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Setion II

Question 6
Solution:
CurrenL neL lncome 300,000 8s. p.a.
8aLe of lncrease of neL lncome 8 p.a.
lnvesLmenL yleld from lnvesLlng 6 p.a.
number of years Lhe lncme ls expecLed Lo conLlnue 23 years
Lconomlc value 13,783,662 8s. v((1+6)/(1+8)-1,23,-300000,0,1)
AlLernaLlve meLhod:
luLure value of all earnlngs for 23 years 67,730,019 8s. 300000*(1+6)*((1+6)^23-(1+8)^23)/(6-8)
resenL value Loday aL Lhe lnvesLmenL yleld of 6 13,783,662 8s. 67730019/(1+6)^23
Setion II
Question 7
Solution:
ald up value of Lhe pollcy 1,314,000 8s. 1200000*18/23+630000
Surrender value = 73 of Lhe above pald up value 1,133,300 8s. 1314000*73
8emalnlng Lerm of Lhe pollcy 7 years
8aLe Lo be earned on surrender value Lo reach pald up 4.20 p.a. 8A1L(7,0,-1133300,1314000,) CAC8
!"#$% '($ )*+, -) .*/-$ 0"-/, 1$ )*2*1/$ "3/2 "3 ,-$ 4*#-5+#2 "6 #($ )"/+728
age 1
Suggested solutions to 3-mark and 4-mark problems contained in the Additional Sample Questions: Insurance Planning (RAIP) and
Retirement Planning (RPEB)
The earning member of a family aged 35 years expects to earn till next 25 years. He expects an annual growth of 8% in her existing net income of Rs. 5 lakh p.a. If he
considers an average investment yield of 6% till his life expectancy of 80 years, what economic value could be ascribed to his life today?
Mr. X has a 25-year endowment policy, the annual premium being Rs. 15,850 for a sum assured of Rs. 12 lakh. He has paid 18 premiums and has Rs. 6,50,000
towards declared bonuses on this policy. He has met his objectives and has sufficient cover and wealth support. He does not wish to continue in the policy. He has the
option to either make this policy paid up, or surrender the same at a factor of 75% of the paid up value. If he chooses to surrender, what return he should earn on the
surrender value to offset the paid up value, when due?
97"3"4+7 .*/-$ 0"-/, 1$ #($ *// $*53+3:; "6 6-#-5$ 2$*5; ,+;7"-3#$, #",*2 *# #($
+3.$;#4$3# 2+$/,8
!"#$ <% '($ =+6$ 9>)$7#*372 6+:-5$ "6 ?@ 2$*5; +; 5$,-3,*3# ($5$8
!"#$ A% '($ B$*/ B$#-53 6"54-/* +; -;$, ($5$ 0+#( C+3.$;#4$3# 2+$/,C #*D$3 +3 3-4$5*#"5
*3, :5"0#( #*D$3 +3 ,$3"4+3*#"58
Setion II
Question 8
Solution:
value of Pouse 8,000,000 8s.
Loan Lllglble 6,400,000 8s. 8000000*80
8aLe of lnLeresL 13.73 p.a.
1erm 13 years
180 monLhs
Month|y payments under reverse mortgage 10,703 8s. M1(13.73/12,180,0,-6400000,1)
!"#$%
Setion II
Question 9
Solution:
value of 8everse MorLgage Loan Lllglble 6,400,000 8s.
8aLe of lnLeresL 13.73 p.a.
1erm 13 years
MonLhly paymenLs under reverse morLgage 10,703 8s. M1(13.73/12,180,0,-6400000,1)
llxed penslon 13,000 8s. p.m.
CurrenL household expenses 16,000 8s. p.m.
