CT1 Pu 17

CT1: CMP Upgrade 2016/17 Page 1
Subject CT1
CMP Upgrade 2016/17
CMP Upgrade
This CMP Upgrade lists the changes to the Syllabus objectives, Core Reading and the
ActEd material since last year that might realistically affect your chance of success in
the exam. It is produced so that you can manually amend your 2016 CMP to make it
suitable for study for the 2017 exams. It includes replacement pages and additional
pages where appropriate. Alternatively, you can buy a full set of up-to-date Course
Notes / CMP at a significantly reduced price if you have previously bought the full-
price Course Notes / CMP in this subject. Please see our 2017 Student Brochure for
more details.
This CMP Upgrade contains:
 all significant changes to the Syllabus objectives and Core Reading.
 additional changes to the ActEd Course Notes, Question and Answer Bank and
Series X Assignments that will make them suitable for study for the 2017 exams.
The Actuarial Education Company © IFE: 2017 Examinations

Page 2 CT1: CMP Upgrade 2016/17
1 Changes to the Syllabus objectives

No changes have been made to the syllabus objectives.
2 Changes to the Core Reading

No changes have been made to the Core Reading.
© IFE: 2017 Examinations The Actuarial Education Company

3 Changes to the ActEd Course Notes

This section contains additional significant changes to the ActEd Course Notes.
However, if you wish to have all the changes to the ActEd Course Notes, you will need
to buy a full set of the up-to-date version (which you can do at a significantly reduced
price if you have previously bought the full-price Course Notes / CMP in this subject).
Chapter 10
Pages 9 and 10
Some of the ActEd text on net present values and internal rates of return on these pages
has been amended for clarity.
Replacement pages 9 to 14 are provided due to changes in subsequent page layout.

4 Changes to the Q&A Bank

The most significant changes to the Q&A Bank are given below.
Q&A All Parts
Throughout the Q&A Bank, indicative marks for the first guess in “trial and error” style
questions have been removed or reallocated for consistency with how marks are
awarded in the exam.
Q&A Part 2
Question 2.24
This new question has been added to the Q&A Bank. Replacement pages are provided.
Q&A Part 4
Solution 4.8
The solution provided for parts (iii) and (iv) of this question has been updated.
Replacement pages are provided.
Q&A Part 5
Question 5.11
The number of marks for part (i) of this question has been increased from 2 to 3, and the
number of marks for part (iii) of this question has been reduced from 4 to 3.
Solution 5.11
The solution to this question has been expanded. Replacement pages are provided.

5 Changes to the X Assignments

The most significant changes to the X Assignments are given below.
All Assignments
The following marking advice has been added at the start of each set of solutions:
In “trial and error” questions, full marks should be awarded for obtaining the correct
final answer whatever method is used (eg “table mode” on a calculator), so long as
sufficient working is given.
Assignment X2
Solution X2.9(i)
The marks for this part of the solution have been reallocated, so that no mark is awarded
for the choice of first guess. The numerical aspects of the solution are unchanged.

6 Other tuition services

In addition to the CMP you might find the following services helpful with your study.
6.1 Study material
We also offer the following study material in Subject CT1:

● Online Classroom
● Flashcards
● MyTest
● Revision Notes
● ASET (ActEd Solutions with Exam Technique) and Mini-ASET
● Mock Exam A
● Additional Mock Pack.
For further details on ActEd’s study materials, please refer to the 2017 Student
Brochure, which is available from the ActEd website at www.ActEd.co.uk.
6.2 Tutorials
We offer the following tutorials in Subject CT1:

 a set of Regular Tutorials (lasting two or three full days)
 a Block Tutorial (lasting two or three full days)
 a Revision Tutorial (lasting one full day)
 a set of Live Online Tutorials (lasting three full days).
For further details on ActEd’s tutorials, please refer to our latest Tuition Bulletin, which
is available from the ActEd website at www.ActEd.co.uk.

