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EXAMINATIONS
31st May 2003 (a.m.)
Subject 102–Financial Mathematics
Time allowed: Three Hours
1. Do not write your name anywhere on the answer scripts. You have only to write your
Candidate’s Number on each answer script.
3. Attempt all 14 questions, beginning your answer to each question on a separate sheet.
4. In addition to this paper you should have available graph paper, Actuarial Tables and
an electronic calculator.
1 1
= +i
an Sn
[3]
b) Calculate the equivalent constant force of interest earned on the transaction. [3]
Q.4 A salaried person aged exactly 35 now wishes to make 15 annual payments
starting today into a pension plan. His aim is to provide for the expenses to
be incurred, towards his daughter’s education, when he is aged 55.
In calculating how much annual payment to invest each year, the person
has assumed that
a) Assuming that the amount of each payment during any period of 5 years is
half the amount of each payment in the subsequent 5 years, calculate the
amount of the first annual payment. [5]
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ASI 102 05 03
• the rate of interest actually earned over the 20- year period is 6%
per annum effective, and
• the annuity certain is purchased at age 55 at a nominal rate of
5% per annum convertible half- yearly.
Assuming that the person makes the payments as in a) above, calculate the
revised amount of the initial lump sum that will be available. [5]
The film generates revenues for a year at the rate of Rs 1,20,000 per annum
during the first month, Rs 1,10,000 per annum during the second month and
so on till Rs 10,000 in the twelfth month. Assume that the revenues are
received continuously during each month.
List the reasons why the net real actual yield that will be achieved can be
less than what is expected.
[3]
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ASI 102 05 03
b) List reasons why the running yield from property investment is expected to
be higher than that for ordinary shares. [5]
Q.9 A mutual fund sells units to unit holders. It retains any income earned on its
investments within the fund. Unit holders can redeem units available in
their account based on the unit price on 1st April each year. The Unit price
on 1st April in each year is:
In order to allow for expenses, the mutual fund sells units at a price that is
2% more than the above-mentioned unit price and buys back units at a price
that is 2% below the above- mentioned price. [2]
b) Write down the equation of value to find the yield obtained by an investor
who purchased 200 units on 1st April in each year, from 1996 to 2001
inclusive, and who sold back his holding to mutual fund on 1st April 2002. [2]
c) Write down the equation of value to find the yield obtained by an investor
who invested Rs.500 in the fund on 1st April in each year, from 1996 to
2001 inclusive, and who sold back his holding to mutual fund on 1st April
2002. [2]
d) List the disadvantages of using time weighted rate of return and money
weighted rate of return in assessing the performance of an investment fund
manager.
[3]
Q.10 Explain the difference between a future contract and forward contract. [2]
Q.11 A 3-month forward contract is issued on 1st February 2003 on a stock with
a price of Rs 500 per share. Dividends are received continuously and the
dividend yield is 3% per annum. In addition, it is anticipated that a special
dividend of Rs 100 per share will be paid on 1st April 2003.
Assuming a risk free force of interest of 5% per annum and no arbitrage,
calculate the forward price per share of the contract.
[3]
Q.12 A company is liable to make four payments at five-yearly intervals, the first
payment being due five years from now. The amount of the tth payment is
Rs (1000+100t). The company values these liabilities at an effective rate of
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ASI 102 05 03
a) Find the present value and the discounted mean term of these liabilities. [4]
b) An amount equal to the total value of the liabilities (on the basis of an
effective annual interest rate of 5%) is immediately invested in two newly
issued loans, one redeemable at the end of ten years and the other at the end
of 30 years.
Each loan bears interest at 5% per annum payable annually in arrear. Both
the loans are issued and redeemable at par.
Given that, on the basis of an effective annual interest rate of 5%, the
discounted mean term of the asset-proceeds is the same as the discounted
mean term of the liability – outgo, determine how much is invested in each
of the loans. [6]
Q.13 A certain irredeemable stock pays interest at 5.5% per annum payable
quarterly on 31st March, 30th June, 30th September and 31st December.
a) On 31st August 2001 this stock was quoted at a price of Rs 49.50 per Rs
100 nominal. Find the gross nominal yield per annum, convertible half-
yearly. [3]
Let Vn be the random variable denoting the present va lue of Re 1 due at the
end of n years.
a) Show that Vn has a log–normal distribution and find the parameters of the
distribution. [3]
b) Assuming further that each year the yield, i t , has mean value 0.08 and
standard deviation 0.05; find the expected value and the standard deviation
of the present value of Rs 1000 due at the end of 10 years.
[10]
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