Lxcess funds avallable for lnvesLmenL: Lnd of year 1 116,439 8s. ((10703+13000)-16000)*12
Pousehold expenses ln Lhe 2nd year 16,960 8s. p.m. 16000*(1+6)
Lxcess funds avallable for lnvesLmenL: Lnd of year 2 233,001 8s. ((10703+13000)-16960)*12+116439*(1+10)
Pousehold expenses ln Lhe 3rd year 17,978 8s. p.m. 16960*(1+6)
Lxcess funds avallable for lnvesLmenL: Lnd of year 3 349,008 8s. ((10703+13000)-17978)*12+233001*(1+10)
Pousehold expenses ln Lhe 4Lh year 19,036 8s. p.m. 17978*(1+6)
Lxcess funds avallable for lnvesLmenL: Lnd of year 4 463,673 8s. ((10703+13000)-19036)*12+349008*(1+10)
Pousehold expenses ln Lhe 3Lh year 20,200 8s. p.m. 19036*(1+6)
Lxcess funds avallable for lnvesLmenL: Lnd of year 3 376,083 8s. ((10703+13000)-20200)*12+463673*(1+10)
MorLgage Loan and lnLeresL ouLsLandlng : Lnd of ?ear 3 926,830 8s. lv(13.73/12,3*12,-10703,0,1)
Net L|ab|||ty due to keverse Mortgage Loan 3S0,747 8s. 926830-376083 age 2
A retiree of age 65 has fixed pension of Rs. 15,000 per month. His household expenses have exceeded his pension of late and are Rs. 16,000 per month now. He has
approached an approved lending institution under Reverse Mortgage Scheme. He is offered fixed monthly payments for 15 years at a rate of interest of 13.75% on Rs. 64
lakh eligible value of his home. He meets his annual expenses as increased by 6% inflation every year and invests the excess amount from his two fixed annuities, fixed
pension and reverse mortgage stream, in an investment yielding 10% p.a. at the end of every year starting from this year onwards. You assess at the end of five years
thus accumulated fund against the total liability under Reverse Mortgage and find that ______.
A retiree of age 60 wants to enter into the reverse mortgage scheme by mortgaging his self-occupied house which is valued at Rs. 80 lakh. An approved lending institution
agrees to provide periodic monthly payments under the scheme considering a loan to value ratio of 80% and at a rate of interest of 13.75% p.a. If the retiree opts for a 15-
year term of reverse mortage, what fixed periodic monthly payments he stands to receive under the scheme?
E<F G*/7+/*#+"3% H$ :$3$5*//2 ;$$ +3 4"5#:*:$ 6"54-/*I #($ /"*3 *4"-3# +; -;-*//2 7"3;+,$5$, 0+#( 3$:*#+.$ ;+:3 +3 JK 0(+/$ LK +; C!+/C8 M3 B$.$5;$ N"5#:*:$ 7*;$I #($
*,4+;;+1/$ /"*3 *4"-3# +; #*D$3 0+#( 3$:*#+.$ ;+:3 -3,$5 LK 0(+/$ JK +; C!+/C8 O/;"I C1$:+3 4",$C +; 7"3;+,$5$,I +8$8 C<C 6"5 C#2)$C8
EAF '($ *33-+#2 )$5+", +; A@ 2$*5;8 '("-:( #($ *3-+#2 )*24$3# ;#"); *6#$5 A@ 2$*5;I #($ /"*3 +; 3"# )*2*1/$ *; /"3: *; #($ 4"5#:*:"5 ;-5.+.$;8 O6#$5 #($ ,$*#( "6 #($
4"5#:*:"5 *3, (+;P($5 ;-5.+.+3: ;)"-;$I #($ /$3,+3: +3;#+#-#+"3 ;$//; #($ ("-;$ *3, 5$7".$5; /"*3 *4"-3# 0+#( +3#$5$;# *3, #($ 1*/*37$I +6 *32 +; )*+, #" #($ ($+5;8
O/#$53*#+.$ N$#(", 6" 6+3,+3: *77-4-/*#$, 6-3,%
v: llxed annulLles (enslon+8M sLream) for 3-year perlod 1,286,147 8s. [1] v(10,3,-(10703+13000)*12,0,1)
v: Lxpenses rlslng [ 6 p.a. for 3-year perlod 892,673 8s. [2] v((1+10)/(1+6)-1,3,-16000*12,0,1)
v of excess funds Lo be lnvesLed for 4 annual perlods 393,472 8s. [1-2] !"#$%&'(%#' *+ %,-%&& +.#/& 0%12# 2' '3% %#/ *+ 4%25 67 '3.& 6&' 2--.(.82'9*# %#/ *+ 4%25 :7 ;;;;<
AccumulaLlon aL Lhe end of year 3 376,083 8s. 393472*(1+10)^4
Setion III
Question 4
Solution:
'+4$ B-/$%
lnlLlal subscrlpLlon daLe 1-Apr-2007 ?ear of lnlLlal subsrlpLlon: 2007-08
Lxplry of 3 years from Lhe end of l? of lnlLlal subscrlpLlon 31-Mar-2013 ?ear of wlLhdrawal Lo be 2013-14
O4"-3# B-/$%
1)8alance aL Lhe end of 4Lh l? precedlng 2013-14, l.e. aL Lhe end
of year 2009-10 or as on 31sL March 2010 243,428 8s.