6.3 Marking
You can have your attempts at any of our assignments or mock exams marked by
ActEd. When marking your scripts, we aim to provide specific advice to improve your
chances of success in the exam and to return your scripts as quickly as possible.
For further details on ActEd’s marking services, please refer to the 2017 Student
Brochure, which is available from the ActEd website at www.ActEd.co.uk.
6.4 Feedback on the study material
ActEd is always pleased to get feedback from students about any aspect of our study
programmes. Please let us know if you have any specific comments (eg about certain
sections of the notes or particular questions) or general suggestions about how we can
improve the study material. We will incorporate as many of your suggestions as we can
when we update the course material each year.
If you have any comments on this course please send them by email to CT1@bpp.com.

All study material produced by ActEd is copyright and is sold
for the exclusive use of the purchaser. The copyright is owned
by Institute and Faculty Education Limited, a subsidiary of
the Institute and Faculty of Actuaries.
Unless prior authority is granted by ActEd, you may not hire

out, lend, give out, sell, store or transmit electronically or
photocopy any part of the study material.
You must take care of your study material to ensure that it is

not used or copied by anybody else.
Legal action will be taken if these terms are infringed. In

addition, we may seek to take disciplinary action through the
profession or through your employer.
These conditions remain in force after you have finished using

the course.

CT1: Q&A Bank Part 2 – Questions Page 11
Question 2.22
A training company is planning to expand into another country. The set up costs (which
are paid out at the start) are expected to be $50,000. Rent and salaries totalling
$120,000 pa are to be paid monthly in arrears for the first two years. After two years,
the total monthly payment for rent and salaries increases each month by $100.
The expected sales of courses and materials during the first three years of business are
shown in the table below:
Total income from Total income from

Year
sales of materials sale of courses
1 $40,000 $20,000
2 $120,000 $120,000
3 $140,000 $160,000
The income is to be payable monthly in advance but, in the first year, no income is
received until the beginning of the 8th month. After the first three years, sales of both
materials and courses are expected to grow at a rate of 0.5% per month compound.
(i) Assuming that the business continues indefinitely, calculate the net present value
of this project at an effective rate of interest of 8% pa. [7]
(ii) Show that the discounted payback period for the project, at an effective rate of
8% pa, is less than 2 years. Hence calculate the discounted payback period. [5]
(iii) Calculate the accumulated profit for this project after 5 years, using an annual
effective rate of interest of 8% pa. [3]
(iv) A year after setting up the project, it is sold. The original investors earned an
effective annual rate of return of 9% pa. Calculate the sale price. [4]
[Total 19]

Page 12 CT1: Q&A Bank Part 2 – Questions
Question 2.23
Company XYZ is considering investing in a capital project.
The costs for the project will be £5 million at the beginning of the first year, and
( )
£ 0.5 ¥ 1.04k - 2 million payable at the beginning of year k , k = 2, 3, ..., 10 .
The returns will be £2 million at the end of each of the first 5 years, increasing by
£250,000 at the end of each of years 6 to 10.
Company XYZ decides to use a risk discount rate of 12% pa to assess this project.
(Note that a risk discount rate is an annual effective interest rate.)
(i) Calculate the net present value of the project. [7]
(ii) Calculate the discounted payback period for the project. [4]
[Total 11]
Question 2.24
An actuarial student takes out a mortgage for £250,000 with a term of 25 years. The
mortgage is repayable in level instalments made monthly in arrears. Interest is charged
at a rate of 6% pa effective.
(i) Calculate the monthly repayment. [2]
(ii) (a) Calculate the capital repaid in the fourth year.
(b) Calculate the interest element of the 49th repayment. [4]
After completing her exams, six years after taking out the mortgage, the newly-qualified
actuary reviews her finances and realises that she can afford to make repayments at
twice the rate calculated in (i).
(iii) Calculate the length of time by which this course of action reduces the remaining
term of the loan. [4]
(iv) Calculate the amount of the final repayment and hence the interest saved by the
actuary if she follows this course of action. [5]
[Total 15]

