

7   

CA PRAVEEN PATWARI 69 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Bonds

Income/CG tax

Index-linked
redemption

Price/yield
Tick when
attempted

Real yield
Optional

Equity
Price

Yield
Question

8   
9  
10  
11 
12    
13 
14  
15   
16   
17   
18    ()
19 
20   
21   
22   
23  
24  

CA PRAVEEN PATWARI 70 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Bonds

Income/CG tax

Index-linked
redemption

Price/yield
Tick when
attempted

Real yield
Optional

Equity
Price

Yield
Question

25  
26   
27 
28  
29  
30   
31  
32    

CA PRAVEEN PATWARI 71 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

1. Subject CT1 April 2010 Question 2

In January 2008, the government of a country issued an index-linked bond with a term of two years.
Coupons were payable half-yearly in arrear, andthe annual nominal coupon rate was 4%, interest and
capital payments were indexed by reference to the value of an inflation index with a time lag of six
months.
A tax-exempt investor purchased £100,000 nominal at issue and held it to redemption. The issue price
was £98 per £100 nominal.
The inflation index was as follows:
Date Inflation Index

July 2007 110.5

January 2008 112.1

July 2008 115.7

January 2009 119.1

July 2009 123.2

(i) Calculate the investor's cashflows from this investment and state the month when each cashflow
occurs. [3]
(ii) Calculate the annual effective money yield obtained by the investor to the nearest 0.1% per an-
num. [3]
[Total 6]
2. Subject CT1 April 2010 Question 3
A company issues ordinary shares to an investor who is subject to income tax at 20%.
Under the terms of the ordinary share issue, the investor is to purchase 1,000,000 shares at a pur-
chase price of 45p each on 1 January 2011.
No dividend is expected to be paid for 2 years. The first dividend payable on 1 January 2013 is ex-
pected to be 5p per share. Dividends will then be paid every 6 months in perpetuity. The two dividend
payments in any calendar year are expected to be the same, but the dividend payment is expected
toincrease at the end of each year at a rate of 3% per annum compound.

CA PRAVEEN PATWARI 72 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Calculate the net present value of the investment on 1 January 2011 at an effective rate of interest of

8% per annum. [5]

3. Subject CT1 April 2010 Question 4

An investor is considering purchasing a fixed-interest bond at issue which pays half-yearly coupons at

a rate of 6% per annum. The bond will be redeemed at £105 per £100 nominal in 10 years' time. The

investor is subject to income tax at 20% and capital gains tax at 25%.

The inflation rate is assumed to be constant at 2.8571% per annum.

Calculate the price per £100 nominal if the investor is to obtain a net real yield of 5% per annum. [7]

4. Subject CT1 September 2010 Question 1

A bond pays coupons in perpetuity on 1 June and 1 December each year. The annual coupon rate is

3.5% per annum. An investor purchases a quantity of this bond on 20 August 2009.

Calculate the price per £100 nominal to provide the investor with an effective rate of return per an-

num of 10%. [3]

5. Subject CT1 September 2010 Question 2

A bond is redeemed at £110 per £100 nominal in exactly four years' time. It pays coupons of 4% per

annum half-yearly in arrear and the next coupon is due in exactly six months' time. The current price

is £110 per £100 nominal.

(i) (a) Calculate the gross rate of return per annum convertible half-yearly from the bond.

(b) Calculate the gross effective rate of return per annum from the bond [2]

(ii) Calculate the net effective rate of return per annum from the bond for an investor who pays in-

come tax at 25%. [2]

[Total 4]

CA PRAVEEN PATWARI 73 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

6. Subject CT1 April 2011 Question 3

An investment trust bought 1,000 shares at £135 each on 1 July 2005. The trust received dividends on

its holding on 30 June each year that it held the shares.

The rate of dividend per share was as given in the table below:

30 June in year Rate of dividend Retail price index

per share (£)

2005 — 121.4

2006 7.9 125.6

2007 8.4 131.8

2008 8.8 138.7

2009 9.4 145.3

2010 10.1 155.2

On 1 July 2010 the investment trust sold its entire holding of the shares at a price of £151 per share.
(i) Using the retail price index values shown in the table, calculate the real rate of return per annum
effective achieved by the trust on its investment. [6]
(ii) Explain, without doing any further calculations, how your answer to (i) would alter (if at all) if
the retail price index for 30 June 2008 had been greater than 138.7 (with all other index values
unchanged). [2]
[Total 8]
7. Subject CT1 April 2011 Question 5
A loan of nominal amount £100,000 was issued on 1 April 2011 bearing interest payable half-yearly in
arrear at a rate of 6% per annum. The loan is to be redeemed with a capital payment of £105 per £100
nominal on any coupon date between 20 and 25 years after the date of issue, inclusive, with the date
of redemption being at the option of the borrower.
An investor who is liable to income tax at 20% and capital gains tax of 35% wishes to purchase the en-
tire loan on 1 June 2011 at a price which ensures that the investor achieves a net effective yield of at
least 5% per annum.
CA PRAVEEN PATWARI 74 JAI SHREE SHYAM
CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

(i) Determine whether the investor would make a capital gain if the investment is held until re-
demption. [3]
(ii) Explain how your answer to (i) influences the assumptions made in calculating the price the in-
vestor should pay. [2]
(iii) Calculate the maximum price the investor should pay. [5]
[Total 10]
8. Subject CT1 September 2011 Question 7
An investment manager is considering investing in the ordinary shares of a particular company.
The current price of the shares is 12 pence per share. It is highly unlikely that the share will pay any
dividends in the next five years. However, the investment manager expects the company to pay a divi-
dend of 2 pence per share in exactly six years' time, 2.5 pence per share in exactly seven years’ time,
with annual dividends increasing thereafter by 1% per annum in perpetuity.
In five years' time, the investment manager expects to sell the shares. The sale price is expected to be
equal to the present value of the expected dividends from the share at that time at a rate of interest of
8% per annum effective.
(i) Calculate the effective gross rate of return per annum the investment manager will obtain if he
buys the share and then sells it at the expected price in five years' time [6]
(ii) Calculate the net effective rate of return per annum the investment manager will obtain if he
buys the share today and then sells it at the expected price in five years' time if capital gains tax
is payable at 25% on any capital gains. [3]
(iii) Calculate the net effective real rate of return per annum the investment manager will obtain if he
buys the share and then sells it at the expected price in five years' time if capital gains tax is pay-
able at 25% on any capital gains and inflation is 4% per annum effective. There is no indexation
allowance. [3]
[Total 12]
9. Subject CT1 April 2012 Question 6
A fixed-interest bond pays annual coupons of 5% per annum in arrear on 1 March each year and is re-
deemed at par on 1 March 2025.
On 1 March 2007, immediately after the payment of the coupon then due, the gross redemption yield
was 3.158% per annum effective.

CA PRAVEEN PATWARI 75 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

(i) Calculate the price of the bond per £100 nominal on 1 March 2007. [3]
On 1 March 2012, immediately after the payment of the coupon then due, the gross redemption
yield on the bond was 5% per annum.
(ii) State the new price of the bond per £100 nominal on 1 March 2012. [1]
A tax-free investor purchased the bond on 1 March 2007, immediately after payment of the cou-
pon then due, and sold the bond on 1 March 2012, immediately after payment of the coupon
then due.
(iii) Calculate the gross annual rate of return achieved by the investor over this period. [2]
(iv) Explain, without doing any further calculations, how your answer to part (iii) would change if
the bond were due to be redeemed on 1 March 2035 (rather than 1 March 2025). You may as-
sume that the gross redemption yield at both the date of purchase and the date of sale remains
the same as in parts (i) and (ii) above. [3]
[Total 9]
10. Subject CT1 April 2012 Question 9
An ordinary share pays dividends on each 31 December. A dividend of 35p per share was paid on 31
December 2011. The dividend growth is expected to be 3% in 2012, and a further 5% in 2011. The-
reafter, dividends are expected to grow at 6% per annum compound in perpetuity.
(i) Calculate the present value of the dividend stream described above at a rate of interest of 8% per
annum effective for an investor holding 100 shares on 1 January 2012. [4]

An investor buys 100 shares for £17.20 each on 1 January 2012. He expects to sell the shares for £18
on 1 January 2015.

(ii) Calculate the investor's expected real rate of return.

You should assume that dividends grow as expected and use the following values of the inflation in-
dex:

Year: 2012 2013 2014 2015

Inflation index at start of year: 110.0 112.3 113.2 113.8

[5]
[Total 9]

CA PRAVEEN PATWARI 76 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

11. Subject CT1 April 2013 Question 4

An investor is interested in purchasing shares in a particular company.
The company pays annual dividends. and a dividend payment of 30 pence per share has just been
made.
Future dividends are expected to grow at the rate of 5% per annum compound.
(i) Calculate the maximum price per share that the investor should pay to give an effective return of
9% per annum. [4]
(ii) Without doing any further calculations. explain whether the maximum price paid will be higher,
lower or the same if:
(a) after consulting the managers of the company, the investor increases his estimate of the rate
of growth of future dividends to 6% per annum.
(b) as a result of a government announcement, the general level of future price inflation in the
economy is now expected to be 2% per annum higher than previously assumed.
(c) general economic uncertainty means that, whilst the investor still estimates future dividends
will grow at 5% per annum, he is now much less sure about the accuracy of this assumption.
You should consider the effect of each change separately. [6]
[Total 10]
12. Subject CT1 April 2013 Question 9
A fixed-interest security pays coupons of 8% per annum half yearly on 1 January and 1 July. The secu-
rity will be redeemed at par on any 1 January from 1 January 2017 to 1 January 2022 inclusive, at the
option of the borrower.
An investor purchased a holding of the security on 1 May 2011, at a price which gave him a net yield
of at least 6% per annum effective. The investor pays tax at 30% on interest income and 25% on capi-
tal gains.
On 1 April 2013 the investor sold the holding to a fund which pays no tax ata price to give the fund a
gross yield of at least 7% per annum effective.
(i) Calculate the price per £100 nominal at which the investor bought the security. [5]
(ii) Calculate the price per £100 nominal at which the investor sold the security. [3]

CA PRAVEEN PATWARI 77 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

(iii) Show that the effective net yield that the investor obtained on the investment was between 8%
and 9% per annum. [6]
[Total 14]

13. Subject CT1 September 2013 Question 3

A fixed-interest security pays coupons of 4% per annum, half-yearly in arrear and will be redeemed at
par in exactly ten years.
(i) Calculate the price per £100 nominal to provide a gross redemptionyield of 3% per annum con-
vertible half-yearly. [21
(ii) Calculate the price, 91 days later, to provide a net redemption yield of3% per annum convertible
half-yearly if income tax is payable at 25%. [2]
[Total 4]
14. Subject CT1 September 2013 Question 5
An investor is considering the purchase of two government bonds, issued by two countries A and B
respectively, both denominated in euro.
Both bonds provide a capital repayment of €100 together with a final coupon payment of €6 in exact-
ly one year. The investor believes that he will receive both payments from the bond issued by Country
A with certainty. He believes that there are four possible outcomes for the bond from Country B.
shown in the table below.
Outcome Probability

No coupon or capital payment 0.1

Capital payment received, but no coupon payment received 0.2

50% of capital payment received, but no coupon payment received 0.3

Both coupon and capital payments received in full 0.4

The price of the bond issued by Country A is €101.

(i) Calculate the price of the bond issued by Country B to give the same expected return as that for
the bond issued by Country A. [3]

CA PRAVEEN PATWARI 78 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

(ii) Calculate the gross redemption yield from the bond issued by Country B assuming that the price

is as calculated in part (i). [1]

(iii) Explain why the investor might require a higher expected return from the bond issued by Coun-

try B than from the bond issued by Country A. [2]

[Total 6]

15. Subject CT1 September 2013 Question 8

Mrs. Jones invests a sum of money for her retirement which is expected to bein 20 years' time. The

money is invested in a zero coupon bond which provides a return of 5% per annum effective. At re-

tirement, the individualrequires sufficient money to purchase an annuity certain of £10,000 per an-

num for 25 years. The annuity will be paid monthly in arrear and the purchase price will be calculated

at a rate of interest of 4% per annum convertible half-yearly.

(i) Calculate the sum of money the individual needs to invest at the beginning of the 20-year period.

[5]

The index of retail prices has a value of 143 at the beginning of the 20-year period and 340 at the end

of the 20-year period.

(ii) Calculate the annual effective real return the individual would obtain from the zero coupon

bond. [2]

The government introduces a capital gains tax on zero coupon bonds of 25 per cent of the nominal

capital gain.

(iii) Calculate the net annual effective real return to the investor over the 20- year period before the

annuity commences. [3]

(iv) Explain why the investor has achieved a negative real rate of return despite capital gains tax only

being a tax on the profits from an investment. [2]

[Total 12]

CA PRAVEEN PATWARI 79 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

16. Subject CT1 April 2014 Question 4

A company issues a loan stock bearing interest at a rate of 8% per annum payable half-yearly in ar-
rear. The stock is to be redeemed at 103% on any coupon payment date in the range from 20 years af-
ter issue to 25 years after issue inclusive, to be chosen by the company.
An investor, who is liable to income tax at 30% and tax on capital gains at40%, bought the stock at is-
sue at a price which gave her a minimum net yield to redemption of 6% per annum effective.
Calculate the price that the investor paid. [7]

17. Subject CT1 April 2014 Question 5

On 25 October 2008 a certain government issued a 5-year index-linked stock. The stock had a nominal
coupon rate of 3% per annum payable half-yearly in arrear and a nominal redemption price of 100%.
The actual coupon and redemption payments were index-linked by reference to a retail price index as
at the month of payment.
An investor, who was not subject to tax, bought £10,000 nominal of the stock on 26 October 2012. The
investor held the stock until redemption.
You are given the following values of the retail price index:

2008 — 2012 2013

April — — — 171.4

October 149.2 — 169.4 173.8

(i) Calculate the coupon payment that the investor received on 25 April 2013 and the coupon and
redemption payments that the investor received on 25 October 2013. [3]
(ii) Calculate the purchase price that the investor paid on 25 October 2012 if the investor achieved
an effective real yield of 3.5% per annum effective on the investment. [4]
[Total 7]
18. Subject CT1 September 2014 Question 9
A government issued a number of index-linked bonds on 1 June 2012 which were redeemed on 1 June
2014. Each bond had a nominal coupon of 2% per annum, payable half yearly in arrear and a nominal

CA PRAVEEN PATWARI 80 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

redemption price of 100%. The actual coupon and redemption payments were indexedaccording to
the increase in the retail price index between three months before the issue date and three months
before the relevant payment dates. No adjustment is made to allow for the actual date of calculation of
the price index within the month or the precise coupon payment date within the month.
The values of the retail price index in the relevant months were:
Date Retail Price Index

March 2012 112

June 2012 113

September 2012 116

December 2012 117

March 2013 117

June 2013 118

September 2013 120

December 2013 121

March 2014 121

June 2014 122

An investor purchased £3.5m nominal of the bond at the issue date and held it until it was redeemed.
The investor was subject to tax on coupon payments at a rate of 25%.
(i) Calculate the incoming net cashfows the investor received. [5]
(ii) Express the cashflows in terms of 1 June 2012 prices. [4]
(iii) Calculate the purchase price of the bond per £100 nominal if the real net redemption yield
achieved by the investor was 1.5% per annum effective. [3]

When the investor purchased the security, he expected the retail price index to rise much more slowly
than it did in practice.

(iv) Explain whether the investor's expected net real rate of return at purchase would have been
greater than 1.5% per annum effective. [2]

CA PRAVEEN PATWARI 81 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

In September 2012, the government indicated that it might change the price index to which payments
were linked to one which tends to rise more slowly than the retail price index.

(v) Explain the likely impact of such a change on the market price of index-linked bonds. [2]
[Total 16]
19. Subject CT1 April 2015 Question 6
An ordinary share pays annual dividends. The next dividend is expected to be 6p per share and is due
in exactly six months' time. It is expected that subsequent dividends will grow at a rate of 6% per an-
num compound andthat inflation will be 4% per annum. The price of the share is 175p and dividends
are expected to continue in perpetuity.
Calculate the expected effective real rate of return per annum for an investor who purchases the
share. [6]
Part (i) of Subject C T1 April 2015 Question 8 is about bond pricing However, later parts of this question
concern discounted mean term and volatility, so we have included it in a later booklet.

20. Subject CT1 September 2015 Question 7

A special type of loan is to be issued by a company. The loan is made up of 100,000 bonds, each of no-
minal value €100. Coupons will be paidsemi-annually in arrear at a rate of 4% per annum. The bonds
are to be issued on 1 October 2015 at a price of €100 per €100 nominal. Income tax will be paid by
the bond holders at a rate of 25% on all coupon payments.
Exactly half the bonds will be redeemed after ten years at €100 per €100 nominal. The bonds that are
redeemed will be determined by lot (i.e. the bonds will be numbered and half the numbered bonds
will be chosen randomly for redemption). Coupon payments on the remaining bonds will be increased
to 7% per annum and these bonds will be redeemed 20 years after issue at €130 per €100 nominal.
An individual buys a single bond.
Calculate, as an effective rate of return per annum:
(i) the maximum rate of return the individual can obtain from the bond. [5]
(ii) the minimum rate of return the individual can obtain from the bond. [2]
(iii) the expected rate of return the individual will obtain from the bond [2]
An investor is considering buying the whole loan.

CA PRAVEEN PATWARI 82 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

(iv) Show that the rate of return that the investor will obtain is greater thanthe expected rate of re-
turn that the above individual who buys a singlebond will receive. [5]
[Total 14]

21. Subject CT1 September 2015 Question 8

(i) State the characteristics of an equity. [4]

An investor was considering investing in the shares of a particular company on 1 August 2014. The
investor assumed that the next dividend would be payable in exactly one year and would be equal to 6
pence per share.

Thereafter, dividends will grow at a constant rate of 1% per annum and are assumed to be paid in
perpetuity. All dividends will be taxed at a rate of 20%. The investor requires a net rate of return from
the shares of 6% per annum effective.

(ii) Derive and simplify as far as possible a general formula which will allow you to determine the
value of a share for different values of
 the next expected dividend.
 the dividend growth rate.
 the required rate of return.
 the tax rate.
(iii) Calculate the value of one share to the investor. [5]

The company announces some news that makes the shares more risky.

(iv) Explain what would happen to the value of the share, using the formula derived in part (ii). [2]

The investor bought 1,000 shares on 1 August 2014 for the price calculated in part (iii). He received
the dividend of 6 pence on 1 August 2015 and paid the tax due on the dividend. The investor then sold
the share immediately for 120 pence. Capital gains tax was charged on all gains at a rate of 25%. On 1
August 2014, the index of retail prices was 123. On 1 August 2015, the index of retail prices was 126.

(v) Determine the net real return earned by the investor. [3]
[Total 14]

CA PRAVEEN PATWARI 83 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

22. Subject CT1 April 2016 Question 4

A loan of nominal amount £100,000 is to be issued bearing coupons payable quarterly in arrear at a
rate of 7% per annum. Capital is to be redeemed at £108 per £100 nominal on a coupon date be-
tween15 and 20 years inclusive after the date of issue. The date of redemption is at the option of the
borrower.
An investor who is liable to income tax at 25% and capital gains tax at 40% wishes to purchase the en-
tire loan at the date of issue.
(i) Determine the price which the investor should pay to ensure a net effective yield of at least 5%
per annum. [5]
(ii) Explain the significance of the redemption date being at the option of the borrower in relation to
your calculation in part (i). [2]
[Total 7]

23. Subject CT1 April 2016 Question 9

In January 2014, the government of a country issued an index-linked bond with a term of two years.
Coupons were payable half-yearly in arrear, andthe annual nominal coupon rate was 6%. The re-
demption value, before indexing, was £100 per £100 nominal. Interest and capital payments were in-
dexed by reference to the value of an inflation index with a time lag of six months.
A tax-exempt investor purchased £100,000 nominal at issue and held it to redemption. The issue price
was £97 per £100 nominal.
The inflation index was as follows:
Date Inflation Index

July 2013 120.0

January 2014 122.3

July 2014 124.9

January 2015 127.2

July 2015 129.1

January 2016 131.8

CA PRAVEEN PATWARI 84 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

(i) Set out a schedule of the investor's cashflows, showing the amount and month of each cashflow.
[3]
(ii) Determine the annual effective real yield obtained by the investor to the nearest 0.1% per an-
num. [5]
[Total 8]
24. Subject CT1 April 2016 Question 11
An investor is considering the purchase of 10,000 ordinary shares in Enterprise plc.
Dividends from the shares are payable half-yearly in arrear. The next dividend is due in exactly six
months and is expected to be 6.5 pence per share.
The required rate of return is 6% per half-year effective and an estimated rate of future dividend
growth is 2% per half-year.
(i) Calculate, showing all working, the maximum price that the investor should pay for the shares.
[4]

As a result of a recently announced expansion plan, the investor increases the estimated rate of future
dividend growth to 2.5% per half-year.

(ii) (a) Calculate, showing all working, the maximum price the investor should now pay for the-
shares.
(b) Explain the difference between your answers to part (i) and part (ii)(a). [2]
It is rumoured that new legislation may affect the operation of Enterprise plc.
As a result, the investor decides to increase her required rate of return to 7% per half-year effective.
The estimated dividend growth rate remains at 2% per half-year
(iii) (a) Explain why it might be appropriate for the investor to increase her required rate of return.
(b) Calculate the maximum price that the investor should now pay for the shares.
(c) Explain the difference between your answers to part (i) and part (iii)(b)- [3]
In the prevailing economic circumstances, investors are expecting lower inflation in the wider econ-
omy.
As a result, the investor decides to reduce both the assumed rate of dividend growth and her required
rate of return to 1% and 5% per half-year effective respectively.

CA PRAVEEN PATWARI 85 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

(iv) (a) Explain why it is appropriate for the investor to reduce both the future dividend growth rate
and the required rate of return in this case.
(b) Calculate the maximum price that the investor should now pay for the shares.
(c) Explain the difference between your answers to part (i) and part (iv)(b). [5]
[Total 14]
25. Subject CT1 September 2016 Question 5
A zero-coupon bond was issued on 1 January 1975 with a redemption date of 1 January 2015. An in-
vestor bought the bond to provide a yield to maturity of 5% per annum convertible half yearly. On a
particular date the borrower defaulted, repaying 80% of the capital to all bondholders. The investor
obtained a rate of return until the date of default which was equivalent to a force of interest of 4.8%
per annum.
Determine the date on which the borrower defaulted. [5]

26. Subject CT1 April 2017 Question 7

A fixed-interest bond was issued on 1 January 2017 with a term of 20 years and is redeemable at
105%. The security pays a coupon of 4% per annum, payable half-yearly in arrear.
An investor is liable to income tax at the rate of 30% and capital gains tax at the rate of 40%. Income
tax and capital gains tax are both collected on1 June each year in relation to gross payments made
during the previous 12 months.
The investor bought £10,000 nominal of the stock at an issue price of £9,800.
(i) Show that the net redemption yield obtained by the investor will be between 3% and 4% per
annum effective. [7]

The inflation rate over the term of the bond is assumed to be 2% per annum.

(ii) Calculate the net effective annual real redemption yield that would be obtained by the investor.
[3]
(iii) Explain, without doing any further calculations, how your answers to parts (i) and (ii) would al-
ter if the tax were collected on 1 April instead of1 June each year. [2]
[Total 12]
CA PRAVEEN PATWARI 86 JAI SHREE SHYAM
CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

27. Subject CT1 April 2018 Question 2

(i) Describe what is meant by the term 'ex-dividend'. [1]

An individual purchased 10,000 shares on 1 December 2017. Dividends are payable on 1 January and
1 July each year, and are assumed to be payable in perpetuity. The next dividend, due on 1 January
2018, is $0.07 per share.

The two dividend payments in any calendar year are expected to be the same, but the dividend pay-
ment is expected to increase at the end of each year at a rate of 2% per annum compound.

Assume that the share is ex-dividend on 1 December 2017 and use an effective rate of interest of 7%
per annum.

(ii) Calculate the present value of the investment at the date of purchase. [5]
[Total 6]
28. Subject CT1 April 2018 Question 6
On 1 April 2018 a government issues a 10-year bond redeemable at £105 per £100 nominal and pay-
ing coupons at the rate of 3% per annumhalf-yearly in arrear. The price of the bond was £102 per
£100 nominal.
An investor subject to income tax of 25% and capital gains tax of 35% purchased £10,000 nominal of
the bond at issue.
The investor assumes that inflation will be constant over the term of the bond at a rate of 2% per an-
num.
(i) Calculate the net effective real redemption yield which the investor expects to earn on the in-
vestment. [6]
(ii) Explain how your answer to part (i) would change if inflation were less than 2% per annum
throughout the term. [2]
[Total 8]
29. Subject CT1 September 2018 Question 4
A company issues a loan stock which pays coupons at a rate of 6% per annum half-yearly in arrears.
The stock is to be redeemed at 103% after 25 years.

CA PRAVEEN PATWARI 87 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

(i) (a) Calculate the price per £100 nominal at issue which would provide a gross redemption yield

of 3% per annum convertible half-yearly.

(b) Calculate the price per £100 nominal three months after issue which would provide a gross

redemption yield of 3% per annum convertible half-yearly. [3]

An investor, who is liable to income tax at 30% and capital gains tax at 40%, bought the stock at issue

at a price which gave him a net redemption yield of 10% per annum effective.

(ii) Calculate the price the investor paid. [4]

[Total 7]

30. Subject CT1 September 2018 Question 9 (part)

An investor bought £1m nominal of an index-linked bond on 31 December 2015 for £100 per £100

nominal. Nominal coupon payments of 1% were received on 30 June and 31 December each year. The

bond was sold for £101 per £100 nominal on 31 December 2017 immediately after the coupon due on

that date had been received.

