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INSTITUTE AND FACULTY OF ACTUARIES
EXAMINATION
18 April 2017 (pm)
Subject CT1 – Financial Mathematics

Core Technical
Time allowed: Three hours
INSTRUCTIONS TO THE CANDIDATE
1. Enter all the candidate and examination details as requested on the front of your answer
booklet.
2. You must not start writing your answers in the booklet until instructed to do so by the
supervisor.
3. You have 15 minutes of planning and reading time before the start of this examination.
You may make separate notes or write on the exam paper but not in your answer
booklet. Calculators are not to be used during the reading time. You will then have
three hours to complete the paper.
4. Mark allocations are shown in brackets.
5. Attempt all 10 questions, beginning your answer to each question on a new page.
6. Candidates should show calculations where this is appropriate.
Graph paper is NOT required for this paper.
AT THE END OF THE EXAMINATION
Hand in BOTH your answer booklet, with any additional sheets firmly attached, and this
question paper.
In addition to this paper you should have available the 2002 edition of the Formulae
and Tables and your own electronic calculator from the approved list.
CT1 A2017  Institute and Faculty of Actuaries

1 Calculate the nominal rate of discount per annum convertible monthly which is
equivalent to:
(i) an effective rate of interest of 1% per quarter. [2]
(ii) a force of interest of 5% per annum. [2]
(iii) a nominal rate of discount of 4% per annum convertible every three months.
[2]
[Total 6]
2 A bank offers two repayment alternatives for a loan that is to be repaid over sixteen
years:
Option 1: the borrower pays £7,800 per annum quarterly in arrear.
Option 2: the borrower makes payments at an annual rate of £8,200 every second year
in arrear.
Determine which option would provide the better deal for the borrower at a rate of
interest of 5% per annum effective. [5]
3 A one-year forward contract on a stock was agreed on 1 March 2017 when the stock
price was £78 and the risk-free force of interest was 14% per annum. The stock was
expected to pay dividends of £3.20 on 1 June and 1 December 2017.
On 1 April 2017, the price of the stock was £80 and the risk-free force of interest was
11% per annum. The dividend expectations were unchanged.
Determine the value of the contract to the holder of the long forward position on
1 April 2017. [7]
4 An investor borrows money from a bank in order to invest in a business venture. The
initial loan is £500,000, with further loans of £250,000 made in 6 months’ time and
£250,000 made in 12 months’ time.
The business venture will provide the investor with an income of £2 million in exactly
10 years’ time and £3 million in exactly 15 years’ time.
The bank offers a force of interest, δ(t), as a function of time t (measured in years)
which is given by:
0.04 for 0 ≤ t ≤ 2
δ(t ) = 
0.02 + kt for t > 2
(i) Derive expressions for v(t) which cover all values of t. [5]
CT1 A2017–2
(ii) Determine the minimum value of k that would ensure that the discounted
payback period is exactly 10 years. [4]
[Total 9]
5 An investment fund has liabilities of £11 million due in 7 years’ time and £8.084
million in 11 years’ time.
The manager of the fund will meet the liabilities by investing in zero-coupon bonds.
The manager is able to buy zero-coupon bonds for whatever term is required and there
are adequate funds at the manager’s disposal.
(i) Explain whether it is possible for the manager to immunise the fund against
small changes in the rate of interest by purchasing a single zero-coupon bond.
[2]
The manager decides to purchase two zero-coupon bonds, one paying £15.363 million
in 7.5 years’ time and the other paying £3.787 million in 14.25 years’ time. The
current interest rate is 5.5% per annum effective.
(ii) Determine whether the investment fund satisfies the necessary conditions to be
immunised against small changes in the rate of interest. [7]
[Total 9]
6 Exactly three months ago an investor purchased an office building for £5.8 million
with the intention of renting it out. In three months’ time the investor will spend
£850,000 on necessary refurbishments and improvements.
A tenant has agreed to lease the building in six months’ time for 35 years. The tenant
will pay an initial rent of £1.250 million per annum payable monthly in arrear. The
rent will be increased at five-yearly intervals at a rate of 4.2% per annum compound.
It has further been agreed that at the end of the lease period the tenant will buy the
building from the investor for £11.5 million.
The investor pays income tax at a rate of 35% and is expecting a net effective rate of
return of 8% per annum.
Calculate, showing all workings, the net present value of the project to the investor at
the time of purchase. [11]
CT1 A2017–3 PLEASE TURN OVER

7 A fixed interest bond was issued on 1 January 2017 with a term of 20 years and is
redeemable at 105%. The security pays a coupon of 4% per annum, payable half-
yearly in arrear.
An investor is liable to income tax at the rate of 30% and capital gains tax at the rate
of 40%. Income tax and capital gains tax are both collected on 1 June each year in
relation to gross payments made during the previous 12 months.
The investor bought £10,000 nominal of the stock at an issue price of £9,800.
(i) Show that the net redemption yield obtained by the investor will be between
3% and 4% per annum effective. [7]
The inflation rate over the term of the bond is assumed to be 2% per annum.
(ii) Calculate the net effective annual real redemption yield that would be obtained
by the investor. [3]
(iii) Explain, without doing any further calculations, how your answers to parts (i)
and (ii) would alter if the tax were collected on 1 April instead of 1 June each
year. [2]
[Total 12]
8 Two investment funds A and B are administered by different managers. The initial
values of the two funds on 1 January 2015 were £1.5 million and £2.3 million,
respectively. The funds received additional net cash flows at the beginning of 2015
and 2016, as follows:
Fund Net Cash Flows

1 January 2015 1 January 2016
Fund A £300,000 £1,700,000
Fund B £2,000,000 £200,000
The fund managers achieved the following annual returns during 2015 and 2016:
Fund Annual Returns

2015 2016
Fund A 42% 3%
Fund B 36% 2%
(i) Calculate the annual effective time weighted rate of return for each fund for
the period 1 January 2015 to 31 December 2016. [3]
(ii) Calculate the annual effective money weighted rate of return per annum for
each fund for the period 1 January 2015 to 31 December 2016. [8]
(iii) Comment on your answers to parts (i) and (ii) by explaining which of the two
measures is the better indicator of the comparative performance of the
managers for the given two-year period. [3]
[Total 14]
CT1 A2017–4
9 Let f t denote the one-year effective forward rate of interest over the year from time t
to (t + 1). Let it be the t -year effective spot rate over the period 0 to t.
The annual effective gross redemption yield from an n-year bond which pays coupons
of 5% annually in arrear is given by:
gn = 0.07 + 0.001n for n =1, 2 and 3
Each bond is redeemed at par and is exactly one year from the next coupon payment.
It is assumed that no arbitrage takes place.
(i) Calculate i1, i2 and i3 as percentages to three decimal places. [7]
(ii) Calculate f0, f1 and f2 as percentages to three decimal places. [4]
(iii) Explain why the one-year forward rates increase more quickly with term than
the spot rates. [2]
[Total 13]
10 An individual aged exactly 65 intends to retire in five years’ time and receive an
annuity-certain. The annuity will be payable monthly in advance and will cease after
20 years. The annuity will increase at each anniversary of the commencement of
payment at the rate of 3% per annum.
The individual would like the initial level of annuity to be £20,000 per annum. The
price of the annuity will be the present value of the payments on the date it
commences using an interest rate of 7% per annum effective.
(i) Calculate the price of the annuity. [4]
In order to purchase the annuity described in part (i), the individual invests £200,000
on his 65th birthday in a particular fund.
The investment return on the fund in any given year is independent of returns in all
other years and the annual return is:
• 4% with a probability of 60%.

• 7% with a probability of 40%.
(ii) Calculate, showing all workings, the expected accumulation of the investment
at the time of retirement. [3]
(iii) Calculate, showing all workings, the standard deviation of the investment at
the time of retirement. [4]
(iv) Determine the probability that the individual will have sufficient funds to
purchase the annuity. [3]
[Total 14]
END OF PAPER
CT1 A2017–5
EXAMINERS’ REPORT
April 2017

Core Technical
Introduction
The Examiners’ Report is written by the Principal Examiner with the aim of helping candidates, both
those who are sitting the examination for the first time and using past papers as a revision aid and
also those who have previously failed the subject.
The Examiners are charged by Council with examining the published syllabus. The Examiners have
access to the Core Reading, which is designed to interpret the syllabus, and will generally base
questions around it but are not required to examine the content of Core Reading specifically or
exclusively.
For numerical questions the Examiners’ preferred approach to the solution is reproduced in this
report; other valid approaches are given appropriate credit. For essay-style questions, particularly the
open-ended questions in the later subjects, the report may contain more points than the Examiners
will expect from a solution that scores full marks.
The report is written based on the legislative and regulatory context pertaining to the date that the
examination was set. Candidates should take into account the possibility that circumstances may
have changed if using these reports for revision.
Luke Hatter
Chair of the Board of Examiners
July 2017
 Institute and Faculty of Actuaries

Subject CT1 (Financial Mathematics Core Technical) – April 2017 – Examiners’ Report
A. General comments on the aims of this subject and how it is marked
1. CT1 provides a grounding in financial mathematics and its simple applications. It

introduces compound interest, the time value of money and discounted cashflow
techniques which are fundamental building blocks for most actuarial work.
2. Please note that different answers may be obtained to those shown in these solutions
depending on whether figures obtained from tables or from calculators are used in the
calculations but candidates are not penalised for this. However, candidates may lose
marks where excessive rounding has been used or where insufficient working is shown.
B. General comments on student performance in this diet of the

examination
1. The comments that follow the questions concentrate on areas where candidates could
have improved their performance. Where no comment is made, the question was
generally answered well by most candidates. The examiners look most closely at the
performance of the candidates close to the pass mark and the comments therefore often
relate to those candidates.
2. Performance was of a similar standard to that of most recent examinations. As in

previous examinations, the non-numerical questions were often answered poorly by
marginal candidates.
C. Pass Mark
The Pass Mark for this exam was 60.
Page 2
Solutions
i 
4
Q1 (i)  4%
 
12  3 1
1  d12  v4

= 1 i 4 
 4  1
 
  4  13 
 d 
1
  12(1  1.01 3 )
12
 12  1  1  i 4
 
 
 3.9735% [2]
d 
12 1
12
(ii) 1 e
12
 d   12 1  e 
1
0.0512
12

 
 4.9896% [2]
 4 1
(iii) 1 d4  v4

 1  d12 
12  3
 
  4
1

 d    12  1  1  d 4
12 3

 
 
 4.0134% [2]
[Total 6]
Generally well-answered.
Page 3
Q2 Present value for 1st option:
7,800 a (4)  7,800  1.018559  10.8378

16
 £86,103.52 [2]
Present value for 2nd option:

16, 400  v 2  v 4  ...  v16 
 1  v16 
16, 400 v 2 
 1  v 2 
 
 1  0.45811 
16, 400  0.90703  
 1  0.90703 
 
= £86,702.94 [2]
(above uses factors from Formulae and Tables Book – exact answer is £86.702.16)
Therefore, 1st option is better for the borrower as the total value of the repayments is
less than with the 2nd option. [1]
[Total 5]
For the second option, a common mistake was to assume the annual rate of
payment was £8,200. Some students omitted to give a final conclusion (and
so did not actually answer the question).
Q3 Forward price of the contract is K 0  ( S0  I )eT  (78  I )e0.141 [1]
where I is the present value of income during the term of the contract.
 0.14 123 9
0.14  12 
 I  3.2  e e   5.97098 [1]
 
 K 0   78  5.97098  e 0.14  82.85309 [½]
Forward price when new contract issued at time r (1 month) is
 
11
0.11 12
K r  Sr  I * e(T r )  (80  I * )e [1]
Page 4
where I * is the present value of income during the term of the contract.
 I *  3.2  e   6.115599
2
0.1112 8
0.1112
e  [1]
 
11
0.1112
 K 1   80  6.115599  e
12
 81.72297 [½]
Value of original contract   K r  K 0  e (T  r ) [½]
11
0.11 12
  81.72297  82.85309  e
 1.02172  £1.02172 [1½]

