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using δ(t)

© KSES

Exam questions are copyright

Faculty & Institute of Actuaries & are used

with their permission

Source: www.actuaries.org.uk

67

Reminder:

“total force of interest”

If i is constant annual effective rate of interest, the accumulated

amount at time t is (1+i)^t

so the present value of 1 payable at time t is (1+i)^-t

e ^-(total force of interest)

68

April 2002 5

69

0.05

0.04

from approx .... to ....% (straight red

0.03 line) so average force of interest &

0.02

constant annual effective rate is approx

A = 0.005 t

.... Roll up by very roughly .....% pa to

0.01

A = 0.005t + 0.001t^2 estimate present value as very roughly

0 100* (1 + …%pa * 8 years) = £......

0 1 2 3 4 5 6 7 8

= ...............................................

= ....................................

So present value = 100 * e^+(total force of interest)

= 100 * e^+................... = £......... (agrees rough check?)

Average force of interest = ................... / 8 = ...........%

So constant annual effective rate is e^............% - 1 = ..........% (agrees?) 70

0.05 Force of interest (green curve) goes

from approx 0 to 4% (straight red line)

0.04

so average force of interest & constant

0.03 annual effective rate is approx 2%. Roll

0.02

up by very roughly 2% pa to estimate

A = 0.005 t

present value as very roughly

0.01

A = 0.005t + 0.001t^2 100* (1 + 2% * 8) = £116.

0

0 1 2 3 4 5 6 7 8

= 0.005/2 * 8^2 + 0.0001/3 * 8^3

= 0.17707.

So present value = e^+(total force of interest)

= 100 * e^+0.17707 = £119.37 (consistent with rough check)

Average force of interest = 0.17707 / 8 = 2.213%

So constant annual effective rate is e^2.213% - 1 = 2.238% (agrees) 71

72

Specimen Q8 (i)

73

8%

Force of interest (green curve) goes

7%

from exactly ....% to ....% so average

6%

5%

force of interest is approx ...% for first

4% payment and ....% for second. So roll

3% up by approx ...% * 10 = ...% for first

A = 0.05 + 0.001t + 0.0001t^2

2% investment and .... * 5 = .... for second.

1%

Total approx 100 * ..... + 100 * ..... = ....

0%

0 1 2 3 4 5 6 7 8 9 10

exactly ∫ δ(t) dt = ∫ ................................................... dt

= .............................................................. = ..................

Total force of interest that applies to second investment is

exactly ∫ δ(t) dt = ∫ .....................................................dt

= ..................................................................................

= ..................................................................................

Accumulation factor = e^+(total force of interest) & accumulated amount

= 100 * e^.............. + 100 * e^............. = £......... (OK with rough check?) 74

8%

Force of interest (green curve) goes from

7%

exactly 5% to 7% so average force of

6%

5%

interest is approx 6% for first payment and

4% 6.5% for second.

3% Roll up by approx 6% * 10 = 60% for first

A = 0.05 + 0.001t + 0.0001t^2

2% investment and 6.5% * 5 = 33% for second.

1%

Total approx 100*1.60+100 * 1.33 = 293.

0%

0 1 2 3 4 5 6 7 8 9 10

exactly ∫ δ(t) dt = ∫ 0.05 + 0.001t + 0.0001t^2 dt

= 0.05 * 10 + 0.001/2 * 10^2 + 0.0001/3 * 10^3 = 0.58333.

Total force of interest that applies to second investment is

exactly ∫ δ(t) dt = ∫ 0.05 + 0.001t + 0.0001t^2 dt

= 0.05 * (10 – 5) + 0.001/2 * (10^2 – 5^2) + 0.0001/3 * (10^3 – 5^3)

= 0.58333 – 0.26667 = 0.31667.

Accumulation factor = e^+(total force of interest) & accumulated amount

= 100 * e^0.58333 + 100 * e^0.31667 = £316.45 (OK with rough check) 75

76

April 2000 8

77

9% Average force of interest is about ....%

8% from 0 to 6 then about ....% from t=6 to 12.

7%

100 * 6 = £...... cash is paid on average at t = ...

6%

So roll up by about ... for 3 years

5%

4%

and ... for 6 years = .... ^3 * .....^9.

3% ie accumulated amount is about

2% 600 * .......* ........ = £............

1%

0%

0 1 2 3 4 5 6 7 8 9 10 11 12

= force from t to 6 plus force from 6 to 12

= ( 6 – t ) * ...... + ∫ (6 to 12) ............................... dx

= ( 6 – t ) * .......+ ........................................

= ................... – .......... * t

Total accumulated amount = ∫ rate of payment * Accumulation factor dt

= ....... ∫ e^total force of interest dt = ...... * e^........ * ∫ e^(..... * t) dt 78

= ..................................................... (OK with rough check?)

9% Average force of interest is about 6%

8% from 0 to 6 then about 7% from t=6 to 12.

7%

100 * 6 = £600 cash is paid on average at t = 3.

6%

So roll up by about 6% for 3 years

5%

4%

and 7% for 6 years = 1.06^3 * 1.07^9.

3% ie accumulated amount is about

2% 600 * 1.19 * 1.5 = £1,070

1%

0%

0 1 2 3 4 5 6 7 8 9 10 11 12

= force from t to 6 plus force from 6 to 12

= ( 6 – t ) * 6% + ∫ (6 to 12) 0.05 + 0.0002x^2 dx

= ( 6 – t ) * 6% + (12 – 6 ) * 0.05 + (12^3 – 6^3)/3 * 0.0002

= 0.7608 – 6% * t

Total accumulated amount = ∫ rate of payment * Accumulation factor dt

= 100 ∫ e^total force of interest dt = 100 * e^0.7608 * ∫ e^(6% * t) dt 79

= 213.999 * (1 – e^-.36)/0.06 = 1078.28 (OK with rough check)

80

END of session 2

81

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