The coupon payments from the bond were linked to the retail prices index(RPI) with a three-month

lag with cash payments being rounded to the nearest pound. RPI inflation was 2% per annum effective

from three months before the bond was issued until three months before it was sold.

Assume that all months are of equal length.

(ii) Calculate the cash payments received by the investor from the index-linked bond.

(iii) Calculate, to the nearest 0.1%, the effective rate of return per annum obtained from the bond

over the holding period (before allowing for inflation). [5]

The real rate of return obtained from the bond over the holding period was 1% per annum converti-

ble half-yearly.

(iv) Calculate the rate of inflation in the three months to 31 December 2017, expressing your answer

as an annual effective rate. [7]

[Total 15]

CA PRAVEEN PATWARI 88 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

31. Subject CM1 April 2019 Question 11

On 1 February 2017, an investor was considering purchasing ordinary shares in Actuaria PLC.
Dividends are payable annually, and a dividend of £0.40 per share had just been paid.
At the date of purchase, dividends were expected to grow each year on a compound basis. The rate of
growth was expected to be 5% in the first year, 4% in the second year and 3% per annum thereafter.
The investor was not entitled to the dividend which had just been paid.
(i) Calculate the maximum price per share the investor would have been prepared to pay at this
date to give a rate of return of 9% per annum effective, assuming the investor holds the share in
perpetuity. [6]

The investor purchased a holding of shares on 1 February 2017 at a price of £7.00 per share and sold
the holding at a price of £7.50 per share on 1 February 2019, immediately after receiving the dividend
payment then due.

(ii) Calculate the effective annual real rate of return achieved by the investor between 1 February
2017 and 1 February 2019 using the following information:
Date Inflation index Dividend per share

1 February 2017 211.0 £0.400

1 February 2018 215.7 £0.428

1 February 2019 221.2 £0.449

[5]
[Total 11]
32. Subject CM1 September 2019 Question 8
A loan of £1,000,000 nominal is issued with coupons payable half-yearly in arrears at a rate of 9% per
annum. The loan is to be redeemed at £110 per£100 nominal on a single coupon date between 20 and
25 years after the date of issue, inclusive. The date of redemption is at the option of the borrower.
An investor who is liable to income tax at 15% but not liable to capital gains tax wishes to purchase
the loan at the date of issue.

CA PRAVEEN PATWARI 89 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

(i) Calculate the price the investor should pay to ensure a net effective yield of at least 8% per an-
num. [5]

The investor purchases the loan for the price calculated in part (i). Exactly ten years later, immediate-
ly after the payment of the coupon then due, a second investor, who is liable to income tax at 25% and
capital gains tax of 35%, purchases the loan for a price such that the first investor obtained a net effec-
tive yield of 8% per annum. The second investor holds the loan to maturity.

(ii) Calculate:
(a) the price paid by the second investor
(b) the minimum net redemption yield earned by the second investor, to the nearest 0.1% per
annum. [6]
[Total 11]

CA PRAVEEN PATWARI 90 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

CM1 – ACTUARIAL MATHEMATICS

SECTION –6
TERM STRUCTURE OF INTEREST RATES

FOR THE
2021 EXAMS

COVERING
CHAPTER 13 TERM STRUCTURE OF INTEREST RATES

CA PRAVEEN PATWARI 91 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

PAST EXAM QUESTIONS

This section contains all the relevant parts of the exam questions from 2010 to 2019, that are related to the
topics covered in this booklet.

Solutions are given later in this booklet. These give enough information for you to check your answer, in-
cluding working, and also show you what an adequate examination answer should look like. Further infor-
mation may be available in the Examiners' Report, ASET or Course Notes. (ASET can be ordered from
ActEd.)

We first provide you with a cross4eference grid that indicates the main subject areas of each exam ques-
tion. You can use this. if you wish, to select the questions that relate just to those aspects of the topic that
you may be particularly interested in reviewing.

Alternatively, you can choose to ignore the grid, and instead attempt each question without having any
clues as to its content.

Term structure Immunisation

Bond price/GRY
using spot/fwd

DMT/volatility
Spot/ forward

immunisation
Yield curve
Tick when
attempted

Convexity
Par yield

theories

Check
Rates

Question

1  
2 
3 
4  
5   
6   
7  

CA PRAVEEN PATWARI 92 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Term structure Immunisation

Bond price/GRY
using spot/fwd

DMT/volatility
Spot/ forward

immunisation
Yield curve
Tick when
attempted

Convexity
Par yield

theories

Check
Rates
Question

8  
9   
10  () 
11 
12  
13 
14  
15   
16 
17 
18  
19   
20 
21  
22  
23 
24 

CA PRAVEEN PATWARI 93 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Term structure Immunisation

Bond price/GRY
using spot/fwd

DMT/volatility
Spot/ forward

immunisation
Yield curve
Tick when
attempted

Convexity
Par yield

theories

Check
Rates
Question

25   
26  
27  
28  
29 
30   
31  
32  
33 
34   
35   
36  
37  
38  

CA PRAVEEN PATWARI 94 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

1. Subject CT1 April 2010 Question 5

Let ft denote the one-year forward rate of interest over the year from time t to time t+1.
The current forward rates in the market are:
Time, t 0 1 2 3

one-year forward rate, ft 4.4% pa 4.7% pa 4.9% pa 5.0% pa

A fixed-interest security pays coupons annually in arrear at the rate of 7% per annum and is redeem-
able at par in exactly four years.
(i) Calculate the price per £100 nominal of the security assuming no arbitrage. [3]
(ii) Calculate the gross redemption yield of the security. [3]
(iii) Explain, without doing any further calculations, how your answer to part (ii) would change if the
annual coupon rate on the security were9% per annum (rather than 7% per annum). [2]
[Total 8]
2. Subject CT1 April 2010 Question 7
A pension fund has to pay out benefits at the end of each of the next 40 years. The benefits payable at
the end of the first year total £1 million. Thereafter, the benefits are expected to increase at a fixed
rate of 3.8835% per annum compound.
(i) Calculate the discounted mean term of the liabilities using a rate of interest of 7% per annum ef-
fective. [5]

The pension fund can invest in both coupon-paying and zero-coupon bonds with a range of terms to
redemption. The longest-dated bond currently available in the market is a zero-coupon bond re-
deemed in exactly 15 years.

(ii) Explain why it will not be possible to immunise this pension fund against small changes in the
rate of interest. [2]
(iii) Describe the other practical problems for an institutional investor who is attempting to imple-
ment an immunisation strategy. [3]
[Total 10]

CA PRAVEEN PATWARI 95 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

3. Subject CT1 September 2010 Question 7

(i) State the three conditions that are necessary for a fund to be immunised from small, uniform
changes in the rate of interest. [2]
(ii) A pension fund has liabilities of £10m to meet at the end of each of the next ten years. It is able to
invest in two zero-coupon bonds with a term to redemption of three years and 12 years respec-
tively. The rate of interest is 4% per annum effective.
Calculate:
(a) the present value of the liabilities of the pension fund
(b) the duration of the liabilities of the pension fund
(c) the nominal amount that should be invested in the zero-coupon bonds to ensure that the
present values and durations of the assets and liabilities is the same. [7]
(iii) One year later, just before the pension payment then due, the rate of interest is 5% per annum
effective.
(a) Determine whether the duration of the assets and the liabilities are still equal.
(b) Comment on the practical usefulness of the theory of immunisation in the context of the
above result. [6]
[Total 15]
4. Subject CT1 September 2010 Question 9
The government of a particular country has just issued three bonds with terms to redemption of ex-
actly one, two and three years respectively. Each bond is redeemed at par and pays coupons of 8%
annually in arrear. The annual effective gross redemption yields from the one, two and three-year
bonds are 4%, 3% and 3% respectively.
(i) Calculate the one-year, two-year and three-year spot rates of interest at the date of issue. [8]
(ii) Calculate all possible forward rates of interest from the above spot rates of interest. [4]

An index of retail prices has a current value of 100.

(iii) Calculate the expected level of the retail prices index in one year, two years' and three years'
time if the expected real spot rates of interest are 2% per annum effective for all terms. [5]
(iv) Calculate the expected rate of inflation per annum in each of the next three years. [2]
[Total 19]

CA PRAVEEN PATWARI 96 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

5. Subject CT1 April 2011 Question 4

The n-year spot rate of interest yn, is given by:
n
y n  0.03  for n = 1, 2, 3 and 4
1,000
(i) Calculate the implied one-year and two-year forward rates applicable at time t = 2. [3]
(ii) Calculate, assuming no arbitrage:
(a) the price at time t = 0 per £100 nominal of a bond which pays annual coupons of 4% in ar-
rear and is redeemed at 115% after 3 years.
(b) the 3-year par yield. [6]
[Total 9]
6. Subject CT1 April 2011 Question 8
A company has liabilities of £10 million due in three years' time and£20 million due in six years' time.
The investment manager for the companyis able to buy zero-coupon bonds for whatever term he re-
quires and has adequate monies at his disposal.
(i) Explain whether it is possible for the investment manager to immunise the fund against small
changes in the rate of interest by purchasing a single zero-coupon bond. [2]

The investment manager decides to purchase two zero-coupon bonds, one for a term of four years and
the other for a term of 20 years. The current interest rate is 4% per annum effective.

(ii) Calculate the amount that must be invested in each bond in order that the company is immu-
nised against small changes in the rate of interest. You should demonstrate that all three Reding-
ton conditions are met. [10]
[Total 12]
7. Subject CT1 September 2011 Question 8
(i) State the conditions that are necessary for an insurance company to be immunised from small,
uniform changes in the rate of interest. [2]

An insurance company has liabilities to pay £100m annually in arrear for the next 40 years. In order
to meet these liabilities, the insurance company can invest in zero coupon bonds with terms to re-
demption of five years and 40 years.

(ii) (a) Calculate the present value of the liabilities at a rate of interest of 4% per annum effective.

CA PRAVEEN PATWARI 97 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

(b) Calculate the duration of the liabilities at a rate of interest of 4% per annum effective. [5]
(iii) Calculate the nominal amount of each bond that the fund needs to hold so that the first two con-
ditions for immunisation are met at a rate of interest of 4% per annum effective. [5]
(iv) (a) Estimate, using your calculations in (ii)(b) the revised present value of the liabilities if there
were a reduction in interest rates by 1.5% per annum effective.
(b) Calculate the present value of the liabilities at a rate of interest of 2.5% per annum effec-
tive.
(c) Comment on your results to (iv)(a) and (iv)(b). [6]
[Total 18]
8. Subject CTI September 2011 Question 9
(i) Describe the information that an investor can obtain from the following yield curves for gov-
ernment bonds:
(a) a forward rate yield curve
(b) a spot rate yield curve
(c) a gross redemption yield curve [6]
An investor is using the information from a government bond spot yield curve to calculate the
present value of a corporate bond with a term to redemption of exactly five years. The investor will
value each payment that is due from the bond at a rate of interest equal to j =i+0.01+ 0.001t where:
 t is the time in years at which the payment is due
 iis the annual t-year effective spot rate of interest from the government bond spot yield curve
and i = 0.02t for t< 5.
The bond pays annual coupons of 10% of the nominal amount of the bond and is redeemed at par.
(ii) Calculate the present value of the bond. [6]
(iii) Calculate the gross redemption yield from the bond. [3]
(iv) Explain why the investor might use such a formula for j to determinethe interest rates at which
to value the payments from the corporate bond. [3]
[Total 18]

CA PRAVEEN PATWARI 98 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

9. Subject CT1 April 2012 Question I

In a particular bond market, n -year spot rates can be approximated by the function 0.06  0.02e0.1n .
(i) Calculate the gross redemption yield for a three-year bond which pays coupons of 3% annually
in arrear, and is redeemed at par. Show all workings. [6]
(ii) Calculate the four-year par yield. [3]
[Total 9]
10. Subject CT1 April 2012 Question 10
A company has the following liabilities:
 annuity payments of £200,000 per annum to be paid annually in arrear for the next 20 years
 a lump sum of £300,000 to be paid in 15 years.
The company wishes to invest in two fixed-interest securities in order to immunise its liabilities.
Security A has a coupon rate of 9% per annum and a term to redemption of12 years. Security B has a
coupon rate of 4% per annum and a term to redemption of 30 years.
Both securities are redeemable at par and pay coupons annually in arrear. The rate of interest is 8%
per annum effective.
(i) Calculate the present value of the liabilities. [3]
(ii) Calculate the discounted mean term of the liabilities. [4]
(iii) Calculate the nominal amount of each security that should be purchased so that Redington's first
two conditions for immunisation against small changes in the rate of interest are satisfied for
this company. [8]
(iv) Describe the further calculations that will be necessary to determine whether the company is
immunised against small changes in the rate of interest. [2]
[Total 17]
11. Subject CTI September 2012 Question 5 (part)
(ii) (b) Two certificates of deposit issued by a given bank are being traded. A one-month certificate
of deposit provides a rate of return of 12 per cent per annum convertible monthly. A two-
month certificate of deposit provides a rate of return of 24 per cent per annum convertible
monthly.
Calculate the forward rate of interest per annum convertible monthly in the second month. as-
suming no arbitrage. [4]

CA PRAVEEN PATWARI 99 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

12. Subject CT1 September 2012 Question 9

(i) Describe three theories that have been put forward to explain the shape of the yield curve. [7]

The government of a particular country has just issued five bonds with terms to redemption of
one,two, three, four and five years respectively. The bonds are redeemed at par and have coupon rates
of 4% per annum payable annually in arrear.

(ii) Calculate the duration of the one-year, three-year and five-year bonds at a gross redemption
yield of 5% per annum effective. [6]
(iii) Explain why a five-year bond with a coupon rate of 8% per annum would have a lower duration
than a five-year bond with a coupon rate of 4% per annum. [2]

Four years after issue, immediately after the coupon payment then due the government is anticipating
problems servicing its remaining debt. The government offers two options to the holders of the bond
with an original term of five years:

Option 1: the bond is repaid at 79% of its nominal value at the scheduled time with no final coupon
payment being paid.

Option 2: the redemption of the bond is deferred for seven years from the original redemption date
and the coupon rate reduced to 1 % per annum for the remainder of the existing term and the whole
of the extended term.

Assume the bonds were issued at a price of £95 per £100 nominal.

(iv) Calculate the effective rate of return per annum from Options 1 and 2 over the total life of the
bond and determine which would provide the higher rate of return. [6]
(v) Suggest two other considerations that bond holders may wish to take into account when decid-
ing which options to accept. [2]
[Total 23]

13. Subject CT1 September 2012 Question 10

Two investment projects are being considered.
(i) Explain why comparing the two discounted payback periods or comparing the two payback pe-
riods are not generally appropriate ways to choose between two investment projects, [3]

CA PRAVEEN PATWARI 100 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

The two projects each involve an initial investment of £3m. The incoming cashflows from the two
projects are as follows:

Project A

In the first year, Project A generates cashflows of £0.5m. In the second year it will generate cashflows
of £0.55m. The cashflows generated by the project will continue to increase by 10% per annum until
the end of the sixth year and will then cease. Assume that all cashflows are received in the middle of
the year.

Project B

Project B generates cashflows of £0.64m per annum for six years. Assume that all cash flows are re-
ceived continuously throughout the year.

(ii) (a) Calculate the payback period from Project B.

(b) Calculate the discounted payback period from Project B at a rate of interest of 4% per an-
num effective. [5]
(iii) Show that there is at least one `cross-over point' for Projects A and B between 0% per annum ef-
fective and 4% per annum effective where the cross-over point is defined as the rate of interest
at which the net present value of the two projects is equal. [6]
(iv) Calculate the duration of the incoming cashflows from Projects A and B at a rate of interest of 4%
per annum effective. [6]
(v) Explain why the net present value of Project A appears to fall more rapidly than the net present
value of Project B as the rate of interest increases. [2]
[Total 22]

14. Subject CT1 April 2013 Question 3

Three bonds each paying annual coupons in arrear of 6% and redeemable at £103 per £100 nominal
reach their redemption dates in exactly one, two and three years' time, respectively. The price of each
bond is £97 per £100 nominal.
(i) Calculate the gross redemption yield of the 3-year bond. [3]
(ii) Calculate the one-year and two-year spot rates implied by the information given. [3]
[Total 6]

CA PRAVEEN PATWARI 101 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

15. Subject CT1 April 2013 Question 7

An insurance company has liabilities of £6 million due in 8 years' time and £11 million due in 15
years' time. The assets consist of two zero-coupon bonds, one paying £X in 5 years' time and the other
paying £Y in 20years' time. The current interest rate is 8% per annum effective. The insurance com-
pany wishes to ensure that it is immunised against small changes in the rate of interest.
(i) Determine the values of £X and £Y such that the first two conditions for Redington's immunisa-
tion are satisfied. [8]
(ii) Demonstrate that the third condition for Redington's immunisation is also satisfied. [2]
[Total 10]

16. Subject CT1 September 2013 Question 10 (part)

The force of interest, (t) is a function of time and at any time t measured in years, is given by the for-
mula:
(t) = 0.05 + 0.002t
Calculate the accumulated value of a unit sum of money:
(i) (a) accumulated from time t = 0 to time t = 7.
(b) accumulated from time t = 0 to time t = 6.
(c) accumulated from time t = 6 to time t = 7. [5]
(ii) Calculate, using your results from part (i) or otherwise:
(a) the seven-year spot rate of interest per annum from time t = 0 to time t = 7.
(b) the six-year spot rate of interest per annum from time t = 0 to time t = 6.
(c) f 6,1 where f 6,1 is the one-year forward rate of interest per annum from time t = 6 [3]

(iii) Explain why your answer to part (ii)(b) is higher than your answer to part (ii)(a). [2]
[Total 10]
17. Subject CT1 September 2013 Question 11
A pension fund has liabilities to meet annuities payable in arrear for 40 years at a rate of £10 million
per annum.
The fund is invested in two fixed-interest securities. The first security paysannual coupons of 5% and
is redeemed at par in exactly ten years' time. The second security pays annual coupons of 10% and is

CA PRAVEEN PATWARI 102 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

redeemed at par in exactly five years' time. The present value of the assets in the pension fund is equal
to the present value of the liabilities of the fund and exactly half theassets are invested in each securi-
ty. All assets and liabilities are valued at a rate of interest of 4% per annum effective.
(i) Calculate the present value of the liabilities of the fund. [1]
(ii) Calculate the nominal amount held of each security purchased by the pension fund. [6]
(iii) Calculate the duration of the liabilities of the pension fund, [3]
(iv) Calculate the duration of the assets of the pension fund. [4]
(v) Without further calculations, explain whether the pension fund will makea profit or loss if inter-
est rates fall uniformly by 1.5% per annumeffective. [2]
[Total 16]
18. Subject CT1 April 2014 Question 6
An insurance company has liabilities of £10 million due in 10 years' time and £20 million due in 15
years' time. The company's assets consist of two zero-coupon bonds. One pays £7.404 million in 2
years` time and the other pays £31.834 million in 25 years' time. The current interest rate is 7% per
annum effective.
(i) Show that Redington's first two conditions for immunisation against small changes in the rate of
interest are satisfied for this insurance company. [6]
(ii) Calculate the present value of profit that the insurance company will make if the interest rate in-
creases immediately to 7.5% per annum effective. [2]
(iii) Explain, without any further calculation, why the insurance company made a profit as a result of
the change in the interest rate. [2]
[Total 10]

19. Subject CT1 April 2014 Question 9

The effective n -year spot rate of interest yn is given by:
n
y n  0.035  for n = 1, 2 and 3
1,000
(i) Determine the implied one-year forward rates applicable at times t = 1 and t = 2 to four signifi-
cant figures. [4]
(ii) Calculate, assuming no arbitrage:

CA PRAVEEN PATWARI 103 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

(a) The price at time t = 0 per £100 nominal of a bond which paysannual coupons of 4% in ar-
rear and is redeemed at 105% per £100 nominal after three years.
(b) The two-year par yield. [6]
[Total 10]
20. Subject CT1 September 2014 Question 6
A bond has been issued by a company that pays annual coupons of 5% per annum annually in arrear
and is redeemable at par in exactly 10 years' time.
(i) Calculate the purchase price of the bond at issue at a rate of interest of4% per annum effective
assuming that tax is paid on the coupon payments at a rate of 20%. [2]
(ii) Calculate the discounted mean term of the bond at a rate of interest of 4% per annum effective,
ignoring tax. [3]
(iii) (a) Explain why the discounted mean term of the gross payments from the bond is lower than
the discounted mean term of the net payments.
(b) State two factors other than the size of the coupon payments that would affect the dis-
counted mean term of the bond. [3]
(iv) Calculate the price of the bond three months after issue at a rate of interest of 4% per annum ef-
fective assuring tax is paid on the couponpayments at a rate of 20%. [1]
[Total 9]
21. Subject CT1 September 2014 Question 8
(i) Explain what is meant by the following theories of the shape of the yield curve:
(a) market segmentation theory
(b) liquidity preference theory [4]
Short-term, one-year annual effective interest rates are currently 6%, they are expected to be 5% in
one year's time, 4% in two years' time and 3% in three years’ time.
(ii) Calculate the gross redemption yields from one-year, two-year, three-year and four-year zero
coupon bonds using the above expected interest rates. [4]

The price of a coupon-paying bond is calculated by discounting individual payments from the bond at
the zero-coupon yields in part (ii).
CA PRAVEEN PATWARI 104 JAI SHREE SHYAM
CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

(iii) Calculate the gross redemption yield of a bond that pays a coupon of 4% per annum annually in
arrear and is redeemed at 110% in exactly four years. [5]
(iv) Explain why the gross redemption yield of a bond that pays a coupon of 8% per annum annually
in arrear and is redeemed at par would be greater than that calculated in part (iii). [2]

The government introduces regulations that require banks to hold more government bonds with very
short terms to redemption.

(v) Explain, with reference to market segmentation theory, the likely effect of this regulation on the
pattern of spot rates calculated in part (ii). [2]
[Total 17]
22. Subject CT1 April 2015 Question 7
In a particular country, insurance companies are required by regulation to value their liabilities using
spot rates of interest derived from the government bond yield curve.
Over time t (measured in years), the spot rate of interest is equal to:
i= 0.02t for t<5
An insurance company in this country has a group of annuity policies whichinvolve making payments
of £1m per annum for four years and £2m per annum in the fifth year. All payments are assumed to be
paid halfway through the year.
(i) Calculate the value of the insurance company's liabilities. [3]
(ii) Outline two reasons why the spot yield curve might rise with term to redemption. [3]
(iii) Calculate the forward rate of interest from time t = 3.5 to time t = 4.5. [2]
[Total 8]

23. Subject CT1 April 2015 Question 8

A fixed-interest security, redeemable at par in 10 years, pays annual coupons of 9% in arrear and has
just been issued at a price to give aninvestor who does not pay tax a rate of return of 7% per annum
effective.
(i) Calculate the price of the security at issue. [2]
(ii) Calculate the discounted mean term (duration) of the security at issue. [3]

CA PRAVEEN PATWARI 105 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

(iii) Explain how your answer to part (ii) would differ if the annual couponson the security were 3%
instead of 9%. [2]
(iv) (a) Calculate the effective duration (volatility) of the security at the time of issue.
(b) Explain the usefulness of effective duration for an investor who expects to sell the security
over the next few months. [3]
[Total 10]
24. Subject CT1 September 2015 Question 3
An insurance company has sold a pension product to an individual. Under the arrangement, the indi-
vidual is to receive an immediate annuity of £500 per year annually in arrear for 12 years. The insur-
ance company has invested the premium it has received in a fixed-interest bond that pays coupons
annually in arrear at the rate of 5% per annum and which is redeemable at par in exactly eight years.
(i) Calculate the duration of the annuity at an interest rate of 4% per annum effective. [2]
(ii) Calculate the duration of the bond at an interest rate of 4% per annum effective. [3]
(iii) State with reasons whether the insurance company will make a profit or a loss if there is a small
increase in interest rates at all terms. [2]
[Total 7]
25. Subject CT1 September 2015 Question 6
Three bonds, each paying annual coupons in arrear of 3% and redeemable at £100 per £100 nominal,
reach their redemption dates in exactly one, two and three years time, respectively.
The price of each bond is £101 per £100 nominal.
(i) Determine the gross redemption yield of the three-year bond. [3]
(ii) Calculate the one-year. two-year and three-year spot rates of interest implied by the information
given [5]
(iii) Calculate the one-year forward rate starting from the end of the second year, f 2,1 [2]

The pattern of spot rates is upward sloping throughout the yield curve.
(iv) Explain, with reference to the various theories of the yield curve, why the yield curve might be
upward sloping. [4]
[Total 14]
CA PRAVEEN PATWARI 106 JAI SHREE SHYAM
CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

26. Subject CT1 April 2016 Question 2

An insurance company has liabilities of £6 million due in exactly 8 years' time and a further £11 mil-
lion due in exactly 15 years' time
The assets held by the insurance company consist of:
 a 5-year zero-coupon bond of nominal amount £5.5088 million, and
 a 20-year zero-coupon bond of nominal amount £13.7969 million.
The current rate of interest is 8% per annum effective at all durations.
(i) Show that the first two conditions of Redington's theory for immunisation against small changes
in the rate of interest are satisfied. [5]
(ii) Explain, without doing any further calculations, whether the insurance company will be immu-
nised against small changes in the rate of interest. [2]
[Total 7]
27. Subject CT1 April 2016 Question 3
At time t = 0, the one-year zero-coupon yield is 4% per annum effective and the one-year forward rate
per annum effective at time t (t =1, 2, ...) is given by:
f t, 1   4  t  %

(i) Determine the issue price per £100 nominal of a three-year 4% coupon bond issued at time t = 0,
paying coupons annually in arrear and redeemable at 105%. [4]
(ii) Determine the three-year par yield at time t = 0 [3]
[Total 7]
28. Subject CT1 September 2016 Question 8
Three bonds, each paying annual coupons in arrear of 4% and redeemableat par, reach their redemp-
tion dates in exactly one, two and three years' time, respectively. The price of each bond is £96 per
£100 nominal.
(i) Calculate the gross redemption yield of the three-year bond. [3]
(ii) Calculate, showing all workings, the one-year and two-year spot rates of interest implied by the
information given. [3]
(iii) Calculate the forward rate of interest applicable over the second year. [2]

CA PRAVEEN PATWARI 107 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

(iv) Explain whether the three-year spot rate will be higher than or lower than the three-year gross
redemption yield. [2]
[Total 10]
29. Subject CT1 September 2016 Question 11
The government of a heavily indebted country has a range of bonds currently in issue. These include
bonds with nominal amounts outstanding of£4bn and £5bn with terms to redemption of exactly three
years and ten years respectively from the current time. Both bonds pay annual coupons in arrear of
4%. The government is negotiating a restructuring of its debt portfolio and proposes to transform the
three and ten year bonds into perpetuities paying an annual coupon of 5% in arrear. The yield curve is
currently flat with gross redemption yields at 6% per annum effective.
(i) Calculate, showing all workings, the duration of the current portfolio of three year and ten-year
bonds. [7]
(ii) Calculate, showing all workings, the duration of the proposed portfolio of bonds. [4]

The government's objective is that the present value of the proposed portfolio of bonds will be 80% of
the present value of the current portfolio of three-year and ten-year bonds.