CT1: Q&A Bank Part 2 – Solutions Page 33
The present value of the returns is:
PVr = 2v + 2v 2 +  + 2v5 + 2.25v 6 + 2.50v 7 +  + 3.25v10
( )
= 2a10 + 0.25v5 v + 2v 2 +  + 5v5 = 2a10 + 0.25v5 ( Ia )5
= ( 2 ¥ 5.6502) + (0.25 ¥ 1.12 -5

)
¥ 10.0018 = 12.7193 [2]
So the net present value of the project is:
NPV = PVr - PVc = 12.7193 - 8.0421 = 4.677
ie approximately £4,677,000. [1]
(ii) Discounted payback period
The DPP is the first point in time for which the net present value of the project is
positive. At time 4:
PVc = 5 + 0.5v + 0.5 ¥ 1.04v 2 + 0.5 ¥ 1.042 v3 + 0.5 ¥ 1.043 v 4
0.5v(1 - (1.04v) 4 )
= 5+ = 5 + 1.6033 = 6.6033 [1]
1 - 1.04v
Alternatively, this can be evaluated using an annuity.
PVr = 2a4 = 2 ¥ 3.0373 = 6.0747 [1]
and:
NPV = PVr - PVc = 6.0747 - 6.6033 = -0.529 < 0 [½ ]
At time 5:
PVc = 6.6033 + 0.5 ¥ 1.044 ¥ 1.12-5 = 6.9352 [½ ]

PVr = 2a5 = 2 ¥ 3.6048 = 7.2096 [½ ]
and:
NPV = PVr - PVc = 7.2096 - 6.9352 = 0.274 > 0
So the discounted payback period is 5 years. [½ ]

Page 34 CT1: Q&A Bank Part 2 – Solutions
Alternatively, working in terms of accumulated values:
At time 4, AVc  10.3905 and AVr  9.5587 , so AV  9.5587  10.3905  0.832 .
At time 5, AVc  12.2223 and AVr  12.7057 , so AV  12.7057  12.2223  0.483 .
Solution 2.24
(i) Monthly repayment
Let M be the monthly repayment. The equation of value is:
250, 000  12Ma (12) [1]

25
Using a (12)  13.1312 , this gives:

25
M  £1,586.55 [1]
(ii)(a) Capital repaid in the fourth year
The capital outstanding at the start of the fourth year is calculated (prospectively) as:
12 Ma (12)  12 1,586.55 12.36924  £235, 493.04 [1]

22
The capital outstanding at the end of the fourth year is calculated (prospectively) as:
12 Ma (12)  12 1,586.55 12.08419  £230, 065.97 [1]

21
The capital repaid in the fourth year is therefore:
235, 493.04  230, 065.97  £5, 427 [1]
(ii)(b) Interest element in the 49th repayment
To calculate the interest element in the 49th repayment, the capital outstanding
immediately after the previous (ie 48th) repayment is needed. The 48th repayment is
made at the end of four years, so the capital outstanding at that time is £230,065.97
from (ii)(a).

So, the interest element in the 49th repayment is given by:
1
230, 065.97  (1.06 12  1)  £1,120 [1]
(iii) Reduction in payment term
After six years, when the student has qualified, the remaining term is 19 years. The
capital outstanding at this point is:
12 Ma (12)  12 1,586.55 11.46174  £218, 215.42 [1]

19
If the actuary makes monthly repayments at twice the original rate, the equation of
value is:
218, 215.42  12  2 1,586.55  a (12)

n
where n is the reduced payment term. So:
1  vn
a (12)   5.73087 [1]
n i (12)
1  v n  0.33474
v n  0.66526
Taking logs of both sides:
n ln(1.06)  ln(0.66526)
n  6.9949 [1]
Therefore, the final repayment will be made 7 years after the increased payments
commence.
This means the payment term is shortened by 12 years. [1]
(iv) Final repayment amount and total interest saved
Now assume that the actuary makes twice the original monthly repayments, and let P
be the amount of the final repayment made.

