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102_Sol_1103

# 102_Sol_1103

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06/16/2009

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Actuarial Society of India
EXAMINATIONS
October / November2003
SUBJECT : 102 \u2013 FINANCIAL MATHEMATICS
Indicative Solution
2
Solution to Q1:
(
)
010126
.
8
721735
.
7
*
025
.
0
012348
.
1
*
*
1
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*
)
1
(
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*
*
)
1
(
**
)
(
)
(
)
(
1
)
(
1
)
(
)
(
)
(
)
(
=
+
=
\ue007\ue007\ue008\ue006
\ue001\ue001\ue002\ue000+
=
\ue007\ue007\ue008\ue006
\ue001\ue001\ue002\ue000 +
=
+
==
+
==
n
p
n
p
p
n
p
p
n
p
p
n
p
n
p
p
n
a
pi
i
i
a
p
i
i
i
a
i
i
i
a
v
i
i
a
i
d
d
a
d
d
a
&
&
&
&
(Give 3 marks for correct answer with proper steps showing the working, else 0).
- Total [ 3]
Solution 2

Let the retail price be Rs.100. The cash price is Rs.70, or one may pay Rs.75 in 6 months\u2019 time. The effective rate of discount per annumd is found by solving the equation

70 = 75*(1-d)\u00bd
This implies d=12.89%.
[1 mark]
The effective annual rate of interest is i = d/(1-d) = 14.8%
[1\u00bd mark]
One may pay Rs.72.50 in three months\u2019 time instead of Rs.70 now, so the effective
annual rate of discount d is found from the equation
70 = 72.50*(1-d)\u00bc
[1 mark]
which gives d =13.10%.
3
The new arrangement therefore offers a greater effective annual rate of discount to cash
purchasers.
[1\u00bd mark]
Total [ 5]
Solution to Q3 (a):
For
5
0
\u2264
\u2264t
;
[
]
2
0
2
0
025
.
0
02
.
0
2
05
.
0
02
.
0
)
05
.
0
02
.
0
(
)
(
t
t
t
t
dt
t
eee
t
v
t
t
+
\u2212
\ue00a\ue00a\ue00b\ue009
\ue004\ue004\ue005\ue003
+
\u2212
+
\u2212
==
\u222b
=
[2\u00bd marks]
For
5
>
t
;
[
]
[
]
[
]
[
]
[
]
t
t
t
t
t
dt
dt
t
e
e
e
e
e
e
e
t
v
t
t
06
.
0
425
.
0
3
.
0
06
.
0
725
.
0
06
.
0
025
.
0
02
.
0
06
.
0
)
05
.
0
02
.
0
(
*
*
*
)
(
5
50
2
5
50
+
\u2212
\u2212
\u2212
\u2212
\u2212
+
\u2212
\u2212
+
\u2212
===
\u222b
\u222b
=
[2\u00bd marks]
Total [5]
Solution to Q3 (b):
Present value of the income stream is given by
[
]
048648
.
35
*
09
.
025
09
.
0
*
2525
055
.
1
505
.
1
12
7
425
.
0
09
.
0
12
7
)
06
.
0
425
.
0
(
03
.
0
=
\u2212
\u2212
=
\ue00a\ue00b\ue009
\ue004\ue005\ue003
\u2212
==
\u2212
\u2212\u2212
\u2212
+
\u2212
\u2212
\u222b
e
e
e
dt
e
e
t
t
t
(3 marks for correct equation)
(1 mark for correct evaluation)
Total [ 4]

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