(iii) Determine the nominal amount of the new bonds that the government will have to issue to
achieve the objective. [2]
[Total 13]

30. Subject CT1 April 2017 Question 5

An investment fund has liabilities of £11 million due in 7 years' time and £8.084 million in 11 years'
time.
The manager of the fund will meet the liabilities by investing in zero-coupon bonds. The manager is
able to buy zero-coupon bonds for whatever term is required and there are adequate funds at the
manager’s disposal.
(i) Explain whether it is possible for the manager to immunise the fund against small changes in the
rate of interest by purchasing a single zero-coupon bond. [2]

CA PRAVEEN PATWARI 108 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

The manager decides to purchase two zero-coupon bonds, one paying £15.363 million in 7.5 years'
time and the other paying £3.787 million in 14.25 years' time. The current interest rate is 5.5% per
annum effective.

(ii) Determine whether the investment fund satisfies the necessary conditions to be immunised
against small changes in the rate of interest. [7]
[Total 9]
31. Subject CT1 April 2017 Question 9
Let ft denote the one-year effective forward rate of interest over the year from time t to (t + 1). Let it
be the t -year effective spot rate over the period 0 to t.
The annual effective gross redemption yield from an n-year bond which pays coupons of 5% annually
in arrear is given by:
gn= 0.07 +0.001n for n =1, 2 and 3
Each bond is redeemed at par and is exactly one year from the next coupon payment. It is assumed
that no arbitrage takes place.
(i) Calculate i1, i2 and i3 as percentages to three decimal places. [7]
(ii) Calculate f0, f1 and f2 as percentages to three decimal places. [4]
(iii) Explain why the one-year forward rates increase more quickly with term than the spot rates. [2]
[Total 13]

32. Subject CT1 September 2017 Question 7

Two investors, A and B, value corporate bonds using different models:
Investor A uses the average gross redemption yield from all government securities with the addition
of a risk premium of 1% per annum effective. Investor B uses the spot rates of interest derived from
the government bond yield curve also with the addition of a risk premium of 1% per annum effective
to value each payment.
The investors are valuing a particular corporate bond which has half-yearly coupon payments paid at
a rate of 5% per annum and a term to redemption of exactly two years. The bond is redeemed at
110% and tax is payable on coupons only at a rate of 20%.

CA PRAVEEN PATWARI 109 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

The average gross redemption yield from all government securities is 3% per annum effective.
(i) Calculate the price that investor A would pay for the corporate bond. [3]

Over time t, the spot rate of interest from the yield curve of government securities, yt is given by yt =
0.015t per annum effective for t < 2

(ii) Calculate the price that investor B would pay for the corporate bond. [3]
(iii) Calculate the forward rate of interest from government securities from t = 1 to t = 2. [2]
(iv) Giving two reasons, explain why the spot yield curve might rise with term to redemption. [3]
[Total 11]
33. Subject CT1 September 2017 Question 10
An insurance company has liabilities of £100 million due in 10 years' time and £200 million due in 20
years' time.
The company's assets consist of a zero-coupon bond and a level annuity paid annually in arrears. The
zero coupon bond will pay £144.054 million in15 years' time. The current interest rate is 3% per an-
num effective at all terms to redemption.
Redington's first two conditions for immunisation against small changes in the rate of interest have
been satisfied for this insurance company.
(i) (a) Calculate the present value of the liabilities.
(b) Calculate the discounted mean term of the liabilities. [4]
(ii) Show that the term of the annuity is 41 years. [6]
(iii) Determine the annual rate of payment of the annuity.
(iv) State Redington's third condition for immunisation, explaining whether you think it is fulfilled.
[2]

The insurance company decides to sell the zero-coupon bond it holds and invest the proceeds in
another zero-coupon bond with a shorter term to maturity.

(v) Explain the risks of implementing this decision. [2]

[Total 15]
34. Subject CT1 April 2018 Question 8
An investment fund has liabilities of £20 million due in 8 years' time and £15 million due in 12 years'
time.
CA PRAVEEN PATWARI 110 JAI SHREE SHYAM
CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

The manager wishes to immunise the fund against small changes in the rate of interest and seeks to
achieve this by purchasing two zero-coupon bonds. One bond is for a term of exactly 7 years and the
other bond is for a term of exactly 14 years. The current interest rate is 4.5% per annum effective.
(i) Calculate the amount that should be invested in each bond, demonstrating that all three Reding-
ton conditions are met. [9]
(ii) Explain, without performing any further calculations, how the relative values of the assets and
liabilities will change if the interest ratechanges immediately to 4.7% per annum effective. [2]
[Total 11]
35. Subject CT1 April 2018 Question 9
Two bonds paying annual coupons of 6% in arrear and redeemable at par have terms to maturity of
exactly one year and two years.
The gross redemption yield from the 1-year bond is 5.2% per annumeffective. The gross redemption
yield from the 2-year bond is 6.1% per annum effective. The 3-year par yield is 6.6% per annum.
Calculate the following as a percentage to three decimal places:
(i) the annual effective spot yields for each of the three years [8]
(ii) the annual effective one-year forward rates for each of the three years [4]
[Total 12]

36. Subject CT1 September 2018 Question 10 (part)

This question largely relates to loans, but since it also relates to immunisation it has been included here.
A bank has just granted a loan of $10,000 to a business to be repaid in ten equal instalments, annually
in arrears. The rate of interest is 4% per annum effective.
(ii) (a) Calculate the amount of the annual repayment.
(b) Calculate the duration (discounted mean term) of the repayments.
The bank wishes to immunise itself from changes in interest rates in relation to this particular asset.
For this purpose, the bank has issued two zero-coupon bonds. The first bond is of nominal amount
$5,000 and has a term to redemption of two years.
(iii) Determine the nominal amount of the second zero-coupon bond and its term to redemption such
that the present value and durations of the assets and liabilities are equal. [6]

CA PRAVEEN PATWARI 111 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Immediately upon the loan being granted, the bank agrees to a request to change the terms of the
loan. The loan is now to be repaid monthly in arrears over 25 years and the rate of interest remains
unchanged.

(iv) (a) Calculate the revised monthly instalment.

(b) Explain, without further calculation, the main risk to the bank of a change in interest rates.
(c) Determine the interest and capital portions of the 121st repayment under this new ar-
rangement. [8]
[Total 19]
37. Subject CM1 April 2019 Question 7
An individual buys an annuity from an insurance company for a single lump sum premium. The annui-
ty will pay £10,000 annually in arrears for 15 years. The insurance company invests the premium in a
fixed-interest bond which pays coupons at the rate of 6% per annum annually in arrears and is re-
deemable at par in exactly nine years.
(i) (a) Calculate the duration of the annuity at an interest rate of 5% per annum effective.
(b) Calculate the duration of the bond at an interest rate of 5% per annum effective. [5]
(ii) Explain whether the insurance company will make a profit or a loss if interest rates decrease
slightly at all terms. [3]
[Total 8]
38. Subject CM1 September 2019 Question 6
The annual effective forward rate applicable over the period from t to t + r is defined as f t, r , where t

and r are measured in years.

You are informed that f 0,1  4%, f1,1  5%, f 2,1  6% and f3,1  7% .

(i) Determine the gross redemption yield at issue for a four-year bond, redeemable at par, with a
4% coupon payable annually in arrears. [7]
(ii) Explain why the gross redemption yield in part (ii) is lower than f3,1 [3]

[Total 10]

CA PRAVEEN PATWARI 112 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

CM1 – ACTUARIAL MATHEMATICS

SECTION –7
LIFE TABLES, ASSURANCES ANDANNUITIES

FOR THE
2021 EXAMS

COVERING
CHAPTER 14 THE LIFE TABLE

CHAPTER 15 LIFE ASSURANCE CONTRACTS

CHAPTER 16 LIFE ANNUITY CONTRACTS

CHAPTER 17 EVALUATION OF ASSURANCES AND ANNUITIES

CA PRAVEEN PATWARI 113 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

PAST EXAM QUESTIONS

This section contains all the relevant parts of the exam questions from 2010 to 2019, that are related to the
topics covered in this booklet.

This section contains all the relevant parts of the exam questions from 2010 to 2019, that are related to the
topics covered in this booklet.

Solutions are given later in this booklet. These give enough information for you to check your answer, in-
cluding working, and also show you what an adequate examination answer should look like. Further infor-
mation may be available in the Examiners' Report. ASET or Course Notes. (ASST can be ordered from
ActEd.)

We first provide you with a cross-reference grid of key words or phrases that indicate the main subject
areas of each exam question. You can use this, if you wish, to select the questions that relate just to those
aspects of the topic that you may be particularly interested in reviewing.

Alternatively, you can choose to ignore the grid, and instead attempt each question without having any
clues as to its content.

Policy Details

Constant force of
Life table theory
Term assurance

Non integer age

Expectation /
Endowment

Temporary

Probability
Tick when
attempted

Whole life

Whole life
assurance

assurance

mortality
Variance
Annuity
annuity

PVRV

Question

.
1. 
2. 
3.   
4. 
5.  
6.  E 

CA PRAVEEN PATWARI 114 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Policy Details

Constant force of
Life table theory
Term assurance

Non integer age

Expectation /
Endowment

Temporary

Probability
Tick when
attempted

Whole life

Whole life
assurance

assurance

mortality
Variance
Annuity
annuity

PVRV
Question

.
7. 
8.  
9.  E/V
10.  E 
11.   
12.  
13.  E/V
14.  
15.  E
16.   
17. E/V 
18.  E 
19.  
20. 
21.  E 
22.   E/V
23.  E 
24.  

CA PRAVEEN PATWARI 115 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Policy Details

Constant force of
Life table theory
Term assurance

Non integer age

Expectation /
Endowment

Temporary

Probability
Tick when
attempted

Whole life

Whole life
assurance

assurance

mortality
Variance
Annuity
annuity

PVRV
Question

.
25.    E
26.  E
27.  E 
28.   
29.  E/V 
30.  
31.   E/V
32.     E
33. 
34. E
35.  E 
36.   
37.  E 
38.  
39.  E
40.  E  
41.  
42.   E 

CA PRAVEEN PATWARI 116 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Policy Details

Constant force of
Life table theory
Term assurance

Non integer age

Expectation /
Endowment

Temporary

Probability
Tick when
attempted

Whole life

Whole life
assurance

assurance

mortality
Variance
Annuity
annuity

PVRV
Question

.
43.  E/V
44.  E 
45.  E  
46.  
47.   E 
48.  
49.   E
50.   E
51.  E/V
52.   
53.  E/V 
54.  E 
55.  E 
56.  E
57.  E  
58.  
59.  

CA PRAVEEN PATWARI 117 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

1. Subject CT5 April 2010 Question 1

Explain what the following represent:
(a) l x  r

(b) n|m q x

(c) dx [3]

2. Subject CT5 April 2010 Question 5

A population is subject to the force of mortality x  e0.0002x  1 .

Calculate the probability that a life now aged 20 exact:

(i) survives to age 70 exact [2]

(ii) dies between ages 60 exact and 70 exact. [3]
[Total 5]
3. Subject CT5 April 2010 Question 6

You are provided with the following extract from a life table:

X lx

50 99,813

51 97,702

52 95,046

Calculate 0.75 p50.5 using two different methods. [5]

4. Subject CT5 September 2010 Question 1 part (a)

Calculate 20|10 q .
45
Basis: AM92 Select [1]

CA PRAVEEN PATWARI 118 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

5. Subject CT5 September 2010 Question 2

Calculate 0.5 p 45.75 using the Uniform Distribution of Deaths assumption.

Basis: AM92 Ultimate [3]

6. Subject CT5 September 2010 Question 4

A gymnasium offers membership for a three-year period at a fixed fee of £240 per annum payable
monthly in advance. The contract may only be cancelled at a renewal anniversary. Monthly premiums
cease immediately on the death of the member.
Calculate the expected present value of membership fees if the gymnasium sells 120 memberships.
Basis:
Rate of interest 6% per annum

Rate of mortality 1% per annum

Probability of renewal 80% at each anniversary

Expenses Nil [5]

7. Subject CT5 April 2011 Question 2 (part) Calculate:

(a) 23 p 65

(b) 10|5 q 60

Basis:
MortalityPMA92C20 [2]

8. Subject CT5 April 2011 Question 6

(i) Define uniform distribution of deaths. [2]
(ii) Using the method in (i) above calculate 1.25 q 65.5 [4]

Basis:
Mortality ELT15(Males) [Total 6]

CA PRAVEEN PATWARI 119 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

9. Subject CT5 April 2011 Question 10

Calculate the expected present value and variance of the present value of an endowment assurance of
1 payable at the end of the year of death for a life aged 40 exact with a term of 15 years.
Basis:
Mortality AM92 Select
Rate of interest 4% per annum
ExpensesNil [8]
10. Subject CT5 September 2011 Question 1
Calculate:
(a) 10|1 q50

(b) 10 p
601

(c) a
12 
 40:20
Basis:
MortalityAM92
Rate of interest 6% per annum [3]

11. Subject CT5 September 2011 Question 2

Calculate 0.5 q 75.25 using the assumption of a constant force of mortality,
Basis:
MortalityAM92 [3]

12. Subject CT5 September 2011 Question 3

In a special mortality table with a select period of one year the following relationships are true for all
ages:

0.5 q[x]  0.25q x

0.5 q[x]0.5  0.45q x

Express p[x] in terms of p x . [3]

CA PRAVEEN PATWARI 120 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

13. Subject CT5 September 2011 Question 4

A term assurance contract with a term of 20 years pays a sum assured of 1 immediately on death to a
life now aged 30 exact.
Calculate the expected value and variance of this contract.
Basis:
MortalityAM92 Ultimate
Rate of interest 4% per annum [4]

14. Subject CT5 April 2012 Question 1

(a) Define 4|5 q601

(b) Calculate its value.

Basis:
MortalityAM92 [3]

15. Subject CT5 April 2012 Question 3 (part)

Calculate:
(a) a 50:15

Basis:
MortalityAM92
Rate of interest 6% per annum [2]

16. Subject C T5 April 2012 Question 6

(a) Calculate the constant force of mortality applicable to a life aged between 67 and 68 exact.
(b) Calculate the value of 0.5 q 67.25 using the assumption of a constant force of mortality and the value

derived in (a) above.

Basis: AM92 Ultimate [4]

17. Subject CT5 April 2012 Question 12

An endowment assurance contract with a term of 10 years pays a sum assured of £100,000 imme-
diately on death and a sum of £50,000 on survival for 10 years.
Calculate the expected present value and variance of this contract.
CA PRAVEEN PATWARI 121 JAI SHREE SHYAM
CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Basis:
Mortality  x = 0.03 throughout

Rate of interest 5% per annum [8]

18. Subject CT5 September 2012 Question 1

Calculate:
(a) 12 p 43

(b) 10|5 q55

(c) a45:10

Basis:
MortalityAM92
Rate of interest 6% per annum [3]

19. Subject CT5 September 2012 Question 4

Calculate 3 p55.75 using the assumption of Uniform Distribution of Deaths. Basis:

Mortality ELT15(Females) [4]

20. Subject CT5 September 2012 Question 8

Examine the column of d x shown in the English Life Table No. 15 (Males) in the Formulae and Tables

for Examinations (Pages 68-69).

Describe the key characteristics of this mortality table using the data to illustrate your points. [6]

21. Subject CT5 April 2013 Question 1

Calculate:
(a) 10|5 q 40

(b) a 65

(c) 15 p 46

CA PRAVEEN PATWARI 122 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Basis:
Mortality:AM92
Interest 4%perannum [3]

22. Subject CT5 April 2013 Question 10

A special whole life assurance policy issued to a life aged 40 exact provides a benefit of £1,000 on
death within 20 years of inception, £2,000 on death between 20 and 40 years from inception and
£3,000 on death thereafter. Benefits are payable at the end of the year of death.
Calculate the expected present value and variance of the present value of this policy.
Basis:
Mortality:AM92 Ultimate
Interest: 4%perannum [8]

23. Subject CT5 September 2013 Question 11 (part)

Calculate:
(a) 10 q 63

(b) a63
2

Basis:
Mortality: PFA92C20
Interest: 4% per annum [1]

24. Subject CT5 September 2013 Question 14

Calculate 2.25 p90.25 using the method of Uniform Distribution of Deaths.
Basis:
Mortality: AM92 [3]

25. Subject CT5 September 2013 Question 18

Show, using the random variable approach, that the expected present value of an annuity of 1 per an-
num payable annually in arrears to a life now aged x, deferred for n years is equal to a x  a x:n [7]

CA PRAVEEN PATWARI 123 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

26. Subject CT5 April 2014 Question 2 (part)

Calculate:

(a) a
 4
25:20

Basis:
Mortality AM92
Interest4% per annum [2]

27. Subject CT5 April 2014 Question 3

For a particular species of animal, the mortality and rate of interest are shown according to the basis
below.
Calculate A 3:5

Basis:

Mortality lx  l0e0.15x

Interest5% per annum [4]

28. Subject CT5 April 2014, Question 6

(a) Describe the method of constant force of mortality.
(b) Calculate 2.75 q85.5 using the method given in (a) above.

Basis: Mortality ELT15 (Males) [5]

29. Subject CT5 April 2014, Question 9

Calculate the expected present value and the variance of A1x:20 given thebasis below

Basis:
Mortality:  x = 0.03 for all x

Force of interest:   5% per annum throughout [8]

CA PRAVEEN PATWARI 124 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

30. Subject CT5 September 2014 Question 3

Calculate 2.5 q 75.75 using the method of Uniform Distribution of Deaths.

Basis:
Mortality: PMA92C20 [4]

31. Subject CT5 September 2014 Question 7

A life aged 40 exact purchases an endowment assurance policy whereby the sum assured on survival
at age 60 exact is £20,000 and the benefit payable on death during the term is £ 10,000. Death benefits
are payable at the end of the year of death.
Calculate the expected present value and variance of the benefits under this policy.
Basis: MortalityAM92 Select
Interest4% per annum
Expenses Ignore [6]

32. Subject CT5 September 2014 Question 8

(i) In the context of random variables define Tx and K x

(ii) State the random variable for the following expected values:

(a) A x

(b) a x

(c) A x :n

(d) 5| ax [5]

[Total 7]
33. Subject CT5 September 2014 Question 12
(i) Calculate the probability that a life now aged 30 exact will die between the ages of 55 and 65
both exact.
Basis: Mortality ELT15 (Males) [2]

CA PRAVEEN PATWARI 125 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

(ii) Calculate the above probability again assuming the basis below.
0.09 x  20 
Basis: Mortality  x  0.005 e for 20  x  70 (7]

[Total 9]
34. Subject CT5 April 2015 Question 1
Calculate A 50:4

Basis:
Mortality: q 50 = 0.05

q 51 = 0.06

q51 t  1.1q50 t for t  1

Interest: 6% per annum [3]

35. Subject CT5 April 2015 Question 4

Calculate:
(a) 10|15 q 60

(b) 12 p501

 4
(c) a
40:10

Basis:
Mortality:AM92
Interest: 6%perannum [4]

36. Subject CT5 April 2015 Question 7

Calculate 1.75 p82.75

(a) using the method of Uniform Distribution of Deaths.

(b) using the method of Constant Force of Mortality.
Basis:
Mortality: ELT15(Males) [6]

CA PRAVEEN PATWARI 126 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

37. Subject CT5 September 2015 Question 1

Calculate:
(a) 25 p 40

(b) 10| q53

(c) a55.10

Basis:
MortalityAM92
Interest 4%perannum [3]

38. Subject CT5 September 2015 Question 2

Derive to the nearest integer) the median of the complete future lifetime of a person aged 30 exact
who is subject to the force of mortality shown below:
 0.01 0  t  10

30 t  0.02 10  t  20 [3]
0.03 20  t


39. Subject CT5 September 2015 Question 5

A special annuity pays 5,000 per annum for five years increasing to 6,000 per annum for the next five
years and increasing further to 7,000 per annum thereafter. The payments for the first five years are
guaranteed andthereafter are contingent on survival. The annuity is payable monthly in advance.
Calculate the expected present value of this annuity for a life aged 60 exact. Show all your workings.
Basis:
MortalityPMA92C20
Interest 4%perannum [5]

40. Subject CT5 September 2015 Question 8

Calculate, showing all your workings, a 73.25

4
.

Basis:
Mortality PFA92C20 (assume that the force of mortality is constantbetween ages 73 and 74 only)
Interest4%perannum [7]
CA PRAVEEN PATWARI 127 JAI SHREE SHYAM
CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

41. Subject CT5 April 2016 Question 1

Calculate 0.5 p90.25 using the method of Uniform Distribution of Deaths.

Show all your workings.

Basis:
Mortality ELT15(Males). [3]

42. Subject CT5 April 2016 Question 3

Calculate:
(a) 25 q 30

(b) a
 4
 40:15

(c) A150:20

Basis:
Mortality AM92
Rate of interest 4% per annum [4]
Subject CT5 April 2016 Q6(i) relates to the proof of the premium conversion relationship. It is included in
Booklet 8 as the remainder of the question relates to premium calculation.

43. Subject CT5 September 2016 Question 1

A whole life assurance policy provides a benefit of 100,000 payable immediately on the death of a
male life who is now aged 45 exact.
Calculate, showing all your workings:
(a) the expected present value of this policy
(b) the variance of the value of this policy.
Basis:
Mortality AM92 Ultimate
Rate of interest 4% per annum [4]

CA PRAVEEN PATWARI 128 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

44. Subject CT5 September 2016 Question 4

Calculate, showing all your workings:
(a) 10|5 q 65

(b) a
12 
3015
Basis:
MortalityAM92
Rate of interest 4% per annum [4]

45. Subject CT5 September 2016 Question 6

(i) Show, using the method of Uniform Distribution of Deaths, that:
10
2.5 q80.75  [3]
117

(ii) Calculate, showing all your workings, a80:4

Basis:
Mortality l x =110– x for all x

Rate of interest 5% per annum [3]

[Total 6]
46. Subject CT5 April 2017 Question 1
Calculate 2.75 p 77.4 assuming a Uniform Distribution of Deaths.
Basis:
MortalityPMA92C20 [3]

47. Subject CT5 April 2017 Question 3

Calculate:
(a) 12 p 73

(b) 10| a 56

(c) A 64:10

CA PRAVEEN PATWARI 129 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Basis:
MortalityAM92
Rate of interest 4% per annum [3]

48. Subject CT5 September 2017 Question 3

Calculate 2.25 q85.5 using the method of Uniform Distribution of Deaths.

Basis: ELT15 (Males) [4]

49. Subject CT5 September 2017 Question 5

(i) Calculate A 47:11 [3]

(ii) Calculate a453 :13 [2]

 

Basis:
Mortality:AM92
Interest: 4% per annum [Total 5]

50. Subject CT5 September 2017 Question 6

(i) Calculate a40:4 [2]

(ii) Derive the value of A140:4 using your result from part (i). [4]

Basis:
From the following life table extract:
x Ix

40 100,000

41 99,200

42 98,100

43 96,700

44 94,700

Interest: 5% per annum [Total 6]

CA PRAVEEN PATWARI 130 JAI SHREE SHYAM
CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

51. Subject CT5 September 2017 Question 9

A special whole life assurance policy is issued on a life aged 50 exact.
Under this policy the sum assured, payable at the end of the year of death, is 1 unit for the first 10
years decreasing to 0.75 units thereafter.
(i) Calculate the expected present value of the benefit [3]
(ii) Determine the variance of the present value of the benefit. [5]
Basis:
Mortality:AM92 Ultimate
Interest: 4%perannum [Total 8]

52. Subject CT5 April 2018 Question 1

Calculate 2.75 q84.5 using the method of Constant Force of Mortality.

