Lecturer:

Howard Hines MPhil

Fellow of the Society of Actuaries
Member of the American Academy of Actuaries
Senior Actuary
Date: September 23, 2020
 Course Snapshot

 Module 1: Basic interest theory e.g.

compound interest and simple
interest
 Module 2: Annuities with Non-contingent
payments
 Module 3: General Cash Flows and
Portfolios
 Module 4: Basic Applications
FORCE OF
INTEREST
Nominal rates of
interest and
discount measure
interest over
mths of a year
 We now wish to
measure the intensity
of interest operating
over an
infinitesimally small
interval of time.
Consider a fund at time
𝑡 with no principal
being added or
subtracted. Hence the
growth of the fund is
through interest alone.
 Let the fund at
time 𝑡 equal
𝐴(𝑡)
Then the rate of
change of 𝐴(𝑡)
per unit of fund
at time 𝑡 is:
𝑑 𝐴(𝑡) 𝑑 𝐴 0 𝑎(𝑡) 𝑑 𝑎(𝑡)
𝑑𝑡
= 𝑑𝑡
= 𝑑𝑡
=
𝐴(𝑡) 𝐴 0 𝑎(𝑡) 𝑎(𝑡)

𝛿𝑡 = Force of interest at time

𝑡
 Note the rate of change of
𝐴(𝑡) per unit of fund at time 𝑡
(standardizes for different
fund values) and gives us:

𝛿𝑡 = Force of interest at time 𝑡

 Now;

𝑑𝑎(𝑡)
𝑑𝑡 𝑑(𝑙𝑛𝑎 𝑡 )
𝛿𝑡 = =
𝑎(𝑡) 𝑑𝑡
 Integrating both sides:

𝑡
𝑡
𝑎(𝑡)
න 𝛿𝑟 𝑑𝑟 = ln 𝑎(𝑟) 0 = ln
0 𝑎(0)
 Hence:

𝑡
‫׬‬0 𝛿𝑟 𝑑𝑟
𝑎 𝑡 =𝑒

 Where 𝛿𝑟 is the force of interest

at time 𝑟.
 Alternately,

𝑑𝐴(𝑡)
𝛿𝑡 = 𝑑𝑡
𝐴(𝑡)

𝑑𝐴(𝑡)
 So 𝛿𝑡 𝐴 𝑡 =
𝑑𝑡
 Hence,

𝑛 𝑛
𝑑𝐴(𝑡)
න 𝛿𝑡 𝐴 𝑡 𝑑𝑡 = න 𝑑𝑡
0 0 𝑑𝑡

=𝐴 𝑛 −𝐴 0
 But 𝐴 𝑛 − 𝐴(0) is the interest
earned from time zero to time 𝑛
years.

𝑛
 So ‫׬‬0 𝛿𝑡 𝐴 𝑡 𝑑𝑡 gives the integral
summation of all the increments
of interest earned from zero to 𝑛
EXERCISES
FORCE OF
DISCOUNT
 Analogous to the Force of
interest we have the Force of
discount.
 −1
−𝑑𝑎 (𝑡)
′
𝛿𝑡 = 𝑑𝑡
−1
𝑎 (𝑡)
EXERCISES
 Show algebraically that

′
𝛿𝑡 = 𝛿𝑡 for all 𝑡
  END
 OF

 PART2

 MODULE 1
THE END