30 of Lhls balance 122,714 8s. [1]
2)8alance aL Lhe end of precedlng l?, l.e. as on 31sL March, 2013
493,364 8s.
30 of Lhls balance 246,782 8s. [2]
Lower of [1] and [2] 122,714 8s. Irom 1st Apr||, 2013 |n the year 2013-14
age 3
An individual opened PPF account on 1st April 2007. The amount outstanding in his account on 31st March 2013 was Rs. 4,93,564. If he had a balance of Rs. 2,45,428 on
31st March 2010, what amount can he withdraw and from which date?
'($ B-/$ "6 J*5#+*/ H+#(,5*0*/ 65"4 JJL OP7 .: AnyLlme afLer Lhe explry of flve years from Lhe end of Lhe flnanclal year ln whlch Lhe lnlLlal subscrlpLlon ls made, Lhe
subscrlber can parLlally wlLhdraw buL noL more Lhan flfLy percenL (30) from Lhe balance LhaL sLood Lo hls / her credlL aL Lhe end of Lhe fourLh flnanclal year lmmedlaLely
precedlng Lhe year of wlLhdrawal or aL Lhe end of Lhe precedlng flnanclal year whlchever ls lower, less Lhe loan amounL (lf any). Cnly one wlLhdrawal ls allowed per
flnanclal year.
Setion III
Question 5
Solution:
Suppose Lhe corpus lnvesLed ls: 100 8s.
Cash flow aL Lhe end of flrsL year 6 8s.
CrowLh ln annulLy ln every subsequenL year 3.00 p.a.
CuaranLeed perlod of annulLy 13 years
(-) Corpus lnvesLed (100)
+ Cash flow ?ear 1 6
+ Cash flow ?ear 2 6.30
+ Cash flow ?ear 3 6.62
+ Cash flow ?ear 4 6.93
+ Cash flow ?ear 3 7.29
+ Cash flow ?ear 6 7.66
+ Cash flow ?ear 7 8.04
+ Cash flow ?ear 8 8.44
+ Cash flow ?ear 9 8.86
+ Cash flow ?ear 10 9.31
+ Cash flow ?ear 11 9.77
+ Cash flow ?ear 12 10.26
+ Cash flow ?ear 13 10.78
+ Cash flow ?ear 14 11.31
+ Cash flow ?ear 13 11.88
l88 3.04
O/#$53*#+.$ N$#(",%
-1.8678 8A1L(13,6/1.03,-100,0,0)
3.04 (1+(-1.8678))*(1+3)-1
Setion III
Question 6
Solution: (As in the Alternative Solution to
Question 5 above)
AccumulaLed corpus for annulLy 18,600,000 8s.
8aLe of lnflaLlon consldered 3.30 p.a.
AmounL of currenL annual expenses 1,080,000 8s. 90000*12
erlod of growlng annulLy 30 monLhs
8aLe of reLurn for annulLy 4.0334 p.m. 8A1L(30,1080000,-18600000,0,0)
AnnulLy reLurn Lo be LargeLed 9.76 p.a. (1+4.0334)*(1+3.3)-1
age 4
B*#$ "6 Q@ 2$*5; /$.$/ *33-+#2 "6 0(+7( /$.$/ )*24$3# )5$RS8ST :5"0#( +;
B;8 <I@?@I@@@8 '($3I O33-*/ U5"0#( "6 S8ST 1-+/# +3#" #(+; *33-+#2 #" 4*D$
+# :5"0+3: *33-+#2 "6 0(+7( 6+5;# )*24$3# +; B;8 <I@?@I@@@8
An annuity product is designed in such a way that it gives first cash flow at 6% of the corpus at the end of first year and thereafter every year in the form of growing
annuity at the rate of 5%. If the cash flows are guaranteed for 15 years, what rate of return is obtained on the corpus invested?
