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 Financial Mathematics for
Actuaries Second Edition

10564hc_9789813224667_tp.indd 1 27/4/17 11:04 AM

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 Financial Mathematics for
Actuaries Second Edition

Wai-Sum Chan The Chinese University of Hong Kong, Hong Kong

Yiu-Kuen Tse Singapore Management University, Singapore

World Scientific
NEW JERSEY • LONDON • SINGAPORE • BEIJING • SHANGHAI • HONG KONG • TAIPEI • CHENNAI • TOKYO

10564hc_9789813224667_tp.indd 2 27/4/17 11:04 AM

 Published by
World Scientific Publishing Co. Pte. Ltd.
5 Toh Tuck Link, Singapore 596224
USA office: 27 Warren Street, Suite 401-402, Hackensack, NJ 07601
UK office: 57 Shelton Street, Covent Garden, London WC2H 9HE

British Library Cataloguing-in-Publication Data

A catalogue record for this book is available from the British Library.

FINANCIAL MATHEMATICS FOR ACTUARIES

Second Edition
Copyright © 2018 by World Scientific Publishing Co. Pte. Ltd.
All rights reserved. This book, or parts thereof, may not be reproduced in any form or by any means, electronic or
mechanical, including photocopying, recording or any information storage and retrieval system now known or to
be invented, without written permission from the publisher.

For photocopying of material in this volume, please pay a copying fee through the Copyright Clearance Center,
Inc., 222 Rosewood Drive, Danvers, MA 01923, USA. In this case permission to photocopy is not required from
the publisher.

ISBN 978-981-3224-66-7
ISBN 978-981-3224-67-4 (pbk)

Desk Editor: Shreya Gopi

Typeset by Stallion Press

Email: [email protected]

Printed in Singapore

Shreya - 10564 - Financial Mathematics for Actuaries.indd 1 03-07-17 5:20:14 PM

July 10, 2017 10:33 Financial Mathematics for Actuaries, 2nd Edition 9.61in x 6.69in b3009-fm page v

To Bonnie, Nikki and Kevin

for their continuously compounded rate of support
Wai-Sum Chan

To Vicky, Germaine, Gerald and Gemma

for their unyielding forbearance
Yiu-Kuen Tse

v
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July 10, 2017 10:33 Financial Mathematics for Actuaries, 2nd Edition 9.61in x 6.69in b3009-fm page vii

About the Authors

Wai-Sum Chan, PhD, FSA, HonFIA, CERA, graduated from the Chinese Univer-
sity of Hong Kong with a major in Accounting and a minor in Statistics. He pursued
a doctorate in Applied Statistics at the Fox School of Business Management, Tem-
ple University (Philadelphia, USA), receiving his PhD in 1989. He qualified as a
Fellow of the Society of Actuaries in 1995 and Chartered Enterprise Risk Analyst
in 2008. He was conferred an Honorary Fellow by the Institute and Faculty of
Actuaries in 2014. Dr Chan held teaching and research posts at the National Uni-
versity of Singapore, the University of Waterloo and the University of Hong Kong
before his present appointment as Professor of Finance at the Chinese University
of Hong Kong. Dr Chan’s research interests include Health Care Financing, Actu-
arial Modeling and Financial Econometrics. He has had over 100 scientific articles
published in scholarly journals. Dr Chan has been teaching financial and actuarial
courses since 1992.

Yiu-Kuen Tse, PhD, FSA, graduated from the University of Hong Kong,
majoring in Economics and Statistics. He obtained his MSc in Statistics and PhD
in Econometrics from the London School of Economics. He has been a Fellow of
the Society of Actuaries since 1993. Dr Tse’s research interests are in Empirical
Finance and Financial Econometrics. He is Professor of Economics at the School
of Economics, Singapore Management University. He has published extensively in
scholarly journals and is the author of the book Nonlife Actuarial Models: Theory,
Methods and Evaluation. Dr Tse teaches undergraduate Actuarial Science and is
also involved in many executive training programs.
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July 10, 2017 10:33 Financial Mathematics for Actuaries, 2nd Edition 9.61in x 6.69in b3009-fm page ix

