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Transcript of Actuarial Mathematics (MA310) - 10.10am Mondays AC202 12.10 ...
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OutlineFundamentals
Actuarial Mathematics (MA310)10.10am Mondays AC202
12.10pm Fridays C219
Graham Ellishttp://hamilton.nuigalway.ie
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
A good performance in this course will give you an exemptionfrom the Actuarial Exam
CT1 - Mathematics of Finance
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Outline
I Fundamentals
I Project appraisal
I Investment
I Simple compound interest problems
I Arbitrage and forward contracts
I Term structure of interest rates
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Reading
I “Core Reading 2007 - CT1 Financial Mathematics”, TheOfficial Actuarial Bookshop
I “An introduction to the mathematics of finance”, John J.McCutcheon and William F. Scott, London: Heinemann,1986. ISBN: 0 434 91228 x
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Calculator
Get yourself a good calculator which is NOT capable of storingtext.
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Section A: Fundamentals
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
Interest rates
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
Interest rates
I i = Effective Rate of Interest pa = Amount of interest earnedon a sum of 1 after 1| (= APR).
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
![Page 9: Actuarial Mathematics (MA310) - 10.10am Mondays AC202 12.10 ...](https://reader034.fdocuments.us/reader034/viewer/2022051319/586b6cda1a28abf6088b7183/html5/thumbnails/9.jpg)
OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
Interest rates
I i = Effective Rate of Interest pa = Amount of interest earnedon a sum of 1 after 1| (= APR).
I i (m) = Nominal ROI pa convertible mthly. Effective ROI foreach 1/m period = i (m)/m. Thus, by definition,
(1 +i (m)
m)m = 1 + i
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
![Page 10: Actuarial Mathematics (MA310) - 10.10am Mondays AC202 12.10 ...](https://reader034.fdocuments.us/reader034/viewer/2022051319/586b6cda1a28abf6088b7183/html5/thumbnails/10.jpg)
OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
Interest rates
I i = Effective Rate of Interest pa = Amount of interest earnedon a sum of 1 after 1| (= APR).
I i (m) = Nominal ROI pa convertible mthly. Effective ROI foreach 1/m period = i (m)/m. Thus, by definition,
(1 +i (m)
m)m = 1 + i
I δ = Force of interest pa = i (∞). From the definition
eδ = 1 + i
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
Interest rates
I i = Effective Rate of Interest pa = Amount of interest earnedon a sum of 1 after 1| (= APR).
I i (m) = Nominal ROI pa convertible mthly. Effective ROI foreach 1/m period = i (m)/m. Thus, by definition,
(1 +i (m)
m)m = 1 + i
I δ = Force of interest pa = i (∞). From the definition
eδ = 1 + i
I v = 11+i
= amount that grows to 1 at the end of 1| at ROI i .
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
Interest rates cont.
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
Interest rates cont.
I d = Effective rate of discount pa. d = 1 − v = i
1+i
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
Interest rates cont.
I d = Effective rate of discount pa. d = 1 − v = i
1+i
I 1− d = a loan of 1, to be repaid after 1|, on which interest ofamount d is payable in advance.
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
Interest rates cont.
I d = Effective rate of discount pa. d = 1 − v = i
1+i
I 1− d = a loan of 1, to be repaid after 1|, on which interest ofamount d is payable in advance.
I d (m) =Nominal rate of discount convertible mthly. EffectiveROD for each 1/m period = d (m)/m. Thus, by definition,
(1 −d (m)
m)m = 1 − d
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
i , i (m), δ, v , d , d (m)
Different forms of the same thing.Use the form most appropriate to the task in hand.