(above uses the rounded forward prices shown – exact answer is –£1.02174)
[Total 7]
Reasonably well-answered although a common mistake was not to deal with

the change in the interest rate correctly. There are quicker ways to answer
the question but candidates who took a methodical approach such as that
outlined above were able to maximise the marks for working even if they
made calculation errors.
  s  ds
t
Q4 (i) v(t )  e 0
For 0  t  2
t
  0.04ds
v(t )  e 0  e0.04t [2]
For t > 2
t
   0.02 k .s ds
v (t )  v(2).e 2
t
0.08  0.02 s  12 ks 2 
 2
e e
 e0.08  e  
  0.02t  12 kt 2  0.04 2 k  

0.02t  12 kt 2 0.04  2 k
e [3]
Page 5
(ii) To calculate maximum value of k:
Now PV of outlay (in £000s)

 500  250 e0.02  e0.04 
= 985.247 [1]
At t =10, PV of sale proceeds
 2000 e0.08 .e(0.250k 0.042k )
 2000e 0.2448k [1]
So, for DPP = 10 years, we need PV of sale proceeds ≥ PV of outlay
 2000 e 0.2448k  985.247
 ln  0.4926235  0.24  48k
 k  0.00975 so maximum value is 0.00975 [2]

[Total 9]
In part (i), it was important to give the required expression for 2 explicitly.
Unfortunately in part (ii), there was a typographical error in the question

paper. The intention was to ask for the maximum value of k rather than the
minimum and the solution above obtains this maximum value. The answer to
the question actually on the paper is that the minimum value would be
∞. Students who gave this answer were given full credit as were
students who obtained the maximum value above. Marginal candidates did
not appear to have been disadvantaged as such candidates had typically
been unable to calculate the PV of the sale proceeds in terms of k.
Q5 (i) No, as with only a single asset, the spread of the asset proceeds would be less
than the spread of the liability outgo (at times 7 and 11). [1]
Thus, the convexity of the assets would be less than the convexity of the
liabilities and the third condition of immunisation could not be satisfied. [1]
(ii) Redington’s first condition states that the PV of the assets should equal the PV
 1 
of the liabilities  using v   0.94787  and working in £ millions:
 1.055 
VA  15.363v 7.5  3.787v14.25  12.048 [1]
Page 6
VL  11v 7  8.084v11  12.048 [1]
Allowing for rounding (using three decimal places), Redington’s first

condition applies. [½]
Redington’s second condition states that the discounted mean term (DMT) of
the assets should be equal to the DMT of the liabilities, which equivalently can
be written as
VA  VL (where in the calculations below the derivatives are with respect to
the force of interest)
VA  15.363  7.5 7.5  3.787 14.2514.25  102.28 . [1]
VL  11 77  8.084 1111  102.28 [1]
Allowing for rounding (using 2 decimal places), Redington’s second condition

applies. [½]
Since the spread of asset proceeds exceeds the spread of liability outgo (as
asset proceeds are received at times 7.5 and 14.25, whereas liability outgo is
paid at times 7 and 11), the convexity of the assets is greater than the
convexity of the liabilities.
Alternatively:
VA''  15.363  7.52 v 7.5  3.787 14.252 v14.25  936.94 .
VL''  11 7 2 v 7  8.084 112 v11  913.32  VA'' .

[1½]
Thus, the third condition is also satisfied and the company is immunised
against small changes in the rate of interest. [½]
[Total 9]
In part (i), candidates tended to score 0 or 2 marks depending on whether

they recognised the problem with using a single asset. Part (ii) was answered
well.
Page 7
Q6 The investor’s proceeds in £ millions at the time of purchase can be calculated as:
9
PVin  1.25  (1  0.35)a5|(12) 5 5 10 10
[1  1.042 v  1.042 v  ...  1.042 v 30 30
]v 12
9
35
11.5v 12 @ i  8% p.a.
[3]
1  r 7  0.75
 0.8125  a5|(12)   v  11.5v35.75 @ i  8% p.a. [1½]
 1 r
 
 0.8125  4.1371 [1]

 4.35767 [1]
 0.94391 [½]
 11.5  0.06384 [1]
 14.56039 [½]
where we have:
5
 1.042  (12) 1  0.68058
r    0.836026 ; a5|   4.1371
 1.08  0.07721
At the same time, the investor’s costs (in millions) are:
6
PVout  5.8  0.85v 12 @ i  8% p.a.
 5.8  0.85  0.96225  6.6179 [1½]
Thus, the investor’s net proceeds (in millions) are given by:
NPV  PVin  PVout  14.5604  6.6179  £7.9425m [1]

[Total 11]
This was a question where it was beneficial to use a methodical approach.

Common errors included not allowing for the three month period since
purchase and assuming the rent increases were 4.2% every five years.
Q7 (i) Let i = money rate of return
Then
5 20 512
9,800  400 a (2)  10,500v 20 0.30  400v 12 a20  0.40 (10,500  9,800)v
20
[4]
Page 8
Try i = 3%
RHS = 400  1.007445  14.8775 + 10,500  0.55368 – 120  0.98776 

14.8775 – 280  0.546898 = 9,892.37 [1½]
Try i =4%
RHS = 400 1.009902  13.5903 + 10,500 0.45639 – 120  0.983791 

13.5903 – 280  0.448989 = 8551.92 [1]
Since 8551.92 < 9800 < 9892.37
then 3% < i < 4% [½]
(ii) We can find i from:
9892.37  9800
i  0.03   0.01
9892.37  8551.92
= 0.0307 i.e. i = 3.07% p.a. [1½]
If inflation = 2% p.a. = e, then i = net real yield can be found from
1  i 1.0307
1  i  
1 e 1.02
 i = net real yield = 1.05% p.a. [1½]
(iii) If tax were collected on 1 April instead of 1 June each year then tax payments
would be brought forward which would increase the present value of these
payments. [1]
This would decrease both the net money yield and the net real yield. [1]
[Total 12]
In terms of average mark, this was the worst answered question on the paper.
Many candidates simplified part (a) to assume that taxes were paid at the
same time as the coupon/redemption payments (ignoring the 5-month time
lag and/or assuming income tax was paid half-yearly) and they lost marks
accordingly. It was possible to get full marks on part (b) even if part (a) was
answered incorrectly. Part (c) was very poorly answered even though the
points required were straightforward.
Page 9
Q8 (i) The TWRR for fund A and B results from the annual rates achieved for 2015
and 2016:
TWRR A : 1  i 2  1.42  1.03 => i = 20.94%

TWRR B : (1  i ) 2  1.36  1.02 => i = 17.78%
[3]
(ii) In order to calculate the MWRR, first we need to calculate the values of the
funds at the beginning and at the end of 2016. Working in £m, we have for
fund A and B where Ft , A and Ft ,B are the fund values at the end of 2014 + t
for Funds A and B respectively:
F1, A  (1.5  0.3)  1.42 = 2.556 and
F2, A  ( F1, A  1.7)  1.03 = 4.38368
F1,B  (2.3  2)  1.36 = 5.848 and
F2, B  ( F1, B  0.2)  1.02 = 6.1689 6 [2]
Then the MWRR result from the EV at the end of 2016:
MWRR A : (1.5  0.3)  (1 + i ) 2  1.7  (1  i ) = 4.38368
 1.8 x 2  1.7 x  4.38368  0
 x  1.158229  iA  15.823% [3]

2
MWRR B : (2.3  2)  (1 + i )  0.2  (1 + i )  6.16896
 4.3x 2  0.2 x  6.16896  0
 x  1.174735  iB  17.474% [3]
(iii) The TWRR is a more reliable indicator of the manager’s performance since it
is independent of the size of the amounts and the time at which investments
are made … [½]
…both of which are outside the manager’s control. [½]
In this case, manager A performed better than manager B for both 2015 and
2016 by achieving a higher TWRR for each of those years (i.e. 42%  36%
and 3%  2%). [1]
Page 10
It should be noted that manager A had a worse MWRR for the 2 year period
than manager B because manager A had so few funds invested during the best
period for investment which was 2015/manager A received a large cashflow
just before a period of poor performance. [1]
[Total 14]
Many candidates failed to notice the quick way that part (i) could be solved
although much of the extra working that they undertook was needed for part
(ii) anyway.
Part (iii) was poorly answered although other approaches to those given
above could be used to gain full credit. It is important in this type of question
to refer to the actual results obtained and the actual data given.
Unsubstantiated answers to this part were given no credit.
Q9 (i) Let p  t  = Price of t -year bond
g1 = i1 = 0.071 = 7.100% p.a. [½]
p  2   5a2  100v 2 @ g 2 7.2% p.a. [1]
= 5  1.8030185 + 100  0.8701827
= 96.0334 [1]
5 105
and 96.0334 =  [1]
1.071 1  i2 2
 i2  7.203% p.a. [1]
p  3  5a3  100v3 @ g3  7.3% p.a.
= 5  2.609998 + 100  0.8094701
= 93.9970 [1]
5 5 105
 93.9970 =   [½]
1.071 1.07203 2
1  i3 3
 i3  7.307% p.a. [1]
(ii) f0  i1  7.1% = 7.100% p.a. [½]
1  f0  1  f1   1  i2 2 [1]
Page 11
 1  f1 
1.072032
1.071
 f1  7.306% p.a. [1]

(Above answer is based on rounded answer for i2 . Exact answers is 7.305%).
1  i2 2 1  f 2   1  i3 3
 1  f2 
1.07307 
3
1.072032
 f 2  7.515% p.a. [1½]
(Above answer is based on rounded answers for i2 and i3 . Exact answers is

7.516%).
(iii) The spot rate for a term is the geometric average of the forward rates making
up that term. [1]
Since the spot rates increase with term, the forward rates must increase at a
faster rate than the spot rates to ensure that the geometric average of the
forward rates is itself increasing with term. [1]
[Total 13]
Many marginal candidates answered part (i) as if the gross redemption yields
given were actually spot yields. Others assumed the price of the bonds all to
be par. Part (ii) was answered well even by candidates who had struggled
with part (i). The examiners recognised that part (iii) would stretch many
candidates and indeed this part was found to be challenging.
Q10 (i)
1 
Value of annuity = 20, 000 a(12) 1  1.03v  1.032 v 2  ...  1.0319 v19  [2]
  1.03  20 
 1   
  1.07  
 20, 000 1.037525  0.93458  [1]
 1.03 
 1  1.07 
 
= 19,393.417314.26488
= £276,645. [1]
(above uses factors from Formulae and Tables Book – exact answer is
£276,639)
Page 12
(ii) Let S5 = Accumulation of £1 after 5 years and let it = investment return for
year t.
 5 
[ E ( S5 )  E  1  it 
 
 t 1 
5
  E (1  it ) using independence
t 1
5
  (1  E (it )) ]
t 1
Now E (it )  0.6  0.04  0.4  0.07
 0.052 for t = 1, 2, … 5 [1]
 Expected accumulation  200, 000 E ( S5 )

 200, 000  (1.052)5 [1]
 200, 000  1.288483
 £257, 696.60 [1]
(iii) The variance of the accumulation is
  
200, 0002  E S52  E  S5 
2
 [1]
 5 2
 
[where E S52  E   1  it  
 
 t 1 
 5 

 E   1  2it  it2
  
 t 1 
5
 
  1  2 E (it )  E (it2 ) from independence]
t 1
Now E (it2 )  0.6  0.042  0.4  0.07 2
 0.00292 for t = 1, 2, …5 [1]
Hence, E (S52 )  (1  2  0.052  0.00292)5
 1.661809 [1]
Page 13
 Standard deviation of accumulated fund is
 
1
200, 000  1.661809  1.2884832 2
= £8,051.23 [1]
(above uses factors from Formulae and Tables Book – exact answer is
£8,051.74)
(iv) Note that 200, 000  (1.07)4 (1.04) = 272,645.57 < 276,639
and 200, 000  (1.07)5 = 280,510.35 > 276,639
Hence, the individual would require the annual return to be 7% p.a. for each of
the 5 years in order to reach the required fund. [2]
The probability of this happening is
(0.4)5  0.01024 [1]

[Total 14]
Parts (i) and (ii) were answered reasonably well although a few candidates
appeared to be under time pressure if this was the last question to be
attempted. Part (iii) was less well answered with many marginal candidates
2
confusing E (it ) and Var(it ) . Part (iv) was generally only answered by the
strongest candidates with many candidates incorrectly applying a lognormal
distribution to the problem.
END OF EXAMINERS’ REPORT
Page 14
EXAMINATION
25 September 2017 (pm)

Core Technical
booklet.
supervisor.
question paper.
CT1 S2017  Institute and Faculty of Actuaries