Preface to the Second Edition

A good understanding of the fundamental concepts of financial mathematics is

essential for the evaluation of any financial product and instrument. Mastering
concepts of present and future values of streams of cash flows under different inter-
est rate environments is core for actuaries and financial economists. It is with these
perspectives in mind that we write this textbook.
This book covers the body of knowledge required by the Society of Actuaries
(SOA) for its Financial Mathematics (FM) Exam. In this second edition, we
expand the book to include topics introduced by the SOA in the FM Exam from
2017 onwards. In particular, in Chapter 3 we include the coverage of interest rate
swaps. We also add a chapter on the determination of the rates of interest of vari-
ous financial securities. Some institutional aspects of interest rate policies and the
economic management of Central Banks are also discussed in this chapter.
This book also has a chapter on stochastic interest rate models. Students study-
ing for the Institute and Faculty of Actuaries Exam CT1 will also find this book
suitable for the preparation of the exam.
It is our hope that students in an undergraduate course on financial mathematics
for actuaries will find this book useful. This book contains numerous examples and
exercises, some of which are adapted from previous SOA FM Exams. We believe
it is also useful for students preparing for the actuarial professional exams through
self-study.
Users of this book are assumed to have prior knowledge of high school al-
gebra and college level introductory calculus. An appendix on the preview of
mathematics and statistics is included for the benefits of students who require a
quick revision or occasional reference.
We continue to provide teaching aids to support instructors using this book for
teaching. Instructors who wish to obtain the instructors’ manual for the solutions
of the exercises and/or the slides for use in lectures may write to the publisher at:
[email protected].

Wai-Sum Chan, PhD FSA CERA Yiu-Kuen Tse, PhD FSA

Department of Finance School of Economics
Chinese University of Hong Kong Singapore Management University
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July 10, 2017 10:33 Financial Mathematics for Actuaries, 2nd Edition 9.61in x 6.69in b3009-fm page xi

Contents

About the Authors vii

Preface to the Second Edition ix
Lists of Mathematical Symbols xv

Chapter 1 Interest Accumulation and Time Value of Money 1

1.1 Accumulation Function and Amount Function . . . . . . . . . . . 2
1.2 Simple and Compound Interest . . . . . . . . . . . . . . . . . . . 2
1.3 Frequency of Compounding . . . . . . . . . . . . . . . . . . . . 5
1.4 Effective Rate of Interest . . . . . . . . . . . . . . . . . . . . . . 9
1.5 Rates of Discount . . . . . . . . . . . . . . . . . . . . . . . . . . 12
1.6 Force of Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
1.7 Present and Future Values . . . . . . . . . . . . . . . . . . . . . . 19
1.8 Equation of Value . . . . . . . . . . . . . . . . . . . . . . . . . . 24
1.9 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Chapter 2 Annuities 39
2.1 Annuity-Immediate . . . . . . . . . . . . . . . . . . . . . . . . . 40
2.2 Annuity-Due . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
2.3 Perpetuity, Deferred Annuity and Annuity Values at Other Times . 45
2.4 Annuities under Other Accumulation Methods . . . . . . . . . . . 49
2.5 Payment Periods, Compounding Periods and Continuous Annuities 51
2.6 Varying Annuities . . . . . . . . . . . . . . . . . . . . . . . . . . 56
2.7 Term of Annuity . . . . . . . . . . . . . . . . . . . . . . . . . . 60
2.8 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
July 10, 2017 10:33 Financial Mathematics for Actuaries, 2nd Edition 9.61in x 6.69in b3009-fm page xii

xii Contents

Chapter 3 Spot Rates, Forward Rates and the Term Structure 73

3.1 Spot and Forward Rates of Interest . . . . . . . . . . . . . . . . . 74
3.2 The Term Structure of Interest Rates . . . . . . . . . . . . . . . . 79
3.3 Present and Future Values Given the Term Structure . . . . . . . . 80
3.4 Accumulation Function and the Term Structure . . . . . . . . . . 85
3.5 Interest Rate Swaps . . . . . . . . . . . . . . . . . . . . . . . . . 90
3.6 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
Exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98