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
Example.If the nominal rate of interest convertible every month is 8% p.a.,calculate the nominal rate of interest p.a. convertible every quaterand the effective rate of discount p.a. . [5 minutes]
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
I
i(12) = .08
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
I
i(12) = .08
I
(1 +i (12)
12)12 = 1 + i
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
I
i(12) = .08
I
(1 +i (12)
12)12 = 1 + i
I Soi = .083000
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
I
i(12) = .08
I
(1 +i (12)
12)12 = 1 + i
I Soi = .083000
I
i(4) = ((1 + i)
14 − 1)4
andi(4) = .080535
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
I
i(12) = .08
I
(1 +i (12)
12)12 = 1 + i
I Soi = .083000
I
i(4) = ((1 + i)
14 − 1)4
andi(4) = .080535
I
d = 1 − v = 1 −1
1 + i= .076639
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
Cashflow models
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
Cashflow models
I Cashflow = a sum of money paid or received.
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
Cashflow models
I Cashflow = a sum of money paid or received.
I Cashflow process: timing may be known or unkown andamount may be known or unkown.
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
Cashflow models
I Cashflow = a sum of money paid or received.
I Cashflow process: timing may be known or unkown andamount may be known or unkown.
I Cashflow model: model that describes the timing and amountof the CF
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
Example: Syndicate spending £5 on lotto every week for 10 weeks
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
Example: Syndicate spending £5 on lotto every week for 10 weeks
Cashflows5 per week Winnings
Syndicate’s viewpointCashflow sign (-) (+)Timing known unkownAmount known unkown
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
Example: Syndicate spending £5 on lotto every week for 10 weeks
Cashflows5 per week Winnings
Syndicate’s viewpointCashflow sign (-) (+)Timing known unkownAmount known unkown
Lotto’s viewpointCashflow sign (+) (-)Timing unknown unkownAmount unknown unkown
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
I It can be useful to plot cashflows on a timeline.
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
I It can be useful to plot cashflows on a timeline.
I Where there are uncertainties it is possible to assignprobabilities to both the amount and the existence of acashflow
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
Example: Life assurance policy (Insurance company view). Wholeof life non profit. Premium of £100 pa.
Cashflow Sign Timing AmountPremium (+) unknown knownSum assured (-) unkown knownExpenses (-) known unkown
0
CF
Timing
probability
100
1
2 31
100 100 100
20
100
2PxPx 20Px
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
Accumulations
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
Accumulations
I C accumulated n| @i% pa simple interest: C → (1 + ni)C(Linear growth)
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
Accumulations
I C accumulated n| @i% pa simple interest: C → (1 + ni)C(Linear growth)
I C accumulated n| @i% pa compound interest: C → (1 + i)nC(Exponential growth)
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
Accumulations
I C accumulated n| @i% pa simple interest: C → (1 + ni)C(Linear growth)
I C accumulated n| @i% pa compound interest: C → (1 + i)nC(Exponential growth)
I n| @d% pa simple discount: (1 − nd)C → C
I n| @d% pa compound discount: (1 − d)nC → C
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
ExampleA company wishes to invest £10,000 in 89-day bills from theBritish government. The bills are currently issued at a simple rateof discount of 7% per annum. Calculate the nominal value of thebills that can be purchased. [5 minutes]
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
N = nominal value
(1 − 0.0789
365)N = 10, 000
N = £10,173.65
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
Present values
PV now of an amount X at time n = X/(1 + i)n = vnX
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
Level annuities
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
Level annuities
I an| = PV of 1 pa in arrears for n| @i .
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
Level annuities
I an| = PV of 1 pa in arrears for n| @i .
I Exercise:
an| =1 − vn
i
a∞|= 1i
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
Level annuities
I an| = PV of 1 pa in arrears for n| @i .
I Exercise:
an| =1 − vn
i
a∞|= 1i
I an| = PV of 1 pa in advance for n| @i .
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
Level annuities
I an| = PV of 1 pa in arrears for n| @i .
I Exercise:
an| =1 − vn
i
a∞|= 1i
I an| = PV of 1 pa in advance for n| @i .