1 (i) Calculate the time in days for £6,000 to accumulate to £7,600 at:
(a) a simple rate of interest of 3% per annum.
(b) a compound rate of interest of 3% per annum effective.
(c) a force of interest of 3% per annum. [6]
Note: You should assume there are 365 days in a year.
(ii) Calculate the effective rate of interest per half year which is equivalent to a
force of interest of 3% per annum. [1]
[Total 7]
2 Describe how cash flows are exchanged in an interest rate swap. [2]
3 An investor is considering two investments. One is a 91-day deposit which pays a

compound rate of interest of 3% per annum effective. The second is a government
bill.
Calculate the annual simple rate of discount from the government bill if both
investments are to provide the same effective rate of return. [3]
4 A one-year forward contract was issued on 1 April 2016 on a share with a price of
$4.00 at that date. Dividends of $0.10 per share were expected on 30 September 2016
and 31 March 2017. The 6-month and 12-month risk-free spot rates of interest were
5% and 6% per annum effective respectively on 1 April 2016.
Calculate the forward price at issue, stating any assumptions. [4]
5 An individual invests £100 in an asset. The expected accumulation of this asset after
20 years is £200 and the standard deviation of the accumulation after 20 years is £50.
(i) Calculate the expected effective rate of return per annum. [1]
(ii) Calculate the standard deviation of the effective rate of return per annum. [4]
[Total 5]
6 An investor has a choice of two 15-year savings plans, A and B, issued by a company.
In both plans, the investor pays contributions of $100 at the start of each month and
the contributions accumulate at an effective rate of interest of 4% per annum before
any allowance is made for expenses.
In plan A, the company charges for expenses by deducting 1% from the annual
effective rate of return.
CT1 S2017–2
In plan B, the company charges for expenses by deducting $15 from each of the first
year’s monthly contributions before they are invested. In addition it deducts 0.3%
from the annual effective rate of return.
Calculate the percentage by which the accumulated amount in Plan B is greater than
the accumulated amount in Plan A, at the end of the 15 years. [6]
7 Two investors, A and B, value corporate bonds using different models.
• Investor A uses the average gross redemption yield from all government
securities with the addition of a risk premium of 1% per annum effective.
• Investor B uses the spot rates of interest derived from the government bond
yield curve also with the addition of a risk premium of 1% per annum effective
to value each payment.
The investors are valuing a particular corporate bond which has half-yearly coupon
payments paid at a rate of 5% per annum and a term to redemption of exactly two
years. The bond is redeemed at 110% and tax is payable on coupons only at a rate of
20%.
The average gross redemption yield from all government securities is 3% per annum
effective.
(i) Calculate the price that investor A would pay for the corporate bond. [3]
Over time t, the spot rate of interest from the yield curve of government securities, yt
is given by yt = 0.015t per annum effective for t ≤ 2 .
(ii) Calculate the price that investor B would pay for the corporate bond. [3]
(iii) Calculate the forward rate of interest from government securities from t = 1 to
t = 2. [2]
(iv) Giving two reasons, explain why the spot yield curve might rise with term to
redemption. [3]
[Total 11]
CT1 S2017–3 PLEASE TURN OVER

8 A loan is to be repaid by an increasing annuity. The first payment will be £100 and
the payments will increase by £50 per annum. Payments will be made annually in
arrear for ten years. The repayments are calculated using a rate of interest of 5% per
annum effective.
(i) Calculate the amount of the loan. [2]
(ii) Calculate:
(a) the interest component of the sixth instalment.
(b) the capital component of the sixth instalment. [4]
Immediately after the sixth instalment, the borrower asks to repay the remaining loan
using level annual instalments. The lender agrees, but changes the interest rate at the
time of the alteration to 6% per annum effective.
(iii) Calculate the revised instalment. [3]

[Total 9]
9 The force of interest, δ(t), is a function of time and at any time t, measured in years, is
given by the formula:
0.09 − 0.003t 0 ≤ t ≤ 10
δ(t ) = 
0.06 t > 10
(i) Calculate the corresponding constant effective annual rate of interest for the
period from t = 0 to t = 10. [4]
(ii) Express the rate of interest in part (i) as a nominal rate of discount per annum
convertible half-yearly. [1]
(iii) Calculate the accumulation at time t = 15 of £1,500 invested at time t = 5. [3]
(iv) Calculate the corresponding constant effective annual rate of discount for the
period t = 5 to t = 15. [1]
(v) Calculate the present value at time t = 0 of a continuous payment stream

payable at a rate of 10e0.01t from time t = 11 to time t = 15. [6]
[Total 15]
CT1 S2017–4
10 An insurance company has liabilities of £100 million due in 10 years’ time and £200
million due in 20 years’ time.
The company’s assets consist of a zero-coupon bond and a level annuity paid annually
in arrear. The zero coupon bond will pay £144.054 million in 15 years’ time. The
current interest rate is 3% per annum effective at all terms to redemption.
Redington’s first two conditions for immunisation against small changes in the rate of
interest have been satisfied for this insurance company.
(i) (a) Calculate the present value of the liabilities.
(b) Calculate the discounted mean term of the liabilities.

[4]
(ii) Show that the term of the annuity is 41 years. [6]
(iii) Determine the annual rate of payment of the annuity. [1]
(iv) State Redington’s third condition for immunisation, explaining whether you
think it is fulfilled. [2]
The insurance company decides to sell the zero-coupon bond it holds and invest the
proceeds in another zero-coupon bond with a shorter term to maturity.
(v) Explain the risks of implementing this decision. [2]

[Total 15]
11 A university offers its students three financing options for a degree course that lasts
exactly three years.
Option A
Fees are paid during the term of the course monthly in advance. The fees are £10,000
per annum in the first year and rise by 5% on the first and second anniversaries of the
start of the course.
Option B
The university makes a loan to the students which is repaid in instalments after the
end of the course. The instalments are determined as follows:
• No payments are made until three years after the end of the course.
• Over the following 15 years, students pay the university £1,300 per year, quarterly
in advance.
• After 15 years of payments, the quarterly instalments are increased to £1,500 per
year, quarterly in advance.

• After a further 15 years of payments, the quarterly instalments are increased to
£1,800 per year, quarterly in advance, for a further 15-year period after which
there are no more payments.
Option C
• Students pay to the university 3% of all their future earnings from work, with the
payments made annually in arrear.
A particular student wishes to attend the university. He expects to leave university at

the end of the three-year course and immediately obtain employment. The student
expects that his earnings will rise by 3% per annum compound at the end of each year
for 10 years and then he will take a five-year career break.
After the career break, he expects to restart work on the salary he was earning when
the career break started. He then expects to receive salary increases of 1% per annum
compound at the end of each year until retiring 45 years after graduating.
The student wishes to take the financing option with the lowest net present value at a
rate of interest of 3% per annum effective.
(i) Calculate the present value of the payments due under option A. [4]
(ii) Calculate the present value of the payments due under option B. [5]
(iii) Calculate the initial level of salary that will lead the payments under option C
to have the lowest present value of the three options. [8]
(iv) Comment on whether the student should use the same interest rate to evaluate
all three options. [2]
The university is concerned that this scheme exposes it to considerable financial risk.
(v) Explain three risks which the university faces. [4]

[Total 23]
END OF PAPER
CT1 S2017–6
EXAMINERS’ REPORT
September 2017

Core Technical
Introduction
The Examiners’ Report is written by the Principal Examiner with the aim of helping candidates, both those who
are sitting the examination for the first time and using past papers as a revision aid and also those who have
previously failed the subject.
The Examiners are charged by Council with examining the published syllabus. The Examiners have access to
the Core Reading, which is designed to interpret the syllabus, and will generally base questions around it but are
not required to examine the content of Core Reading specifically or exclusively.
For numerical questions the Examiners’ preferred approach to the solution is reproduced in this report; other
valid approaches are given appropriate credit. For essay-style questions, particularly the open-ended questions
in the later subjects, the report may contain more points than the Examiners will expect from a solution that
scores full marks.
The report is written based on the legislative and regulatory context pertaining to the date that the examination
was set. Candidates should take into account the possibility that circumstances may have changed if using these
reports for revision.
Luke Hatter
December 2017
 Institute and Faculty of Actuaries

Subject CT1 (Financial Mathematics Core Technical) – September 2017 – Examiners’ Report

2. Please note that different answers may be obtained to those shown in these
solutions depending on whether figures obtained from tables or from calculators
are used in the calculations but candidates are not penalised for this. However,
candidates may lose marks where excessive rounding has been used or where
insufficient working is shown.
B. General comments on student performance in this diet of the examination
The comments that follow the questions concentrate on areas where candidates
could have improved their performance. Where no comment is made, the
question was generally answered well by most candidates.
C. Pass Mark
Page 2
Solutions
 0.03t 
Q1 (i) (a) 6, 000 1    7, 600 [1]
 365 
 7, 600  365
t   1  = 3,244.4 days [1]
 6, 000  0.03
6, 000 1  0.03
t
(b) 365
 7, 600 [1]
ln1.03  7, 600 
t  ln    ln1.26667  0.23639
365  6, 000 
0.23639
 t  365  = 2,919.0 days [1]
ln1.03
0.03t
(c) 6, 000e 365  7, 600 [1]
365  7, 600 
t 
0.03  6, 000 
ln = 2,876.1 days [1]
i 
2
(ii) Effective interest rate per half year is where
2
 i 2   i 
2
1  e 2 e 0.015
 1.0151131   1.51131% [1]
 2  2
 
[Total 7]
Well answered although some candidates gave i   as their final

2
answer to part (ii).
Q2 One party agrees to pay to the other a regular series of fixed amounts… [½]
…for a certain/given term. [½]
In exchange, the second party agrees to pay a series of variable amounts [½]
…based on the level of a short-term interest rate. [½]
[Total 2]
The worst-answered question on the paper even though the above

comes directly from the Core Reading.
Q3 Let d be the annual simple rate of discount.
The discounted value of 100 in the deposit account would be X such that:
Page 3
91
X  100 1.03
365
 99.26576 [1]
To provide the same effective rate of return a government bill that pays 100 must have
 91d 
a price of 99.26576 and so 100 1    99.26576
 365 
365
d 1  0.9926576  0.029450 [2]
91
[Total 3]
There was a potential ambiguity with this question in that the term of
the government bill was not separately stated. Most students assumed
the term of the bill was also 91 days as the examiners intended but
candidates who assumed another term were also given credit.
Q4 Assuming no arbitrage: [1]
Present value of dividends

 0.10v5%
0.5
 0.10v6%  0.1 0.97590  0.1 0.94340  0.19193 [2]
Forward price   4  0.19193 1.06  $4.03655 [1]
[Total 4]
No comments.
Q5 (i) Let S 20  Accumulated value at time 20 of £1 invested at time 0
then E  S20   1  j 
20
E 100S20   100 E  S20   200  E  S20   2
1  j 20  2  j  0.035265 [1]
(ii) Let s be the standard deviation of the annual effective rate of return.
Var 100 S20   502
10, 000Var  S20   2,500  Var  S20   0.25 [1]
Page 4
 
20
Var  S20   1  j   s 2  E  S20 
2 2
[1]
 
1 20
0.25  2 10  s2  22
 
1
1
 s 2  0.25  22 2  0.00325372
20
10
 s  0.057041 [2]
[Total 5]
Part (i) was well answered although many candidates struggled with
part (ii). The above solution uses the formulae developed in the core
reading in the case where the returns in each year are assumed to be
independent and identically distributed although these assumptions are
not necessary for the calculation of the above answer.
Q6 Accumulated amount from Fund A
12  1.0315  1
 12 100s  1, 200
15 3%

12 1  1.03
 112

 $22, 679.74
[2]
Accumulated amount from Fund B
12  12 
 12 100s
15 3.7%
 12 15s
1 3.7%
1.037 14
1.03715  1 1.037  1
 1, 200  180 1.037 14

12 1  1.037
 112
 
12 1  1.037
 112

 23,967.992  305.313  $23, 662.68
[3]
The percentage by which B is greater is found from

