Sect 3 1 PDF

Chapter 3. Annuities.
Manual for SOA Exam FM/CAS Exam 2.

Chapter 3. Annuities.
Section 3.1. Geometric series.
2009.
c Miguel A. Arcones. All rights reserved.
Extract from:
”Arcones’ Manual for the SOA Exam FM/CAS Exam 2,
Financial Mathematics. Fall 2009 Edition”,
available at http://www.actexmadriver.com/
1/??
2009.
c Miguel A. Arcones. All rights reserved. Manual for SOA Exam FM/CAS Exam 2.
Chapter 3. Annuities. Section 3.1. Geometric series.
Pn
We use the summation notation i=m xi to mean
xm + xm+1 + · · · + xn−1 + xn .
Usually arithmetic rules hold. In particular:

Pn Pn Pn
i=m (xi + yi ) = i=m xi + i=m yi
I
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2009.
Pn
xm + xm+1 + · · · + xn−1 + xn .

Pn Pn Pn
I
Pn Pn
i=m axi = a i=m xi .
I
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2009.
Pn
xm + xm+1 + · · · + xn−1 + xn .

Pn Pn Pn
I
Pn Pn
I
I If m ≤ k ≤ n,
n
X k
X n
X
xi = xi + xi .
i=m i=m i=k+1
4/??
2009.
Pn
xm + xm+1 + · · · + xn−1 + xn .

Pn Pn Pn
I
Pn Pn
I
I If m ≤ k ≤ n,
n
X k
X n
X
xi = xi + xi .
i=m i=m i=k+1
Pn
I
i=m 1 = n − m + 1.
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2009.
Definition 1
The sequence of real numbers ∞ = {a + nd}∞
n=0 n=0 is called an
arithmetic sequence.
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2009.
Definition 1
The sequence {xn }∞ ∞
n=0 = {a + nd}n=0 satisfies that for each n ≥ 1,
xn−1 + d = xn . Notice that
xn−1 + d = a + (n − 1)d + d = a + nd = xn .
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Definition 1
xn−1 + d = a + (n − 1)d + d = a + nd = xn .
Theorem 1
If a sequence {xn }∞
n=0 of real numbers satisfies xn = xn−1 + d, for
each n ≥ 1, then xn = x0 + nd for each n ≥ 1.
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2009.
Definition 1
xn−1 + d = a + (n − 1)d + d = a + nd = xn .
Theorem 1
If a sequence {xn }∞
n=0 of real numbers satisfies xn = xn−1 + d, for
each n ≥ 1, then xn = x0 + nd for each n ≥ 1.
Proof.
The proof is by induction on n. The case n = 0 is obvious. Assume
that the case n holds. Then,
xn+1 = xn + d = x0 + nd + d = x0 + (n + 1)d.
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2009.
Theorem 2
P n n(n+1)
j=1 j = 2 .
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2009.
Theorem 2
P n n(n+1)
j=1 j = 2 .
Proof.
n
X
2 j = (1 + 2 + · · · + (n − 1) + n) + (1 + 2 + · · · + (n − 1) + n)
j=1
=(1 + 2 + · · · + (n − 1) + n) + (n + (n − 1) + · · · + 2 + 1)
=(1 + n) + (2 + n − 1) + (3 + n − 2) · · · + (n + 1)
=(n + 1) + (n + 1) + (n + 1) · · · + (n + 1) = n(n + 1).
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2009.
Theorem 2
P n n(n+1)
j=1 j = 2 .
Proof.
n
X
2 j = (1 + 2 + · · · + (n − 1) + n) + (1 + 2 + · · · + (n − 1) + n)
j=1
=(1 + 2 + · · · + (n − 1) + n) + (n + (n − 1) + · · · + 2 + 1)
=(1 + n) + (2 + n − 1) + (3 + n − 2) · · · + (n + 1)
=(n + 1) + (n + 1) + (n + 1) · · · + (n + 1) = n(n + 1).
Previous theorem can be proved by induction.
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2009.
Theorem 2
P n n(n+1)
j=1 j = 2 .
Proof.
n
X
2 j = (1 + 2 + · · · + (n − 1) + n) + (1 + 2 + · · · + (n − 1) + n)
j=1
=(1 + 2 + · · · + (n − 1) + n) + (n + (n − 1) + · · · + 2 + 1)
=(1 + n) + (2 + n − 1) + (3 + n − 2) · · · + (n + 1)
=(n + 1) + (n + 1) + (n + 1) · · · + (n + 1) = n(n + 1).
Previous theorem can be proved