Basis: AM92 [3]

53. Subject CT5 April 2018 Question 8

A term assurance policy is issued on a life aged x for a term of 20 years.
Under this policy a sum assured, payable immediately on death, is 10,000 for the first 10 years in-
creasing to 20,000 for the subsequent 10 years.
(i) Calculate the expected present value of the benefits. [3]
(ii) Determine the variance of the present value of the benefits. [5]
Basis:
Mortality  x = 0.03 for all x

Force of interest  = 5% throughout [Total 8]

54. Subject CT5 September 2018 Question 1 (part)

Calculate:
(a) 12 q54 [3]

CA PRAVEEN PATWARI 131 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

a65
6
(b)

Basis:
Mortality:AM92
Rate of interest:4% per annum [2]

55. Subject CT5 September 2018 Question 3

A life insurance company sells a special immediate annuity policy to a life aged 65 exact. The policy
provides an annuity of 30,000 a year payable monthly in advance. Payment is guaranteed for the first
five years and thereafter ceases immediately on the death of the policyholder.
Calculate the expected present value of this annuity.
Basis:
Mortality:PFA92C20
Rate of interest:4% per annum
Expenses:Ignore [4]

56. Subject CT5 September 2018 Question 5

A two-year term assurance policy is issued to a life aged x. Under this policy an immediate payment of
100,000 is made if death occurs in the first year, rising to 150,000 if death occurs in the second year.
Calculate the expected present value of this policy.
Basis:
Mortality: p x = 0.99 and p x 1 = 0.975
The force of mortality can be assumed to be constant over each year of age.
Force of interest:5% per annum [7]
57. Subject CT5 September 2018 Question 7
Calculate A70.75 assuming a constant force of mortality between ages 70 and 71 only.
Basis:
Mortality:PMA92C20
Rate of interest:4% per annum [8]

CA PRAVEEN PATWARI 132 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

CM1 – ACTUARIAL MATHEMATICS

SECTION –8
WITH-PROFITS POLICIES, GROSS
PREMIUMS AND RESERVES

FOR THE
2021 EXAMS

COVERING
CHAPTER 18 VARIABLE BENEFITS AND CONVENTIONAL WITH-PROFITS
POLICIES

CHAPTER 19 GROSS PREMIUMS

CHAPTER 20 GROSS PREMIUM RESERVES

CA PRAVEEN PATWARI 133 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

PAST EXAM QUESTIONS

This section contains all the relevant parts of the exam questions from 2010 to 2019, that are related to the
topics covered in this booklet.

Solutions are given later in this booklet. These give enough information for you to check your answer, in-
cluding working, and also show you what an adequate examination answer should look like. Further infor-
mation may be available in the Examiners' Report. ASET or Course Notes. (ABET can be ordered from
ActEd.)

We first provide you with a cross-reference grid of key words or phrases that indicate the main subject
areas of each exam question. You can use this, if you wish, to select the questions that relate just to those
aspects of the topic that you may be particularly interested in reviewing.

Alternatively, you can choose to ignore the grid, and instead attempt each question without having any
clues as to its content.

Compound bonus
E/V/probability
formula/Profit

Bookwork on

Bookwork on

Simple bonus
assurances
Tick when
attempted

Incr/ deer
Recursive

Incr/drcr
annuities
Premium

Reserves

reserves

bonuses
PVRVs
Question

1.  
2.  
3.   
4.  
5.    
6. 
7. 
8.  
9.    

CA PRAVEEN PATWARI 134 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Compound bonus
E/V/probability
formula/Profit

Bookwork on

Bookwork on

Simple bonus
assurances
Tick when
attempted

Incr/ deer
Recursive

Incr/drcr
annuities
Premium

Reserves

reserves

bonuses
PVRVs
Question

10. 
11. 
12. 
13.   
14.  
15.  
16.  
17.   
18. 
19.   
20.   
21. 
22. 
23. 
24.     
25.  
26. 
27.   
28.    
29.  

CA PRAVEEN PATWARI 135 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Compound bonus
E/V/probability
formula/Profit

Bookwork on

Bookwork on

Simple bonus
assurances
Tick when
attempted

Incr/ deer
Recursive

Incr/drcr
annuities
Premium

Reserves

reserves

bonuses
PVRVs
Question

30. 
31.  
32.   
33.   
34. 
35.  
36.   
37.   
38. 
39.     
40. 
41. 
42.   
43. 
44. 
45.  
46. 
47.  
48.    
49. 

CA PRAVEEN PATWARI 136 JAI SHREE SHYAM

 54.
53.
52.
51.
50.
Question
Tick when
attempted

CA PRAVEEN PATWARI
Premium




CM1 ACTUARIAL MATHEMATICS

Reserves


Recursive
formula/Profit

Bookwork on


 reserves

137
E/V/probability


Incr/drcr

annuities

Incr/ deer


assurances

PVRVs


Bookwork on
bonuses

Simple bonus



Compound bonus


JAI SHREE SHYAM

ACTUATORS EDUCATIONAL INSTITUTE
CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

1. Subject CT5 April 2010 Question 4

A life insurance company offers an increasing term assurance that provides a benefit payable at the
end of the year of death of 10,000 in the first year, increasing by 100 on each policy anniversary.
Calculate the single premium for a five-year policy issued to a life aged 50 exact.
Basis:
Rate of interest:4% per annum
Mortality:AM92 Select
Expenses:Nil [4]
2. Subject CT5 April 2010 Question 8
100 graduates aged 21 exact decide to place the sum of £1 per week into a fund to be shared on their
retirement at age 66 exact.
Show that each surviving member can expect to receive on retirement a fund of approximately £7,240
[4]
Basis:
Rate of interest: 4% per annum
Mortality:AM92 Ultimate
One of the survivors uses the accumulated fund to buy a weekly annuity payable for 10 years certain.
After 10 years the annuity is payable at two-thirds of the initial level for the rest of life.
Calculate the weekly amount of the annuity on the basis used in part (i). [2]
[Total 6]
3. Subject CT5 April 2010 Question 14
A life insurance company issues a 30-year with-profits endowment assurance policy to a life aged 35
exact. The sum assured of £100,000 plus declared reversionary bonuses are payable on survival to the
end of the term or immediately on death if earlier
(i) Show that the quarterly premium payable in advance throughout the term of the policy or until
earlier death is approximately £616.
Pricing basis:

Mortality: AM92 Select

Interest: 6% per annum

CA PRAVEEN PATWARI 138 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Initial commission: 100% of the first quarterly premium

Initial expenses: £250 paid at policy commencement date

Renewal commission: 2.5% of each quarterly premium from the start of the second
policy year

Renewal expenses: £45 at the start of the second and subsequent policy years

Claim expense: £500 on death: £250 on maturity

Future reversionary bonus: 1.92308% of the sum assured, compounded and vesting at the
end of each policy year (i.e. the death benefit does not include
any bonus relating to the policy year of death)

[10]

At the end of the 25th policy year, the actual past bonus additions to the policy have been £145,000.

(ii) Calculate the gross prospective policy reserve at the end of that policy year immediately before
the premium then due.
Policy reserving basis:

Mortality: AM92 Ultimate

Interest: 4% per annum

Bonus loading: 4% of the sum assured and attaching bonuses, compounded

and vesting at the end of each policy year

Renewal commission: 2.5% of each quarterly premium

Renewal expenses: £90 at the start of each policy year

Claim expense: £1,000 on death,£500 on maturity

[6]
[Total 16]

CA PRAVEEN PATWARI 139 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

4. Subject CT5 September 2010 Question 7

A life insurance company issues a 10-year term assurance policy to a life aged 55 exact. The sum as-
sured which is payable immediately on death is given by the formula:
50,000 × (1+0.1t) t=0, 1,2……….., 9
where t denotes the curtate duration in years since the inception of the policy.
Level premiums are payable monthly in advance throughout the term of the policy or until earlier
death.
Calculate the monthly premium for this policy using the following basis:
Mortality:AM92 Select
Interest:4% per annum
Expenses: Nil [6]

5. Subject CT5 September 2010 Question 12

A life insurance company issued a with-profits whole life policy to a life aged 40 exact on 1 January
2000. Under the policy, the basic sum assured of £50,000 and attaching bonuses are payable imme-
diately on death. Level premiums are payable annually in advance under the policy until age 65 or
earlier death.
The company declares simple reversionary bonuses at the start of each yearincluding the first year
and the bonus entitlement on the policy is earned immediately the bonus is declared.
(i) Give an expression for the gross future loss random variable under the policy at the outset, de-
fining symbols where necessary. [4]
(ii) Calculate the annual premium using the following assumptions
Mortality: AM92 Select

Interest: 6% per annum

Bonus loading: 2.5% per annum simple

Initial expenses £300

Renewal expenses: £25 at the start of the second and subsequent policy years
while the policy is in force

Claim expense: £250

[4]

CA PRAVEEN PATWARI 140 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

On 31 December 2009, the policy is still in force. Bonuses declared to date total £13,750
(iii) Calculate the gross premium prospective reserve for the policy as at 31 December 2009 using
the following assumptions:
Mortality AM92 Ultimate

Interest 4% per annum

Bonus loading 3% per annum simple

Renewal expenses: £35 at the start of each policy year while the policy is in force

Claim expense: £250[4]

[Total 12]
6. Subject CT5 April 2011 Question 2 (part)
Calculate:

(c) S 65:10

Basis:
MortalityPMA92C20
Rate of interest 4% per annum [2]

7. Subject CT5 April 2011 Question 3

Calculate  la x

Basis:  x = 0.02 for all x

 = 4%perannum [4]

8. Subject CT5 April 2011 Question 8

A life insurance company issues a with-profits whole life assurance policy to a life aged 40 exact. The
sum assured of £100,000 plus declared reversionary bonuses are payable immediately on death. Level
premiums are payable annually in advance to age 65 or until earlier death.

CA PRAVEEN PATWARI 141 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

A simple bonus, expressed as a percentage of the sum assured, is added to the policy at the start of
each year (i.e. the death benefit includes the bonus relating to the policy year of death).
The following basis is used to price this policy:
Mortality: AM92 Select

Interest: 4% per annum

Initial expenses £300 plus 50% of the first annual premium,

incurred at the policy commencement date

Renewal expenses: 2.5% of each premium from the start of thesecond policy year

Claim expense: £350 at termination of the contract.

Using the principle of equivalence, calculate the level simple bonus rate that can be supported each
year on this policy if the annual premium is £3,212. [6]

9. Subject CT5 April 2011 Question 12

On 1 April 1988, a life insurance company issued a 25-year term assurance policy to a life then aged
40 exact The initial sum assured was £75,000 which increased by 4% per annum compound at the be-
ginning of the second and each subsequent policy year The sum assured is payable immediately on
death and level monthly premiums are payable in advance throughout the term of the policy or until
earlier death.
The company uses the following basis for calculating premiums and reserves:
Mortality: AM92 Select

Rate of Interest: 4% per annum

Initial commission: 50% of the total premium payable in the firstpolicy year

Initial expenses: £400 paid at the policy commencement date

Renewal commission: 2.5% of each premium from the start of thesecond policy year

CA PRAVEEN PATWARI 142 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Renewal expenses: £75 per annum, inflating at 4% per annum compound, at the
start of the second and subsequent policy years (the renewal
expense quoted is as at the start of the policy and the increas-
es due to inflation start immediately)

Claim expense: £300 on termination (the claim expense is fixed

over the duration of the policy)

(i) Show that the monthly premium for the policy is approximately £56 [10]
(ii) Calculate the gross premium prospective reserve as at 31 March 2011. [6]
[Total 16]
10. Subject CT5 September 2011 Question 10 (part)
Suggest two reasons why a life insurance company might use the super compound method of adding
bonuses to with-profits policies, as opposed to the compound method. [2]

11. Subject CT5 April 2012 Question 2

Under a policy issued by a life insurance company, the death benefitpayable at the end of year of death
is a return of premiums paid without interest. A level premium of £3,000 is payable annually in ad-
vance throughout the term of the policy.
For a policy in force at the start of the 12th policy year, you are given the following information:
Reserve at the start of the policy year £25,130

Reserve at the end of the policy year per survivor £28,950

Probability of death during the policy year 0.03

Expenses incurred at the start of the policy year £90

Rate of interest earned 4% per annum

Reserves given above are immediately before payment of the premium due.
Calculate the profit/loss expected to emerge at the end of the 12th policy year per policy in force at
the start of that year. [3]

CA PRAVEEN PATWARI 143 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

12. Subject CT5 April 2012 Question 3 (part)

Calculate

(b)  IA 50:15
1

Basis:
MortalityAM92
Rate of interest 6% per annum [2]

13. Subject CT5 April 2012 Question 13

A life insurance company issues a 40-year with-profits endowment assurance policy to a life aged 20
exact. The sum assured of £85,000 plus declared reversionary bonuses is payable on survival to the
end of the term or immediately on death if earlier.
The company assumes that future annual bonuses will be declared at a rate of 1.92308% of the sum
assured, compounded and vesting at the end of each policy year (i.e. the death benefit does not in-
clude any bonus relating to the policy year of death).
Calculate the monthly premium payable in advance throughout the term of the policy.
Basis:

Mortality: AM92 Select

Interest: 6% per annum

Initial commission: 480% of the first monthly premium

Initial expenses: £325

Renewal commission: 2.5% of each monthly premium excluding the first

Renewal expenses: £75 per annum at the start of the second and subsequent poli-
cy years. The renewal expense is assumed to increase by £5
per annum from the start of the third policy year.

[10]

CA PRAVEEN PATWARI 144 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

14. Subject CT5 April 2012 Question 15 (part)

A life insurance company issues a three-year term assurance policy to a male life aged 57 exact under
which level premiums are payable annually in advance throughout the term of the policy or until ear-
lier death. The sum assured is £150,000 payable at the end of year of death.
The company uses the following assumptions to calculate the premium for this policy:
Rate of interest on cashflows: 6% per annum

Mortality: AM92 Select

Initial expenses £350

Renewal expenses: £50 per annum on the second and third premium dates

Initial commission: 15% of first premium

Renewal commission: 2.5% of the second and third years' premiums

Risk discount rate: 6% per annum

(i) Write down the gross future loss random variable at the outset of the policy. [5]
(ii) Calculate the office premium using assurance and annuity functions, setting the expected value
of the gross future loss random variable to zero. [4]

15. Subject CT5 September 2012 Question 6

A life insurance company issues a with-profits whole life assurance policy toa life aged 40 exact, under
which the sum assured S and any attaching bonuses. are payable immediately on death. Compound
bonuses are added annually in advance. Premiums are payable annually in advance ceasing at exact
age 85 or on earlier death.
Write down an expression for the net future loss random variable at outset for this policy defining all
symbols that are used. [4]

16. Subject CT5 September 2012 Question 9

(i) Explain what is meant by the following in the context of life insurance policies:
(a) gross premium prospective reserve
CA PRAVEEN PATWARI 145 JAI SHREE SHYAM
CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

(b) gross premium retrospective reserve. [4]

(ii) State the conditions necessary for gross premium prospective and gross premium retrospective
reserves to be equal. [3]
[Total 7]
17. Subject CT5 September 2012 Question 13
A life insurance company issues a with-profits whole life assurance policy to a life aged 55 exact. The
sum assured is £75,000 together with any attaching bonuses and is payable immediately on death,
Level premiums are payable monthly in advance ceasing on the policyholder's death or on reaching
age 85 if earlier.
Simple annual bonuses are added at the end of each policy year (le the death benefit does not include
any bonus relating to the policy year of death).
The company calculates the premium on the following basis:
Mortality: AM92 Select

Interest: 4% per annum

Expenses
Initial £275

Renewal £65 at the start of the second and subsequent policy

years and payable until death

Claim £200 on death

Commission
Initial 75% of the total premium payable in the first policy
year

Renewal 2.5% of the second and subsequent monthly premiums

Bonuses Simple bonus of 2.0% of basic sum assured per annum

(i) Calculate the monthly premium for this policy. [6]

(ii) Calculate the gross prospective policy value at the end of the 30th policy year given that the total
actual past bonus additions to the policy have followed the assumptions stated in the premium
basis above (including the bonus just vested).

CA PRAVEEN PATWARI 146 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Policy value basis:

Mortality: AM92 Ultimate

Interest: 4% per annum

Expenses

Renewal £80 at the start of each policy year and payable until death

Claim £250 on death

Commission

Renewal 2.5% of the monthly premiums

Bonuses Simple bonus of 2.5% of basic sum assured per annum

[4]
[Total 10]
18. Subject CT5 April 2013 Question 4
Describe the use of terminal bonus within the reversionary bonus system. [3]

19. Subject CT5 April 2013 Question 6

A life insurance company issues a 20-year increasing endowment assurance policy which provides a
sum assured given by the formula:

£ 50,000  1,500t  t  1, 2,....., 20

where t denotes the policy year.

The sum assured is payable on maturity at age 50 exact or at the end of year of death if earlier. Pre-
miums on the policy are payable annually in advance.
Write down an expression for
(a) the net premium for the policy.
(b) the net premium prospective policy reserve for the policy immediately before the tenth pre-
mium is paid. [4]

CA PRAVEEN PATWARI 147 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

20. Subject CT5 April 2013 Question 12

A life insurance company issues whole life assurance policies to lives aged50 exact for a sum assured
of £75,000 payable at the end of the year of death. Premiums are payable annually in advance.
(i) Calculate the annual gross premium for each policy using the basis below. [4]
(ii) Calculate the minimum annual gross premium that the company should charge in order that the
probability of making a loss on any one policy would be 10% or less. [6]
Basis:
Mortality: AM92 Select

Interest: 6% per annum

Initial commission: 100% of the annual gross premium

Initial expenses: £325

Renewal commission: 2.5% of each annual gross premium excludingthe first

Renewal expenses: £75 per annum at the start of the second andsubsequent policy
years

[Total 10]
21. Subject CT5 September 2013 Question 11 (pan)
Calculate:
(c) s55:10

Basis:
Mortality:PFA92C20
Interest: 4%perannum [1]

22. Subject CT5 September 2013 Question 13

A whole life assurance policy was issued to a life aged x exact for a sum assured of S payable at the end
of year of death. A premium of P is payable annually in advance until death. The following expenseas-
sumptions were used to derive the gross premium payable on the policy:
Initial commission: a% of the annual premium

CA PRAVEEN PATWARI 148 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Initial expenses: B

Renewal commission: c% of each annual premium excluding the first

Renewal expenses: D per annum at the start of the second andsubsequent policy
years

Claim expenses: e% of the sum assured

Let t Vx represent the gross premium reserve on this policy at duration t.

Mite down an equation linking the gross premium reserve at the beginning and the end of:
(a) the first policy year
(b) the tthpolicy year where t >1. [3]

23. Subject CT5 September 2013 Question 16

A life aged 75 exact purchases a ten-year temporary annuity of an initial amount of £1,200 per annum.
This annuity increases on each policy anniversary by £100 per annum, the last increase being at the
beginning of the tenth policy year. All annuity payments are annual in advance.
Calculate the expected present value of the annuity benefits. Basis:
Mortality:AM92 Ultimate
Interest: 6% per annum
Expenses: Nil [4]

24. Subject CT5 September 2013 Question 23

A life insurance company issues a 15-year increasing term assurance policy to a life aged 50 exact.
The death benefit on the policy. payable immediately on death, is given by the formula:
£10,000 ×[6 + t] t= 0, 1, 2,……….,14
where t denotes the curtate duration in years since the inception of the policy.
Level premiums on the policy are payable monthly in advance for the term of the policy, ceasing on
death if earlier.
(i) Calculate the monthly premium for the policy using the following premium basis:

CA PRAVEEN PATWARI 149 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Mortality: AM92 Select

Interest: 6% per annum

Expenses: Initial: £225

Renewal: £65 per annum inflating at 1.92308% per

Annum, at the start of the second and subsequent
policy years

Commission: Initial: 30% of the total premium payable in the firstpo-

licy year

Renewal: 4% of the second and subsequent monthlypre-

miums

Claim £275 on termination, inflating at 1.92308% pe-

rannum

Inflation: For renewal and claim expenses. the

amountsquoted are at outset, and the increases
due to inflation start immediately.

[8]
(ii) Calculate the gross prospective reserve for the policy at the end of the 14th policy year using the
elements of the premium basis that are relevant. [3]
(iii) Write down an expression for the gross future loss random variable at the end of the 14th policy

year, again using the elements of the premium basis that are relevant. [4]

[Total 15]

25. Subject CT5 September 2013 Question 24 (part)

A life insurance company issues a four-year with-profits endowment assurance policy for a basic sum

assured of £25,000 to a life aged 56 exact. Level premiums are payable annually in advance through-

out the term of the policy.

CA PRAVEEN PATWARI 150 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Compound reversionary bonuses are added to the policy at the start of each year, including the first.

The basic sum assured (together with any bonuses attaching) is payable at maturity or at the end of

year of death, if earlier.

Show that the annual premium is approximately £6,483 using the following premium basis:

Mortality: AM92 Select

Interest: 6% per annum

Initial expenses: £100 plus 25% of the first premium (allincurred on policy

commencement)

Renewal expenses: 2.5% of the second and subsequent premiums plus £40 at the

start of the second and subsequent policy years

Bonus rates: A compound reversionary bonus will be declared each year at

a rate of 1.92308% per annum.

[5]

26. Subject CT5 April 2014 Question 2 (part)

Calculate  IA 
1
.
25:20

Basis: Mortality:AM92

Interest:4% per annum [2]

27. Subject CT5 April 2014 Question 11

On 1 January 2008, a life insurance company issued a number of without-profit endowment policies
maturing at age 60 to lives then aged 40 exact. The sum assured is payable at the end of year of death
or on survival to the end of the term and level premiums are payable annually in advance throughout
the term of the contract.
Premiums and reserves on each policy are both calculated on the following basis:

CA PRAVEEN PATWARI 151 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Mortality: AM92 Select

Interest: 4% per annum

Initial commission: 60% of the first premium

Renewal commission: 6% of each annual premium excluding the first

(i) Calculate the annual office premium per £1,000 sum assured for each policy. [2]
(ii) Calculate the gross premium prospective reserve per £1,000 sum assured for each policy in
force at 31 December 2012. [2]
(iii) Calculate the profit or loss to the company in 2013 in respect of these policies given the fol-
lowing information:
 The total sums assured in force on 1 January 2013 were £15,500,000.
 The company incurred expenses relating to these policies of £76,500 on 1 January 2013
(including renewal commission).
 The total sums assured paid on 31 December 2013 in respect of deaths during 2013 were
£295,000.
 The total sums assured surrendered during 2013 were £625,000. The surrender value on
each policy (which was paid on 31 December 2013) was calculated as 85% of the gross
premium prospective reserve applicable at the date of payment of the surrender value.
 The company earned interest of 3.5% per annum on its assetsduring 2013. [10]
[Total 14]
28. Subject CT5 April 2014 Question 13
On 1 January 2003, an insurance company issued a 35 year with-profits endowment assurance policy
to a life aged 30 exact for a sum assured of £60,000. The sum assured (together with any bonuses at-
taching) is payable at maturity or immediately on death, if earlier. Level premiums are payable an-
nually in advance throughout the policy term or until earlier death. Compound reversionary bonuses
vest at the end of each policy year (i.e. the death benefit does not include any bonus relating to the
policy year of death).

CA PRAVEEN PATWARI 152 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

The company calculates the premium on the following basis:

Mortality: AM92 Ultimate

Interest: 6% per annum

Initial expenses: £250 plus 60% of the first year's premium, incurredat outset

Renewal expenses: 2.5% of the second and each subsequent year'spremium, in-
curred at the beginning of therespective policy years

Bonuses: 1.92308% per annum

(i) Show that the annual premium is approximately £1,146. [8]

(ii) Express, in stochastic form, the gross future loss random variable for this policy at duration t,
wheret is an integer and 0 < t <35.
You should use Tx, Kx or both, together with the elements of the premium basis that are rele-
vant.
Assume bonuses declared follow the assumptions stated in thepremium basis. [3]

On 31 December 2012, and just after the 10th bonus has been declared, the life wishes to surrender
the policy. The insurance company calculates a surrender value equal to the gross prospective policy
reserve, using the premium basis above.

(iii) Calculate the surrender value payable by the insurance company given that the total actual
past bonus additions to the policy have followed the assumptions stated in the premium basis
(including the bonus just vested). [6]
[Total 17]
29. Subject CT5 September 2014 Question 9
A life aged 60 exact purchases a special deferred term assurance policy for an overall term of 20 years.
Under this policy a sum assured of £100,000 is paid on death but only on death from age 65 exact up
to the end of the term. On death between age60 and 65 the benefit is equal to the total premiums paid
without interest.