Chapter 4 Rates of Return 105

4.1 Internal Rate of Return . . . . . . . . . . . . . . . . . . . . . . . 106
4.2 One-Period Rate of Return . . . . . . . . . . . . . . . . . . . . . 112
4.3 Rate of Return over Multiple Periods . . . . . . . . . . . . . . . . 116
4.4 Portfolio Return . . . . . . . . . . . . . . . . . . . . . . . . . . . 121
4.5 Short Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
4.6 Crediting Interest: Investment-Year Method
and Portfolio Method . . . . . . . . . . . . . . . . . . . . . . . . 125
4.7 Capital Budgeting and Project Appraisal . . . . . . . . . . . . . . 127
4.8 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132
Exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134

Chapter 5 Loans and Costs of Borrowing 147

5.1 Loan Balance: Prospective and Retrospective Methods . . . . . . 148
5.2 Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152
5.3 Sinking Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154
5.4 Varying Installments and Varying Interest Rates . . . . . . . . . . 159
5.5 Comparison of Borrowing Costs . . . . . . . . . . . . . . . . . . 163
5.6 Flat Rate Loan and Flat Rate Discount Loan . . . . . . . . . . . . 165
5.7 Borrowing Costs and Reference Rates . . . . . . . . . . . . . . . 168
5.8 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170
Exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172

Chapter 6 Bonds and Bond Pricing 187

6.1 Basic Concepts . . . . . . . . . . . . . . . . . . . . . . . . . . . 188
6.2 Bond Evaluation . . . . . . . . . . . . . . . . . . . . . . . . . . 190
6.3 Bond Amortization Schedule . . . . . . . . . . . . . . . . . . . . 193
6.4 Valuation between Coupon-Payment Dates . . . . . . . . . . . . . 198
6.5 Callable Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . 202
6.6 Bond Pricing under a General Term Structure . . . . . . . . . . . 204
6.7 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206
Exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207
July 10, 2017 10:33 Financial Mathematics for Actuaries, 2nd Edition 9.61in x 6.69in b3009-fm page xiii

Contents xiii

Chapter 7 Bond Yields and the Term Structure 213

7.1 Some Simple Measures of Bond Yield . . . . . . . . . . . . . . . 214
7.2 Yield to Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . 215
7.3 Par Yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 219
7.4 Holding-Period Yield . . . . . . . . . . . . . . . . . . . . . . . . 221
7.5 Discretely Compounded Yield Curve . . . . . . . . . . . . . . . . 225
7.6 Continuously Compounded Yield Curve . . . . . . . . . . . . . . 228
7.7 Term Structure Models . . . . . . . . . . . . . . . . . . . . . . . 232
7.8 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236
Exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237

Chapter 8 Bond Management 245

8.1 Macaulay Duration and Modified Duration . . . . . . . . . . . . . 246
8.2 Duration for Price Correction . . . . . . . . . . . . . . . . . . . . 252
8.3 Convexity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 254
8.4 Some Rules for Duration . . . . . . . . . . . . . . . . . . . . . . 256
8.5 Immunization Strategies . . . . . . . . . . . . . . . . . . . . . . 259
8.6 Some Shortcomings of Duration Matching . . . . . . . . . . . . . 272
8.7 Duration under a Nonflat Term Structure . . . . . . . . . . . . . . 274
8.8 Passive versus Active Bond Management . . . . . . . . . . . . . 277
8.9 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 278
Exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 279

Chapter 9 Interest Rates and Financial Securities 291

9.1 Interest Rate Determination . . . . . . . . . . . . . . . . . . . . . 292
9.2 Financial Securities . . . . . . . . . . . . . . . . . . . . . . . . . 296
9.3 Inflation and Central Bank Policy . . . . . . . . . . . . . . . . . . 300
9.4 Macroeconomic Management . . . . . . . . . . . . . . . . . . . 301
9.5 Rate of Interest in an Open Economy . . . . . . . . . . . . . . . . 302
9.6 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 302
Exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 303

