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KO FM Exercise138

fm exercise with solutions

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68 views

KO FM Exercise138

fm exercise with solutions

Uploaded by

mahirahmed51
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Krzys Ostaszewski, http://www.math.ilstu.

edu/krzysio/, Exercise 138, 1/5/8


Author of a study manual for exam FM available at:
http://smartURL.it/krzysioFM (paper) or http://smartURL.it/krzysioFMe (electronic)
Instructor for online seminar for exam FM: http://smartURL.it/onlineactuary
If you find these exercises valuable, please consider buying the manual or attending our
seminar, and if you cant, please consider making a donation to the Actuarial Program
at Illinois State University: https://www.math.ilstu.edu/actuary/giving/
Donations will be used for scholarships for actuarial students. Donations are tax-
deductible to the extent allowed by law.
Questions about these exercises? E-mail: [email protected]

November 2001 Course 2 Examination, Problem No. 9, also Study Note FM-09-05,
Problem No. 16
A loan is amortized over five years with monthly payments at a nominal interest rate of
9% compounded monthly. The first payment is 1000 and is to be paid one month from
the date of the loan. Each succeeding monthly payment will be 2% lower than the prior
payment. Calculate the outstanding loan balance immediately after the 40-th payment is
made.

A. 6751 B. 6889 C. 6941 D. 7030 E. 7344

Solution.
The key issue is to determine the outstanding balance of a loan when the payments are
not level. The monthly payment at time t (in months) is 1000 ! 0.98 t "1. As the actual
amount of the loan is not given, the outstanding balance must be calculated prospectively.
The balance at time 40 is the present value of the future payments made at times 41 to 60.
This equals (using a monthly rate 0.75%):
0.98 40 0.98 41 0.98 59
1000 ! + 1000 ! + ... + 1000 ! =
1.00751 1.0075 2 1.0075 20
0.98 40 " " 0.98 % %
2 19
0.98 " 0.98 %
= 1, 000 ! ! 1+ +$ ' + ... + $# ' =
1.00751 $# 1.0075 # 1.0075 & 1.0075 & '&
20
" 0.98 %
1( $
0.98 40
# 1.0075 '&
= 1, 000 ! ! ) 6889.11.
1.00751 0.98
1(
1.0075
Answer B.

Copyright 2006-2007 by Krzysztof Ostaszewski.


All rights reserved. Reproduction in whole or in part without express written
permission from the author is strictly prohibited.
Exercises from the past actuarial examinations are copyrighted by the Society of
Actuaries and/or Casualty Actuarial Society and are used here with permission.

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