23, 662.68  22, 679.74
 1  4.33% [1]
22, 679.74
A comparatively straightforward question that was poorly done by
marginal candidates.
Q7 (i) Let P be the price per £100 nominal.
Page 5
 2
P  0.8  5a  110v2 with a gross redemption yield of 4% per annum. [1]
2
1  1.042
 P  0.8  5  110 1.042
 1
2 1.04 2  1 
 P  4 1.904771 110  0.924556  £109.320 [2]
(ii)
Time Government bond Present value Payment Present value
t spot rate yt + 1% factor of payment
0.5 0.0175 0.99136 2 1.9827
1 0.025 0.97561 2 1.9512
1.5 0.0325 0.95316 2 1.9063
2 0.04 0.92456 112 103.5503
Total present value = £109.391 per £100 nominal [3]

1  y2 
2
1 
1.032
 1  0.04522
(iii) Forward rate [2]
1  y1 1.015
(iv) It may be because interest rates are expected to rise in the future and the yield
curve is determined by expectations theory.
And/or because investors might expect inflation to rise leading to expectations

of higher interest rates over the longer term.
And/or because investors have a preference for liquidity which puts an

upwards bias on the yield curve. A rising curve would be compatible, for
example, with constant expectations of interest rates.
And/or because the market segmentation theory holds and short-term bonds
might be in demand by investors such as banks.
[1½ each point, maximum 3]
[Total 11]
Marginal candidates struggled with this question with a common error

in part (ii) being to assume coupons were annual (which simplified the
question considerably).
Part (iv) was poorly answered. Explanations of why the yield curve
would be the given shape were required. It was not sufficient just to
name the various theories of the yield curve.
Page 6
Q8 (i) Amount of loan is 50  Ia 10  50a10 at 5% per annum effective [1]
 50  39.3738  50  7.7217
= 1968.69 + 386.09 = £2,354.78 [1]

(ii) (a) The outstanding loan after fifth instalment is:
50  Ia 5  300a5 [1]
 628.32  1, 298.85 = £1,927.17 [1]
The interest component is therefore 0.05 1,927.17  £96.36 [1]
(b) The capital component = 350 - 96.36 = £253.64 [1]
(iii) The capital remaining after the sixth instalment is

1,927.17 – 253.64 = £1,673.53 [1]
Let the new instalment = X
Xa4 6%  1,673.53
1, 673.53
X  £482.96 [2]
3.4651
[Total 9]
The best answered question on the paper (excluding Q1)
10
Q9 (i) A  0,10   exp  0.09  0.003s ds
0
10
 exp 0.09s  0.0015s 2   exp  0.9  0.15  e0.75 =2.1170 [3]
 0
Require i where 1  i 
10
 2.1170  i  0.077884 [1]
(ii) 
d  2  2 1  1  i 
 12
  0.073611 [1]
Page 7
10
(iii) A  5,10   exp  0.09  0.003s ds
5
10
 exp 0.09s  0.0015s 2   exp  0.75  0.45  0.0375  e0.3375
 5
A 10,15   e50.06  e0.3
A  5,15   A  5,10  A 10,15   e0.6375  1.89175
Accumulated amount = 1,500 e0.6375 =£2,837.62 [3]
(iv) Equivalent annual effective rate of discount is d such that

1  d   e0.6375  d  0.061760
10
[1]
(v) For t > 10,
 t 
v  t   v 10  exp   0.06 ds 
 10 
 e0.75 exp  0.06s 10

t
 e0.75 exp  0.06t  0.6  e0.06t 0.15

[3]
15 15 15
Present value     t  v  t  dt   10e0.01t e 0.06t 0.15 dt   10e 0.05t 0.15 dt
11 11 11
15
 e0.05t 0.15 
 10 

  200 e
0.9

 e0.7 
 0.05 11
 81.314  99.317  18.003

[3]
Another standard question that was well-answered.
Q10 (i) (a) Work in £ millions
PV of liabilities = 100v10  200v 20 at 3% per annum
Page 8
 100  0.74409  200  0.55368  185.145 [1½]
1,000  0.74409  4,000  0.55368 2,958.797

(b) DMT of liabilities = 
185.145 185.145
=15.981 years [2½]
(ii) PV of assets = 144.054v15  Xat where t is the term of the annuity and X is the
annual payment.
So Xat  185.145  144.054v15  185.145  144.054  0.64186  92.682 for first

condition to be satisfied. [1]
144.054 15  0.64186  X  Ia t
DMT of assets = = 15.981 years [2½]
185.145
So X  Ia t  2,958.797  144.054 15  0.64186  1,571.859 for second
condition to be satisfied. [1]
X  Ia t 1,571.859  Ia t
Thus    16.960
Xat 92.682 at
From inspection of tables, t = 41 years. [1½]
(iii) Xa41  92.682  X  £3.95865m [1]
(iv) Redington’s third condition requires that the convexity or spread of the terms
of the asset proceeds around the discounted mean term is greater than that for
the liabilities.
It is likely that this is the case given that the asset proceeds consist in part of
an annuity of term 41 years (though not certain). [2]
(v) If the insurance company sells the security and buys one with a shorter term,
the discounted mean term of its assets will no longer be equal to that of its
liabilities (it will be shorter). This will mean that, if interest rates were to fall,
the insurance company would make a loss. [2]
[Total 15]
Part (i) was answered well. In a ‘Show that…’ question as in part (ii),
it is important to show steps clearly. Many marginal candidates did not
do this or, more seriously, appeared to claim that incorrect workings
led to the required final answer.
Part (v) was answered very poorly with few candidates explaining the
precise scenario where a loss would be made.
12 12 12

Q11 (i) PVA  10,000a  10,000 1.05v  a  10,000 1.052 v2  a [2]
1 1 1
Page 9
 10, 000a
12 
1 1  1.05v  1.05v   2
12  1  1.05v 
3
 10, 000a
1 1  1.05v
1  v 1  1.05v 
3
 10, 000
d   1  1.05v
12
 10, 000  0.986579  3.058629

 £30,176
[2]
[or from 2nd line in 1 above:

1 v
 10, 000  1  1.019417  1.039212 
d 
12
 10, 000  0.986579  3.058629

 £30,176]
(ii) PVB 1  i   1,300a

6  4
45
 200 a     a    300 a   a  
4
45
4
15
4
45
4
30
[2]
 4  4  4
PVB  v6 1,800a  200a  300a 
 45 15 30  
 PVB  1.036
  
1,800 1  v 45  200 1  v15  300 1  v30 
    

4 1  1.03
 14

1,800  0.735561  200  0.358138  300  0.588013
 PVB  0.837484   £30,598
0.0294499
[3]
[or
 4  4  4
PVB 1  i   1,300a
6
 1,500v15a  1,800v30 a
15 15 15
a
 4
15 1,300  1,500v  1,800v  15 30

1  v   1,300  1,500  0.641862  1,800  0.411987
15

4 1  1.03
 14

0.358138
  3, 004.3696
0.0294499
 PVB  0.837484  36,535.91  £30,598 ]
Page 10
(iii) Option A has the lower present value out of A and B. Therefore, the student
has to calculate the salary level so that PVC  30,176 [1]
Let the initial salary level in relation to option C be SC

30,176  0.03SC v3 v  1.03v2   
 1.039 v10  0.03SC1.0310 v18 v  1.01v2   1.0129 v30 
[3]
4

 0.03SC v 10  1.03 v 10 15
1  1.01v   1.01 v
29 29

 1  1.0130 v30 
 0.03SC v 4 10  v5 
 1  1.01v 

 0.03SC 1.034 10  0.862609  22.90226   0.79313SC
 SC  £38, 047 [3]

Therefore, the starting salary has to be less than £38,047 for option C to have the
lowest net present value. [1]
(iv) The risks to the students of the three options are very different. For example, the
payments under option C vary with salaries and probably with general inflation and
the time spent out of the labour market, whereas under options A and B payments are
fixed. Therefore, it does not seem reasonable to use the same interest rate (and
therefore risk premium) to evaluate all three options. [2]
(v) Possible risks could be:

Student defaults on loan payments (for those that choose option B)
Student salaries are less than the university expects (for those that choose option C) –
this could include lower than expected general inflation
Salary earning periods being shorter than expected (for those that choose option C)
e.g. because of periods of maternity/paternity leave.
Mortality risk: e.g. under options B and C, if mortality were higher than expected,
payments received would be lower than expected.
Students select against the university with those expecting low salaries or poor
employment prospects choosing C and those expecting high salaries choosing options
A or B.
Students choosing option C artificially restrict official salary (e.g. ‘cash-in-hand’,
payment via dividends, working abroad). [1½ each point, maximum 4]
[Total 23]
There was an ambiguity in part (iii) where the examiners intended for
the maximum initial level of salary to be given as the answer. All
marginal candidates appeared to read this part as the examiners had
intended.
Parts (i) and (ii) were answered well but the later parts were answered
poorly, possibly as a result of time pressure. Parts (iv) and (v) did not
Page 11
require reference to the earlier calculations but were still not answered
well by marginal candidates.
Page 12
EXAMINERS’ REPORT
April 2018

Core Technical
Introduction
The Examiners’ Report is written by the Principal Examiner with the aim of helping
candidates, both those who are sitting the examination for the first time and using past papers
as a revision aid and also those who have previously failed the subject.
The Examiners are charged by Council with examining the published syllabus. The
Examiners have access to the Core Reading, which is designed to interpret the syllabus, and
will generally base questions around it but are not required to examine the content of Core
Reading specifically or exclusively.
For numerical questions the Examiners’ preferred approach to the solution is reproduced in
this report; other valid approaches are given appropriate credit. For essay-style questions,
particularly the open-ended questions in the later subjects, the report may contain more points
than the Examiners will expect from a solution that scores full marks.
The report is written based on the legislative and regulatory context pertaining to the date that
the examination was set. Candidates should take into account the possibility that
circumstances may have changed if using these reports for revision.
Luke Hatter
June 2018
 Institute and Faculty of Actuaries


1. The comments that follow the questions concentrate on areas where candidates
question was generally answered well by most candidates. The examiners look
most closely at the performance of the candidates close to the pass mark and the
comments therefore often relate to those candidates.
2. Student performance was similar to that in recent diets with the average mark
being very close to the average of the previous six diets although lower than that
in September 2017. Students seemed to have difficulty with the early part of the
paper with the four worst answered questions all in the first five questions.
C. Pass Mark
Page 2
Solutions
Q1 The characteristics of a Eurobond are:

• Medium- or long-term borrowing
• Usually unsecured
• Regular interest payments
• Redeemed at par
• Issued and traded internationally/not in the jurisdiction of any one country
• Can be denominated in any currency (e.g. not the currency of issuer)
• Tend to be issued by large companies, governments or supra-national
• organisations
• Yields depend on issue size and issuer (or marketability and risk)…
• …(although typically yields will be higher than those on gilts and lower than
those on equities)
• Issue characteristics may vary – market free to allow innovation
[½ mark for each point, max 4]
This was a bookwork question similar to the type asked in most diets.
This was generally answered poorly particularly by marginal
candidates.
Q2 (i) An equity which is offered for sale without the next dividend is called ex-
dividend [1]
(ii) Value of dividends to investor =
0.07 ×10, 000 × v ( 7

12 + 1.02 v( 13
12 +v
19
12
) + 1.02 ( v
2 25
12 +v
31
12
) + ....) [1]
= 700v
1
12
(v 6
12 + 1.02 v + v ( 112
) + 1.02 ( v2 2
+v
2 12
) + ....)
= 700v
7
12 + 700v
1
12
(
1.02 v + v
112
) × 1 + 1.02v + 1.02 v 2 2
+ ... @ 7%

= 700v
7
12 + 700v
1
12
(
1.02 v + v
112
) ×  1 − (1.021 /1.07)  [2]
 1 
= 672.91 + 709.99 ×1.83807 ×  
 1 − (1.02 /1.07) 
= $28,600 [2]
Page 3
Candidates who scored well on this question tended to score very well
overall but this was poorly answered by marginal candidates. Very few
got the timing right, with many failing to include the extra one month
offset. Many also struggled with simplifying the long equation into a
format which could be more easily calculated.
Q3 Effective rate of interest per month for first 10 years, i1 , comes from:
1
1=
+ i1 (1.03) 6 =
⇒ i1 0.49386% per month [1]
and effective rate of interest per month for last 15 years, i2 , comes from:
0.06
1 + i=
2 e
12 ⇒ i=
2 0.50125% per month [1]
× (1.0050125 )
180
⇒ Accumulation after 25 years = 80 s120
0.49386%
+ 80 s180
0.50125%
(1.0049386120 − 1)
s120
where = 0.49386%
1.0049386 ×
0.0049386
= 164.0318 [1½]
and s180
= 0.50125%
1.0050125 ×
(1.0050125 180
) = 292.6504
−1
[1½]
0.0050125
⇒ Accumulation = 80 × 164.0318 × 1.0050125180 + 80 ×292.6504
= 32276.13 + 23412.03 = £55,688.16 (exact answer is £55,688.38)