CA PRAVEEN PATWARI 153 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

All payments on death are made at the end of the year of death. An annual premium paid in advance is
payable for the full 20 year term.
Calculate the annual premium payable. [7]
Basis: Mortality: AM92 Ultimate
Interest: 4% per annum
Expenses: Ignore
30. Subject CT5 April 2015 Question 6
A life aged 55 exact purchases a 3-year term assurance with sum assured of £150,000 payable if death
occurs during the term of the policy. Level premiums of £900 are payable annually in advance
throughout the term of the policy or until earlier death. The death benefit is payable at the end of the
policy year of death.
Calculate the expected present value of the profit or loss to the office on the contract.
Basis:

Mortality: AM92 Select

Interest: 3% per annum

Initial expenses: £260

Renewal expenses: £70 per annum incurred at the start of both thesecond and
third policy year

Assume no reserves are required for this policy. [6]

31. Subject CT5 April 2015 Question 9

On 1 January 1999, an insurance company issued a without-profit whole life policy to a life aged 45
exact. The sum assured on the policy is £125,000 which is payable at the end of the year of death. Lev-
el premiums are payable annually in advance to age 65 or until earlier death. The company calculated
the premium on the following basis:
Mortality: AM92 Select

CA PRAVEEN PATWARI 154 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Interest: 6% per annum

Initial expenses 75% of the first year's premium, incurred at outset

Renewal expenses: 5% of the second and each subsequent year's premium, in-
curred at the beginning of the respective policy years

Claim expense: £325 payable at the end of the year of death

(i) Show that the annual premium is approximately £1,883. [4]

On 31 December 2013, immediately before the premium then due, the life wishes to surrender the
policy. The insurance company calculates a surrender value equal to the gross prospective policy re-
serve, using the following basis:
Mortality:AM92 Ultimate
Interest:6% per annum
Expenses: Ignore
(ii) Calculate the surrender value payable by the insurance company. [3]
[Total 7]
32. Subject CT5 April 2015 Question 12
An insurance company issues a 25-year with-profits endowment assurance policy to a life aged 40 ex-
act. The sum assured of £75,000 plus declared reversionary bonuses are payable on survival to the
end of the term or immediately on death if earlier.
The insurance company assumes that future reversionary bonuses will be declared at a rate of 3% of
the sum assured, simple and vesting at the end of each policy year (i.e. the death benefit does not in-
clude any bonus relating to the policy year of death). Premiums are payable in advance throughout
the term of the policy or until earlier death.
Calculate the monthly premium.
Basis:
Mortality: AM92 Select

Interest: 6% per annum

Initial commission: 115% of the first monthly premium

CA PRAVEEN PATWARI 155 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Initial expenses £210

Renewal commission: 2.5% of each monthly premium payable excluding the first

Renewal expenses: £85 per annum, inflating at 1.92308% per annum compound,
at the start of the second and subsequent policy years

Inflation: For renewal expenses, the amount quoted is at outset, and the
increases due to inflation start immediately.

[9]
33. Subject CT5 September 2015 Question 13
A life assurance company issues a policy to a male life aged 40 exact which provides the following
benefits.
 An annuity of 30,000 per annum, payable annually in advance starting on the policyholder's 65th
birthday and continuing for life thereafter. The annuity increases by 1,500 each year, with the first
increase given on the policyholder's 66th birthday.
 A decreasing term assurance with a death benefit, payable immediately on death. which is given
by the formula:
10,000 × (25 – t) t = 0, 1, 2,………, 24
where t denotes the curtate duration in years since inception of the policy. Death benefit cover ceases
at age 65.
The policy is paid for by level monthly premiums payable in advance from the date of issue for 25
years, but ceasing on earlier death.
The company uses the following premium basis for the policy:
Mortality: AM92 Select

Interest: 4% per annum

Initial commission: 35% of the total premiums payable in the first

policy year

Initial expenses 225

Renewal commission: 5% of the second and subsequent monthlypremiums

CA PRAVEEN PATWARI 156 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Renewal expenses: 55 per annum at the start of the second andsubsequent policy
years

Death benefitclaim expense: 275

Annuity paymentexpense: 2.5% of each annuity payment

The renewal expense and the death benefit claim expense are both assumed to increase continuously
at 4% compound per annum from inception of the policy and to cease at age 65, or earlier death.
Calculate, showing all your workings, the monthly premium for the policy. [13]

34. Subject CT5 April 2016 Question 2

(i) State the two conditions under which the net premium prospective reserve will equal the net
premium retrospective reserve. [2]
(ii) Describe two reasons why these conditions are unlikely to hold in practice. [2]
[Total 4]
35. Subject CT5 April 2016 Question 6
(i) Prove that Ax:n  1  ax:n for the following basis. [3]

Force of mortality  x is constant for all x

Force of interest  throughout
An endowment assurance pays a sum assured of 10,000 immediately on death or on survival to
the end of the term of the policy.
(ii) Calculate, showing all your workings, the premium payable continuously for a life aged 40 exact
for an endowment assurance with a term of 20 years. [4]
Basis:
Mortality  x = 0.01 for all x

Rate of interest5% per annum [Total 7]

36. Subject CT5 April 2016 Question 12
On 1 March 1997, a life insurance company issued a whole life with-profits policy to a life then aged
45 exact. The basic sum assured was 150,000. The sum assured (together with any bonuses attaching)
is payable immediately on death. Level premiums are payable monthly in advance to age 85 or until

CA PRAVEEN PATWARI 157 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

earlier death. Compound reversionary bonuses vest at the beginning of each policy year (le the death
benefit includes any bonus relating to the policy year of death).
The company calculates the premium on the following basis:
Mortality: AM92 Select

Interest: 6% per annum

Initial expenses 70% of the first year's premium. incurred at the outset

Renewal expenses: 5% of the second and each subsequent year's premium, in-
curred at the beginning of the respective policy years

Bonuses: 1.92308% per annum compound

(i) Show that the monthly premium is approximately 276. 17]

On 28 February 2015, the company alters the policy at the request of the policyholder to a paid-up
policy with no future premiums payable. The sum assured under the policy is reduced, with no fur-
ther bonuses payable.
The company calculates the reduced sum assured after alteration by equating prospective gross pre-
mium policy reserves immediately before and after alteration, allowing for an expense of alteration of
175.
The company calculates prospective gross premium policy reserves for the purpose of the alteration
using the following basis:
Mortality: AM92 Ultimate

Rate of interest: 6% per annum

Expenses: Ignore

Future bonuses: ignore

Bonuses have vested at a rate of 2% per annum compound at the beginning of each policy year from
the date of issue of the policy.
(ii) Calculate, showing all your workings, the sum assured for the policy after alteration. [6]
[Total 13]

CA PRAVEEN PATWARI 158 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

37. Subject CT 5 April 2016 Question 13 (part)

On 1 January 2015, a life insurance company issued four-year increasing term assurance policies with
level premiums payable annually in advance for the term of the policy, but ceasing on earlier death.
The initial sum assured is 140,000, increasing by 20,000 at each policy anniversary (the first increase
taking place at the beginning of the second policy year). The death benefit is payable at the end of the
year of death. If the policyholdersurvives to the end of the term of the contract, 50% of the total pre-
miums paid (accrued with no interest) is payable.
The company calculates the premium on the following basis:
Mortality: AM92 Select

Rate of interest : 6% per annum

Initial expenses: 275

Initial commission: 30% of the first year's premium, incurred at the outset

Renewal expense: 55 per annum, incurred at the time of payment of the second
and subsequent years' premiums

Renewal commission: 2.5% of the second and subsequent years' premiums.

For a male life aged 56 exact at inception of the policy:

(i) Set out, in stochastic form, the gross future loss random variable at the outset of this policy using
where applicable, Tx, Kx and elements of the premium basis that are relevant. [3]
(ii) Calculate, showing all your workings, the office premium using annuity and assurance functions
and setting the expected present value of the gross future loss random variable equal to zero. [4]

38. Subject CT5 September 2016 Question 9

A life insurance company issues a 35-year with-profits endowment assurance policy to a life aged 30
exact. The sum assured of125,000 plus declared reversionary bonuses are payable at the end of the
year of death or on maturity.
Level premiums of 3,090 are payable annually in advance for 35 years or until earlier death.

CA PRAVEEN PATWARI 159 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

A simple bonus, expressed as a percentage of the sum assured. is added to the policy at the end of each
year. The death benefit does not include the bonus relating to the policy year of death.
The following basis is used to price this policy:
Mortality: AM92 Select

Rate of interest: 4% per annum

Initial expenses: 325 plus 75% of the first annual premium,incurred at the pol-
icy commencement date

Renewal commission: 2.5% of each premium from the start of the, second policy
year

Claim expense: 375 at the point of claim payment

Calculate, showing all your workings, the level simple bonus rate that can be supported each year on
this policy, using the principle of equivalence. [9]

39. Subject CT5 September 2016 Question 12

A life insurance company issues a 15-year decreasing term assurance policy to a life aged 50 exact.
The initial sum assured is 450,000, decreasing by30,000 at each policy anniversary (the first decrease
taking place at the beginning of the second policy year). The death benefit is payable immediately on
death.
Level annual premiums are payable in advance for 15 years, ceasing on earlier death.
The life insurance company uses the following basis for calculating premiums and reserves:
Mortality: AM92 Select

Rate of interest: 4% per annum

Expenses: Initial 275 plus 30% of the first premium

Renewal 5% of all premiums excluding the firstplus 68 per annum

inflating at 4% per annum compound at the start of the
second and subsequent policy years.

Claim: 315 inflating at 4% per annum compound

CA PRAVEEN PATWARI 160 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

For renewal and claim expenses, the amounts quoted are at outset of the policy and the increases due
to inflation start immediately.
(i) Write down the Gross Premium Future Loss Random Variable at the start of the policy. Use P for
the annual premium. [4]
(ii) Calculate, showing all your workings, the premium, using the principle of equivalence. [8]
(iii) Calculate, showing all your workings, the gross premium prospective reserve after 14 years. [2]
[Total 14]
40. Subject CT5 April 2017 Question 2
Under a 20-year policy issued by a life insurance company, the benefit payable on death, at the end of
the year of death, is a return of premiums paid without interest.
A premium of 631 is payable annually in advance, throughout the term of the policy.
The following information is available for a policy in force at the start of the 19th year:
Reserves at the start of the year, 18V : 17,095
Reserves at the end of the year per survivor, 19V : 18,510
Probability of death during the year: 0.015
Rate of interest earned: 4.5% per annum
Determine the profit which is expected to emerge at the end of the 19th year for each policy in force at
the start of that year. Ignore expenses and all decrements other than death. [3]

41. Subject CT5 April 2017 Question 8

(i) Describe in words the difference between  IA 
x:n  x:n
and lA

(ii) Determine. showing all your working,  lA 

x:15

Basis:
Force of mortality  x = 0.02 for all x
Force of interest3% [5]
[Total 7]
42. Subject CT5 April 2017 Question 12

A life insurance company issues a 30-year with-profits endowment assurance policy to a life aged 35

exact. The sum assured is 100,000 together with any attaching bonuses and is payable immediately on

death.
CA PRAVEEN PATWARI 161 JAI SHREE SHYAM
CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Level premiums are payable monthly in advance, ceasing on maturity or on the policyholder's death if

earlier.

Simple annual bonuses are added at the end of each policy year. The death benefit does not include

any bonus relating to the policy year of death.

The company calculates the premium on the following basis:

Mortality: AM92 Select

Rate of interest : 4% per annum

Expenses:

Initial 325

Renewal 70 at the start of the second and subsequent policy years and paya-

ble until death

Claim 275 on death

Commission

Initial 70% of the total premium payable in the first policy year

Renewal 2.5% of the second and subsequent monthlypremiums

Bonuses: Simple bonus of 2.5% of basic sum assured per annum

(i) Show that the monthly premium for this policy is approximately 292. [9]

As at the end of the 28th policy year, the total actual past bonus additions to the policy have followed

the assumptions stated in the premium basis above.

(ii) Calculate the gross prospective policy value at the end of the 28th policy year.

Policy value basis:

Mortality: AM92 Ultimate

Rate of interest: 4% per annum

CA PRAVEEN PATWARI 162 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Expenses:

Renewal 85 at the start of each policy year and payable untildeath

Claim 300 on death

Commission:

Renewal 2.5% of the monthly premiums

Bonuses Simple bonus of 2.75% of basic sum assured perannum

[6]
[Total 15]
43. Subject CT5 September 2017 Question 4
Explain why a life insurance company will need to set up reserves for the level premium conventional
whole life assurance contracts it has sold. [4]

44. Subject CT 5 April 2018 Question 2

Describe three types of reversionary bonus that may be awarded to a with-profits contract. [4]

45. Subject CT5 April 2018 Question 3

A life aged 50 exact purchases a single-premium temporary annuity. The annuity pays 7,500 annually
in arrears for a term of 10 years, ceasing on death, if earlier.
Calculate the reserve for the annuity at the end of the first policy year, using the net retrospective me-
thod and the following basis:
Mortality: AM92 Select

Interest: 4% per annum

Expenses: Ignore

[4]
CA PRAVEEN PATWARI 163 JAI SHREE SHYAM
CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

46. Subject CT5 April 2018 Question 10

A life insurance company sells a special deferred annuity policy to a life aged 60.75 years exact (i.e. 60
years and 9 months). The policy is funded by quarterly premiums in advance ceasing at age 65 (no
premium is payable at age 65 exact).
The benefits under the policy are as follows:
 At age 65, an annuity of 12,000 a year is payable half-yearly in advance. Payment is guaranteed for
five years and then continues to the age of 75 when it reduces to 10,000 a year under the same
payment method until the death of the policyholder.
 At age 75, an additional lump sum benefit of 10,000 is payable. The annuity then reduces to
10,000 a year, ceasing on the death of the policyholder.
Determine that the quarterly premium is approximately 9,030.
Basis:
MortalityPFA92C20 (assume the uniform distribution ofdeaths method)
Rate of interest4% per annum
ExpensesIgnore [9]

47. Subject CT5 April 2018 Question 11

A life insurance company issues 30-year term assurance policies to lives aged 35 exact. For each poli-
cy, the initial sum assured is 90,000 which increases by 45,000 at the start of the 16th policy year. The
sum assured ispayable immediately on death. Level monthly premiums are payable in advance
throughout the term of these policies or until earlier death.
The company uses the following basis for calculating premiums and reserves:
Mortality: AM92 Select

Interest: 4% per annum

Initial commission: 50% of the total premium payable in the first policyyear

Initial expenses: 375 at policy commencement date

CA PRAVEEN PATWARI 164 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Renewal commission: 2.5% of each premium from the start of the second policy year

Renewal expenses: 72 per annum, inflating at 4% per annum compound,at the

start of the second and subsequent policy years (the renewal
expense quoted is at outset and the increases due to inflation
start immediately)

Claim expense: 295 on death

Calculate the monthly premium for the policy. [10]

48. Subject CT5 April 2018 Question 12

On 1 January 2013, a life insurance company issued a with-profits whole-life policy to a life then aged
25 exact. Under the policy, the basic sum assured of 150,000 and attaching bonuses are payable im-
mediately on death. Thecompany declares simple reversionary bonuses at the start of each year(i.e.
the death benefit includes the bonus relating to the policy year of death). Level premiums are payable
annually in advance under the policy.
(i) Give an expression for the gross future loss random variable under the policy at the outset using
the basis below. [3]
(ii) Calculate the gross annual premium, using the equivalence principle and the same basis. [4]
Basis:
Mortality: AM92 Select

Interest: 6% per annum

Bonus loading: 4% per annum simple

Expenses Initial 265

Renewal 5% of each premium payable in the second and subsequent years

Claim 315

On 31 December 2017 the policy is still in force. The actual bonuses added to the policy have
been as follows:

CA PRAVEEN PATWARI 165 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Year Simple bonus per annum

2013 4.0%

2014 4.0%

2015 3.75%

2016 3.5%

2017 3.0%

(iii) Determine the gross premium prospective reserve for the policy as at 31 December 2017 using
the following basis:
Mortality: AM92 Ultimate

Interest: 4% per annum

Bonus loading: 3% per annum simple

Renewal expenses: 5% of each premium

Claim expenses 325 [4]

[Total 11]
49. Subject CT5 September 2018 Question I (part)
Calculate
(c) S43:10

Basis
Mortality:AM92
Rate of interest:4% per annum [2]

50. Subject CT5 September 2018 Question 10

A life insurance company issues whole of life assurance policies to lives aged 35 exact for a sum as-
sured of 85,000 payable at the end of year of death. Premiums are payable annually in advance.
(a) Calculate the annual office premium for each policy using the basis below.
(b) Calculate the minimum office premium the company should charge in order that the probability
of making a loss on any one policy would be 5% or less.

CA PRAVEEN PATWARI 166 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Basis:
Mortality: AM92 Select

Interest: 6% per annum

Initial commission: 75% of the annual premium

Initial expenses: 350

Renewal commission: 2.5% of each annual premium excluding thefirst

Renewal expenses: 85 per annum at the start of the second andsubsequent policy
years

[10]
51. Subject CT5 September 2018 Question 12
A life insurance company issues with-profits whole of life policies to lives aged 35 exact with the sum
assured of 100,000 together with any attaching bonuses payable immediately on death of the life as-
sured. Level premiums are payable monthly in advance to age 65 or until earlier death.
The company markets two versions of this policy as follows:
Version A — assumed to provide compound bonuses of 4% of the sum assured vesting at the end of
each policy year.
Version B — assumed to provide simple bonuses of b% per annum of the sum assured, again vesting
at the end of each policy year
The death benefit under each version does not include any bonus relating to the policy year of death.
The following basis is used to price these contracts:
Mortality: AM92 Select

Rate of interest: 4% per annum

Initial expenses: 275

Renewal expenses: 2.5% of the second and subsequent monthlypremiums

Initial commission: 40% of the total premiums payable in thefirst policy year, all

CA PRAVEEN PATWARI 167 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

incurred at the policy commencement dale

Renewal commission: 2.5% of the second and subsequent monthlypremiums

Claim expenses: 225 at payment of death claim

(a) Show that the monthly premium under version A of this policy is approximately 511.

(b) Calculate the level simple bonus rate b that can be supported each year under version B of this

policy if the monthly premium calculated in part (a) is charged. [10]

52. Subject CM1 April 2019 Question 10

(i) Define the term 'prospective reserve" when used for a life insurance contract [2]

(ii) State the conditions necessary for the prospective reserve to equal the retrospective reserve. [2]

A life insurance company issues a whole life assurance with a sum assuredS to a life aged exactly x.

Annual premiums, payable annually in advance, are paid throughout the policy term. The benefit is

payable immediately on death and there are no expenses.

(iii) Demonstrate that the prospective reserve is equal to the retrospectivereserve at time t assuming

that the conditions referred to in part (ii) are met [4]

[Total 8]

53. Subject CM1 September 2019 Question 5

A life office issued a whole of life assurance contract to a life aged x exact with a sum assured of 1 pay-

able at the end of the year of death.

Level premiums of P are payable annually in advance, ceasing on death. Ignore expenses.

(i) Using standard actuarial notation, write down:

(a) the equation of value at time 0

P
(b) an expression for the prospective reserve at duration t years, denoted by t VX

R
(c) an expression for the retrospective reserve at duration t years, denoted by t VX [3]

CA PRAVEEN PATWARI 168 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Assume that the basis used to calculate both the prospective and retrospective reserves is the same

as that used to calculate the premium, P.

(ii) Show that the prospective and retrospective reserves are equal attime t. [4]

[Total 7]
54. Subject CM1 September 2019 Question 11
A life insurance company issues a with-profits whole life policy. The benefitis payable at the end of the
year of death and is equal to the basic sum assured plus any attaching bonus.
Level premiums are paid monthly in advance ceasing after 25 years or on the death of the policyhold-
er if earlier.
Simple reversionary bonuses are added at the start of each policy year.
The company uses the following basis to calculate premiums:
Mortality: AM92 Select

Rate of interest: 6% per annum

Commission:

Initial: 25% of the total premium payable in the first policy year

Renewal: 2.5% of the second and subsequent monthly premiums

Expenses:

Initial: £300

Renewal: £75 at the start of each year from the first year increasingat a
rate of 1.92308% per annum. The first increase will take place
at the start of the second year.

Claim: £50 inflating at 1.92308% per annum. The first increasewill

take place at the end of the first year.

Bonus: Simple bonus rate of 1.5% of basic sum assured

CA PRAVEEN PATWARI 169 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

The company issues the policy to lives aged 50 exact. The basic sum assured is £150,000.
(i) Show that the monthly premium is approximately £303. [9]
For the first 24 years of the policy, the actual simple bonuses declared have been at an annual rate of
1% per annum.
(ii) Calculate the gross premium prospective reserve at the end of the 24th policy year.
Prospective Reserving Basis
Mortality: AM92 Ultimate

Interest rate: 4% per annum

Commission

Renewal: 2.5% of the monthly premiums

Expenses

Renewal: £125 per annum

Claim: £75

Bonus: Simple bonus rate of 0.75% of basic sum assured

[8]
[Total 17]

CA PRAVEEN PATWARI 170 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

CM1 – ACTUARIAL MATHEMATICS

SECTION –9
JOINT LIVES

FOR THE
2021 EXAMS

COVERING
CHAPTER 21 JOINT LIFE AND LAST SURVIVOR FUNCTIONS

CHAPTER 22 CONTINGENT AND REVERSIONARY BENEFITS

CA PRAVEEN PATWARI 171 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

PAST EXAM QUESTIONS

This section contains all the relevant parts of the exam questions from 2010 to 2019, that are related to the
topics covered in this booklet.

Solutions are given later in this booklet. These give enough information for you to check your answers, in-
cluding working, and also show you what an adequate examination answer should look like. Further infor-
mation may be available in the Examiners' Report, ASET or Course Notes. (ASET can be ordered from
ActEd.)

We first provide you with a cross-reference grid of key words or phrases that indicate the main subject
areas of each exam question. You can use this, if you wish, to select the questions that relate just to those
aspects of the topic that you may be particularly interested in reviewing.

Alternatively, you can choose to ignore the grid, and instead attempt each question without having any
clues as to its content
Order of death

Reversionary

Probabilities
Assurances

Prem/EPV
Tick when
attempted

Annuities

annuities

Integrals
Variance
PVRV

Question

1. 
2.  
3.    
4.   
5.     
6.   
7.  
8.   
9.    

CA PRAVEEN PATWARI 172 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Order of death

Reversionary

Probabilities
Assurances

Prem/EPV
Tick when
attempted

Annuities

annuities

Integrals
Variance
PVRV
Question

10.    
11.     
12.   
13.  
14.     
15.     
16.   
17.    
18.   
19.   
20.   
21.     
22.     
23.   
24.   
25.    

CA PRAVEEN PATWARI 173 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

1. Subject CTS October 2010 Question 1 part (b)

Calculate 30 p[45]:[50]

Basis: AM92 Select [2]

2. Subject CT5 October 2010 Question 3

Calculate the single premium payable for a temporary reversionary annuity of £12,000 per annum
payable monthly in arrear to a female life currently aged 55 exact on the death of a male life currently
aged 50 exact. No payment is made after 20 years from the date of purchase.
Basis:
Rate of interest 4% per annum
Mortality of male lifePMA92C20
Mortality of female lifePFA92C20
ExpensesNil [4]

3. Subject CT5 October 2010 Question 6

Calculate:
(a) A30:40

(b) a30:40:20

Basis:
 = 0.01 throughout for the life aged 30 now
 = 0.02 throughout for the life aged 40 now
 = 4% per annum. [6]

4. Subject CT5 April 2011 Question 9

A male life aged 52 exact and a female life aged 50 exact take out a whole life assurance policy. The
policy pays a sum assured of £100,000 immediately on first death. Premiums are payable for a period
of five years, monthly in advance.
Calculate the monthly premium payable.