P can be found by solving the equation of value:
218, 215.42  12  2 1,586.55  a (12)

11
 Pv 7 [1]
612
Using a (12)
11
 5.67886 , gives:
612
Pv 7  1,980.313  P  £2,977.66 [1]
The total interest paid is equal to the difference between the total repayments made and
the total capital to be repaid.
Hence, if the actuary is making twice the original monthly repayments, the total interest
paid after the end of the sixth year is:
11  2,977.66  218, 215.42  £48,129.54

12  2  1,586.55  6 12 [1]
If the actuary continues making only the original repayments, the total interest paid after
the end of the sixth year is:
12 1,586.55 19  218, 215.42  £143,517.98 [1]
Hence, the total interest saved by following the new course of action is:
143,517.98  48,129.54  £95,388 [1]
Alternatively, calculate the total interest paid over the whole term of the loan, under
each of the repayment schedules.
Where only the original repayments are made, the total interest is:
12 1,586.55  25  250, 000  £225,965.00
Where twice the original repayments are made after six years, the total interest is:
11  2,977.66  250, 000  £130,576.56

12  1,586.55  6  12  2  1,586.55  6 12
Subtracting these gives the total interest saved as £95,388 as above.

Solution 4.8
(i) Here we need to find (after cancelling a factor of 1,000):
20 20
DMT = Â tvt Â vt [1]
t =1 t =1
The numerator is ( Ia) 20| = 63.9205 and the denominator is a20| = 8.5136 .
So the discounted mean term is 63.9205 8.5136 = 7.51 years . [1]
(ii) Here we need to find:
20 20
DMT = Â t (950 + 50t )v t
Â (950 + 50t )vt [1]
t =1 t =1
The numerator is (using the figure given at the end of the question):
20
950( Ia) 20| + 50Â t 2vt = 950 ¥ 63.9205 + 50 ¥ 718.027 = 96, 626 [½ ]
t =1
and the denominator is:
950a20| + 50( Ia ) 20| = 950 ¥ 8.5136 + 50 ¥ 63.9205 = 11, 284 [½ ]
So the discounted mean term is 96, 626 11, 284 = 8.56 years . [1]

(iii) The first annuity payment (made at time 1) is 1,000. The second annuity payment
(made at time 2) is 1,000 ¥ 1.05 , and so on, with the tth annuity payment (made at
time t) being 1,000 ¥ 1.05t-1 . So, here we need to find:
20 20
DMT = Â t ¥ 1,000 ¥ 1.05 t -1
¥v t
Â1,000 ¥ 1.05t -1 ¥ vt
t =1 t =1
20 20
= Â t ¥ 1.05t -1 ¥ vt Â1.05t -1 ¥ vt [1]
t =1 t =1
The denominator is a geometric series:
20
Â1.05t -1 ¥ vt = v + 1.05v 2 +  + 1.0519 v20
t =1
=
(
v 1 - (1.05v) 20 )
1 - 1.05v
= 12.1121 [1]
The numerator can be evaluated as follows:
20
1 20 1 20
Â t ¥ 1.05 t -1
¥v = t
Â
1.05 t =1
t t
t ¥ 1.05 ¥ v = Â
1.05 t =1
t ¥V t
t =1
1 1.05 1.1
where V = = fi I= - 1 = 4.7619% . So, the numerator is:
1 + I 1.1 1.05
Ê 1 - (1 + I ) -20 -20 ˆ
- 20 ¥ (1 + I )
1 1 Á I / (1 + I ) ˜
( Ia )20 @ I = 4.7619%
= Á ˜
1.05 1.05 Á I ˜
ÁË ˜¯
= 108.7075 [1]
So the discounted mean term is 108.7075 12.1121 = 8.98 years . [1]