[1]
[or working in years:
1=
+ i1 (1.03) 2 ⇒
= i1 6.09% per year
1 + i2= e0.06 ⇒ i2= 6.1837% per year
(12 ) @ 6.09% (12 ) @ 6.1837%

× (1.061837 ) + 960 s
15
⇒ Accumulation after 25 years = 960 s
10 15
(1.0609 − 1) 10
where s( )
12 @ 6.09%
= = 13.6693
10   0.0609  112 
12 × 1 − 1 − 
  1.0609  
 
Page 4
(1.06183715 − 1)
and s( )
12 @ 6.1837%
= = 24.3877
15   0.061837  112 
12 × 1 − 1 − 
  1.061837  
 
⇒ Accumulation = 960 × 13.6693 × 1.06183715 + 960 × 24.3877
= 32276.42 + 23412.17 = £55,688.59]
Many of the comments on Q2 also apply here although the

performance on this question was better. Common errors included
those in the calculation of the appropriate interest rate and in the
calculation of the accumulation factors.
Q4 (i) Let Sn denote the accumulation at time n of an initial investment of 1 at

time 0.
Then, the accumulation at time 10 is:
10 10
S10= ∏ (1 + it ) ⇒ ln ( S10=) ∑ ln (1 + it ) ~ N (10µ,10σ2 ) [1]
t =1 t =1
Also, an initial investment of X at time 0 will accumulate to XS10 at time 10.
Then, we require to find the value of X such that:
P ( XS10 ≥ 800, 000 ) =

0.95 [1]
 800, 000 
⇒ P  S10 ≥ = 0.95
 X 
  800, 000  
⇒ P ln ( S10 ) ≥ ln   =0.95
  X 
  800, 000  
 ln   − 10µ 
⇒ P Z ≥  X 
=0.95
 10σ 2 

 800, 000 
ln   − 10µ
⇒  X  = −1.645
10σ2
 800, 000 
⇒ ln  = 0.019708
 X 
⇒= X 784,388 ≈ €784, 000
(exact answer is £784,333) [3]
Page 5
(ii) (a) Increasing the value of µ will increase the expected annual investment
return and so the amount required at time 0 (to meet the liability with
probability 95%) will decrease. [1]
(b) Increasing the value of σ will increase the volatility of the annual
investment return ⇒ the amount required at time 0 (to meet the
liability with probability 95%) will increase. [1]
(c) If the probability of meeting the liability is increased from 95% to

99%, then the risk of not meeting the liability has been reduced and so
the amount required to be invested now must be increased so that, with
a greater initial investment, there is more certainty that the target figure
of £800.000 after 10 years will be reached. [1]
This was the worst answered question on the paper. Some candidates
tried to calculate the parameters of the distribution for the 10-year
accumulation from first principles and others made method/calculation
errors when manipulating the Normal distribution.
In part (ii), many candidates stated conclusions with no supporting

reasoning. No credit was awarded in such cases.
Q5 (i) The “no arbitrage” assumption means that neither of the following applies:
(a) an investor can make a deal that would give her or him an immediate
profit, with no risk of future loss; nor
(b) an investor can make a deal that has zero initial cost, no risk of future
loss, and a non-zero probability of a future profit. [2]
(ii) (a) The current value of the forward price of the old contract is:
7.10 × (1.02)3 − 1.1a62%
whereas the current value of the forward price of a new contract is:
10.20 − 1.1 a62%
Hence, current value of old forward contract is:
10.20 − 7.10 × (1.02)3 =

£2.6654 [3]
Alternative solution
Page 6
K 0 =(7.1 − 1.1v3a6 ) ×1.029 =1.5462

K3 = (10.2 − 1.1a6 ) ×1.026 = 4.5479
V4 = (4.5479 − 1.5462) ×1.02−6 = £2.6654
Solution if it is assumed that dividends are paid from the start:

K0 = (7.1 − 1.1a9 ) ×1.029 =−2.22449
K3 = (10.2 − 1.1a6 ) ×1.026 = 4.5479
V3 = (4.5479 + 2.2449) ×1.02−6 = £6.0319
(ii) (b) The current value of the forward price of the old contract is:
7.10(1.02)3 (1.025) −9 = 6.0331
Whereas the current value of the forward price of a new contract is
−6
10.20 (1.025 ) = 8.7954
⇒ current value of old forward contract is
8.7954 – 6.0331 = £2.7623 [3]

Alternative Solution
7.1×1.025−9 ×1.029 =
K0 = 6.7943
K3 =10.2 ×1.025−6 ×1.026 =9.9051
V3 = (9.9051 − 6.7943) ×1.02−6 = £2.7623
In part (i), many candidates seemed confused between ‘arbitrage’ and

‘no arbitrage’. In part (ii)(a), candidates who assumed the dividends
were payable from outset also received full credit.
Q6 (i) Let i = money yield per annum.
Consider £100 nominal stock purchased on 1/4/2018.
= 0.75 × 3 × a (2) + (105 − 0.35 × (105 − 102) ) v10

102
10
⇒ 102
= 2.25 a (2) + 103.95 v10 [2]
10
Try 2%, RHS = 2.25 × 1.004975 × 8.9826 + 85.2752
Page 7
= 105.59
Try 3%, RHS = 2.25 × 1.007445 ×8.5302 + 77.3486
= 96.68
105.59 − 102
i=
0.02 + × 0.01
105.59 − 96.68
= 0.0240 (exact answer is 0.0239)

[3]
and (1 + i) = (1 + i′)(1 + e)
1.0239
⇒ i′
= =− 1 0.00382 i.e. Real yield = 0.4% per annum [1]
1.02
(ii) If inflation had been less than 2% per annum throughout the term then the real
rate of return would have been higher. This is because one would be stripping
out a lower rate of inflation from the money yield to obtain the real yield. [2]
Generally well-attempted although in part (b) some candidates, as in

Q4, gave a conclusion without supporting reasoning.
1
Q7 (i) Present value of initial outlay =
2 + 0.5 v 2 =
2.4767 [1]
PV of 1st year’s net revenue = 0.2 v a1 = 0.2 v 2 i

δ
= 0.2 × 0.82645 × 1.049206
= 0.1734 [2]
PV of 2nd to 14th year of net revenue
= 0.25 v 2 a1 + 0.25 ×1.04 v3 a1 + ....... + 0.25 ×1.0412 v14 a1
(
= 0.25v 2 a1 1 + 1.04 v + ... + 1.0412 v12 )

( )
13 
 1 − 1.04
i
= 0.25v3  1.10 
δ 1 − 1.04 
 1.10 
 
Page 8
= 0.25×0.75131×1.049206×9.49094
= 1.8704 [3]
PV of refit = 0.8 v 8 = 0.3732 [½]
PV of sale proceeds = 6.4 v 15
= 1.5321 [½]
⇒ NPV = 0.1734 + 1.8704 + 1.5321 – 2.4767 – 0.3732
= £0.726m [1]
(ii) If the net revenue had been received mid-year rather than continuously then
1
we would be replacing a1 with v 2 in the formulae for the PV of the net
revenue.
i 1
Since we can observe that a= v > v 2 we can see that the PV of the net
1 δ
revenue would decrease. Therefore, the NPV of the profit would decrease.
[2]
Generally well-attempted. In questions like part (i), candidates are

advised to show their working for each element separately as this
provides a clear ‘audit trail’ for markers to follow and appropriate
partial credit can be awarded for correct elements.
Q8 (i) Let X and Y be the maturity proceeds from the amounts invested in the 7-year
and 14-year zero-coupon bonds respectively.
Redington’s first condition states that the PV of the assets should equal the PV
1
= = 0.95694 and working in £million):
of the liabilities (using
1.045
VL = 20ν8 + 15ν12 = 22.9087

VA = X ν 7 + Y ν14 = 22.9087 (1) [2]
Redington’s second condition states that the discounted mean term (DMT) of
the assets should be equal to the DMT of the liabilities. The denominators for
the DMTs will be the respective PVs, which are assumed to be equal from the
first condition above, so we can just consider the numerators:
For the liabilities: = 20 × 8ν8 + 15 ×12ν12 = 218.6491
Page 9
For the assets: = 7 X ν 7 + 14Y ν14= 218.6491 (2) [2]
Taking (2) – 7 × (1):
=
7Y ν14 218.6491 − 7 × 22.9087
= 58.2882 [1]
58.2882
=Y = £15.421m
7 ×1.045−14
with an amount invested of Y ν14 =
£8.327 m [1]
Sub back in (1):

22.9087 − 15.421×1.045−14
= X = £19.844m
1.045−7
with an amount invested of X ν 7 = £14.582m [1]
Since the spread of asset proceeds exceeds the spread of liability outgo (as
asset proceeds are received at times 7 and 14, whereas liability outgo is paid at
times 8 and 12), the convexity of the assets is greater than the convexity of the
liabilities. Thus, the third condition is also satisfied and the company is
immunised against small changes in the rate of interest. [2]
(ii) The small increase in interest rates will mean that the present value of both
assets and liabilities will fall. The greater convexity of the assets mean that the
assets will fall by a smaller amount. There is a greater positive contribution
from the convexity term in the present value of the assets than that of the
present value of the liabilities. [2]
Part (i) was answered well although, for full credit, the amounts
invested needed to be given rather than the maturity values. Part (ii)
was less well answered with many marginal candidates not
appreciating how the greater asset convexity would influence the
change in relative values.
Q9 (i) Let the 1-year and 2-year zero-coupon yields (spot rates) be i1 and i2
respectively.
106
= 106v @ 5.2%
1 + i1
∴ i1 =0.052 (=5.200% to 3 dp) [1]
For the 2-year spot rate:
Page 10
6 106
+ = 6a2 6.1% + 100v6.1%
2
[1]
1 + i1 (1 + i2 ) 2
1 − 1 
 2
6 1.061  + 100
6 106
+ =
1.052 (1 + i2 ) 2 0.061 1.0612
= 10.984960 + 88.831957
= 99.816917
106 6
= 99.816917 −
(1 + i2 ) 2 1.052
106
⇒ (1 + i2 ) 2 =
94.113495
⇒ i2 =
6.1273% p.a.(= 6.127% to 3 dp) [3]
For the 3- year spot rate:
The 3-year par yield is 6.6% p.a.
 1 1 1  1
=⇒ 1 0.066  + + +
 1 + i1 (1 + i ) 2 (1 + i )3  (1 + i )3
[1]
 2 3  3
1.066 0.066 0.066

⇒ =
1− −
(1 + i3 )3 1.052 (1.061273) 2
1.066
⇒ (1 + i3 )3 =
0.878663
⇒ i3 =
6.6543% p.a. (= 6.654% to 3 dp) [2]
(ii) 1-year forward rates:
f 0= 1i= 5.2% p.a. [1]
(1 + i1 )(1 + f1 ) =(1 + i2 ) 2
1.0612732
⇒ 1 + f1 =
1.052
Page 11
⇒ f1 =
7.0628% p.a (=7.063% to 3dp). [1½]
(answer is 7.062% if rounded spot rates used)
(1 + i2 ) 2 (1 + f 2 ) =(1 + i3 )3
(1.066543)3
⇒ 1 + f2 =
(1.061273) 2
⇒ f2 =
7.7162% p.a. (= 7.716% to 3 dp) [1½]
(answer unchanged if rounded spot rates used)
Candidates who made errors in part (i) often scored full marks in part
(ii) after allowance was made for the effects of the earlier errors.
 t 
Q10 (i) We make use of: ( )
v = t exp  − ∫δ ( s ) ds  .
 
