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NAMIBIAlA UnIVERSITY
nAmIB UNIVERSITY
OF SCIEnCE
OF SCIENCE AND
AnD TECHNOLOGY
TECHnOLOGY

FACULTY OF
FACULTY OF HEALTH
HEALTH AND
AND APPLIED
APPLIED SCIENCES
SCIENCES

DEPARTMENT OF
DEPARTMENT OF MATHEMATICS
MATHEMATICS AND STATISTICS
AND STATISTICS

QUALIFICATION: : BACHELOR
QUALIFICATION BACHELOR OF
OF SCIENCES
SCIENCES

QUALIFICATION CODE:
QUALIFICATION CODE: 07BAMS
07BAMS LEVEL: 6
LEVEL: 6

COURSE CODE
COURSE CODE: : FIM
FIM 601S
6015S COURSE NAME:
COURSE NAME: FINANCIAL
FINANCIAL MATHEMATICS
MATHEMATICS

SESSION: JUNE
SESSION: JUNE 2016
2016 PAPER: THEORY
PAPER: THEORY

DURATION: 33 HOURS
DURATION: HOURS MARKS: 95
MARKS: 95

FIRST OPPORTUNITY
FIRST OPPORTUNITY EXAMINATION
EXAMINATION QUESTION
QUESTION PAPER
PAPER
EXAMINER
EXAMINER Dr. A.
Dr. A. S. Eegunjobi
S. Eegunjobi

MODER ATOR:
MODERATOR: Dr.
Dr. V Katoma
V Katoma

INSTRUCTIONS
INSTRUCTIONS
1. Answer
1. Answer ALL
ALL the questions.
the questions.
2. Write clearly
Write clearly and
and neatly.
neatly.
3.
3. Number the
Number the answers
answers clearly.
clearly.

PERMISSIBLE MATERIALS
PERMISSIBLE MATERIALS

1.
1. Compound Interest
Compound Interest Table
Table (Attached)
(Attached)

THIS QUESTION
THIS QUESTION PAPER
PAPER CONSISTS
CONSISTS OF
OF 33 PAGES
PAGES (Including this front
(Including this front page)
page)
FIM 6018 Financial Mathematics 2 JUNE 2016

QUESTION 1 [ 24 marks]

1. (a) Find the internal rate of return from an investment that, for an initial payment of
N$100,000, yields returns of N$60,000 at the end of each of the first two periods. (7)
(b) Given the force of interest 5(t) by

0.04 + 0.01t; if 0:::; t:::; 8

5(t) = 0.12- O.Olt; if 8 < t:::; 16
{
0.04; if 16 < t

Calculate the net present value at time t = 0 if a payment stream, paid continuously
from timet= 17 tot= 20, under which the rate of payment at timet is 25e0 ·0 1t. (8)
(c) The force of interest 5(t) at time t(measured in year) is given by

5( ) {0.06; if 0 < t < 8

t = 0.05 + 0.0002t2 ; if 8 :::; t :::; 16

Calculate the accumulated values at timet = 16 of a continuous payment stream

of N$100 per annum payable from timet= 0 to timet= 8. (9)

QUESTION 2 [24 marks]

2. (a) At time 0, the value of a risk-free bond is B 0 = 100, and the stock price is S 0 = 100.
Suppose that the annual risk-free interest rate is r = 5%, and the one-year return
on the stock is
r = { 10%; with probability 60%
8
-5%; with probability 40%
i. Find the risk-neutral probabilities for the binomial model (5)
11. Verify that under the risk-neutral probabilities we have

(5)
(b) Consider a one-period binomial model with = 10%,rs = -10%, rs = rt
20%, S 0 = N$100, and B 0 = N$10. Construct a self-financing strategy with an
initial value of N$1000 such that 50% of the wealth is always invested in risk-free
bonds. (14)

Page 2
FIM 601S Financial Mathematics 2 JUNE 2016

QUESTION 3 [24 marks]

3. (a) A stock price is currently N$80. It is known that at the end of 4 months it will be
either N$75 or N$85 . The risk-free interest rate is 5% per annum with continuous
compounding. What is the value of a 4-month European put option with strike
price of N$80? Use no-arbitrage arguments. (8)
(b) A stock price is currently N$100. Over each of the next two 6-month periods it is
expected to go up by 10% or down by 10%. The risk-free interest rate is 8% per
annum with continuous compounding. What is the value of a 1-year European call
option with an exercise price N$100? (8)
(c) Consider a European call option on a non-dividend-paying stock where the stock
price is N$40, the strike price is N$40 , the risk-free rate is 4% per annum , the
volatility is 30% per annum, and the time to maturity is 6 months. Calculate u, d,
and p for the two-step tree. (8)

