ETC2430 Actuarial Cash Flow Modeling Final exam Part 1

Java Python ETC2430

Actuarial Cash Flow Modeling

Final exam

Part 1 (40%/100%)

Part A (Application): [5points]

A bank ofers to its customers a product that pays a regular monthly amount of 750 in arrears for 15 years starting from the end of the first month, against a one-of initial investment of 100 , 000 in the beginning of the first month, where the efective yearly rate of interest is strictly positive.

● Given that the efective yearly rate of interest is strictly positive, what is the numerical value of the annual efective rate of discount implied by this product?

(show the intermediary steps of the derivations, but the numerical value of the discount rate can be calculated using Excel or a  calculator – provide  the number in the format 1.234%)

Part B (Application): [15 points (5+5+5)]

The force of interest δ(t), where t is measured in years, is equal to a for t < 5, and to b for t ≥ 5. We also know that:

● a payment of 500 due at time 3 is valued to be 580 at time 8

● a payment of 500 due at time 4 is valued to be 530 at time 6.

(a) Write down a system of two equations to solve a and b. (show the intermediary steps  of the  derivations)

(b) Derive the numerical values of a and b.

(provide the numbers in the format 1.234%)

(c) Calculate the accumulated value at time 10 of a payment stream paid continuously from t = 0 until t = 5 at a rate P(t) = 500e0.03t.

(show the intermediary steps of the derivations  –  round the number to the 3rd decimal, i.e. ‘.123’)

Part C (Application): [20 points ( ETC2430 Actuarial Cash Flow Modeling Final exam Part 1 5+5+5+5) ]

An individual aged 35 exact deposits each year in arrears an amount in a bank account that pays an efective interest rate of i = 2% pa.  The amount deposited the first year is 10, 000, and this amount increases each year at a compound rate of j pa, where j  > i.  The last deposit is made at the end of the year of age 64, which means that the total number of deposits is 30.  After the last deposit, the individual starts withdrawing each year in arrears a fixed amount of 30, 000, i.e. the first withdrawal is made at the end of the year of age 65. All payments are deterministic, and mortality is not taken into account.

(a) Derive an analytical expression of the accumulated value at the end of the year of age 64 of

all deposits, i.e. at the time of the last deposit.  (show the intermediary steps  of the  derivations)

(b) Assuming that the accumulated value at the end of the year of age 64 of all deposits is equal to 600, 000, what is the numerical value of the compound rate j?

(Recall that j > i)  (intermediary  steps  are  not  required,  and  the  rate  can  be  calculated  using Excel or a calculator – provide the number in the format 1.234%)

(c) Assuming that the accumulated value at the end of the year of age 64 of all deposits is equal to 600, 000, and without using Excel, how many withdrawals of 30, 000 can the individual

aford before the account balance becomes insufflcient for further withdrawals? (show the intermediary steps  of the  derivations  – provide  an  integer number)

(d) What should the account balance be at time 30 (i.e.  beginning of the year of age 65) such that the individual’s account balance reaches 0 after age 95?  If the efective yearly interest rate i = 2% earned during the first 30 years was to change to the efective yearly interest rate r, what is the minimum value of r that will lead to that amount?

(show the intermediary steps of the  derivations,  but the numerical value of r can be calculated using Excel or a calculator – provide the number in the format 1