CA PRAVEEN PATWARI 174 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Basis:
Mortality:PMA92C20 (male life), PFA92C20 (female life)
Rate of interest:4% per annum
Expenses:Nil [7]

5. Subject CT5 October 2011 Question 5

(a) Write down the random variable form of A1x:y

(b) Calculate A1x:y on the following assumptions:

 x = 0.02 for all x

 y = 0.03 for all y

 = 4% per annum. [5]

6. Subject CT5 October 2011 Question 7

A special joint life last survivor annuity of £10,000 per annum is payable continuously in respect of a
male and female life each aged 60 exact. Payments commence on the first death and continue for 5
years after the second death.
Calculate the expected present value of this annuity
Basis:
Mortality: PMA92C20 (male life), PFA92C20 (female life)
Rate of interest: 4% per annum
Expenses: Nil [6]

7. Subject CT5 April 2012 Question 4

A joint life assurance contract provides a death benefit of £100,000 payable immediately on the
second death of two lives. a male life currently aged 60 exact and a female life currently aged 55 exact.
Calculate the expected present value of the contract.
Basis:
Mortality: PMA92C20 (male life), PFA92C20 (female life)

CA PRAVEEN PATWARI 175 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Rate of interest:4% per annum

Expenses: Nil [4]

8. Subject CT5 October 2012 Question 11

A special joint life annuity of £500 per week is payable in arrear in respect of a male life aged 65 exact
and a female life aged 62 exact. The annuity has the following features:
 The annuity is guaranteed in any event for the first 5 years at the level of £500 per week.
 At the end of the guarantee period if both lives are still surviving the annuity continues at the
same level until one life dies at which time it reduces to two-thirds of the initial level and contin-
ues at this reduced level until the second life dies.
 At the end of the guarantee period if only one life has survived the annuity reduces to two-thirds
of the initial level and continues at this reduced level until the second life dies.
 At the end of the guarantee period if both lives have previously died then the annuity ceases.
Calculate the expected present value of this annuity.
Basis:
Mortality:PMA92C20 (male life), PFA92C20 (female life)
Rate of interest: 4% per annum
Expenses:Nil [8]

9. Subject CT5 October 2012 Question 12

A life insurance company issues a special endowment assurance policy for a 25 year term to two lives
x and y. Under this policy, a sum assured of£100,000 is paid immediately on the second death within
the 25 year term. At the end of 25 years a sum of £50,000 is paid to each survivor.
Calculate the annual premium paid continuously under this policy assuming this is paid throughout
the term or until the second death if earlier.
Basis:
Mortality: Life x:  x = 0.02 for all x

Life y:  y = 0.03 for all y

CA PRAVEEN PATWARI 176 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Force of interest: 5% per annum

Expenses Nil

[10]
10. Subject CT5 April 2013 Question 9
A male life currently aged 65 exact purchases a special joint life annuity of£10,000 per annum payable
monthly in advance together with additional benefits detailed below.
On the death of the male life, the annuity reduces to £5,000 per annum payable monthly in advance to
a female life until her death, assuming she survives him. The female life is currently aged 62 exact.
The policy additionally provides benefits of:
 an annuity-certain (extra to the above and not dependent on the survivalstatus of each life) of
£10.000 per annum payable monthly in advance and paid only for ten years, and
 £10,000 payable immediately on the death of each life.
Calculate the expected present value of the total benefits.
Basis:
Mortality: Malelife PMA92C20

Female life PFA92C20

Interest: 4% per annum

Expenses Nil

[7]
11. Subject CT5 April 2013 Question 11
Two lives are both aged 45 exact.
Calculate:
(i) the probability of both lives surviving to age 65 exact. [1]
(ii) the present value of an annuity of £1,000 per annum increasing by 3% each year payable annual-
ly in advance so long as both lives survive. [3]

CA PRAVEEN PATWARI 177 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

(iii) the present value of a 20-year term assurance with a benefit of £100,000 payable immediately
on the second death. [5]
Basis: Mortality:  x =0.05 for all x for both lives
Interest: 4%perannum [Total 9]

12. Subject CT5 April 2014 Question 7

A joint life annuity is issued to a male aged 65 exact and a female aged 62 exact. The annuity is payable
quarterly in arrear, the first payment commencing 3 months after issue.
The annuity has the following conditions-
 £10,000 per annum whilst both lives survive
 If the male life predeceases the female life the annuity reduces to £7,500 per annum payable for
the remainder of her lifetime.
 If the female life predeceases the male life the annuity reduces to £6,000 per annum payable for
the remainder of his lifetime.
Calculate the expected present value of the annuity.
Basis: Mortality: PMA92C20 (male) and PFA92C20 (female)

Interest: 4% per annum

Expenses Ignore

[6]
13. Subject CT5 September 2014 Question 4
1
Calculate 5|3 q 40:40

Basis: Mortality AM92 [4]

14. Subject CT5 April 2015 Question 10

(i) Calculate A140:50 [2]

Basis:
Mortality:  x = 0.04 throughout life for the life aged 40

CA PRAVEEN PATWARI 178 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

 x = 0.06 throughout life for the life aged 50

Rate of interest: 5% per annum

Two lives aged 40 and 50 exact purchase a policy with the benefit in part (i) above and a sum as-
sured of 75,000. The benefit is funded by a premiumpayable continuously for a 30-year period
or until the first death if earlier. The premium is paid at a level annual rate for the first 20 years,
thenreduces by 25% to be paid at the lower level annual rate for the remainder of the period.
(ii) Calculate the initial level annual premium using the basis in part (i) above. [6]
[Total 8]
15. Subject CT5 April 2015 Question 11
A special joint life annuity is issued to a male life now aged 65 exact and a female life now aged 62 ex-
act. The annuity is payable monthly in arrear and is subject to the following conditions:
 The amount of the annuity while both lives survive is 100,000 per annum.
 If the male life dies first leaving the female life surviving the annuity reduces to 50,000 per annum
payable until she dies.
 If the female life dies first leaving the male life surviving the annuity reduces to 75,000 per annum
payable until he dies.
 In addition, if either life is alive at the 10thand 20thanniversaries of the policy a cash lump sum of
20,000 is paid at each date.
Calculate the expected present value of the annuity.
Basis:
Mortality: PMA92C20 and PFA92C20
Interest:4% per annum
Expenses:Nil [9]

16. Subject CT5 September 2015 Question 11

An assurance policy provides a benefit of 10,000 payable immediately on the death of the last survivor
of a male life aged 55 exact and a female life aged 50 exact.
(i) Calculate, showing all your workings, the expected present value for this policy. [5]
(ii) Derive an expression for the variance of the value of this policy. [3]
CA PRAVEEN PATWARI 179 JAI SHREE SHYAM
CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Basis:
Mortality: PMA92C20 and PFA92C20
Interest: 4%perannum [Total 8]

17. Subject CT5 April 2016 Question 10

A life insurance policy for a male life aged 55 exact provides the following benefits:
 50,000 payable it on his death, if this occurs before the age of 65 exact.
 On survival to age 65 exact, a refund of 25% of total premiums paid without interest.
 On death of the male at any time. a pension of 5,000 per annum is payable monthly in advance to
his widow (who is 5 years younger than him) for the remainder of her life, should she survive him.
(This benefit is available throughout the lifetime of the male.)
The policy is funded by premiums payable annually in advance for five years, or until the death of the
male life, if earlier.
Basis:
Male mortality: PMA92C20
Female mortality: PFA92C20
Rate of interest: 4% per annum
Expenses: Nil.
Calculate, showing all your workings, the premium for this policy. [9]

18. Subject CT5 September 2016 Question 11

A life insurance company issues a joint annuity policy to a male aged 60 exact and a female aged 62
exact.
Under the policy:
 an annuity of 50,000 per annum is guaranteed to be payable for a period of 10 years and thereaf-
ter for the lifetime of the male.
 on the death of the male an annuity of 20,000 per annum is payable to the female, if she is still
alive. This annuity commences on the monthly payment date next following, or coincident with,
CA PRAVEEN PATWARI 180 JAI SHREE SHYAM
CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

the date of his death or from the 10th policy anniversary, if later. It is payable for the lifetime of
the female.
 all annuities are payable monthly in arrear.
Determine the expected present value of the policy.
Basis:
Mortality: PMA92C20 for the male and PFA92C20 for the female
Rate of interest: 4% per annum
Expenses: Ignore [10]

19. Subject CT5 April 2017 Question 9

An assurance policy provides a benefit of 1 payable immediately on the death of the last survivor of a
male life aged 55 exact and a female fife aged 50 exact.
Determine:
(i) the expected present value of this policy. [4]
(ii) the variance of the present value of this policy, [4]
Basis:
Force of mortalityMale life – a constant force of 0.03
Female life – a constant force of 0.02
Force of interest4% [Total 8]

20. Subject CT5 April 2017 Question 10

A special joint life deferred annuity policy provides the following benefits:

 20,000 payable immediately on each death at any age

 a pension payable monthly in advance after 10 years at a rate of 10,000 per annum if both lives
are alive and 5,000 per annum if only one life is alive
Premiums are payable monthly in advance until the first death for a maximum of 10 years.

CA PRAVEEN PATWARI 181 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Show that the monthly premium payable for a male life aged 55 exact and a second female life aged 50
exact is approximately 1,114.
Basis:
First life mortalityPMA92C20
Second life mortalityPFA92C20
Rate of interest4% per annum
ExpensesIgnore [9]

21. Subject CT5 April 2018 Question 6

(i) Give expressions. using random variables, for the expected present value of:
(a) an annual temporary annuity-due
(b) a joint whole-life insurance payable immediately on first death.

Define any symbols that you use. [4]

A life insurance company issues continuous reversionary annuities based on two lives, x and y. Pay-
ments begin on the death of the first life, x, provided the second life. y, is alive, and cease on the death
of the second life, y
(ii) (a) State, using random variables, the present value of this annuity.
(b) Give an expression for the expected present value of thisannuity in terms of life table func-
tions. [4]
[Total 8]
22. Subject CT5 September 2018 Question 2
A reversionary continuous annuity begins on the death of life x, if a second life y is then alive. Payment
continues during the lifetime of y
(a) State, using random variables, the present value of this annuity.
(b) Give an expression for the expected present value of this annuity in terms of assurance functions.
[4]
23. Subject CM1 April 2019 Question 4
A life insurance company provides the following benefits:
 an annuity, on survival to age 65, of £15,000 per annum payable monthly in advance
 a spouse's annuity of £8,000 per annum payable monthly in advance on the death of the policy-
holder, provided that the policyholder survives to age 65.

CA PRAVEEN PATWARI 182 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

No benefit is payable if the policyholder dies before age 65.

Calculate the single premium in respect of a female policyholder currently aged exactly 50 who has a
male spouse currently aged exactly 53.
Basis:

Mortality: Female PFA92C20

Male PMA92C20

Interest rate: 4% per annum

Expenses: Ignore

[6]
24. Subject CM1 September 2019 Question 3

(i) Explain what is meant by the expression 5|17 q140:40 [2]

Two lives, each aged exactly 40, are independent with respect to mortality and are each subject
to a constant force of mortality of 0.01 per annum.
(ii) Calculate the value of the expression in part (i) [4]
[Total 6]
25. Subject CM1 September 2019 Question 9
A man aged 60 exact purchases a whole life level annuity of £20,000 per annum payable monthly in
arrears with payment guaranteed for the first five years.
In addition, a reversionary annuity of £10,000 per annum is payable to the man's wife, who is two
years younger. This reversionary annuity commences on the monthly payment date following the
man's death or on completion of the five-year guaranteed period, if later. The annuity is payable
monthly in arrears until the wife's death.
Calculate the single premium payable using the following basis:
Interest: 4% per annum
Mortality:PMA92C20 for the policyholder
PFA92C20 for the spouse
Expenses: Initial expenses of £250 plus £10 on eachannuity payment date [11]

CA PRAVEEN PATWARI 183 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

CM1 – ACTUARIAL MATHEMATICS

SECTION –10
MORTALITY PROFIT

FOR THE
2021 EXAMS

COVERING
CHAPTER 23 MORTALITY PROFIT

CA PRAVEEN PATWARI 184 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

PAST EXAM QUESTIONS

This section contains all the relevant parts of the exam questions from 2010 to 2019, that are related to the
topics covered in this booklet

Solutions are given later in this booklet. These give enough information for you to check your answer, in-
cluding working, and also show you what an adequate examination answer should look like. Further infor-
mation may be available in the Examiners' Report, ASET or Course Notes. (ASET can be ordered from
ActEd.)

We first provide you with a cross-reference grid of key words or phrases that indicate the main subject
areas of each exam question. You can use this, if you wish, to select the questions that relate just to those
aspects of the topic that you may be particularly interested in reviewing.

Alternatively, you can choose to ignore the grid, and instead attempt each question without having any
clues as to its content.

Policy Details
Pure endowment
Term assurance

MP calculations

Definitions /
Endowment

comments
Tick when
attempted

Whole life
assurance

assurance

Recursive
Single life

Joint life
Annuity

Question formula

1.    
2.   
3.     
4.    
5.    
6.   
7.    
8.    

CA PRAVEEN PATWARI 185 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

9.    
10.    
11.      
12.   
13.    
14.    
15.    
16.    
17.   
18.     
19.    

CA PRAVEEN PATWARI 186 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

1. Subject CT5 April 2010 Question 12

On 1 January 2005, a life insurance company issued 1,000 10-year term assurance policies to lives
aged 55 exact. For each policy, the sum assured is £50,000 for the first five years and £25,000 thereaf-
ter. The sum assured is payable immediately on death and level annual premiums are payable in ad-
vance throughout the term of this policy or until earlier death.
The company uses the following basis for calculating premiums and reserves.
Mortality:AM92 Select
Interest:4% per annum
Expenses: Nil
(i) Calculate the retrospective reserve per policy as at 31 December 2009. [6]
(ii) (a) Give an explanation of your numerical answer to (i) above.
(b) Describe the main disadvantage to the insurance company of issuing this policy.
(c) Give examples of how the terms of the policy could be altered so as to remove this disad-
vantage. [3]
There were, in total, 20 deaths during the years 2005 to 2008 inclusive and a further 8 deaths in
2009.
(i) Calculate the total mortality profit or loss to the company during 2009. [3]
[Total 12]
2. Subject CT5 September 2010 Question 13
On 1 January 2009, a life insurance company issued 10,000 joint life wholelife assurance policies to
couples. Each couple comprised one male life aged 60 exact and one female life aged 55 exact when
the policy commenced. Under each policy, a sum assured of £100,000 is payable immediately on the
death of the second of the lives to die.
Premiums under each policy are payable annually in advance while at least one of the lives is alive.
The life insurance company uses the following basis for calculating premiums and net premium re-
serves:
Mortality: PMA92C20 for the male
PFA92C20 for the female
Interest: 4% per annum
Expenses: Nil

CA PRAVEEN PATWARI 187 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

(i) Calculate the annual premium payable under each policy. [4]
During the calendar year 2009, there was one claim for death benefit, in respect of a policy where
both the male and the female life died during the year. In addition, there were 20 males and 10 fe-
males who died during the year.
(ii) Calculate the mortality profit or loss for the group of 10,000 policies for the calendar year 2009.
[10]
[Total 14]
3. Subject CT5 April 2011 Question 13
(i) Explain, including formulae, the following expressions assuming that the sum assured is payable
at the end of the year of death:
 death strain at risk
 expected death strain
 actual death strain [6]
(ii) A life insurance company issues the following policies:
 25-year term assurances with a sum assured of £200,000
 25-year endowment assurances with a sum assured of £100,000
The death benefit under each type of policy is payable at the end of year of death.
On 1 January 2000, the company sold 10,000 term assurance policies to male lives then aged 40
exact and 20,000 endowment assurance policies to male lives then aged 35 exact. For each type
of policy, premiums are payable annually in advance.
During the first ten years, there were 145 actual deaths from the term assurance policies written
and 232 actual deaths from the endowment assurance policies written.
(a) Calculate the death strain at risk for each type of policy during 2010.
During 2010, there were 22 actual deaths from the term assurance policies and 36 actual deaths
from the endowment assurance policies.
Assume that there were no lapses/withdrawals on each type of policyduring the first eleven years.
(b) Calculate the total mortality profit or loss to the office in the year 2010.
(c) Comment on the results obtained in (b) above.

CA PRAVEEN PATWARI 188 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Basis:
Mortality: AM92 Ultimate
Rate of interest: 4% per annum
Expenses: Nil [11]
[Total 17]
4. Subject CT5 September 2011 Question 14
On 1 January 2001, a life insurance company issued a number of 30-year endowment assurance poli-
cies that pay £100,000 at maturity, or £50,000 at the end of the year of earlier death to lives then aged
35 exact. Premiums are payable annually in advance.
The company uses the following basis for calculating premiums and reserves:
Mortality: AM92 Select

Interest: 4% per annum

Initial commission: 50% of the premium payable in the first policy year

Initial expenses: £300 paid at policy commencement date

Renewal expenses: 2.5% of each premium from the start of the second policy year

(i) Write down the recursive relationship between the gross premium reserves at successive dura-
tions of these policies, defining all symbols used [4]
(ii) Show that the annual premium for each policy is approximately £1,803. [4]
There were 385 policies in force on 1 January 2010. During 2010, there were three actual deaths, ac-
tual interest earned by the company was 5% and expenses were as expected.
(iii) Calculate the profit or loss made by the company from both mortality and interest in respect of
these policies for the year 2010 based on the formula stated in (i) above. [10]
[Total 18]
5. Subject CT5 April 2012 Question 14
A life insurance company issues 20-year decreasing term assurance policies to single lives aged 40 ex-
act. The death benefit, which is payable at the end of the year of death, is £200,000 in the first policy
year, £190,000 in the second policy year thereafter reducing by £10,000 each year until the benefit is
£10,000 in the twentieth and final policy year. Premiums on the policies are payable annually in ad-
vance for 20 years or until earlier death.
CA PRAVEEN PATWARI 189 JAI SHREE SHYAM
CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

The company calculates its reserves on a net premium basis and negative reserves are permitted.
(i) Show that the annual net premium for each policy is approximately equal to £204 using the basis
below. [4]

625 policies were in force at the start of the 10thpolicy year and 3 policyholders died during that poli-
cy year.

(ii) Calculate the mortality profit or loss to the life insurance company during the 10thpolicy year us-
ing the basis below. [6]
(iii) Comment briefly on the results obtained in part (ii) above. [2]

Basis:

Mortality: AM92 Ultimate

Interest: 4% per annum
Expenses: Nil [Total 12]

6. Subject CT5 September 2012 Question 7

On 1 January 2007, a life insurance company sold a large number of 30- year pure endowment policies
to lives then aged 35 exact. The sum assured under each policy is £125,000 payable on maturity. Pre-
miums are payable annually in advance throughout the term of the policy.
There were 3,521 pure endowment policies still in force on 1 January 2011 and 8 policyholders died
during 2011.
Calculate the total mortality profit or loss to the life insurance company during 2011 assuming the
company calculates net premium reserves on the following basis:
Mortality:AM92 Select
Interest:4% per annum
Expenses:Nil [4]

7. Subject CT5 April 2013 Question 13

A life insurance company issues 5,000 four-year decreasing term assurance policies on 1 January
2012 to a group of male lives aged 56 exact at that date.

CA PRAVEEN PATWARI 190 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Premiums are payable annually in advance on each policy. The initial annual gross premium P reduces
to 0.75P, 0.5P and 0.25P at the beginning of the second, third and fourth policy year respectively.
The sum assured on each policy is payable at the end of year of death and is given by the formula:
£100,000 ×[1 – 0.25t] t = 0,1,2,3
where t denotes the curtate duration in years since the inception of the policy.
(i) Calculate the initial annual gross premium P for each policy using the basis below. [7]
(ii) Determine the prospective gross premium reserve for each policy in force at the end of the first
policy year using the same basis. [5]
(iii) Calculate the mortality profit or loss for this portfolio of business for the calendar year 2012 giv-
en that 27 policyholders died during that year. [2]

Actual expenses incurred and interest earned by the company on this portfolio of business during
2012 was the same as that assumed in the premium basis.

(iv) Derive the mortality profit or loss for the calendar year 2012 using therecursive relationship be-
tween the opening and closing prospective reserves in the first policy year. [2]
Basis:
Mortality: AM92 Ultimate

Interest : 6% per annum

Initial commission: 25% of the first annual premium

Initial expenses: £125

Renewal commission: 3% of each annual premium excluding the first

Renewal expenses: £35 per annum at the start of the second and subsequent policy years.
The renewal expense is assumed to increase by 1.92308% compound
per annum from inception of the policy.

[Total 16]

8. Subject CT5 September 2013 Question 22

At the beginning of 2004, a life insurance company issued a number of 20-year 'special' endowment
assurance policies to male lives then aged 40 exact. Each policy provides a death benefit of £75,000
payable at the end of year of death and a maturity benefit of £150,000.

CA PRAVEEN PATWARI 191 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Premiums on each policy are payable annually in advance for the term of the policy, ceasing on earlier
death.
(i) Calculate the annual gross premium for each policy using the following premium basis: 14]
Mortality: AM92 Select

Interest: 4% per annum

Initial commission: 25% of the first annual premium

Initial expenses: £400

Renewal expenses: £45 per annum at the start of the second and subsequent policy years

(ii) Determine the gross premium reserve for each policy in force at the end of the eighth policy year
and for each policy in force at the end of the ninth policy year, using the same basis as above. [6]

At the beginning of 2012, there were 625 policies in force. Actual experience for this portfolio of busi-
ness during 2012 was as follows:

Number of deaths:3
Interest earned:4.5%
Expense incurred per policy
in force at beginning of policy year:£45
(iii) Derive, using the recursive relationship between the opening and closing reserves, the prof-
it/loss from this portfolio of business in 2012 separately from:
 mortality
 interest
 expenses. [4]
[Total 14]
9. Subject CT5 September 2014 Question 11
A life assurance company has issued whole of life assurance policies over a number of years. Pre-
miums on these policies are payable annually in advance and the sums assured are payable at the end
of the year of death.

CA PRAVEEN PATWARI 192 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

You are given the following information relating to a group of policies within the portfolio of whole of
life assurance policies:
Age exact on Sums assured in force on Reserves held on 31 December
1 January 2013 1 January 2013 2013 for policies in force at that
date

69 £740,000 £371,000

During 2013, there was 1 death claim (on a policy which was issued on 1 January 2000 for a sum as-
sured of £15,000) arising from this group of policies.
(i) Calculate the mortality profit or loss for 2013 to the company in respect of this group of policies
assuming net premium reserves are held on the following basis:
Mortality: AM92 Ultimate
Interest: 4%perannum [5]
(ii) Calculate the amount of expected death claims in 2013 for this group of policies. [1]
(iii) Compare your answer in part (ii) with the amount of actual claims and comment on your answer
with reference to your answer in part (i) above. [2]

[Total 8]

10. Subject C T5 April 2015 Question 13

On 1 January 2004, an insurance company issued 15-year temporary assurance policies to 3,000 lives
then aged 45 exact. For each policy, the sum assured is £100,000 for the first 10 years, and £40,000
thereafter. The sum assured is payable immediately on death and level annual premiums are payable
in advance throughout the term or until earlier death.
Basis:
Mortality:AM92 Ultimate
Interest:4% per annum
(i) Show that the annual premium payable for each policy is approximately £233 using the basis
above. [4]

CA PRAVEEN PATWARI 193 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

(ii) Calculate the reserve per policy as at 31 December 2013. assuming the reserving basis is the
same as the premium basis. [3]
(iii) (a) Describe the disadvantages to the insurance company of issuing this policy.
(b) Suggest two examples of how the terms of the policy could be altered so as to remove these
disadvantages. [4]
There were 122 deaths between 2004 and 2012 inclusive and a further 12 deaths in 2013.
(iv) Calculate the mortality profit or loss to the insurance company in 2013 on the basis above. [2]
[Total 13]
11. Subject CT5 September 2015 Question 14
(i) Write down in the form of symbols, and also describe, the expression `death strain at risk'. [2]

On 1 January 2011, a life insurance company issued the following three types of policies to male lives
aged 55 exact:

A 5-year pure endowment assurances with a sum assured of 75,000.

B 5-year term assurances with a sum assured of 75,000, where the death benefit is payable at
the end of the year of death.
C 5-year single premium temporary immediate annuities with an annual benefit payable in ar-
rear of 15,000.
For policies A and B, premiums are payable annually in advance throughout the policy term or until
earlier death.
(ii) Calculate, showing all your workings, the death strain at risk for each type of policy during 2014.
[8]
Basis:
Mortality: AM92 Ultimate for policies A and B
PMA92C20 for policy C
Expenses: Ignore
Interest: 4% per annum

CA PRAVEEN PATWARI 194 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

At the beginning of 2014, the numbers of policies in force were:

Pure endowment assurances984
Term assurances3,950
Temporary immediate annuities495
During 2014, the actual deaths were 5 from policy A, 22 from policy B and 2 from policy C
(iii) Calculate, showing all your workings, the total mortality profit or loss to the company for 2014
using the same basis as in (ii). [5]
[Total 15]
12. Subject CT5 April 2016 Question 11
On 1 January 2012, a life insurance company issued joint life whole life assurance policies. Each policy
was issued to a male life aged 65 exact and a female life aged 60 exact. A sum assured of 75,000 is
payable immediately on the death of the second of the lives to die.
Premiums of 1,395.11 are payable annually in advance for each policy while at least one of the lives is
alive.
At the beginning of 2014, there were 5,997 policies in force. For all of thesepolicies, both lives were
still alive. During 2014, the following experience was observed:

 for 2 policies, both lives died

 for 12 policies, only the male life died

 for 8 policies, only the female life died.

Calculate, showing all your workings, the mortality profit or loss for the group of policies for the ca-
lendar year 2014.
Basis:
Mortality: PMA92C20 for the male
PFA92C20 for the female
Rate of interest: 4% per annum
Expenses: Ignore. [10]

CA PRAVEEN PATWARI 195 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

13. Subject CT5 September 2016 Question 10

A 25-year 'double' endowment assurance policy is issued to a group of lives aged 40 exact. Each policy
provides a sum assured of 25,000 payable at the end of the year of death or 50,000 payable lithe life
survives until the maturity date.
Premiums are payable annually in advance throughout the term of the policy or until earlier death.
The following information has been provided:
Number of deaths during the 17thpolicy year:24
Number of policies in force at the end of the 17thpolicy year: 5,350
(i) Calculate, showing all your workings, the profit or loss for the group arising from mortality in the
17th policy year. [7]
(ii) Comment on your result. [2]
Basis:
Mortality: AM92 Select
Rate of interest: 4% per annum
Expenses: Ignore [Total 9]

14. Subject CT5 April 2017 Question 11

On 1 January 2000 a life insurance company issued a number of 20-year pure endowment policies to a
group of lives aged 40 exact.In each case, the sum assured was 60,000 and premiums were payable
annually in advance throughout the term or until earlier death.
On 1 January 2016, 18,230 policies were still in force. During 2016, 86 policyholders died, and no pol-
icy lapsed for any other reason.
(i) Calculate the profit or loss from mortality for this group for the year ending 31 December 2016.
[7]
Basis:
Mortality: AM92 Select
Rate of interest: 4% per annum
Expenses: Ignore
(ii) Comment on your answer in part (i). [2]
[Total 9]

CA PRAVEEN PATWARI 196 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

15. Subject CT5 September 2017 Question 13

On 1 January 2000, a life insurance company issued 25-year increasing term assurance policies to sin-
gle lives aged 40 exact.
The death benefit, payable at the end of the year of death, was 50,000 in the first policy year and in-
creased at the beginning of each policy year at a rate of 1.92308% per annum compound. The first in-
crease was at the start of the second policy year.
A return of premiums paid, with no interest, is payable on survival to the end of the term of the policy.
Level premiums on the policies are payable annually in advance for 25 years or until earlier death.
The company calculates its reserves on a net premium basis and negative reserves are permitted.
(i) Show that the annual net premium for each policy is approximately equal to 323 using the basis
below. [4]
At the start of 2016, there were 1,425 policies in force. 10 policyholders died during 2016.
(ii) Calculate the mortality profit or loss to the company during 2016 using the basis below. [7]

After an analysis of surplus investigation by the company, it found that it had made neither a profit
nor a loss in 2016 in respect of the policies in part (ii).