Chapter 10 Stochastic Interest Rates 305

10.1 Deterministic Scenarios of Interest Rates . . . . . . . . . . . . . . 306
10.2 Random-Scenario Model . . . . . . . . . . . . . . . . . . . . . . 307
10.3 Independent Lognormal Model . . . . . . . . . . . . . . . . . . . 310
10.4 Autoregressive Model . . . . . . . . . . . . . . . . . . . . . . . . 314
10.5 Dynamic Term Structure Model . . . . . . . . . . . . . . . . . . 316
10.6 An Application: Guaranteed Investment Income . . . . . . . . . . 317
10.7 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 320
Exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 320
July 10, 2017 10:33 Financial Mathematics for Actuaries, 2nd Edition 9.61in x 6.69in b3009-fm page xiv

xiv Contents

Appendix A Review of Mathematics and Statistics 327

A.1 Exponential Function . . . . . . . . . . . . . . . . . . . . . . . . 327
A.2 Logarithmic Function . . . . . . . . . . . . . . . . . . . . . . . . 327
A.3 Roots of a Quadratic Equation . . . . . . . . . . . . . . . . . . . 328
A.4 Arithmetic Progression . . . . . . . . . . . . . . . . . . . . . . . 328
A.5 Geometric Progression . . . . . . . . . . . . . . . . . . . . . . . 328
A.6 Some Derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . 328
A.7 Integration by Part . . . . . . . . . . . . . . . . . . . . . . . . . . 329
A.8 Taylor Series Expansion . . . . . . . . . . . . . . . . . . . . . . . 329
A.9 Binomial Expansion . . . . . . . . . . . . . . . . . . . . . . . . . 329
A.10 Expected Value and Variance of a Random Variable . . . . . . . . 330
A.11 Mean and Variance of Sum of Random Variables . . . . . . . . . 330
A.12 Uniform Distribution . . . . . . . . . . . . . . . . . . . . . . . . 330
A.13 Normal Distribution . . . . . . . . . . . . . . . . . . . . . . . . . 331
A.14 Lognormal Distribution . . . . . . . . . . . . . . . . . . . . . . . 331

Appendix B Answers to Selected Exercises 333

Index 349
July 10, 2017 10:33 Financial Mathematics for Actuaries, 2nd Edition 9.61in x 6.69in b3009-fm page xv

List of Mathematical Symbols

Symbol Meaning

an
same as an
i when the rate of interest is understood

an
i present value of an annuity-immediate
q| an
i present value of a q-period deferred annuity-immediate
a∞
present value of a perpetuity-immediate
(m) (m)
an
same as an
when the rate of interest is understood
i
(m)
an
present value of an mn-payment annuity-immediate with
i
m payments per interest-conversion period
(m)
q| an
i present value of a q-period deferred, mn-payment
annuity-immediate with m payments per interest-conversion period
än
same as än
i when the rate of interest is understood
än
i present value of an annuity-due
q| än
i present value of a q-period deferred annuity-due
ä∞
present value of a perpetuity-due
(m) (m)
än
same as än
when the rate of interest is understood
i
(m)
än
present value of an mn-payment annuity-due with
i
m payments per interest-conversion period
(m)
q| än
i present value of a q-period deferred, mn-payment annuity-due
with m payments per interest-conversion period
ān
present value of a continuous annuity
q| ān
present value of a q-period deferred continuous annuity
a(t) accumulation function at time t
at (τ ) accumulation function for a forward payment due at time t
A(t) amount function at time t
July 10, 2017 10:33 Financial Mathematics for Actuaries, 2nd Edition 9.61in x 6.69in b3009-fm page xvi

xvi List of Mathematical Symbols

Symbol Meaning

BjA fund value after transaction at time tj

BjB fund value before transaction at time tj
d rate of discount
d(m) nominal rate of discount payable m times a year
δ constant force of interest
δ(t) force of interest at time t
D Macaulay duration
D∗ modified duration
DF Fisher-Weil duration
(Da)n
present value of a decreasing annuity-immediate
(Dä)n
present value of a decreasing annuity-due
(Dā)n
present value of a decreasing continuous annuity
(D̄ā)n
present value of a continuously decreasing continuous annuity
(Ds)n
future value of a decreasing annuity-immediate
(Ds̈)n
future value of a decreasing annuity-due
(Ds̄)n
future value of a decreasing continuous annuity
(D̄s̄)n
future value of a continuously decreasing continuous annuity
i constant annual effective rate of interest
iH one-year holding yield
iP par yield of a bond
iYt investment-year credit rate at year t
i(t) annual effective rate of interest for year t
i(t, t + n) annual effective rate of interest in the period t to t + n
iFt forward rate of interest
iFt,τ annualized forward rate of interest over τ periods from t to t + τ
iSt spot rate of interest
S the spot rate of interest applicable to period t to t + τ
t iτ