P by induction.
Note that in the summation nj=1 j, there are n numbers and the
Pn n(n+1)
average of these numbers is n+1
2 . Hence, j=1 j = 2 .
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For an arithmetic sequence,

n n n
X X X n(n + 1)
(a + jd) = a+d j = (n + 1)a + d .
2
j=0 j=0 j=0
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2009.
Example 1
P100
Find k=10 k.
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2009.
Example 1
P100
Find k=10 k.
Solution 1:P
P 100 100 P9 (100)(101) (9)(10)
k=10 k = k=1 k − k=1 k = 2 − 2 = 5005.
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2009.
Example 1
P100
Find k=10 k.
Solution 1:P
P 100 100 P9 (100)(101) (9)(10)
k=10 k = k=1 k − k=1 k = 2 − 2 = 5005.
Solution 2: By the change of variables k = j + 9,

100 91
X X (91)(92)
k= (j + 9) = + (9)(91) = 5005.
2
k=10 j=1
Notice that if k = 10, then j = 9; and if k = 100, then j = 91.
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2009.
Definition 2
The sequence {ar n }∞
n=0 is called a geometric sequence.
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2009.
Definition 2
The sequence {ar n }∞
n=0 is called a geometric sequence.
The geometric sequence {ar n }∞ n=0 satisfies that for each n ≥ 1,
rxn−1 = rar n−1 = ar n = xn , where xn = ar n .
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2009.
Theorem 3
If a sequence satisfies xn = rxn−1 , for each n ≥ 1, then xn = x0 r n
for each n ≥ 1.
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2009.
Theorem 3
If a sequence satisfies xn = rxn−1 , for each n ≥ 1, then xn = x0 r n
for each n ≥ 1.
Proof.
The proof is by induction on n. The case n = 0 is obvious. Assume
that the case n holds. Then,
xn+1 = rxn = rx0 r n = x0 r n+1 = xn+1 .
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2009.
Theorem 4
For any r ∈ R,
n
X
n+1
r − 1 = (r − 1) rj.
j=0
Proof.
Pn j (r
j=0 r − 1) = (1 + r + r 2 + · · · + r n )(r − 1)
= (r + r2 + · · · + r n+1 ) − (1 + r + r 2 + · · · + r n ) = r n+1 − 1.
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In particular, we that
(x 2 − 1) = (x − 1)(1 + x),
(x 3 − 1) = (x − 1)(1 + x + x 2 ),
(x 4 − 1) = (x − 1)(1 + x + x 2 + x 3 ),
(x 5 − 1) = (x − 1)(1 + x + x 2 + x 3 + x 4 ).
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2009.
Corollary 1
n+1
(i) If r 6= 1, nj=0 r j = r r −1−1 .
P
Pn
(ii) If r = 1, j=0 r j = n + 1.
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2009.
Corollary 1
n+1
(i) If r 6= 1, nj=0 r j = r r −1−1 .
P
Pn
(ii) If r = 1, j=0 r j = n + 1.
Proof. Pn
(i) If r 6= 1, from r n+1 − 1 = (r − 1) j=0 r
j, we get that
n
X r n+1 − 1
rj = .
r −1
j=0
(ii) If r = 1,
n
X n
X
rj = 1 = n + 1.
j=0 j=0
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2009.
Example 2
P20 k.
Find k=5 2
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2009.
Example 2
P20 k.
Find k=5 2
Solution:
20 20 4
X
k
X
k
X 221 − 1 25 − 1
2 = 2 − 2k = − = 221 −25 = 2097120.
2−1 2−1
k=5 k=0 k=0
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We also have that for 1 ≤ m ≤ n and r 6= 1,

n n m−1
X
j
X
j
X r n+1 − 1 r m − 1 r n+1 − r m
r = r − rj = − = .
r −1 r −1 r −1
j=m j=0 j=0
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2009.