I Exercise:
an| =1 − vn
d
a∞|= 1d
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
ExampleA loan of £2400 is to be repaid in 20 equal installments. The rateof interest for the transaction is 10% per annum. Find the amountof each annual repayment assuming that payments are made (a) inarrear, (b) in advance.
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
ExampleA loan of £2400 is to be repaid in 20 equal installments. The rateof interest for the transaction is 10% per annum. Find the amountof each annual repayment assuming that payments are made (a) inarrear, (b) in advance.
I (a) X = annual repayment.
2400 = X (v + v2 + · · · + v
20) = Xa20| @10%
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
ExampleA loan of £2400 is to be repaid in 20 equal installments. The rateof interest for the transaction is 10% per annum. Find the amountof each annual repayment assuming that payments are made (a) inarrear, (b) in advance.
I (a) X = annual repayment.
2400 = X (v + v2 + · · · + v
20) = Xa20| @10%
X = 281.90
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
ExampleA loan of £2400 is to be repaid in 20 equal installments. The rateof interest for the transaction is 10% per annum. Find the amountof each annual repayment assuming that payments are made (a) inarrear, (b) in advance.
I (b) Y = annual repayment.
2400 = X (1 + v + · · · + v19) = Xa20| @10%
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
ExampleA loan of £2400 is to be repaid in 20 equal installments. The rateof interest for the transaction is 10% per annum. Find the amountof each annual repayment assuming that payments are made (a) inarrear, (b) in advance.
I (b) Y = annual repayment.
2400 = X (1 + v + · · · + v19) = Xa20| @10%
Y = 256.28
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
Level annuities contd.
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
Level annuities contd.
I a(m)n| = PV of 1
mper mthly interval in arrears for n| @i .
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
Level annuities contd.
I a(m)n| = PV of 1
mper mthly interval in arrears for n| @i .
I
a(m)n| =
i
i (m)an|
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
Level annuities contd.
I a(m)n| = PV of 1
mper mthly interval in arrears for n| @i .
I
a(m)n| =
i
i (m)an|
I a(m)n| = PV of 1
mper mthly interval in advance for n| @i .
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
Level annuities contd.
I a(m)n| = PV of 1
mper mthly interval in arrears for n| @i .
I
a(m)n| =
i
i (m)an|
I a(m)n| = PV of 1
mper mthly interval in advance for n| @i .
I
a(m)n| = (1 + i)
1m a
(m)n|
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
Level annuities contd.
I a(m)n| = PV of 1
mper mthly interval in arrears for n| @i .
I
a(m)n| =
i
i (m)an|
I a(m)n| = PV of 1
mper mthly interval in advance for n| @i .
I
a(m)n| = (1 + i)
1m a
(m)n|
I an| = PV of an annuity payable continuously for n| where therate of payment per unit time is equal to 1.
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
Level annuities contd.
I a(m)n| = PV of 1
mper mthly interval in arrears for n| @i .
I
a(m)n| =
i
i (m)an|
I a(m)n| = PV of 1
mper mthly interval in advance for n| @i .
I
a(m)n| = (1 + i)
1m a
(m)n|
I an| = PV of an annuity payable continuously for n| where therate of payment per unit time is equal to 1.
I
an| =
∫n
01.v t
dt =1 − vn
δ
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
Level annuities contd.
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
Level annuities contd.
I sn| = Value @n of 1 pa in arrears for n| @i .
sn| =(1 + i)n − 1
i
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
Level annuities contd.
I sn| = Value @n of 1 pa in arrears for n| @i .
sn| =(1 + i)n − 1
i
I sn| = Value @n of 1 pa in advance for n| @i .
sn| =(1 + i)n − 1
d
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
Level annuities contd.
I sn| = Value @n of 1 pa in arrears for n| @i .
sn| =(1 + i)n − 1
i
I sn| = Value @n of 1 pa in advance for n| @i .
sn| =(1 + i)n − 1
d
I s(m)n| = V @n of 1
mper mthly interval in arrears for n| @i .
s(m)n| =
i
i (m)sn|
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
Level annuities contd.