A retiree has accumulated Rs. 1.86 crore towards his retirement corpus. His current monthly household expenses are Rs. 90,000 which he needs inflation adjusted for 30
years. If he considers average inflation to be 5.5% p.a. from now onwards, what rate of return from a 30 year annuity, payable annually and deferred by one year, should
meet his goal?
8aLe of 13 years level annulLy of whlch level paymenL pre-3
growLh ls 8s. 6
Annual CrowLh of 3 bullL lnLo Lhls annulLy Lo make lL growlng
annulLy of whlch flrsL paymenL ls 8s. 6
Setion III
Question 7
Solution:
Corpus already accumulaLed 4,000,000 8s.
lnvesLmenL raLe obLalned ln deferred lnsLrumenL 8.0 p.a.
CurrenL household expenses 300,000 8s. p.a.
8aLe of lnflaLlon of expenses 6.0 p.a.
8enL recelvable from renLlng offlce space on reLlremenL 180,000 8s. p.a.
8aLe of lncrease of renLals 6.0 p.a.
v of 6 lncreaslng expenses for 13 years aL 8 dlscounL raLe 6,112,623 8s. 300000*(1-((1+6)^13)/((1+8)^13))/(8-6) or v(1.08/1.06-1,13,-300000/1.06,0,0)
v of 6 lncreaslng renLal for 13 years aL 8 dlscounL raLe 2,200,344 8s. 180000*(1-((1+6)^13)/((1+8)^13))/(8-6) or v(1.08/1.06-1,13,180000/1.06,0,0)
urawn from corpus ln 13 years 3,912,079 8s. 6112623-2200344
v of balance corpus (on lnvesLlng) 87,921 8s. 4000000-3912079
AccumulaLed lnvesLmenL afLer 13 years 278,902 8s. 87921*(1+8)^13
value of commerclal properLy now 3,000,000 8s.
lncrease ln value 8.0 p.a.
valuaLlon afLer 13 years 13,860,846 8s. 3000000*(1+8)^13
1oLal fresh corpus afLer 13 years 16,139,747 278902+13860846
Lxpenses requlred afLer 13 years 1,198,279 8s. p.a. 300000*(1+6)^13
erlod upLo whlch Lhls revlsed corpus would lasL 16.7913 years nL8(1.08/1.06-1,1198279/1.06,-16139747,0,0)
16 years 9 months
Setion III
Question 8
Solution:
3Lh cash flow sLream Lo be recelved 330,000 8s.
of balance amounL 6
1he ouLsLandlng balance of corpus before 3Lh lnsLallmenL 9,166,667 8s. 330000/6
8evlsed wlLhdrawal amounL of 8Lh lnsLallmenL 473,000 8s.
lnLeresL raLe 6.30 p.a.
CrowLh ln annulLy as agreed 3 p.a.
CuLsLandlng corpus afLer paylng 3Lh lnsLallmenL (ouL of 20) 8,691,667 8s. 9166667-473000
number of years Lhe corpus Lo lasL beglnnlng 6Lh lnsLall. 21.36 8s. nL8(1.063/1.03-1,473000*1.03,-8691667*1.063,0,1)
1oLal lnsLallmenLs lncludlng already 8 dlsbursed 26.36 3+21.36
lncrease ln lnsLallmenLs 6.36 lnsLallmenLs 26.36-20
age S
A retired person has contracted a 20-year immediate annuity plan which provides an annual stream of income, increasing year-on-year at 5%. He is due to receive 5th
installment of Rs. 5.50 lakh which is 6% of the balance corpus remaining in annuity. He wants the term of the annuity to increase. He estimates that Rs. 4.75 lakh would
be sufficient for his current living expenses. He proposes this to the annuity provider with other terms remaining as originally agreed. If the yield of the annuity is 6.5%
p.a., how many more installments would get added in the restructured annuity than the original?
A professional just retired has accumulated Rs. 40 lakh. He invests this corpus in an investment instrument giving return of 8% p.a. His current annual household
expenses are Rs. 5 lakh, escalating at inflation of 6% p.a. He would rent out his other fixed property at an expected annual rent of Rs. 1.80 lakh, the rentals increasing at
6% p.a. The balance expenses are met by withdrawing from the invested corpus. The commercial property, currently valued at Rs. 50 lakh, is expected to appreciate at
8% p.a. He expects to sell the property after 15 years to create a fresh corpus for his living expenses. How long the total funds available are expected to last after 15
years?