n n m−1
X
j
X
j
X r n+1 − 1 r m − 1 r n+1 − r m
r = r − rj = − = .
r −1 r −1 r −1
j=m j=0 j=0
Example 3
P20 k.
Find k=5 2
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2009.

n n m−1
X
j
X
j
X r n+1 − 1 r m − 1 r n+1 − r m
r = r − rj = − = .
r −1 r −1 r −1
j=m j=0 j=0
Example 3
P20 k.
Find k=5 2
P20 k 221 −25
Solution: k=5 2 = 2−1 = 221 − 25 = 2097120.
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2009.
Theorem 5 P
∞ j 1
For |r | < 1, j=0 r = 1−r .
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2009.
Theorem 5 P
∞ j 1
For |r | < 1, j=0 r = 1−r .
Proof.
If |r | < 1, then ln(|r |) < 0 and |r n+1 | ≤ |r |n+1 = e (n+1) ln(|r |) → 0,
as n → ∞. Hence,
∞ n
X X r n+1 − 1 1
r j = lim r j = lim = .
n→∞ n→∞ r − 1 1−r
j=0 j=0
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2009.
Corollary 2
For |r | < 1,
∞
X rn
rj = .
1−r
j=n
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2009.
Corollary 2
For |r | < 1,
∞
X rn
rj = .
1−r
j=n
Proof.
By the change of variables j = k + n,
∞ ∞ ∞
X X X rn
rj = r k+n = r n rk = .
1−r
j=n k=0 k=0
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2009.
Example 4
P∞ −k .
Find k=9 3
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2009.
Example 4
P∞ −k .
Find k=9 3
Solution:
∞
X 3−9
3−k = = 0.0000762079.
1 − (1/3)
k=9
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2009.
Theorem 6
For r 6= 1,
n
X nr n+2 − (n + 1)r n+1 + r
jr j = .
(r − 1)2
j=1
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2009.
Theorem 6
For r 6= 1,
n
X nr n+2 − (n + 1)r n+1 + r
jr j = .
(r − 1)2
j=1
Proof.
Taking derivatives with respect to r in the inequality
j = r n+1 −1 , we get that
Pn
j=0 r r −1
Pn j−1 (n+1)r n (r −1)−(r n+1 −1) nr n+1 −(n+1)r n +1

j=1 jr = (r −1)2
= (r −1)2
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2009.
Corollary 3
P∞ j r
For |r | < 1, j=1 jr = (r −1)2
.
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2009.
Corollary 3
P∞ j r
For |r | < 1, j=1 jr = (r −1)2
.
Proof.
If |r | < 1, then
∞ n
X
j
X nr n+2 − (n + 1)r n+1 + r r
jr = lim jr j = lim 2
= .
n→∞ n→∞ (r − 1) (r − 1)2
j=1 j=1
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2009.
Example 5
P∞ −k
Find k=1 k4 .
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2009.
Example 5
P∞ −k
Find k=1 k4 .
Solution:
∞
X 4−1 4
k4−k = = = 0.4444444444.
(1 − 4−1 )2 9
k=1
42/??
2009.

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Chapter 3. Annuities.

Manual for SOA Exam FM/CAS Exam 2.

Usually arithmetic rules hold. In particular:

Usually arithmetic rules hold. In particular:

Usually arithmetic rules hold. In particular:

Usually arithmetic rules hold. In particular:

Previous theorem can be proved by induction.

Previous theorem can be proved

For an arithmetic sequence,

Solution 2: By the change of variables k = j + 9,

Notice that if k = 10, then j = 9; and if k = 100, then j = 91.

We also have that for 1 ≤ m ≤ n and r 6= 1,

We also have that for 1 ≤ m ≤ n and r 6= 1,

We also have that for 1 ≤ m ≤ n and r 6= 1,

Pn j−1 (n+1)r n (r −1)−(r n+1 −1) nr n+1 −(n+1)r n +1

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