QUESTION 4 [23 marks]

4. (a) A loan of N$10 , 000 is repaid by an annuity payable annually in arrears for 12 years
calculated at effective rate of interest of 8% per annum. Find the element in the
7th payment. (8)
(b) An investment project gives rise to the following cash flows. At the beginning of
each of the first three years, N$180, 000 will be invested in the project. From the
beginning of the first year until the end of the twenty-fifth year, net revenue will
be received continuously. The initial rate of payment of net revenue will begin at
N$25, 000 per annum. The rate of payment is assumed to grow continuously at a
rate of 6% per annum effective .
1. Calculate the net present value of the project at an effective rate of interest of
7% per annum. (7)
n. Calculate the discounted payback period of the project at an effective rate of
interest of 7% per annum. (8)

End of Exam!

Page 3
 Appendix 4: Compound Interest Tables

Compound Interest Tables

Constants 8 Per Cent

Function Value n (1 + l)n v" sm (la)m n

0.080 000 1.080 00 0.925 93 1.000 0 0.925 9 0.925 9
0.078 461 2 1.166 40 0.857 34 2.080 0 1.783 3 2.640 6 2
0.077 706 3 1.259 71 0. 793 83 3.246 4 2.577 1 5.022 1 3
0.077 208 4 1.360 49 0.735 03 4.506 1 3.312 1 7.962 2 4
0.076 961 5 1.469 33 0.680 58 5.866 6 3.992 7 11.365 1 5

(1 + 1) 1.080 000 6 1.586 87 0.630 17 7.335 9 4.622 9 15.146 2 6

(1 +1) 112 1.039 230 7 1.713 82 0.583 49 8.922 8 5.206 4 19.230 6 7
(1 + 1)1/4 1.019 427 8 1.850 93 0.540 27 10.636 6 5.746 6 23.552 7 8
(1 + 1) 1/12 1.006 434 9 1.999 00 0.500 25 12.487 6 6.246 9 28.055 0 9
10 2.15892 0.463 19 14.486 6 6.710 1 32.686 9 10

0.925 926 11 2.331 64 0.428 88 16.645 5 7.139 0 37.404 6 11

0.962 250 12 2.518 17 0.397 11 18.977 1 7.536 1 42.170 0 12
0.980 944 13 2.71962 0.367 70 21.495 3 7.903 8 46.950 1 13
0 .993 607 14 2.937 19 0.340 46 24.214 9 8.244 2 51 .7165 14
15 3.172 17 0.315 24 27.152 1 8.559 5 56.445 1 15

0.074 074 16 3.425 94 0.291 89 30.324 3 8.851 4 61.115 4 16

0.075 499 17 3.700 02 0.270 27 33.750 2 9.121 6 65.710 0 17
0.076 225 18 3.996 02 0.250 25 37.450 2 9.371 9 70.214 4 18
0.076 715 19 4.315 70 0.231 71 41.446 3 9.603 6 74.617 0 19
20 4.660 96 0.214 55 45.762 0 9.818 1 78.907 9 20

;;;!2) 1.019 615 21 5.033 83 0.198 66 50.422 9 10.016 8 83.079 7 21

;;;!4) 1.029 519 22 5.436 54 0.183 94 55.456 8 10.200 7 87.126 4 22
;;;!12) 1.036 157 23 5.871 46 0.170 32 60.893 3 10.371 1 91.043 7 23
24 6.341 18 0.157 70 66.764 8 10.528 8 94.828 4 24
25 6.848 48 0.146 02 73.105 9 10.674 8 98.478 9 25

ilo 1.039 487 26 7.396 35 0.135 20 79.954 4 10.810 0 101.9941 26

27 7.988 06 0.125 19 87.350 8 10.935 2 105.374 2 27
28 8.627 11 0.115 91 95.338 8 11.051 1 108.619 8 28
29 9.317 27 0.107 33 103.965 9 11 .158 4 111.732 3 29
30 10.062 66 0.099 38 113.283 2 11.257 8 114.713 6 30

i/d 12) 1.059 615 31 10.867 67 0.092 02 123.345 9 11.349 8 117.566 1 31

i!d 14 ) 1.049519 32 11.73708 0.08520 134.2135 11.4350 120.2925 32
;;J12) 1.042 824 33 12.676 05 0.078 89 145.950 6 11.513 9 122.895 8 33

(Continued)