 0 
 t 
For 0 < t ≤ 6 v ( t ) =exp  − ∫ ( 0.24 − 0.02 s ) ds 
 
 0 

( )
t 
= exp  − 0.24 s + 0.01s 2  = exp −0.24t + 0.01t 2 [2]
 0
 t 
For t > 6 v ( t ) = v ( 6 ) × exp  − 0.12ds 
∫
 
 6 
(
= exp ( −0.24 × 6 + 0.01× 36 ) × exp − 0.12 s 6
t
)
= exp ( −0.36 − 0.12t ) [3]
(ii) Discounted value

v (10 ) exp ( −0.36 − 0.12 ×10 )
1, 000 × v ( 4,10 ) =
= =
( )
1, 000 1, 000
v ( 4) exp −0.24 × 4 + 0.01× 42
−1.56−( −0.8 )
= 1, 000e = 000e−0.76 467.67
1,= [2]
Page 12
12×(10− 4 )
 i (12 )  1, 000
(iii) 1 +  = =e0.76
 12  1, 000e −0.76
 
= > 1
72
(
i ( ) = e0.76 − ×12 =
12
)
0.12734 [2]
10 10
(iv) PV =∫ρ ( t ) v ( t ) dt =∫ 20 exp ( 0.36 + 0.32t ) × exp ( −0.36 − 0.12t ) dt
6 6
10
= ∫ 20e
0.2t
=
20 0.2t 10
dt 100
0.2
e
6
= ( )
× e 2 − e1.2 = 406.89 [4]
6
This calculation question was the best-answered on the paper.
Q11 (i) Denote PV of annuity by:

( Da )n = nv + ( n − 1) v 2 + ( n − 2 ) v3 +  + 2v n−1 + v n [1]
⇒ (1 + i ) × ( Da )n =n + ( n − 1) v + ( n − 2 ) v 2 +  + 2v n−2 + v n−1
⇒ i × ( Da )n = n − ( v + v 2 +  + v n )
n − an
⇒ ( Da )n =
i
[2]
(ii) Initial amount of loan, L , is given by:
=L 8, 000v5.5% + 7,800v5.5%
2
+ 7, 600v5.5%
3
+  + 3, 200v5.5%
25
+ 200 × ( Da )
5.5%
= 3, 000 × a25
5.5%
25
[1]
1 − v5.5%
25
where =5.5%
a25 = 13.4139 , and
0.055
25 − a25
5.5%
( Da )5.5%
= = 210.6558 [1½]
25 0.055
Thus, initial amount of loan is:
L= 3, 000 ×13.4139 + 200 × 210.6558= £82,372.95 [½]
[or can use
Page 13
− 200 × ( Ia )
5.5%
L= 8, 200 × a25
5.5%
25
= 8, 200 ×13.4139 − 200 ×138.1065
= £82,372.95
a25
5.5%
− 25v5.5%
25
1.055 ×13.4139 − 25 ×1.055−25
=
where ( Ia )5.5% = = 138.1065 ]
25 0.055 0.055
(iii) Need loan outstanding immediately after 9th instalment (i.e. PV of future
repayments).
Amount of tenth instalment is £6,200.
Loan outstanding is PV of future repayments, given by:
L* = 6, 200v5.5% + 6, 000v5.5%
2
+ 5,800v5.5%
3
+  + 3, 200v16
5.5%
+ 200 × ( Da )
5.5%
= 3, 000 × a16
5.5%
16
where
5.5% 16 − a16
5.5%
1 − v16
=5.5%
a16 5.5% (
= 10.4622 and = Da ) = 100.6880
0.055 16 0.055
Thus, amount of loan outstanding is:
L*= 3, 000 ×10.4622 + 200 ×100.6880= £51,524.08 [4]
[or can use

− 200 × ( Ia )
5.5%
L*= 6, 400 × a16
5.5%
16
= 6, 400 ×10.4622 − 200 × 77.1688
= £51,524.08
a16
5.5%
− 16v16 1.055 ×10.4622 − 16 ×1.055−16
=
where ( Ia )5.5% =
5.5%
= 77.1688 ]
16 0.055 0.055
Then, we have:
• interest component of 10th instalment is 0.055 × 51, 524.08 =£2,833.83 ,
and
• capital component of 10th instalment is 6, 200 − 2,833.83 = £3,366.17
[2]
(iv) Total amount repaid is:
3, 200 + 3, 400 + 3, 600 +  + 7,800 + 8, 000
Page 14
= ( 3, 000 + 3, 000 +  + 3, 000 ) + ( 200 + 400 +  + 5, 000 )
= 3, 000 × 25 + 200 × 0.5 × 25 × 26
= 140, 000 [1½]
Thus, total interest paid is:
140, 000 − 82,372.95 =

£57, 627.05 [½]
Many attempts at proofs in part (i) were unclear. Part (ii) was generally answered well
although a common error was to miscalculate the amount of the level annuity component of
the loan outstanding. Some candidates also deducted the decreasing annuity component (or
equivalently added the increasing component).
Page 15
EXAMINATION
17 April 2018 (am)

Core Technical
booklet.
supervisor.
question paper.
CT1 A2018  Institute and Faculty of Actuaries

1 State the characteristics of a Eurobond. [4]
2 (i) Describe what is meant by the term “ex-dividend”. [1]
An individual purchased 10,000 shares on 1 December 2017. Dividends are payable

on 1 January and 1 July each year, and are assumed to be payable in perpetuity. The
next dividend, due on 1 January 2018, is $0.07 per share.
The two dividend payments in any calendar year are expected to be the same, but the
dividend payment is expected to increase at the end of each year at a rate of 2% per
annum compound.
Assume that the share is ex-dividend on 1 December 2017 and use an effective rate of
interest of 7% per annum.
(ii) Calculate the present value of the investment at the date of purchase. [5]
[Total 6]
3 An investor pays £80 at the start of each month into a 25-year savings plan.
The contributions accumulate at an effective rate of interest of 3% per half-year for

the first 10 years, and at a force of interest of 6% per annum for the final 15 years.
Calculate the accumulated amount in the savings plan at the end of 25 years. [6]
4 The annual investment return achieved by an insurance company in year t is it .
Returns in successive years are assumed to be independent and:
ln(1  it ) ~ N (, 2 ) , where   0.08 and   0.15 .
The insurance company has a liability of €800,000 payable at the end of year 10.
The company wishes to invest an amount now so that there is a 95% probability that
the accumulated amount at the end of year 10 will be sufficient to meet this liability.
(i) Calculate the amount of money that the insurance company should invest. [5]
(ii) Explain, without doing any further calculations, how your answer to part (i)
would change if each of the following occurs separately, with all other
parameters as in part (i):
(a) The value of  is increased to 0.1.

(b) The value of  is increased to 0.2.
(c) The desired probability of meeting the liability is increased to 99%.
[3]
[Total 8]
CT1 A2018–2
5 (i) Describe what is meant by the “no arbitrage” assumption in financial
mathematics. [2]
An investor entered into a long forward contract for a security three years ago and the
contract is due to mature in six years’ time. The price of the security was £7.10 three
years ago and is now £10.20. The risk-free rate of interest can be assumed to be
2% per annum effective throughout the nine-year period.
(ii) Calculate the current value of the contract with the following dividend
payments, assuming no arbitrage:
(a) The security will pay dividends of £1.10 annually in arrear from now
until the maturity of the contract.
(b) The security has paid and will continue to pay annually in arrear a
dividend equal to 2.5% of the market price of the security at the time
of payment.
[6]
[Total 8]
6 On 1 April 2018 a government issued a 10-year bond redeemable at £105 per £100
nominal and paying coupons at the rate of 3% per annum half-yearly in arrear. The
price of the bond was £102 per £100 nominal.
An investor subject to income tax of 25% and capital gains tax of 35% purchased
£10,000 nominal of the bond at issue.
The investor assumes that inflation will be constant over the term of the bond at a rate
of 2% per annum.
(i) Calculate the net effective real redemption yield which the investor expects to
earn on the investment. [6]
(ii) Explain how your answer to part (i) would change if inflation were less than
2% per annum throughout the term. [2]
[Total 8]

7 A retailer is considering opening a new store as a business venture. The purchase
price of the store will be £2 million and there will be a further investment required of
£0.5 million 6 months after purchase.
The store will open 12 months after purchase. Revenues less running costs are
expected to occur continuously and will be £0.2 million in the first year of operation,
£0.25 million in the second year of operation and thereafter increasing at yearly
intervals by 4% per annum compound.
Eight years after purchase, a major refit costing £0.8 million will be required. Fifteen
years after purchase, it is assumed that the store will be closed and sold for
£6.4million.
The retailer requires a rate of return on its investment of 10% per annum effective.
(i) Calculate the net present value of the venture. [8]
It is now assumed that the revenue less running costs will be received mid-way
through each year, rather than continuously.
(ii) Explain how your answer to part (i) would change. [2]
[Total 10]
8 An investment fund has liabilities of £20 million due in 8 years’ time and £15 million
due in 12 years’ time.
The manager wishes to immunise the fund against small changes in the rate of interest
and seeks to achieve this by purchasing two zero-coupon bonds. One bond is for a
term of exactly 7 years and the other bond is for a term of exactly 14 years. The
current interest rate is 4.5% per annum effective.
(i) Calculate the amount that should be invested in each bond, demonstrating that
all three Redington conditions are met. [9]
(ii) Explain, without performing any further calculations, how the relative values
of the assets and the liabilities will change if the interest rate changes
immediately to 4.7% per annum effective. [2]
[Total 11]
CT1 A2018–4
9 Two bonds paying annual coupons of 6% in arrear and redeemable at par have terms
to maturity of exactly one year and two years.
The gross redemption yield from the 1-year bond is 5.2% per annum effective. The
gross redemption yield from the 2-year bond is 6.1% per annum effective. The 3-year
par yield is 6.6% per annum.
Calculate the following as a percentage to three decimal places:
(i) the annual effective spot yields for each of the three years [8]
(ii) the annual effective one-year forward rates for each of the three years [4]
[Total 12]
10 The force of interest (t) is a function of time, and at any time t, measured in years is
0.24  0.02t 0 t 6
(t )  
 0.12 6 t
(i) Derive, and simplify as far as possible, expressions in terms of t for the present
value of a unit investment made at any time, t. You should derive separate
expressions for each time interval 0  t  6 and 6  t . [5]
(ii) Determine the discounted value at time t = 4 of an investment of £1,000 due at

time t = 10. [2]
(iii) Calculate the constant nominal annual interest rate convertible monthly
implied by the transaction in part (ii). [2]
(iv) Calculate the present value of a continuous payment stream invested from
time t = 6 to t = 10 at a rate of (t )  20e0.360.32t per annum. [4]
[Total 13]

11 An n-year decreasing annuity is payable annually in arrear where the payment at the
end of the first year is n, the payment at the end of the second year is (n – 1), and so
on until the final payment at the end of year n is 1.
n -a
(i) Show that the present value of this annuity is n [3]
i
A loan is to be repaid over 25 years by means of annual instalments payable in arrear.
The amount of the first instalment is £8,000 and each subsequent instalment reduces
by £200.
The effective rate of interest charged by the lender is 5.5% per annum.
(ii) Calculate the initial amount of the loan. [3]
(iii) Determine the interest and capital components of the 10th instalment. [6]
(iv) Calculate the total amount of interest payable over the term of the loan. [2]
[Total 14]
END OF PAPER
CT1 A2018–6
EXAMINERS’ REPORT
September 2018

Core Technical
Introduction
The Examiners’ Report is written by the Principal Examiner with the aim of helping
candidates, both those who are sitting the examination for the first time and using past papers
as a revision aid and also those who have previously failed the subject.
The Examiners are charged by Council with examining the published syllabus. The
Examiners have access to the Core Reading, which is designed to interpret the syllabus, and
will generally base questions around it but are not required to examine the content of Core
Reading specifically or exclusively.
For numerical questions the Examiners’ preferred approach to the solution is reproduced in
this report; other valid approaches are given appropriate credit. For essay-style questions,
particularly the open-ended questions in the later subjects, the report may contain more points
than the Examiners will expect from a solution that scores full marks.
The report is written based on the legislative and regulatory context pertaining to the date that
the examination was set. Candidates should take into account the possibility that
circumstances may have changed if using these reports for revision.
Mike Hammer
December 2018
 Institute and Faculty of Actuaries