I sn| = Value @n of 1 pa in arrears for n| @i .
sn| =(1 + i)n − 1
i
I sn| = Value @n of 1 pa in advance for n| @i .
sn| =(1 + i)n − 1
d
I s(m)n| = V @n of 1
mper mthly interval in arrears for n| @i .
s(m)n| =
i
i (m)sn|
I
s(m)n| = (1 + i)
1m s
(m)n|
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
Level annuities contd.
I
sn| =(1 + i)n − 1
δ
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
Increasing & decreasing annuities
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
Increasing & decreasing annuities
I (Ia)n| = PV of (1@t = 1) + (2@t = 2) + · · · + (n@t = n)(Ia)n| = v + 2v2 + 3v3 + · · · + nvn
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
Increasing & decreasing annuities
I (Ia)n| = PV of (1@t = 1) + (2@t = 2) + · · · + (n@t = n)(Ia)n| = v + 2v2 + 3v3 + · · · + nvn
I
(Ia)n| =an| − nvn
i
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
Increasing & decreasing annuities
I (Ia)n| = PV of (1@t = 1) + (2@t = 2) + · · · + (n@t = n)(Ia)n| = v + 2v2 + 3v3 + · · · + nvn
I
(Ia)n| =an| − nvn
i
I
(I a)n| = 1 + 2v + 3v2 + · · · + nvn−1 = (1 + i)(Ia)n|
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
Increasing & decreasing annuities
I (Ia)n| = PV of (1@t = 1) + (2@t = 2) + · · · + (n@t = n)(Ia)n| = v + 2v2 + 3v3 + · · · + nvn
I
(Ia)n| =an| − nvn
i
I
(I a)n| = 1 + 2v + 3v2 + · · · + nvn−1 = (1 + i)(Ia)n|
I
(Ia)n| =
∫n
0tv
tdt =
an| − nvn
δ
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
Increasing & decreasing annuities
I (Ia)n| = PV of (1@t = 1) + (2@t = 2) + · · · + (n@t = n)(Ia)n| = v + 2v2 + 3v3 + · · · + nvn
I
(Ia)n| =an| − nvn
i
I
(I a)n| = 1 + 2v + 3v2 + · · · + nvn−1 = (1 + i)(Ia)n|
I
(Ia)n| =
∫n
0tv
tdt =
an| − nvn
δ
I
(I a)n| =n∑
r=1
(
∫r
r−1rv
tdt) =
an|
an|(Ia)n|
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
Increasing & decreasing annuities contd.
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
Increasing & decreasing annuities contd.
I
(Da)n| = nv + (n − 1)v2 + (n − 2)v3 + · · · + vn =
n − an|
i
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
Increasing & decreasing annuities contd.
I
(Da)n| = nv + (n − 1)v2 + (n − 2)v3 + · · · + vn =
n − an|
i
I and so on . . .
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
ExampleShow that
(Ia)n| =an| − nvn
δ.
[5 minutes]
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
ExampleShow that
(Ia)n| =an| − nvn
δ.
[5 minutes]
I ∫n
0t(vn
dt) = (t(−1
δe−δ)n0 −
∫n
0−
1
δe−δ
dt
= −nvn
δ+
1
δ
∫n
0v
tdt
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)
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OutlineFundamentals
Interest RatesCashflow modelsThe value of moneyLevel annuitiesIncreasing & decreasing annuities
ExampleShow that
(Ia)n| =an| − nvn
δ.
[5 minutes]
I ∫n
0t(vn
dt) = (t(−1
δe−δ)n0 −
∫n
0−
1
δe−δ
dt
= −nvn
δ+
1
δ
∫n
0v
tdt
I
= −nvn
δ+
1
δan|
Graham Ellis http://hamilton.nuigalway.ie Actuarial Mathematics (MA310)