ACTL20001 Financial Mathematics I Tutorial 8

1. (a) Calculate the discounted value, at time minus 5 years, of a continuous level cash flow at the
rate of $10 per time unit that commences at time 3 years and runs for 10 years, stopping at time
13 years, using an effective rate of discount of 6% per annum.
(b) Calculate the accumulated value when the payments stop at time 13.
2. (a) On lecture slide 98, compute the second present value.
(b) Make a graph (BY HAND) of d(t).
(Whats the use of making a graph by hand, dont we have software that does this far better? Because
making a graph improves our understanding of particular functions by having to compute values, estimate
derivatives, and so on. Convexity or concavity acquire a clearer meaning. All your lecturers had to make
graphs by hand in their studies, and my guess is that all of them use simple geometric arguments to
understand or remember various mathematical facts. Making a graph by hand requires advanced tools:
a pen or pencil, and a piece of paper. Ancient Greeks did them in the sand, but this requires walking to a
place where there is sand, which is tiring. It is well known that ancient Greeks were physically fit, probably
because of their rigorous mathematical studies.)
3. (a) Enter Thiele differential equation in Google. How many results do you get?
(b) Thieles differential equation is a fundamental (core, essential) concept in actuarial mathematics. One of the Google results is
http://www.math.ku.dk/~mogens/lifebook.pdf
Open the PDF at that address, and consider equation (4.43) on page 52. The symbol Vt represents
the reserve, defined as the expected present value premiums received minus benefits paid (the
meaning of Vt is not part of FM1, but solving simple differential equations is part of FM1, because
it is required in subsequent actuarial subjects). In this subject (FM1) we do not consider mortality,
so let x+t = 0. The symbol pt refers to the insurance premium, paid continuously; the x is the
age of the insured at issue of the policy and has no importance in this problem. Find the solution
of this differential equation, assuming an arbitrary value for V0 and that pt is constant and equal
to p.
(c) Give a verbal interpretation of the solution in (b).
(d) Suppose d = 0.10, V (0) = 100 and p = 25. Find the numerical value of Vt for at least three
different values of t, and make a graph of Vt BY HAND.
Thorvald Nicolai Thiele (1838-1910) was a Danish astronomer, actuary and mathematician. When
you will hear about cumulants in statistics, and Brownian motion in option pricing, you will
probably not be told that he was the first to define both concepts. The author of the text I refer to
above is Ragnar Norberg, a Norwegian professor of Actuarial Science, who has visited the Centre
for Actuarial Studies in the past.
4. Consider a continuous cash flow starting in three years time and continuing for 10 years,
where the rate of payment at time t years is K (t) = 100 e0.07t (for 0 < 3 < 13, it is 0 otherwise).
Make a graph of K (t). Calculate the present value of this cash flow using a continuous rate of
interest of 4% per annum.
(b) Redo (a) with a continuous rate of interest of 7% per annum.
(c) Redo (a) with a continuous rate of interest of 10% per annum.
1

5. Calculate the present value of a continuous cash flow over the next 3 years where the rate of
payment is
8
<300,
0t1
K (t) =
:100,
1 < t 3.
Use a continuous rate of interest rate of 6% per annum.