1. The comments that follow the questions concentrate on areas where candidates
question was generally answered well by most candidates. The examiners look
most closely at the performance of the candidates close to the pass mark and the
comments therefore often relate to those candidates.
2. The number of candidates taking this exam was much lower than in previous
diets. This was not surprising given that non-members were not permitted to take
this exam due to the fact CT1 without CT5 will not translate to a pass in any
subject under the Curriculum 2019 structure.
C. Pass Mark
Page 2
Solutions
Q1
(i) Let d be the annual simple rate of discount.
Assume the bank bond also pays out €100.
The present value of the amount invested in the bank bond would be X such
that:
−91
(1.04 )
365
= =
X 100 99.0269 (99.0276 if 365.25 days in a year used) [1]
To provide the same effective rate of return a treasury bill that pays 100 must
 91d 
have a price of 99.0269 and so 100 1 − = 99.0269 [1]
 365 
365
d = (1 − 0.990269 ) = 0.03903 (unchanged if 365.25 days in a year used) [1]
91
(ii) An additional factor could be the risk of the investments [1]
[Total 4]
Part (i) was well answered although some candidates did not explicitly
give the price of treasury bill as asked for in the question. In part (ii),
answers referring to present value (which is directly related to the rate
of return) or term (which was the same for both investments) were not
given credit. Credit was given for answers mentioning marketability or
liquidity.
Q2
(i) δ = ln (1 + i ) = − ln (1 − d ) = − ln 0.95 = 0.051293 [1]
12
 i (12 ) 
(ii) 1 +


12 
 = 1+ i =

1
1− d
12
(
−1
)
= 0.95−1 ⇒ i ( ) = 12 0.95 12 − 1 = 0.051403 [2]
12
 d (12 ) 
(iii) 1 −


12 

( )
 =1 − d =0.95 ⇒ d (12 ) =12 1 − 0.95 12 =0.051184
1
[1]
[Total 4]
The best answered question on the paper.
Page 3
Q3 (i) Time-weighted rate of return is i where:

70 300
(1 +=
i)
2.5
= 2.05882 [2]
60 70 + 100
⇒=
1 + i 1.33489=
⇒ i 0.3349 [1]
(ii) The money weighted rate of return gives a greater weighting to performance
when there is more money in the fund. [½]
The fund was performing better after it had been given the large injection of
money on 1 January 2017. [1½]
[Total 5]
Part (i) was answered well. As with similar questions in previous diets,
part (ii) was poorly answered. It is important in this type of question to
refer to the actual results obtained and the actual data given and the
majority of marks in this part were awarded for this.
Q4 (i) (a) = 3a50 + 103v50 at 1.5% working in half-years

Price [1]
=×
3 34.9997 + 103 × 0.47500 =
153.925 [1]
(1.015) 2 155.075 [1]

1
(b) =
Three months later the =
price will be 153.925
(ii) Is there a Capital gain?
= (
i ( 2) 2 1.1 2 −=
1
)
1 9.762% [½]
D 6
(1 − t1 )= × 0.7= 4.078% [½]
R 1.03
i ( 2) ≤ g (1 − t ) ⇒ Capital gain [½]
Price paid per £100 nominal = P where

( )
P =0.7 × 6a25 + 103v 25 − 0.4 (103 − P ) v 25at 10%
2
Page 4
( )
0.7 × 6a25 + 0.6 × 103v 25
2
P=
1 − 0.4v 25
0.7 × 6 × 1.024404 × 9.0770 + 0.6 × 103 × 0.09230
=
1 − 0.4 × 0.09230
39.05395 + 5.70389
= = 46.474
0.96308
Price = £46.474 per £100 nominal [2½]

[Total 7]
The convertible half-yearly interest rate seemed to confuse some

candidates but otherwise the questions was generally answered well.
Q5 (i) (a) Options – holder has the right but not the obligation to trade. [1]
Futures – both parties have agreed to the trade and are obliged to do so.
[1]
(b) Call Option – right but not the obligation to BUY specified asset in the
future at specified price. [1]
Put Option – right but not the obligation to SELL specified asset in the
future at specified price. [1]
(ii) Present value of dividends

(
= 0.1 1.025− 2 + 1.025−1 + 1.025−=
1
2
3
0.29270 ) [2]
(1.1 − 0.29270 ) ×1.0252 =

Forward price = £0.84817 [2]
[Total 8]
Well answered although some candidates in part (i) seemed to write

down everything that they knew about options whereas the answer
required was quite specific. In part (i)(a), partial credit was given for
stating the option involved the payment of an initial premium by the
holder.
(1 + it )  log N ( µ , σ 2 ) ⇒ S10 = Π (1 + it )  log N (10µ ,10σ 2 )

10
Q6 (i)
t =1
[1]
E (1 + it ) =1 + E ( it ) =1 + j =1.08 =e
( µ+ σ
2
2 )
Page 5
Var (1 + it ) = Var ( it ) = s 2 = 0.07 2 = e

( 2µ+σ2 ) ×
( eσ − 1
2
) [1]
0.07 2
eσ 1
2
⇒ =−
(1.08) 2
  0.07 2 
⇒ σ= ln 1 + 
2
=  0.0041922
  1.08  
[1]
 0.0041922 
 µ+ 
1.08 = e 2 
0.0041922
⇒ µ = ln1.08 − = 0.074865 [1]
2
⇒ S10 ~ log N ( 0.74865, 0.041922 ) [1]
(ii) ln S10 ~ N ( 0.74865, 0.041922 )
and we require X such that P ( 6, 000 S10 > X ) =

0.975
 X 
⇒ P  ln S10 > ln =
6, 000 
0.975 [1]

 X 
 ln 6, 000 − 0.74865 
⇒ 1− Φ   = 0.975 [1]
 0.041922 
 
 
X
ln − 0.74865
6, 000
⇒ = −1.96
0.041922
= (
⇒ X 6, 000 exp −1.96 × 0.041922 + 0.74865
= £8, 492 )
[1]
[Total 8]
This question proved to be a good differentiator with strong candidates

scoring well on both parts but many weaker candidates scoring very
little. Full marks could still be scored in part (ii) even if candidates
made errors.
Page 6
δ( s ) ds
20
Present value is v(20) = e ∫0
−
Q7 (i) [1]
20 10 20
∫0 δ ( s ) ds = ∫ 0.03ds + ∫ 0.003sds
0 10
20
= [0.03s ]100 + 0.0015s 2 10
=0.3 + 0.0015 ( 400 − 100 ) =0.75
[2]
( 20 ) e= 0.47237
v= −0.75
[1]
−20δ
(ii) Require δ such that e= e −0.75 =
⇒ δ 0.0375 [2]
8 8 8
(iii) Present value ∫ ρ ( t ) v (=
t ) dt ∫e
−0.06t −0.03t
e =dt ∫e
−0.09t
dt [2]
4 4 4
e −0.09t 8
=  [1]
 −0.09  4
= -5.40836 + 7.75196 = 2.34360 [1]

[Total 10]
Well answered.
Q8 (i) (a) The payback period is the first point at which the total revenues from a
project exceed the total cost, with no allowance made for interest. [1½]
(b) The payback period takes no account of interest at all. It is therefore

inappropriate for assessing an investment project which should provide
the investor with a return or be paid for from borrowings. [1]
The payback period takes no account of what happens after the

payback period. In this particular case, it is known that the revenue
from the project might be weighted towards the end and the payback
period will make no allowance for this. [1½]
(ii) Work in £2017 millions at 6% per annum
PV of initial costs = 15a5= 15 × 4.2124 = 63.1855 [1]

1 − 1.06−30
PV of running costs = 3a30 =
3× =
3 ×14.1738 =
42.5213 [1½]
ln (1.06 )
Page 7
PV of revenue in first ten years =

1 − 1.06−10
3.1a10 = 3.1× = 3.1× 7.57875 =
23.4941 [1½]
ln (1.06 )
PV of revenue in years 11 to 30 =
(
v10 3.2a1 + 3.2 ×1.05va1 + 3.2 ×1.0519 v19 a1 ) [1½]
(
= 3.2v10 a1 1 + 1.05v + (1.05v )
19
)
1 − (1.05v )
20
= 3.2v a1
10
1 − 1.05v
[1]
1 − 1.06−1 1 − (1.05 1.06 )
20
3.2 1.06−10 ×
=×
ln1.06 1 − 1.05 1.06
=
3.2 × 0.55839 × 0.97142 ×18.30506 = 31.7739
[1]
Sales proceeds are P such that
Pv30 = 63.1855 + 42.5213 − 23.4941 − 31.7739 = 50.4388
P = 50.4388 ×1.0630 = £289.69m [1½]
(iii) Probabilities could be assigned to the cash flows… [1]

… or a higher discount rate could be used to account for risk. [1]
[Total 15]
The calculations in part (ii) were generally done well but parts (i) and
(iii) were poorly answered. Part (i) has been asked in previous diets
and generally answered better by candidates. Whilst part (iii) has not
often been asked, the answer comes directly from the Core Reading.
Q9 (i) The investor pays a purchase price at outset. [½]

The investor receives a series of coupon payments and a capital payment at
maturity. [1]
The coupon and capital payments are linked to an index of prices (possibly
with a time lag). [½]
[Time lag does not have to be mentioned].
(ii) Let the RPI three months before issue (end 9/2015) = 100
Relevant RPI values are three months before first coupon payment (end
3/2016), three months before second coupon payment (end 9/2016) etc.
Cash payments from the bond are in the following table:
Page 8
Nominal Base index Index three (3) divided Cash payment

payment per months before by (2) (4) ×1%×£1m
£100 nominal payment
(1) (2) (3) (4)
1 100 100(1.02)0.5 1.00995 £10,100
1 100 100(1.02) 1.02 £10,200
1 100 100(1.02)1.5 1.0301 £10,301
1 100 100(1.02)2 1.0404 £10,404
There is also the sale value of £1,010,000 [3]
(iii) Equation of value is:
1, 000, 000= 10,100v 0.5 + 10, 200v + 10,301v1.5 + 10, 404v 2 + 1, 010, 000v 2 [2½]
Try 2.5%.
RHS of equation of value becomes 1,001,089
Try 3%
RHS of equation of value becomes 991, 538 [1½]
Interpolating:
1, 000, 000 − 1, 001, 089
i = 0.025 + ( 0.03 − 0.025 ) × ≈ 0.0256 [1]
991,538 − 1, 001, 089
(iv)
The equation of value for the real cash flows is as follows (working in half
years):
RPI ( March 2016 ) RPI ( December 2015 )
=1, 000, 000 10, 000 × v
RPI ( September 2015 ) RPI ( June 2016 )
RPI ( September 2016 ) RPI ( December 2015 )
+10, 000 × v2
RPI ( March 2017 ) RPI ( December 2015 )
+10, 000 × v3
RPI ( September 2015 ) RPI ( June 2017 )
+10, 000 × v4
RPI ( December 2015 )
+1, 010, 000 v4
All the RPI factors cancel out except the last two because each is the ratio of
RPI at three-month intervals multiplied by the inverse of that ratio. [4]
The equation of value therefore becomes:
Page 9
1, 000, 000 =10, 000v + 10, 000v 2 + 10, 000v3

+ (10, 404 + 1, 010, 000 ) × v4
Let rate of inflation per annum in the last three months = x
Equation of value becomes:

1, 020, 404
1,=
000, 000 10, 000a3 + v 4 at 0.5%
1.021.75
(1 + x ) 0.25
1, 020, 404 ×1.005−4

⇒ (1 + x )
0.25
= = 0.995755
( )
1, 000, 000 − 10, 000a3 × 1.021.75
⇒ (1 + x ) =0.98313 ⇒ x =−0.01687 [3]
[Total 17
This proved to be the most difficult question on the paper by some

margin. Whilst the examiners expected the calculations in part (iii) and
especially part (iv) to be challenging, it was more surprising to see
candidates having considerable difficulty with part (ii).
Q10 (i) A loan repayable by a series of payments at fixed times set in advance. [½]
Typically issued by banks and building societies [½]
Typically long-term … [½]

…e,g. used to fund house purchase
…and secured against the property [½]
Each payment contains an element to pay interest on the loan with the
remainder being used to repay capital [½]
In its simplest form, the interest rate will be fixed … [½]

….and the payments will be of fixed equal amounts. [½]
The interest payment portion of the repayments will fall over time… [½]
… and the capital payments will rise over time. [½]
Risk that borrower defaults on loan [½]
Complications might be added such as allowing the loan to be repaid early or

allowing the interest rate to vary. [½]
[Max 3]
Page 10
(ii) (a) Annual repayment is X where