(iv) Here we need to find:
20 20
DMT = Â t ¥ 1,000 ¥ 1.1t -1 ¥ vt Â1,000 ¥ 1.1t -1 ¥ vt
t =1 t =1
20 20
= Â t ¥ 1.1t -1 ¥ vt Â1.1t -1 ¥ vt [1]
t =1 t =1
Now, since i = 0.1 , 1.1t vt = 1 , so this is just:
20 20
DMT = 1.1 -1
Ât 1.1 -1
Â1
t =1 t =1
20 20
= Ât Â1
t =1 t =1
1
= ¥ 20 ¥ 21 20
2
= 10.5 years [1]
Solution 4.9
(i) The present value at interest rate i can be found by summing a geometric series:

D(1  j )v D(1  j )  1 j
PV (i )   D(1  j )t vt    D  [2]
t 1 1  (1  j )v (1  i )  (1  j ) i j
The discounted mean term can be found from the relationship:
PV ¢(i )
DMT = (1 + i) ¥ Volatility = (1 + i ) ¥ - [1]
PV (i )
Using the formula just derived for the present value, this gives:
(1 + j ) (1 + j ) 1 + i
DMT = (1 + i ) ¥ D D = [2]
(i - j ) 2 (i - j ) i - j

(ii) With the value given:
1.03
PV = 5, 000 ¥ = £103, 000 [1]
0.08 - 0.03
and:
1.08
DMT = = 21.6 years [1]
0.08 - 0.03
Solution 4.10
Purpose of models
Both types are used to project the accumulated value of flows of money. [½ ]
Assumptions
Deterministic models assume that future rates of return are fixed. Stochastic models
assume that future rates of return are random variables. [½ ]
Results obtained
For a given assumed set of future rates of return, a deterministic model will give a single
definite answer. For a given assumption about the statistical distribution of future rates of
return, a stochastic model will give a statistical distribution describing a range of possible
answers. [1]
Risk and uncertainty
Stochastic interest rate models make allowance for uncertainty by enabling the probability
that the actual value will lie in a given range to be calculated. Deterministic models make
allowance for uncertainty by carrying out calculations based on different sets of
assumptions (eg by including contingency margins in the assumptions). [1]

CT1: Q&A Bank Part 5 – Revision Solutions Page 9
Solution 5.11
(i) The money-weighted rate of return for the fund is the solution of the equation:
4(1 + i ) + 3(1 + i ) ¾ = 9 [1]
Using a first order binomial approximation to obtain a first guess:
4(1 + i ) + 3(1 + 34 i ) ª 9 fi 6.25i ª 2 fi i ª 32%
When i = 32% , 4(1 + i ) + 3(1 + i ) ¾ = 8.9745 .
When i = 32.5% , 4(1 + i ) + 3(1 + i ) ¾ = 9.0050 .
Using linear interpolation, the money-weighted rate of return is:
Ê 9 - 8.9745 ˆ
i = 32% + Á (32.5% - 32%) = 32.4% [1]
Ë 9.0050 - 8.9745 ˜¯
The time-weighted rate of return is given by:
4.5 9
¥ - 1 = 0.35
4 7.5
So the time-weighted rate of return is 35%. [1]
(ii) The yield on the subfund is given by:
1.24 - 1 = 1.0736
So the yield is 107%. [1]

Page 10 CT1: Q&A Bank Part 5 – Revision Solutions
(iii) If we exclude the progress of the subfund, the main fund grows from 7 to 7.5
during the third quarter, and from 8.7 to 9 in the last quarter. So the equation for
the money-weighted rate of return is now:
4(1 + i ) + 3(1 + i ) ¾ - 1(1 + i )½ + 1.2(1 + i )¼ = 9 [1]
Using a first order binomial approximation to obtain a first guess:
4(1 + i ) + 3(1 + ¾i ) - 1(1 + ½i ) + 1.2(1 + ¼i ) ª 9

fi 6.05i ª 1.8 fi i ª 29.8%
When i = 30% , 4(1 + i ) + 3(1 + i ) ¾ - 1(1 + i )½ + 1.2(1 + i )¼ = 8.9936 .
When i = 30.5% , 4(1 + i ) + 3(1 + i ) ¾ - 1(1 + i )½ + 1.2(1 + i )¼ = 9.0231 .
Using linear interpolation, the money-weighted rate of return is:
Ê 9 - 8.9936 ˆ
i = 30% + Á (30.5% - 30%) = 30.1% [1]
Ë 9.0231 - 8.9936 ˜¯
The time-weighted rate of return is now equal to:
4.5 8 7.5 9
¥ ¥ ¥ - 1 = 0.3300493 = 33% [1]
4 7.5 7 8.7

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CT1: CMP Upgrade 2016/17 Page 1

This CMP Upgrade contains:

 all significant changes to the Syllabus objectives and Core Reading.