(iii) Determine the rate of interest the company earned in 2016. [6]
Basis:
Mortality:AM92 Select
Interest:6% per annum
Expenses: Ignore [Total 17]

16. Subject CT5 April 2018 Question 5

On 1 January 2010, a life insurance company issued single life annuities to policyholders then aged 65
exact.
Each annuity is for 30,000 payable annually in arrears.
At the beginning of 2017, there were 5,650 policyholders alive and during 2017, 80 policyholders
died.
The company calculates its reserves using the following basis:
Mortality: PMA92C20

CA PRAVEEN PATWARI 197 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Interest: 4% per annum

Expenses: Ignore
(i) Calculate the mortality profit or loss for these annuities for the year 2017. [4]
(ii) Comment on your answer in part (i). [2]
[Total 6]
17. Subject CT5 September 2018 Question 13
A life insurance company issued 25-year decreasing term assurance policies on 1 January 2001 to
lives then aged 40 exact. The death benefit, payable at the end of the year of death, is 500,000 in the
first policy year, 480,000 inthe second policy year, thereafter reducing by 20,000 each year until the
benefit is 20,000 in the twenty-fifth and final policy year. Premiums on the policies are payable an-
nually in advance for 25 years or until earlier death.
(a) Show that the annual net premium per policy is approximately 643 using the basis below.
(b) Calculate the mortality profit or loss to the life insurance company during 2017 using the basis
below if 1,527 policies were in force at the start of that year and 9 policyholders died during the
year.
Basis:
Mortality:AM92 Ultimate
Rate of interest:4% per annum [11]

18. Subject CMI April 2019 Question 13

On 1 January 2002 a life insurance company issued the following policies:
 Identical 25-year without profit endowment assurances each with a sum assured of £200,000
payable at the end of the policy term or at the end of the year of death if earlier. Premiums are
payable annually in advance throughout the term or until earlier death. The policies were issued
to lives aged 35 exact.
 Identical level whole life annuities, each payable annually in advance at a rate of £10,000 per an-
num, issued to lives aged 65 exact.
An extract from the company's records gives the following information for 2018 in respect of these
policies:

CA PRAVEEN PATWARI 198 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Policy type Endowment assurance Annuity

Number of policies in force on 1 January 2018 15,203 12,352

Total annual premium for in-force policies as 82,774,000 –

at1 January 2018
Number of policyholder deaths during 2018 46 746

There were no other exits in 2018.

(i) Calculate the mortality profit for the year ended 31 December 2018 in respect of:
(a) endowment assurances
(b) annuities. [8]
Basis:

Mortality: Endowmentassurances AM92

Annuities PMA92C20

Interest rate: 4% per annum

Expenses: Ignore

(ii) Discuss your answers in part (i). [5]

[Total 13]
19. Subject CM1 September 2019 Question 7
On 1 January 2002, a life insurance company issued whole life increasing assurances to lives then
aged 45 exact.
The initial sum assured was £20,000, which increased by £2,000 on each policy anniversary.
Benefits are payable at the end of the year of death. Premiums are payableannually in advance for a
maximum of 20 years, ceasing on earlier death.
On 1 January 2018, there were 378 policies in force and. during 2018, 4 of these policyholders died.

(i) Calculate the mortality profit during 2018. assuming the insurance company uses the following
basis for both premiums and reserves.
Mortality:AM92 Ultimate
Interest:4% per annum
Expenses:none [9]
(ii) Explain why the result in part (o) has arisen. [3]
[Total 12]

CA PRAVEEN PATWARI 199 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

CM1 – ACTUARIAL MATHEMATICS

SECTION –11
COMPETING RISKS AND MULTIPLE
DECREMENTS

FOR THE
2021 EXAMS

COVERING
CHAPTER 24 COMPETING RISKS

CA PRAVEEN PATWARI 200 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

PAST EXAM QUESTIONS

This section contains all the relevant parts of the exam questions from 2010 to 2019, that are related to the
topics covered in this booklet.

The Syllabus and Core Reading for these topics changed significantly after the 2014 exam sitting. so some of
the questions set before 2015 are no longer entirely relevant to the current syllabus. We have amended
such questions and included them, where appropriate.

Solutions are given later in this booklet. These give enough information for you to check your answer, in-
cluding working, and also show you what an adequate examination answer should look like. Further infor-
mation may be available in the Examiners' Report ASET or Course Notes, bearing in mind that the Examin-
ers' Reports will relate to the original questions, which in some cases will no longer reflect the current syl-
labus content, ABET can be ordered from ActEd.

We first provide you with a cross-reference grid of key words or phrases that indicate the main subject
areas of each exam question. You can use this, if you wish, to select the questions that relate just to those
aspects of the topic that you may be particularly interested in reviewing.

Alternatively, you can choose to ignore the grid, and instead attempt each question without having any
clues as to its content.
Constant underly-
Indep to dep or

Multiple decre-

Multiple decre-
Description of

Multiple state

ment model
Probability

ment table
Tick when
attempted

vice versa

Integrals
ing force

model
policy

EPV

Question

1.     
2.   
3.   
4.   
5.   
6.   
CA PRAVEEN PATWARI 201 JAI SHREE SHYAM
 9.
8.
7.

19.
18.
17.
16.
15.
14.
13.
12.
11.
10.
Question

CA PRAVEEN PATWARI
Tick when
attempted
CM1 ACTUARIAL MATHEMATICS

Description of


policy

Indep to dep or






vice versa

Constant underly-










ing force

202
Multiple state





model

Integrals






EPV







Probability







 Multiple decre-








ment model

Multiple decre-



ment table

JAI SHREE SHYAM

ACTUATORS EDUCATIONAL INSTITUTE
CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

1. CT5 April 2010 Question 9

A life insurance company models the experience of its pension scheme contracts using the following
three-state model

(i) Derive the dependent probability of a life currently active and aged x retiring in the year of age x
to x + 1 in terms of the transition intensities. [2]
(ii) Derive a formula for the independent probability of a life currently active and aged x retiring in
the year of age x to x + 1 using the dependent probabilities. [4]
[Total 6]
2. Subject CT5 April 2010 Question 10 (adapted)
The decrement table extract below is based on the historical experience of a very large multinational
company's workforce.

Number of employees Deaths Withdrawals

Age (x)
 al x  ad dx  ad wx
40 10.000 25 120
41 9,855 27 144
42 9,684

Recent changes in working conditions have resulted in an estimate that the underlying annual force of
withdrawal is now 75% of that previously used.
Calculate a revised table assuming no changes to the force of mortality, stating your results to one de-
cimal place. [7]

CA PRAVEEN PATWARI 203 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

3. Subject CT5 September 2010 Question 9 (adapted)

The following is an extract from the decrement table used to value a pension scheme's benefits:

Number of III-health Normal

Deaths  ad x
d
Age,
members retirements retirements
x
 al x  ad ix  ad rx

61 6,548 50 219 516

The actuary advising the pension scheme has decided that the independent mortality in the table is no
longer appropriate.
Calculate the revised row of the table for age 61, assuming that the revised underlying force of mortal-
ity at that age is 80% of the previous value. [7]

4. Subject CT5 April 2011 Question 5 (adapted)

A pension scheme uses the following model to calculate probabilities, where the transition intensities
are  = 0.05 and  = 0.08

Derive and calculate:

(a) the dependent probability of retirement
(b) the independent probability of death from active service
using the Kolmogorov equations. [5]

CA PRAVEEN PATWARI 204 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

5. Subject CT5 September 2011 Question 9 (reworded)

Members of a pension scheme are subject to three decrements:
(a) Deaths — with independent decrement rates that are assumed to follow ELT15(Males)
(b) Ill-health retirement — with an independent probability of retirement of 0.01 at age 50 exact in-
creasing by 0.005 for each additional year of age (so the independent probability of ill-health re-
tirement at age 53 exact is 0.025)
(c) Age retirement — with an independent probability of 0.2 at each age from 60 to 64 all exact
Age retirements are assumed to take place on the attainment of the exact age, whilst other decre-
ments act continuously across the year of age.
Calculate the probability that a member currently aged 59 exact will retire at age 62 exact. [6]

6. Subject CTS April 2012 Question 10

An insurance company writes policies that provide benefits of £1,000 in the event of becoming dis-
abled due to accident and £10,000 on death.
(a) Construct a multiple state transition model for these polices.
(b) Give a formula for the expected present value of the benefits. [6]

7. Subject CT5 April 2013 Question 2


Calculate  aq  x
Basis:
Mortality:  
x = 0.1 and  x = 0.2 for all x
 ,  are independent decrements [3]

8. Subject CT5 September 2013 Question 20 (adapted)

The following is an extract of a decrement table assumed for a funeral plan. showing deaths (d) and
withdrawals (w):

Age x  al x  ad dx  ad wx

85 10,000 1,400 2,300

CA PRAVEEN PATWARI 205 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

86 6,300 1,000 1,100

87 4,200

It has been established that the forces of withdrawal are now only 50% of those assumed in the table
above for the ages of 85 and 86. The underlying forces of mortality are unchanged.
Construct a revised decrement table to reflect this change, [7]

9. Subject CT5 September 2014 Question 13 (reworded)

A life insurance company issues 3-year policies to lives aged 55 exact who are employees of a manu-
facturer. These policies offer the following benefits during the term of the policy:
 On death whilst still an employee, £200,000 paid at the end of the year of death.
 On ill-health retirement, £100,000 paid at the end of the year of retirement.
 On leaving their employer other than on death or ill-health retirement, a return of all premiums
paid accumulated with interest at a rate of 2% per annum payable at the end of the year of leaving.
 On survival as an employee at the end of 3 years, £10,000 is payable.
The company uses the following basis to calculate annual premiums for this policy:
Independent rate of mortality 110% of AM92 Ultimate

Interest earned on cash flows 5% per annum

Initial expenses £150

Renewal expenses £25 at the start of the second and third policy year

Reserves None held

In addition, you are given the following independent forces of ill-health retirement and withdrawal.
You can assume that these forces remain constant over each individual year of age.
Age Ill-health retirement Withdrawal

55 0.04 0.10

56 0.05 0.08

57 0.06 0.06

CA PRAVEEN PATWARI 206 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

(i) Calculate the dependent rates of mortality, ill-health retirement and withdrawal for each policy
year. [3]

The company sets premiums so that the net present value of the profit for the policy is 5% of the an-
nual premium, using a risk discount rate of 5% per annum.

(ii) Calculate the level premium payable annually in advance for this policy. [9]
(iii) Discuss briefly whether the life insurance company needs to hold reserves at the beginning and
end of each policy year for this policy. [2]

Assume that the company does hold reserves at the beginning and end of each policy year for this pol-
icy and that reserves earn interest at 5% per annum.

(iv) Explain, without doing further calculations, whether the premium would be higher, the same or
lower than that calculated in part (ii) above. [2]
[Total 16]
10. Subject CT5 April 2015 Question 3
1
Suppose  and  are the only two independent modes of decrement and x  x Express  aq x in
4

terms of x . [3]

11. Subject CT5 September 2015 Question 6

The employees of a manufacturing company are subject to two modes of decrement, mortality and
withdrawal from employment.
The independent forces of mortality and withdrawal for employees aged 50 and 51 are given in the
following table:

Age dx w
x

50 0.0010 0.15

51 0.0015 0.10

Calculate, showing all your workings, the probability that a new employee aged 50 exact will die as an
employee at age 51 last birthday. State any assumptions that you make. [5]
CA PRAVEEN PATWARI 207 JAI SHREE SHYAM
CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

12. Subject CT5 September 2015 Question 7

A critical illness scheme provides a benefit of 100,000 on death or earlier diagnosis of a critical illness.

(i) Draw and label the appropriate transition diagram. [3]

(ii) Set out an expression for the expected present value of this benefit. [3]

[Total 6]

13. Subject CT5 April 2016 Question 8 (part)

A company provides its employees with a benefit on disability before age 65. The benefit is a life annu-

ity of 50% of salary at the date of disability.

Draw and label a transition state diagram for this benefit. [4]

14. Subject CT5 April 2016 Question 9

A company provides a cash benefit of five times salary on disability before retirement where normal

retirement age is 65.

Determine the expected present value of this benefit for a life aged 63 exact with current annual sala-

ry of 50,000 stating all your assumptions.

Basis:

Independent force of mortalityELT15 (Males)

Independent force of disability0.03

Discount rate5% per annum

Salary increase 3% atage64. [8]

15. Subject CT5 September 2016 Question 7 (part)

A life insurance company writes policies that provide income during periods of disability.

Draw the transition state model for these policies labelling your diagram carefully. [5]

CA PRAVEEN PATWARI 208 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

16. Subject CT5 September 2017 Question 7

A population is subject to two modes of decrement.  and  as defined below:

x  1 / 110  x  for 0  x  110; and

x  0.03 for 0  x  110

1
You are given that  te0.03t dt  0.490112
0


Determine the value of  aq 40 [7]

17. Subject CT5 April 2018 Question 9

A life insurance company issues 20-year critical illness term assurance policies. The benefits, payable
during the policy term, are a lump sum of 50,000 payable immediately on diagnosis of a critical illness,
or a benefit of 100,000 immediately on death if earlier.
Premiums are payable monthly in advance during the term of the policy, ceasing on any claim.
(i) Draw a transition state model for this policy labelling your diagram. [3]
A policy is issued to a life aged 45 exact, with an annual premium rate of 750.
(ii) Calculate the value of the policy to the company. [6]
Basis:
Mortality m x = 0.004 for all x

Critical illness S x = 0.002 for all x

Force of interest  = 4% throughout [Total 9]

18. Subject CM1 April 2019 Question 6

A life insurance company issues a 20-year term assurance with additional permanent disability bene-
fit. The benefits provided are.
 on death (whether the life was previously healthy or permanently disabled) a lump sum payment
of £150,000 payable immediately

CA PRAVEEN PATWARI 209 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

 on permanent disability a lump sum of £75,000 payable immediately.

(i) Draw a transition state model for this policy labelling your diagram. [2]
(ii) Calculate the total expected present value of the benefits. [8]
Basis:

Force of mortality from healthy: 0.03 for all ages

Force of modality from permanent disability: 0.08 for all ages

Force of permanent disability: 0.001 for all ages

Force of interest: 5% per annum

[Total 10]
19. Subject CM1 September 2019 Question 1
Describe the main features of an income protection health insurance contract. [4]

CA PRAVEEN PATWARI 210 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

CM1 – ACTUARIAL MATHEMATICS

SECTION –12
PROFIT TESTING

FOR THE
2021 EXAMS

COVERING
CHAPTER 25 UNIT-LINKED AND ACCUMULATING WITH-PROFITS CONTRACTS

CHAPTER 26 PROFIT TESTING

CHAPTER 27 RESERVING ASPECTS OF PROFIT TESTING

This booklet includes all the Core Reading for these chapters plus the past exam ques-
tions on conventional contracts: the questions relating to unit-linked contracts are in
Booklet 13.

CA PRAVEEN PATWARI 211 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

PAST EXAM QUESTIONS

This section contains all the relevant parts of the exam questions from 2010 to 2019, that are related to the
topics covered in this booklet, in respect of conventional contracts only. The exam questions that involve
unit-linked and accumulating with-profits contracts are covered in the other profit testing booklet-
Solutions are given later in this booklet. These give enough information for you to check your answer, in-
cluding working, and also show you what an adequate examination answer should look like. Further infor-
mation may be available in the Examiners' Report, ASET or Course Notes. (ASET can be ordered from
ActEd.)
We first provide you with a cross-reference grid of key words or phrases that indicate the main subject
areas of each exam question. You can use this, if you wish, to select the questions that relate just to those
aspects of the topic that you may be particularly interested in reviewing.
Alternatively, you can choose to ignore the grid, and instead attempt each question without ha‘hng any
clues as to its content.

NPV/ IRR /Profit

Profit vector /
assumptions
Bookwork /

decrements

calculation
comment/
Tick when
attempted

signature
Premium
Multiple

Change
discuss

margin
Question
.

1.  
2.   
3.    
4.  
5.   
6.    
7.    
8.    
9.  
10.  

CA PRAVEEN PATWARI 212 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

1. CT5 September 2010 Question 14

A life insurance company issues four-year without profits endowment assurance policies to male lives
aged 56 exact. The sum assured is £21,500 payable on maturity or at the end of the year of death if
earlier. Premiums of £5,000 are payable annually in advance throughout the term of the policy.
The company holds net premium reserves for these policies, calculated using AM92 Ultimate mortali-
ty and interest of 4% per annum.
Surrenders occur only at the end of a year immediately before a premium is paid. The surrender value
is 70% of the net premium reserve calculated at the time the surrender value is payable.
The company uses the following assumptions in carrying out profit tests of this contract:
Rate of interest on cashflows 4% per annum

Mortality AM92 Select

Surrenders 10% of all policies still in force at the end ofeach of the first,
second and third policy years

Initial expenses £600

Renewal expenses £45 per annum on the second and subsequent premium dates

Risk discount rate 6% per annum

Calculate the expected profit margin for this contract. [15]

2. Subject CT5 September 2011 Question 13

A life insurance company issues a 3-year without profits endowment assurance policy to a male life
aged 57 exact for a sum assured of £15,000 payable on maturity or at the end of the year of death if
earlier. Premiums of £4,700 are payable annually in advance throughout the term of the policy.
The office holds net premium reserves for these policies, calculated using AM92 Ultimate mortality
and interest of 4% per annum.
Surrenders occur only at the end of a year immediately before a premium is paid. The surrender value
payable is 75% of total premiums paid on the contract at the time the surrender value is payable.

CA PRAVEEN PATWARI 213 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Assume that at the end of the first and second policy years. 10% and 5% respectively of all policies
still in force at that time then surrender.
The company uses the following assumptions in carrying out profit tests of this contract:
Rate of interest on cashflows 5% per annum
and reserves

Mortality AM92 Select

Initial expenses 10% of the annual premium

Renewal expenses £65 per annum on the second and subsequentpremium dates

Risk discount rate 7% per annum

(i) Calculate the net present value of profits for this contract. [10]
(ii) Calculate the internal rate of return for this contract. [2]

The company weakens the reserving basis by assuming that net premium reserves for these policies
are now calculated using AM92 Ultimate mortality and interest of 6% per annum.

(iii) Calculate the revised net present value of profits and comment on your answer. [4]
[Total 16]
3. Subject CT5 April 2012 Question 15 (part)
A life insurance company issues a three-year term assurance policy to a male life aged 57 exact under
which level premiums are payable annually in advance throughout the term of the policy or until ear-
lier death. The sum assured is £150,000 payable at the end of year of death.
The company uses the following assumptions to calculate the premium for this policy:
Rate of interest on cashflows 6% per annum

Mortality AM92 Select

Initial expenses £350

Renewal expenses £50 per annum on the second and third premium dates

Initial expenses 15% of first premium

CA PRAVEEN PATWARI 214 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Renewal expenses 2.5% of the second and third years' premiums

Risk discount rate 6% per annum

(i) Write down the gross future loss random variable at the outset of the policy. [5]
(ii) Calculate the office premium using assurance and annuity functions, setting the expected value
of the gross future loss random variable to zero. [4]
(iii) Derive the office premium using a discounted cashflow projection, assuming no withdrawals and
using the same profit criterion as in part (ii). [6]
(iv) Without further calculation explain the effect of:
(a) setting up reserves within the calculation of part (iii).
(b) having set up the reserves in part (a), increasing the risk discount rate to 8% per annum. [2]
[Total 17]
The first two parts of this question are covered in Booklet 8.

4. Subject CT5 September 2012 Question 14

A life insurance company issues a four-year policy to a male life aged 30 exact that offers the following
benefits:
 On death during the term of the policy or on survival to the end of the term, a sum of £60,000.
 On redundancy during the term of the policy, a return of 100% of total premiums paid.
 On surrender during the term of the policy, a return of 50% of total premiums paid.
Premiums of £14,000 are payable annually in advance throughout the termof the policy or until earli-
er claim. The death, surrender and redundancy benefits are payable immediately on claim. The con-
tract ceases on payment of any claim.
The company uses the following basis to profit test this contract:
Interest earned on cashflows3% per annum
Expenses5% of each premium paid
ReservesIgnore

CA PRAVEEN PATWARI 215 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

The company has also calculated the following dependent probabilities of mortality, surrender and
redundancy which are used to profit test this contract:

Year t  aq d30 t 1  aq s30t 1  aq 30

r
 t 1

1 .000447 .098727 .023744

2 .000548 .049361 .024368

3 000602 .024680 .024680

4 .000636 0 0

Calculate the expected profit margin to the company on this policy using a risk discount rate of 5% per
annum. [10]
5. Subject CT5 April 2014 Question 12
A life assurance company issues a policy which provides a three-year temporary annuity of £15,000
per annum payable annually in arrear to a male life aged 65 exact. The single premium payable at out-
set on the policy is £42,000.
The company uses the following basis to profit test the policy:
Mortality PMA92C20

Interest earned on cashflow and reserves 5% per annum

Initial commission 1% of the single premium

Initial expenses £350

Renewal expenses £55 per annuity paymentwhich is assumed to increase

by 3% per annum from inception of the policy

Risk discount rate 7% per annum

In addition, the company establishes reserves on the policy at the beginning and end of each policy
year where:

t V  15,000   3  t  for t  1 and 2

tV 0 otherwise

CA PRAVEEN PATWARI 216 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

(i) Calculate the net present value of the expected profits on the policy:
(a) allowing for reserves
(b) ignoring reserves. [10]
(ii) Briefly comment on the reason for the difference in the two values calculated in part (i). [2]
(iii) Describe briefly how the net present value calculated in part (i)(a) and part (i)(b) would change
if a risk discount rate of 4% per annum had been used (instead of 7% per annum) and state the
reasons for the difference. [3]
[Total 15]
6. Subject CT5 September 2014 Question 10
A life insurance company issues a non-profit assurance policy for a term of n years to a life aged x ex-
act.
For t = 1, 2, ……., n:

 The level annual premium payable at the start of year t is P.

 The expense at the start of policy year t is Et.

 The benefits payable at the end of the t thpolicy year on death surrender and survival are Dt, Bt
and St respectively.

 The rate of interest earned on net cashflows during the t th policy year is it.

The dependent rates of mortality and surrender at age x + t are  aq x  t and  aq x  t respectively.
d w


Assume that the insurance company does not set up a reserve for the policy.

(i) Write down an expression for  CFt . the accumulation to the end of the t th policy year of the

expected net cashflow arising during the t th policy year per policy in force at the start of that
year. [2]
(ii) Derive an expression which could be used to calculate the level annual premium that the compa-
ny should charge if the company requires the expected net present value of profit on the policy
to be zero assuming a risk discount rate of j% per annum defining any notation used [3]

CA PRAVEEN PATWARI 217 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Assume that the insurance company does set up a reserve t-1V for the policy at the start of the t th pol-

icy year.

(iii) Write down an expression for the expected profit at the end of the t thpolicy year for each policy
in force at the start of that year. [2]

[Total 7]

7. Subject CT5 April 2016 Question 13 (part)

On 1 January 2015, a life insurance company issued four-year increasing term assurance policies with
level premiums payable annually in advance for the term of the policy, but ceasing on earlier death.
The initial sum assured is 140,000, increasing by 20,000 at each policy anniversary (the first increase
taking place at the beginning of the second policy year). The death benefit is payable at the end of the
year of death. If the policyholdersurvives to the end of the term of the contract, 50% of the total pre-
miums paid (accrued with no interest) is payable.
The company calculates the premium on the following basis:
Mortality AM92 Select

Rate of interest 6% per annum

Initial expenses 275

Initial commission 30% of the first year's premium, incurred at the outset

Renewal expenses 55 per annum, incurred at the time of payment of the second and
subsequent years' premiums

Renewal commission 2.5% of the second and subsequent years premiums.

For a male life aged 56 exact at inception of the policy:

(i) Set out, in stochastic form, the gross future loss random variable at the outset of this policy using
where applicable, Tx, Kx and elements ofthe premium basis that are relevant. [3]

CA PRAVEEN PATWARI 218 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

(ii) Calculate, showing all your workings, the office premium using annuity and assurance functions
and setting the expected present value of the gross future loss random variable equal to zero. [4]
(iii) Calculate, showing all your workings, the office premium using a discounted cashflow projection,
assuming no surrenders, ignoring reserves and using the same profit criterion as in part (ii)
above. The discount rate is assumed to be 6% per annum. [6]
(iv) Explain, without further calculations, the effect of:
(a) allowing for the setting up of reserves for the calculation in (iii)
(b) having set up reserves in (iv) (a), increasing the discount rate to 8% per annum. [3]
[Total 16]
The first two parts of this question are covered in Booklet 8

8. Subject CT5 September 2016 Question 13

A life insurance company issues a 3-year endowment assurance policy to an unmarried life that offers
the following benefits:
 On marriage, a return of 107.5% of total premiums paid.
 On surrender, a return of 50% of total premiums paid.
 On death, a benefit which is given by the formula:
10,000 × (1+t)t = 0,1 and 2
where t denotes the curtate duration in years since the inception of the policy.
 On survival, 30,000 is payable immediately.
The marriage, surrender and death benefits are payable at the end of the policy year of claim.
Premiums of 9,516 are payable annually in advance throughout the term of the policy or until earlier
claim.
The policy ceases on payment of any benefit.