10, 000 = Xa10 at 4%
10, 000
=X = $1, 232.91 [2]
8.1109
(b) DMT of repayments =
10
∑1, 232.91× tvt 1, 232.91× ( Ia )10
t =1
10
=
10, 000
∑1, 232.91× vt [1½]
t =1
1, 232.91× 41.9922
= = 5.1773 years
10, 000
[1½ including ½ for units]
(iii) Let the nominal amount invested in the second zero coupon bond = X and let
term = n
If the present values are to be equal:
10, 000 5, 000v 2 + Xv n (1)
= [1]
If the discounted mean terms are to be equal:
2 × 5, 000v 2 + nXv n
5.1773 =
10, 000
⇒ 51,773= 10, 000v 2 + nXv n ( 2)
[1½]
(
Sub (1) into ( 2 ) ⇒ 51,773= 10, 000v + n 10, 000 − 5, 000v
2 2
)
51,773 − 10, 000v 2 42,527
=⇒n = = 7.909 years
10, 000 − 5, 000v 2 5,377
[2½]
10, 000 − 5, 000v 2
=
Sub back in (1) ⇒ X = $7,332.81 [1]
v 7.909
(iv) (a) Monthly instalment is M where

(12 )
10, 000 = 12Ma [1]
25
10, 000 = 12 M
(1 − 1.04 ) −25
(
12 1.04
1
12 −1)
10, 000 × 0.0032737
=⇒M = $52.39
0.62488
[1½]
(b) The assets now have a much longer duration than the liabilities. [1]
Therefore, if interest rates rise, the assets will fall in value by more than
the liabilities and the bank will make a loss. [1]
Page 11
(12 )
(c) After ten years of payments, the capital outstanding is 12 × 52.39a
15
[1]
−15
1 − 1.04
=
12 × 52.39 =
7,117.15 [1]
0.039289
0.039289
Interest component of 121st payment =7,117.15 × =$23.30
12
[1]
Capital component of 121st payment = 52.39 − 23.30 = $29.09 [½]

[Total 22]
It was pleasing to see that many candidates scored well on this

question even if they had struggled with the previous question. Parts
(ii), (iii), (iv)(a) and (iv)(c) were also generally answered well. Part (i)
was answered less well despite the wide range of mark-scoring points
available to be made.
Page 12
EXAMINATION
28 September 2018 (pm)

Core Technical
1. Enter all the candidate and examination details as requested on the front of your
answer booklet.
supervisor.
question paper.
CT1 S2018 © Institute and Faculty of Actuaries

1 An investor is considering two investments. One investment is a 91-day bond issued
by a bank which pays a rate of interest of 4% per annum effective. The second is a
91-day treasury bill which pays out €100.
(i) Calculate the price of the treasury bill and the annual simple rate of discount
from the treasury bill if both investments are to provide the same effective rate
of return. [3]
(ii) Suggest one factor, other than the rate of return, which might determine which
investment is chosen. [1]
[Total 4]
2 The effective rate of discount per annum is 5%.
Calculate:
(i) the equivalent force of interest; [1]
(ii) the equivalent rate of interest per annum convertible monthly; [2]
(iii) the equivalent rate of discount per annum convertible monthly. [1]
[Total 4]
3 An investment fund is valued at £60m on 1 January 2016 and at £70m on 1 January

2017. Immediately after the valuation on 1 January 2017, £100m is paid into the
fund. On 1 July 2018, the value of the fund is £300m.
(i) Calculate the effective time-weighted rate of return per annum over the whole
period.[3]
(ii) Explain why the money-weighted rate of return per annum would be higher
than the time-weighted rate of return per annum. [2]
[Total 5]
CT1 S2018–2
4 A company issues a loan stock which pays coupons at a rate of 6% per annum
half-yearly in arrears. The stock is to be redeemed at 103% after 25 years.
(i) (a) Calculate the price per £100 nominal at issue which would provide a
gross redemption yield of 3% per annum convertible half yearly.
(b)
Calculate the price per £100 nominal three months after issue which
would provide a gross redemption yield of 3% per annum convertible
half-yearly.
[3]
An investor, who is liable to income tax at 30% and capital gains tax at 40%, bought
the stock at issue at a price which gave him a net redemption yield of 10% per annum
effective.
(ii) Calculate the price the investor paid. [4]

[Total 7]
5 (i) Explain the main difference:
(a) between options and futures;
(b) between call options and put options.

[4]
A 12-month forward contract is issued on 1 March 2017 on a share with a price of

£1.10 at that date. Dividends of £0.10 per share are expected on 1 June, 1 September
and 1 December 2017.
(ii) Calculate the forward price at issue assuming a risk-free rate of interest of 5%
per annum convertible half-yearly and no arbitrage. [4]
[Total 8]
6 In a particular investment fund, it is the effective rate of return in the t th year. Let Sn
be the accumulation of £1 invested over a period of n years.
Assume the mean of it is 0.08, the standard deviation of it is 0.07 and that 1 + it is
independently and lognormally distributed.
(i) Determine the distribution of S10.[5]
An investor is considering investing £6,000 in the fund for 10 years.
(ii) Determine the amount of the accumulated value after 10 years such that there
is a 97.5% probability of the investor actually achieving an amount greater
than this. [3]
[Total 8]

7 The force of interest, d(t), is a function of time and at any time t, measured in years, is
⎧0.03 0 ≤ t ≤ 10
δ(t ) = ⎨
⎩0.003t t > 10
(i) Calculate the present value of a unit sum of money due at time t = 20. [4]
(ii) Calculate the equivalent constant force of interest from t = 0 to t = 20. [2]
(iii) Calculate the present value at time t = 0 of a continuous payment stream

payable at a rate of e–0.06t from time t = 4 to time t = 8. [4]
[Total 10]
CT1 S2018–4
8 Two countries have recently signed a free-trade treaty and an insurance company in
one of the countries is considering establishing a subsidiary in the other. The country
in which the investment will take place currently has a small insurance market, but it
is expected to grow slowly over the next ten years and then rapidly thereafter.
The company expects to make investments of £15m in each of the next five years to
establish the subsidiary. These costs are assumed to be incurred at the end of each
year.
The subsidiary will start business immediately. Upon starting business, the following
costs and revenues are expected.
• Costs at a rate of £3m per year will be incurred continuously throughout the first
30 years of the subsidiary’s life.
• Revenues of £3.1m per year will be received continuously throughout the first
10 years of the subsidiary’s life.
• In the 11th year, revenues will be received continuously at a rate of £3.2m. The
rate at which revenues will be received is then expected to increase at a rate of 5%
per annum from the end of the 11th year to the end of the 30th year with increases
occurring at the end of each year from the end of the 11th year.
At the end of the 30th year, the company assumes that it will sell the subsidiary.
(i) (a) Define the term “payback period”.
(b)
State two reasons why the payback period is a poor decision-making
criterion in the above circumstances.
[4]
(ii) Calculate the amount for which the company will have to sell the subsidiary
at the end of 30 years so that the project breaks even at a rate of interest of 6%
per annum effective. [9]
Some directors are concerned that the project is too risky.
(iii) Suggest two ways in which risk could be taken into account when appraising
the project. [2]
[Total 15]

9 (i) Describe the cash flows which are paid and received in respect of an
index‑linked security. [2]
An investor bought £1m nominal of an index-linked bond on 31 December 2015 for

£100 per £100 nominal. Nominal coupon payments of 1% were received on 30 June
and 31 December each year. The bond was sold for £101 per £100 nominal on
31 December 2017 immediately after the coupon due on that date had been received.
The coupon payments from the bond were linked to the retail prices index (RPI)
with a three-month lag with cash payments being rounded to the nearest pound. RPI
inflation was 2% per annum effective from three months before the bond was issued
until three months before it was sold.
Assume that all months are of equal length.
(ii) Calculate the cash payments received by the investor from the index-linked
bond.[3]
(iii) Calculate, to the nearest 0.1%, the effective rate of return per annum obtained
from the bond over the holding period (before allowing for inflation). [5]
The real rate of return obtained from the bond over the holding period was 1% per
annum convertible half-yearly.
(iv) Calculate the rate of inflation in the three months to 31 December 2017,
expressing your answer as an annual effective rate. [7]
[Total 17]
CT1 S2018–6
10 (i) Describe the characteristics of a repayment mortgage. [3]
A bank has just granted a loan of $10,000 to a business to be repaid in ten equal
instalments, annually in arrears. The rate of interest is 4% per annum effective.
(ii) (a) Calculate the amount of the annual repayment.
(b) Calculate the duration (discounted mean term) of the repayments.

[5]
The bank wishes to immunise itself from changes in interest rates in relation to this
particular asset. For this purpose, the bank has issued two zero-coupon bonds. The
first bond is of nominal amount $5,000 and has a term to redemption of two years.
(iii) Determine the nominal amount of the second zero-coupon bond and its term
to redemption such that the present value and durations of the assets and
liabilities are equal. [6]
Immediately upon the loan being granted, the bank agrees to a request to change the
terms of the loan. The loan is now to be repaid monthly in arrears over 25 years and
the rate of interest remains unchanged.
(iv) (a) Calculate the revised monthly instalment.
(b) Explain, without further calculation, the main risk to the bank of a
change in interest rates.
(c)
Determine the interest and capital portions of the 121st repayment
under this new arrangement.
[8]
[Total 22]
END OF PAPER

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INSTITUTE AND FACULTY OF ACTUARIES

18 April 2017 (pm)

Subject CT1 – Financial Mathematics

Time allowed: Three hours

INSTRUCTIONS TO THE CANDIDATE

4. Mark allocations are shown in brackets.

6. Candidates should show calculations where this is appropriate.

Graph paper is NOT required for this paper.

AT THE END OF THE EXAMINATION

CT1 A2017  Institute and Faculty of Actuaries

(i) an effective rate of interest of 1% per quarter. [2]

(ii) a force of interest of 5% per annum. [2]

Option 1: the borrower pays £7,800 per annum quarterly in arrear.

CT1 A2017–3 PLEASE TURN OVER

Fund Net Cash Flows

Fund Annual Returns

gn = 0.07 + 0.001n for n =1, 2 and 3

(i) Calculate i1, i2 and i3 as percentages to three decimal places. [7]

(ii) Calculate f0, f1 and f2 as percentages to three decimal places. [4]

(i) Calculate the price of the annuity. [4]

• 4% with a probability of 60%.

Subject CT1 – Financial Mathematics

 Institute and Faculty of Actuaries

A. General comments on the aims of this subject and how it is marked

1. CT1 provides a grounding in financial mathematics and its simple applications. It

B. General comments on student performance in this diet of the

2. Performance was of a similar standard to that of most recent examinations. As in

The Pass Mark for this exam was 60.

Q2 Present value for 1st option:

7,800 a (4)  7,800  1.018559  10.8378

Present value for 2nd option:

Q3 Forward price of the contract is K 0  ( S0  I )eT  (78  I )e0.141 [1]

 K 0   78  5.97098  e 0.14  82.85309 [½]

Forward price when new contract issued at time r (1 month) is

Value of original contract   K r  K 0  e (T  r ) [½]

 1.02172  £1.02172 [1½]

Reasonably well-answered although a common mistake was not to deal with

(ii) To calculate maximum value of k:

Now PV of outlay (in £000s)

At t =10, PV of sale proceeds

 2000 e0.08 .e(0.250k 0.042k )

 2000e 0.2448k [1]

So, for DPP = 10 years, we need PV of sale proceeds ≥ PV of outlay

 2000 e 0.2448k  985.247

 ln  0.4926235  0.24  48k

 k  0.00975 so maximum value is 0.00975 [2]

Unfortunately in part (ii), there was a typographical error in the question

VA  15.363v 7.5  3.787v14.25  12.048 [1]

VL  11v 7  8.084v11  12.048 [1]

Allowing for rounding (using three decimal places), Redington’s first

VA  15.363  7.5 7.5  3.787 14.2514.25  102.28 . [1]

VL  11 77  8.084 1111  102.28 [1]

Allowing for rounding (using 2 decimal places), Redington’s second condition

VA''  15.363  7.52 v 7.5  3.787 14.252 v14.25  936.94 .

VL''  11 7 2 v 7  8.084 112 v11  913.32  VA'' .

In part (i), candidates tended to score 0 or 2 marks depending on whether

 0.8125  4.1371 [1]

At the same time, the investor’s costs (in millions) are:

 5.8  0.85  0.96225  6.6179 [1½]

NPV  PVin  PVout  14.5604  6.6179  £7.9425m [1]