The Actuarial Education Company © IFE: 2017 Examinations

1 Changes to the Syllabus objectives

2 Changes to the Core Reading

© IFE: 2017 Examinations The Actuarial Education Company

3 Changes to the ActEd Course Notes

Replacement pages 9 to 14 are provided due to changes in subsequent page layout.

The Actuarial Education Company © IFE: 2017 Examinations

4 Changes to the Q&A Bank

Q&A All Parts

© IFE: 2017 Examinations The Actuarial Education Company

5 Changes to the X Assignments

The Actuarial Education Company © IFE: 2017 Examinations

6 Other tuition services

6.1 Study material

We also offer the following study material in Subject CT1:

We offer the following tutorials in Subject CT1:

© IFE: 2017 Examinations The Actuarial Education Company

6.4 Feedback on the study material

The Actuarial Education Company © IFE: 2017 Examinations

Unless prior authority is granted by ActEd, you may not hire

You must take care of your study material to ensure that it is

Legal action will be taken if these terms are infringed. In

These conditions remain in force after you have finished using

© IFE: 2017 Examinations The Actuarial Education Company

Total income from Total income from

The Actuarial Education Company © IFE: 2017 Examinations

Company XYZ is considering investing in a capital project.

(i) Calculate the net present value of the project. [7]

(i) Calculate the monthly repayment. [2]

(ii) (a) Calculate the capital repaid in the fourth year.

(b) Calculate the interest element of the 49th repayment. [4]

© IFE: 2017 Examinations The Actuarial Education Company

The present value of the returns is:

PVr = 2v + 2v 2 +  + 2v5 + 2.25v 6 + 2.50v 7 +  + 3.25v10

= ( 2 ¥ 5.6502) + (0.25 ¥ 1.12 -5

So the net present value of the project is:

NPV = PVr - PVc = 12.7193 - 8.0421 = 4.677

ie approximately £4,677,000. [1]

(ii) Discounted payback period

PVc = 5 + 0.5v + 0.5 ¥ 1.04v 2 + 0.5 ¥ 1.042 v3 + 0.5 ¥ 1.043 v 4

Alternatively, this can be evaluated using an annuity.

PVr = 2a4 = 2 ¥ 3.0373 = 6.0747 [1]

NPV = PVr - PVc = 6.0747 - 6.6033 = -0.529 < 0 [½ ]

PVc = 6.6033 + 0.5 ¥ 1.044 ¥ 1.12-5 = 6.9352 [½ ]

NPV = PVr - PVc = 7.2096 - 6.9352 = 0.274 > 0

So the discounted payback period is 5 years. [½ ]

The Actuarial Education Company © IFE: 2017 Examinations

Alternatively, working in terms of accumulated values:

At time 4, AVc  10.3905 and AVr  9.5587 , so AV  9.5587  10.3905  0.832 .

At time 5, AVc  12.2223 and AVr  12.7057 , so AV  12.7057  12.2223  0.483 .

(i) Monthly repayment

Let M be the monthly repayment. The equation of value is:

250, 000  12Ma (12) [1]

Using a (12)  13.1312 , this gives:

(ii)(a) Capital repaid in the fourth year

12 Ma (12)  12 1,586.55 12.36924  £235, 493.04 [1]

12 Ma (12)  12 1,586.55 12.08419  £230, 065.97 [1]

The capital repaid in the fourth year is therefore:

235, 493.04  230, 065.97  £5, 427 [1]

(ii)(b) Interest element in the 49th repayment