The company uses the following basis to profit test this policy:
Independent force of marriage 15%

Independent force of surrender 7.5% in years 1 and 2 only

Independent force of mortality 1%

Interest earned on cashflows 3.5% per annum

CA PRAVEEN PATWARI 219 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Expenses 1.5% of each premium paid

Reserves None held

The company assumes that:

 each force of decrement is independent and constant over each year of age.
 surrenders only occur in policy years 1 and 2.
(i) Determine for each policy year the dependent rates of mortality, marriage and surrender. [4]
(ii) Derive the expected cashflows for the policy for each policy year. [7]
(iii) Calculate, from part (ii) the expected present value of the profit or loss to the company for each
policy year and in total. Use a risk discount rate of 4% per annum. [2]
(iv) Discuss the consequences for the company of the profit vector derived in part (iii). [2]
[Total 15]
9. Subject CT5 September 2017 Question 12
A life insurance company issues a 3-year guaranteed bonus endowment assurance policy to a life
aged 62 exact with a basic sum assured of 75,000. The basic sum assured, together with any attaching
bonuses, is payable at the end of the year of death or maturity if earlier.
Level premiums are payable annually in advance throughout the term of the policy or until earlier
death.
Simple annual bonuses are added at the beginning of each policy year (i.e. the death benefit does in-
clude any bonus relating to the policy year of death).
The company uses the following basis for carrying out profit tests of this policy:
Mortality AM92 Ultimate

Withdrawals: Ignore

Interest earned: 5% per annum on cashflows

Expenses: Initial: 15% of the first premium

Renewal: 5% of subsequent premiums

Bonuses: Simple bonus of 4% of basic sum assured perannum

The company holds net premium reserves for the policy using the following basis:
Mortality: AM92 Ultimate
CA PRAVEEN PATWARI 220 JAI SHREE SHYAM
CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Interest:4% per annum

(i) Calculate the net premium reserve for the policy at policy duration t = 1 and t = 2 years imme-
diately before the premium then due. [8]
(ii) Determine the annual premium required for the policy to achieve an internal rate of return of
6% per annum to the company. [9]
[Total 17]
10. Subject CT5 September 2018 Question 9
A life insurance company issues a three-year policy to a life that offers the following benefits:
 On death during the term of the policy, a sum of 37,500.
 On redundancy during the term of the policy, a return of 105% of total premiums paid.
 On surrender during the term of the policy, a return of 33% of total premiums paid.
 On survival to the end of the term. a sum of 39,000.
Premiums of 12,500 are payable annually in advance throughout the term of the policy or until earlier
claim. The death, redundancy and surrender benefits are payable immediately on claim. The policy
ceases on payment of any claim.
The company uses the following basis to profit test this policy:
Independent force of mortality: 1.5%

Independent force of redundancy: 2%

Independent force of surrender: 5% in years 1 and 2 only

Interest earned on cashflows: 2.5% per annum

Expenses: 2.5% of each premium paid

Reserves: Ignore

The company assumes that each force of decrement is constant over each year of age.
(i) Calculate the dependent rates of mortality, redundancy and surrender for each policy year. [3]
(ii) Calculate the expected profit margin to the company on this policy using a risk discount rate of
4% per annum. [7]
[Total 10]

CA PRAVEEN PATWARI 221 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

CM1 – ACTUARIAL MATHEMATICS

SECTION –13
PROFIT TESTING

FOR THE
2021 EXAMS

COVERING
CHAPTER 25 UNIT-LINKED AND ACCUMULATING WITH-PROFITS CONTRACTS

CHAPTER 26 PROFIT TESTING

CHAPTER 27 RESERVING ASPECTS OF PROFIT TESTING

This booklet includes the exam questions relating to unit-linked and accumulating
with-profits contracts only

CA PRAVEEN PATWARI 222 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

PAST EXAM QUESTIONS

This section contains all the relevant parts of the exam questions from 2010 to 2019,that are related to the
topics covered in this booklet, in respect of unit-linked and accumulating with-profits contracts only. The
exam questions that involve conventional contracts are covered in the other profit testing booklet
Solutions are given later in this booklet. These give enough information for you to check your answer, in-
cluding working, and also show you what an adequate examination answer should look like. Further infor-
mation may be available in the Examiners' Report, ASET or Course Notes. (ASET can be ordered from
ActEd.)
We first provide you with a cross-reference grid of key words or phrases that indicate the main subject
areas of each exam question. You can use this, if you wish, to select the questions that relate just to those
aspects of the topic that you may be particularly interested in reviewing.
Alternatively, you can choose to ignore the grid, and instead attempt each question without having any
clues as to its content.
Need for non-unit

Random variable
Zeroisenegative

Profit vector /

Profit margin
AWP 1 UVVP

assumptions
Bookwork /

NPV / IRR /
decrements

calculation
comment/

.cashflows
Tick when
attempted

signature

approach
Premium

Reserves
Multiple

Change
discuss

Question

1.   - 
2.  
3.  
4.  
5.   
6.    
7.   
8.    
9.   
10.    
11.    
CA PRAVEEN PATWARI 223 JAI SHREE SHYAM
 17.
16.
15.
14.
13.
12.
Question
Tick when
attempted

CA PRAVEEN PATWARI
Bookwork /
comment/



CM1 ACTUARIAL MATHEMATICS

discuss

AWP 1 UVVP


Multiple




decrements

Premium
calculation

224
Need for non-unit
Reserves

Zeroisenegative





.cashflows

Change



assumptions

Profit vector /



signature
-
NPV / IRR /





Profit margin

Random variable
approach

JAI SHREE SHYAM

ACTUATORS EDUCATIONAL INSTITUTE
CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

1. Subject CT5 April 2010 Question 13

A life insurance company issues a 3-year unit-linked endowment assurance policy to a male life aged
45 exact.
Level premiums of £4,000 per annum are payable yearly in advance throughout the term of the policy
or until earlier death. 95% of the premium is allocated to units in the first policy year, 100% in the
second and 105% in the third. A policy fee of £50 is deducted from the bid value of units at the start of
each year. The units are subject to a bid-offer spread of 5% on purchase. An annual management
charge of 1.75 of the bid value of units is deducted at the end of each policy year.
Management charges are deducted from the unit fund before death, surrender and maturity benefits
are paid.
If the policyholder dies during the term of the policy, the death benefit of 125% of the bid value of the
units is payable at the end of the policy year of death. On maturity, 100% of the bid value of the units
is payable.
The policyholder may surrender the policy only at the end of the first and second policy years. On sur-
render, the bid value of the units less a surrender penalty is payable at the end of the policy year of ex-
it. The surrender penalty is £1,000 at the end of the first policy year and £500 at the end of the second
policy year.
The company uses the following assumptions in carrying out profit tests of this contact:
Rate of growth on assets in the unit fund 5.5% per annum in year 1

5.25% per annum in year 2

5.0% per annum in year 3

Rate of interest on non-unit fund cashflows 4.0% per annum

Mortality AM92 Select

Initial expenses £200

Renewal expenses £50 per annum on the second and third premium
dates

Initial commission 15% of first premium

CA PRAVEEN PATWARI 225 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Renewal commission 2.0% of the second and third years premiums

Rate of expense inflation 2.0% per annum

Risk discount rate 7.0% per annum

For renewal expenses, the amount quoted is at outset and the increases due to inflation start imme-

diately. In addition, you should assume that at the end of the first and second policy years, 12% and

6% respectively of all policies still in force then surrender immediately.

(i) Calculate the profit margin for the policy. [13]

(ii) Calculate the expected present value of profit for the policy if the company assumed that there

were no surrenders at the end of each of the first and second policy years. [3]

[Total 16]

2. Subject CT5 September 2010 Question 11

A life insurance company issues a four-year unit-linked policy to a male life. The following non-unit

cashflows, NUCFt (t = 1, 2, 3. 4), are obtained at the end of each year t per policy in force at the start of

the year t:

Year t 1 2 3 4

NUCFt – 50.2 – 43.1 – 32.1 145.5

Assume that the annual mortality rate for the male life is constant at 1% at all ages.

(i) Show that the annual internal rate of return is 6%. [31

The company sets up reserves in order to zeroise future negative cashflows. The rate of interest

earned on non-unit reserves is 2.5% per annum.

(ii) Calculate the net present value of the profits after zeroisation using a risk discount rate of 6%

per annum. [3]

(iii) Comment on the results obtained in (i) and (ii) above. [1]

[Total 7]
CA PRAVEEN PATWARI 226 JAI SHREE SHYAM
CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

3. Subject CT5 September 2011 Question 12

(i) List the main features of a unit-linked policy. [4]

A four-year unit-linked policy issued by a life insurance company to a life aged 56 exact has the

following profit vector:

(1525.89, – 334.08, – 292.05, – 933,82)

(ii) Determine the net present value of the profits of this policy, assuming that the company sets up

reserves in order to zeroise future negative expected cashflows on the policy.

Basis:

MortalityAM92 Ultimate

Rate of interest on non-unit fund cashflows4.5% per annum

Risk discount rate 7.5%perannum [5]

[Total 9]

4. Subject CT5 April 2012 Question 5

A 10-year unit-linked policy has the following profit vector:

(– 40,– 12, – 6,– 1, 5,– 4, 8, 20, 25, 30)

Determine the revised profit vector if reserves are set up to zeroise future negative cashflows on the

following basis:

Mortality0.5% per annum (i.e. probability of death at each age)

Interest 2.5%perannum [4]

5. Subject CT5 September 2012 Question 15

A life insurance company issues a three-year unit-linked endowmentassurance policy to a male life

aged 45 exact. The main features of the contract are:

Premiums: £3,000 per annum are payable yearly in advance throughout the

term of the policy or until earlier death

CA PRAVEEN PATWARI 227 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Allocation rates: 75% of premium is allocated to units in the first policy year, 100%

in the second and 105% in the third

Policy fee: £35 is deducted from the bid value of units at the start of each poli-

cy year

Death benefit: 150% of the bid value of the units is payableat the end of the policy

year of death

Maturity benefit: 100% of the bid value of the units is payable

Bid-offer spread: 5%

Annual management charge: 1.5% of the bid value of units is deducted atthe end of each policy

year (management charges are deducted from the unit fund before

death and maturity benefits are paid).

The company uses the following assumptions in carrying out profit tests of this contract:

Rate of growth on assets in the unit fund 5.0% per annum in year 1

4.5% per annum in year 2

4.0% per annum in year 3

Rate of interest on non-unit fund cash flows 3.0% per annum

Mortality AM92 Select

Withdrawals None

Initial expenses £275

Renewal expenses £80 per annum on the second and subsequent

premium dates

CA PRAVEEN PATWARI 228 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Initial commission 20% of first premium

Renewal commission 2.5% of the second andsubsequent years' pre-

miums

Rate of expense inflation 2.0% per annum

Risk discount rate 6.5% per annum

For renewal expenses, the amount quoted is at outset, and the increases due to inflation start imme-
diately.
(i) Calculate the non-unit fund cashflows in each year of the contract and hence the expected
present value of profit assuming that the policyholder dies in the third year of the contract. [9]
(ii) Calculate the expected present value of profit for the policy if the policyholder dies in the:
(a) first year of the contract.
(b) second year of the contract. [4]
(iii) Hence calculate the expected present value of the contract allowing for the possibility that the
policyholder survives to the end of the contract. [2]
[Total 15]
6. Subject CT 5 April 2013 Question 14
A life insurance company issues a three-year unit-linked endowment assurance policy to a life aged 67
exact. Level premiums are payable yearly in advance throughout the term of the policy or until earlier
death. In the first year, 50% of the premium is allocated to units and 110% in the second and third
years. The units are subject to a bid-offer spread of 5% and an annualmanagement charge of 0.75% of
the bid value of units is deducted at the end of each policy year.
Management charges are deducted from the unit fund before death and surrender benefits are paid.
If the policyholder dies during the term of the policy, the death benefit of the bid value of the units is
payable at the end of the year of death. The policyholder may surrender the policy only at the end of

CA PRAVEEN PATWARI 229 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

each yearimmediately before a premium is paid. On surrender or on survival to the end of the term,
the bid value of the units is payable at the end of the year of exit.
The company uses the following assumptions in carrying out profit tests of this contract:

Rate of growth on assetsin the unit fund: 4% per annum

Rate of interest on non-unitfund cash flows: 3% per annum

Mortality: 90% AM92 Ultimate

Surrenders: 8% at end of first year, 4% at end of secondyear

based on policies in force at that time

Initial expenses: £235

Renewal expenses: £45 per annum on the second and third premium

dates

Initial commission: 12.5% of first premium

Renewal commission: 2.5% of the second and third years’premiums

Claim expense: £75 on deaths and surrenders only

The company sets premiums so that the net present value of the profit for the policy is 10% of the an-

nual premium, using a risk discount rate of 6% per annum.

(i) Calculate the premium for the policy on the assumption that the company does not zeroise fu-

ture expected negative cashflows. [12]

(ii) Calculate the net present value of the profit on the policy on the assumption that the company

does set up reserves in order to zeroise future expected negative cashflows. [5]

[Total 17]

CA PRAVEEN PATWARI 230 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

7. Subject CT5 September 2013 Question 15

A three-year unit-linked endowment assurance policy is sold to a male life aged 40 exact. The profit

signature for this policy, calculated using AM92 Select mortality and making no allowance for sur-

renders, is:

(–209.80, 253.55, 109.85)

It is now assumed for the cashflows for this policy that 15% of all policies inforce at the end of the first

policy year are surrendered at that time. The surrender value payable at that time is the bid value of

units at the end of the policy year less a surrender penalty of £500. There are no other changes to the

policy.

(a) Calculate the revised profit signature in the first policy year.

(b) Comment on the impact on the profit signature in the second and third policy years. [4]

8. Subject CT5 September 2014 Question 14

A life insurance company is proposing to launch a 'Low Start' unit-linked endowment policy for a term
of 3 years under which premiums increase by a fixed monetary amount each year and are payable
yearly in advance throughout the term of the policy or until earlier death. The premium payableand
the amount of premium allocated to units in each policy year are as follows:
Policy Year Premium Payable Allocation Rate
£ %

1 1,500 50

2 2,250 105

3 3,000 115

If the policyholder dies during the term of the policy, the death benefit of £6,750 (i.e. the total amount
of premiums due to be paid on the policy if held to maturity) or the bid value of the units, whichever is
higher, is payable at the end of the policy year of death. The policyholder may surrender the policy on-
CA PRAVEEN PATWARI 231 JAI SHREE SHYAM
CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

ly at the end of each policy year. On surrender or on survival to the end of the term, the bid value of
the units is payable at the end of the policy year of exit.
The units are subject to a bid-offer spread of 6% and an annualmanagement charge of 1% of the bid
value of units is deducted at the end of each policy year. Management charges are deducted from the
unit fund before death, surrender and maturity benefits are paid.
You should use the following assumptions in carrying out profit tests of this policy:
Rate of growth on assets in the unit fund 4.5% per annum

Rate of interest on non-unit fund cash flows 2.5% per annum

Mortality 90% AM92 Ultimate

Surrender 7.5% of policies in force atthe end of Year 1 and

2.5% of policies in force at the end of Year 2 then
surrender

Initial expenses £200

Renewal expenses £55 per annum on thesecond and third premium

dates

Initial commission 5% of first premium

Renewal commission 2.5% of the second and third years' premiums

Claim expense £75 (payable only on deathand surrender)

Risk discount rate 6.5% per annum

(i) Calculate the profit margin for the policy issued to a life aged 61 exact on the assumption that the
company does not set up sterling reserves for this policy. [13]
(ii) Explain why a life insurance company might need to set up non-unit reserves in respect of a unit-
linked life assurance policy. [2]

CA PRAVEEN PATWARI 232 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

(iii) Calculate the profit margin for the policy on the assumption that the company does set up re-
serves for this policy. [4]
[Total 19]
9. Subject CT5 April 2015 Question 14
A life insurance company issues a three-year unit-linked endowmentassurance policy to a life aged 58
exact under which level premiums of £3,000 are payable annually in advance throughout the term of
the policy or until earlier death. The premium allocation rate (%) at time t is given by[75 +20t] where
t = 0,1 and 2.
The units are subject to a bid-offer spread of 5%. An annual managementcharge of 0.75% of the bid
value of units is deducted at the end of each policy year.
Management charges are deducted from the unit fund before any death, surrender or maturity bene-
fits are paid.
If the policyholder dies during the term of the policy, the death benefit of £9,000 or the bid value of
the units if higher, is payable at the end of the policy year of death. The policyholder may surrender
the policy only at the end of each policy year. On surrender at the end of the policy year or on survival
to the end of the term, the current bid value of the units is payable.
The company uses the following assumptions in carrying out profit tests of this contract:
Rate of growth on assets in the unit fund: 4% per annum
Rate of interest on non-unit fund cashflows:2% per annum
Mortality: AM92 Select

Surrender: 10% at the end of first, second and third policy years

Initial expenses: £275

Renewal expenses: £70 per annum on the second and subsequent premium dates

Initial commission: 5% of first premium

Renewal commission: 2% of the second and subsequent years' premiums

Risk discount rate: 6% per annum

(i) Calculate the profit margin for the policy on the assumption that the company does not zeroise
future expected negative cashflows. [13]
CA PRAVEEN PATWARI 233 JAI SHREE SHYAM
CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Suppose the company sets up reserves in order to zeroise future negative expected cashfiows
(ii) Calculate the profit margin for the policy allowing for the cost of setting up these reserves. [4]
[Total 17]
10. Subject CT5 September 2015 Question 12
A life insurance company issues a two year unit-linked endowment assurance policy to a male life
aged 45 exact. Level premiums of 6,000 per annum are payable yearly in advance throughout the term
of the policy or until earlier death with 98% of each premium being allocated to units. A policy fee of
50 is deducted from the bid value of units at the start of each policy year. The units are subject to a
bid-offer spread of 6%. An annual management charge of 1.25% of the bid value of units is deducted
at the end of each policy year.
If the policyholder dies during the term of the policy, the death benefit of 200% of the bid value of the
units is payable at the end of the policy year of death.
The policyholder may only surrender the policy at the end of the first policy year. On surrender, the
bid value of units less a surrender value penalty of 500 is payable.
On maturity, 100% of the bid value of the units is payable.
Management charges are deducted from the unit fund before death, surrender and maturity benefits
are paid.
The company uses the following assumptions in carrying out profit tests of this contract:
Rate of growth onassets in the unit fund 5.0% per annum in year 1

4.5% per annum in year 2

Rate of interest onnon-unit fund cashflows 3.0% per annumin both years 1 & 2

Mortality AM92 Select

Surrenders 2.5% of all policies in force at the end of policy year 1

Initial expense 225

Renewal expense 80 on the second premium date

Initial commission 7.5% of first premium

CA PRAVEEN PATWARI 234 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Renewal commission 2.5% of the second premium

Death claim expense 90

Maturity claim expense 55

Risk discount rate 6% per annum

(i) Calculate, showing all your workings, the non-unit fund cashflows in the first and second years
of the policy if the policyholder-
(a) dies in the first year of the policy.
(b) surrenders in the first year of the policy.
(c) dies in the second year of the policy.
(d) survives to the end of the policy. [7]
(ii) Derive the expected present value of profit for the policy in the event that the policyholder:
(a) dies in the first year of the policy.
(b) surrenders in the first year of the policy
(c) dies in the second year of the policy.
(d) survives to the end of the policy. [5]
(iii) Calculate, showing all your workings, the expected present value of the profit for the policy. [1]
[Total 13]
11. Subject CT5 April 2016 Question 7
A five-year unit-linked policy issued by an insurance company to a life aged 60 exact has the following
profit vector:
(751.25, –321.06, – 267.57. –192.05. 201.75)
(i) Define the meaning of zeroisation in the context of this unit linked policy. [1]
(ii) Explain why an insurance company might choose to zeroise the above profit vector. [1]
(iii) Calculate, showing all your workings, the net present value of the profits of this policy after ze-
roisation.
Basis:
MortalityAM92 Ultimate
CA PRAVEEN PATWARI 235 JAI SHREE SHYAM
CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Rate of interest onnon-unit fund cashflows 3.5%perannum

Risk discount rate6.0% per annum [5]
[Total 7]
12. Subject CT5 September 2016 Question 2
A 10-year unit-linked policy has the following profit vector:
(–50, –10, – 10, 5, 5, 5, – 3, 15, 40, 60)
Reserves are set up to zeroise future negative cashflows on the following basis:
Basis:
Mortality The probability of death at each age is a constant 0.25%per annum

Rate of interest 1.5% per annum

Determine the revised profit vector. [4]

13. Subject CT5 April 2017 Question 4 (part)

Describe the principal features of a non-unitised accumulating with-profits contract. [4]

14. Subject CT5 April 2017 Question 13

A life insurance company issues a 3-year unit-linked endowment assurance policy to a male life aged
60 exact. The details are:
 Level premiums of 9,000 per annum are payable yearly in advance throughout the term of the pol-
icy or until earlier death.
 80% of the premium is allocated to units in the first policy year and 100% in the second and third
policy years.
 A policy fee of 25 is deducted from the annual premium before the allocation to units.
 The units are subject to a bid-offer spread of 5%.
 An annual management charge of 1.5% of the bid value of the units is deducted at the end of each
policy year.
 Management charges are deducted from the unit fund before death, surrender and maturity bene-
fits are paid.

CA PRAVEEN PATWARI 236 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

 If the policyholder dies during the term of the policy, the death benefit of 125% of the bid value of
the units is payable at the end of the policy year of death.
 On maturity, 100% of the bid value of the units is payable.
 The policyholder may surrender the policy at any time during the first and second policy years.
 On surrender, the bid value of the units less a surrender penalty is payable at the end of the policy
year of exit as follows:
Year Penalty

1 600

2 300

The company uses the following assumptions in carrying out profit tests of this contract:
Rate of growth on assets in the unit fund 4.5% per annum in year 1

4.0% per annum in year 2

3.5% per annum in year 3

Rate of interest on non-unit fund cashflows 2.0% per annum

Mortality AM92 Select

Initial expenses 220

Renewal expenses 75 per annum on the second and subsequent

premium dates

Initial commission 30% of first premium

Renewal commission 1.5% of the second and subsequent years' pre-

miums

Rate of expense inflation 2.0% per annum

Risk discount rate 6.5% per annum

CA PRAVEEN PATWARI 237 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

For renewal expenses, the amount quoted is at the commencement of the policy, and the increases
due to inflation start immediately.
The company assumes that the force of decrement due to surrender is:
 0.1 in policy year 1
 0.05 in policy year 2.
It also assumes that each force of decrement is independent and constant over each year of age.
(i) Determine for each policy year the dependent rates of mortality and surrender. [4]
(ii) Calculate the profit margin for the policy. [11]
The company now assumes that there are no surrenders.
(iii) Calculate the expected present value of profit for the policy. [4]
[Total 19]

15. Subject CT5 September 2017 Question 11

A life insurance company issues a large number of 4-year unit-linked endowment assurance policies
to lives aged 65 exact. Level premiums are payable annually in advance until maturity or earlier death.
The company has performed a profit test on these policies and the profit vector per policy sold, ignor-
ing surrenders, is as follows:
(185.21, –121.52, – 5.28, 12.95)
(i) Calculate the profit signature per policy sold if negative non-unit fund cashflows are zeroised. [3]
The company now wishes to allow for surrenders in its calculations. It assumes that at the end of the
first and second policy years only, 3% of the surviving policyholders will surrender. Surrender values
are equal to the bid value of units held (after deduction of the fund management charge) less a sur-
render penalty of 50.
(ii) Calculate the revised profit signature per policy sold after allowing for surrenders if negative
non-unit cashflows are zeroised. [6]
(iii) Calculate the net present value of the revised profit signature in part (ii), using a risk discount
rate of 8% per annum. [1]
Basis:
MortalityAM92 Ultimate

CA PRAVEEN PATWARI 238 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Interest earned on non-unit cashflows5% per annum fund

ExpensesIgnore [Total 10]

16. Subject CT5 April 2018 Question 13

A life insurance company issues a three-year unit-linked endowmentassurance contract to a male life
aged 62 exact under which level annual premiums of 6,000 are payable in advance throughout the
term of the policy or until earlier death. 90% of each year's premium is invested in units at the offer
price.
There is a bid-offer spread in unit values, with the bid price being 95% of the offer price.
There is an annual management charge of 1% of the bid value of units. Management charges are de-
ducted at the end of each year before death or maturity benefits are paid.
On the death of the policyholder during the term of the policy, the benefit, payable at the end of the
year of death, is 12,000, or the bid value of the units if greater.
The policyholder may surrender the policy only at the end of each year immediately before a premium
is payable. On surrender, the bid value of the units is payable at the end of the year of exit. On maturi-
ty, 110% of the bid value of the units is payable.
The company holds unit reserves equal to the full bid value of the units. It sets up non-unit reserves to
zeroise any negative non-unit fund cashflows, other than those occurring in the first year.
The company uses the following assumptions in carrying out profit tests of this contract:
Rate of growth onassets in the unit fund 5% per annum

Rate of interest onnon-unit fund cashflows 3% per annum

Mortality AM92 Ultimate

Surrenders 10% at the end of the first policy year, 5% at theend of the
second policy year based on policies in force at that time

Initial expenses 225 plus 5% of the first premium (all incurred on policy
commencement)

Renewal expenses 65 at the start of each of the second and thirdpolicy years
plus 2.5% of the second and third premiums

CA PRAVEEN PATWARI 239 JAI SHREE SHYAM

CM1 ACTUARIAL MATHEMATICS ACTUATORS EDUCATIONAL INSTITUTE

Risk discount rate 7% per annum

Calculate the profit margin on the contract [15]

17. Subject CT5 September 2018 Question 8

(i) State the main features of a unit-linked policy. [4]
A life insurance company issues a four-year unit-linked policy to a life aged 51 exact. The policy has the
following profit vector:
(1798.01, – 401.56, –355.10, –1075.23)

(ii) Determine the net present value of the profits of this policy, assuming that the company sets up
reserves in order to zeroise future negative expected cashflows on the policy.

Basis:
Mortality: AM92 Ultimate
Rate of interest on non-unit fund cashflows:2.5% per annum
Risk discount rate: 4.5 % per annum [5]
[Total 9]

CA PRAVEEN PATWARI 240 JAI SHREE SHYAM