Setion III
Question 9
Solution:
osL reLlremenL lncome currenLly 30,000 8s. p.m.
osL reLlremenL expenses currenLly 31,000 8s. p.m.
Loan ellglble under reverse morLgage 4,000,000 8s.
1erm of reverse morLgage 13 years
8aLe of lnLeresL 12.30 p.a.
Loan ouLsLandlng aL Lhe end of 8 years 10,263,138 8s. 4000000*(1+12.3)^8
AmounL Lo be lnvesLed Loday 3,988,000 8s. 4000000-1000*12
8aLe of reLurn expecLed from lnvesLmenL 9.00 p.a.
LxpecLed lnflaLlon 6.00 p.a.
AmounL under lnvesLmenL - end of year 1 4,346,920 8s. 3988000*(1+9)
AmounL under lnvesLmenL - end of year 2 4,700,734 8s. (4346920-(31000*(1+6)-30000)*12)*(1+9)
AmounL under lnvesLmenL - end of year 3 3,060,603 8s. (4700734-(31000*(1+6)^2-30000)*12)*(1+9)
AmounL under lnvesLmenL - end of year 4 3,423,324 8s. (3060603-(31000*(1+6)^3-30000)*12)*(1+9)
AmounL under lnvesLmenL - end of year 3 3,794,312 8s. (3423324-(31000*(1+6)^4-30000)*12)*(1+9)
AmounL under lnvesLmenL - end of year 6 6,163,376 8s. (3794312-(31000*(1+6)^3-30000)*12)*(1+9)
AmounL under lnvesLmenL - end of year 7 6,337,697 8s. (6163376-(31000*(1+6)^6-30000)*12)*(1+9)
AmounL under lnvesLmenL - end of year 8 6,908,798 8s. (6337697-(31000*(1+6)^7-30000)*12)*(1+9)
ulfference beLween loan llablllLy and lnvesLmenL (3,334,340) 8s. 6908798-10263138
O/#$53*#+.$ 4$#(",%
CurrenL annual expenses 372,000 31000*12
v of 6 escalaLalng expenses dlscounLed aL 9 for 8 years (2,704,370) v(1.09/1.06-1,8,372000,0,1)
v of flxed penslon dlscounLed aL 9 for 8 years (2,171,863) v(9,8,30000*12,0,1)
v of addlLlonal expenses recovered from 8M loan dlsbursed 332,707 2704370-2171863
8alance loan amounL Lo be lnvesLed for 8 years aL 9 p.a. 3,467,293 4000000-332707
AccumulaLed value afLer 8 years 6,908,798 3467293*(1+9)^8
ShorLfall ln value accumulaLed from loan llablllLy (3,334,340) 6908798-10263138
Setion IV
Question 6
Solution:
remlum of wlLh-proflL pollcy 12,046 8s.
remlum of Lerm pollcy 3,363 8s.
Lxcess premlum on lnvesLmenL componenL 8,481 8s.
1ermlnal value on survlvlng Lhe Lerm 240,730 8s. age 6
8eLurn on lnvesLmenL componenL 7.63 p.a. 8A1L(13,-8481,0,240730,1)
A 40 year old male individual can get a 15-year with-profit life insurance policy of a company at an annual premium of Rs. 12,046 which gives a sum assured of Rs. 1.5
lakh. The company historically has declared reversionary bonuses and terminal bonus per thousand sum assured at Rs. 35 and Rs. 80, respectively. A term plan with
same life and other parameters is generally available for an annual premium of Rs. 3,565. Find the return on investment component of the companys policy on surviving
the term.
A retired couple has fixed pension of Rs. 30,000 p.m. while their current living expenses are at 31,000 p.m. They stay in their own house. You advise them to avail a loan
under reverse mortgage which is an eligible lump sum of Rs. 40 lakh for 15 years at 12.5% p.a. interest. The annual interest is calculated after every 12 months on the
pre-standing balance and added to the outstanding loan amount. You invest the available amount after withholding the excess normal expenses for the first year and
considering 6% inflation thereafter at the beginning of every year. If the investment yield is 9% p.a., by what amount outstanding loan would exceed investment after 8
years?