I(t) interest incurred in period t

July 10, 2017 10:33 Financial Mathematics for Actuaries, 2nd Edition 9.61in x 6.69in b3009-fm page xvii

List of Mathematical Symbols xvii

Symbol Meaning

(Ia)n
present value of an increasing annuity-immediate

(Iä)n
present value of an increasing annuity-due
(Iā)n
present value of an increasing continuous annuity
(I¯ā)
n present value of a continuously increasing continuous annuity
(Is)n
future value of an increasing annuity-immediate
(I s̈)n
future value of an increasing annuity-due
(I s̄)n
future value of an increasing continuous annuity
(I¯s̄)

n future value of a continuously increasing continuous annuity
r (m) nominal rate of interest payable m times a year
r̄ continuously compounded rate of interest
rI rate of inflation
rN nominal rate of interest
rR real rate of interest
RA arithmetic mean rate of return
RB interest rate for borrowing
RD one-period DWRR (dollar-weighted rate of return)
RG geometric mean rate of return
RL interest rate for lending
RP rate of return for a portfolio
RS swap rate of an interest rate swap
RT one-period TWRR (time-weighted rate of return)
s n
same as sn
i when the rate of interest is understood
sn
i future value of an annuity-immediate
q| sn
i future value of a q-period deferred annuity-immediate
(m) (m)
s n
same as sn
when the rate of interest is understood
i
(m)
s n
future value of an mn-payment annuity-immediate with
i
m payments per interest-conversion period
July 10, 2017 10:33 Financial Mathematics for Actuaries, 2nd Edition 9.61in x 6.69in b3009-fm page xviii

xviii List of Mathematical Symbols

Symbol Meaning

(m)
q| sn
i future value of an q-period deferred, mn-payment
annuity-immediate with m payments per interest-conversion period
s̈n
same as s̈n
i when the rate of interest is understood
s̈n
i future value of an annuity-due
q| s̈n
i future value of a q-period deferred annuity-due
(m) (m)
s̈n
same as s̈n
when the rate of interest is understood
i
(m)
s̈n
future value of an mn-payment annuity-due with
i
m payments per interest-conversion period
(m)
q| s̈n
i future value of a q-period deferred, mn-payment annuity-due
with m payments per interest-conversion period
s̄n
present value of a continuous annuity
q| s̄n
present value of a q-period deferred continuous annuity
v discount factor
v(t) present value of 1 to be paid at time t
July 10, 2017 10:31 Financial Mathematics for Actuaries, 2nd Edition 9.61in x 6.69in b3009-ch01 page 1

1 Interest Accumulation and

Time Value of Money

From time to time we are faced with problems of making financial

decisions. These may involve anything from borrowing a loan from
a bank to purchase a house or a car; or investing money in bonds,
stocks or other securities. To a large extent, intelligent wealth man-
agement means borrowing and investing wisely.

Financial decision making should take into account the time value of
money. It is not difficult to see that a dollar received today is worth
more than a dollar received one year later. The time value of money
depends critically on how interest is calculated. For example, the
frequency at which the interest is compounded may be an important
factor in determining the cost of a loan.

In this chapter, we discuss the basic principles in the calculation of

interest, including the simple- and compound-interest methods, the
frequencies of compounding, the effective rate of interest and rate of
discount, and the present and future values of a single payment.
July 10, 2017 10:31 Financial Mathematics for Actuaries, 2nd Edition 9.61in x 6.69in b3009-ch01 page 2

2 CHAPTER 1

Learning Objectives

• Basic principles in calculation of interest accumulation

• Simple and compound interest
• Frequency of compounding
• Effective rate of interest
• Rate of discount
• Present and future values of a single payment

1.1 Accumulation Function and Amount Function

Many financial transactions involve lending and borrowing. The sum of money
borrowed is called the principal. To compensate the lender for the loss of use of
the principal during the loan period the borrower pays the lender an amount of in-
terest. At the end of the loan period the borrower pays the lender the accumulated
amount, which is equal to the sum of the principal plus interest.
We denote A(t) as the accumulated amount at time t, called the amount func-
tion. Hence, A(0) is the initial principal and

I(t) = A(t) − A(t − 1) (1.1)

is the interest incurred from time t − 1 to time t, namely, in the tth period. For
the special case of an initial principal of 1 unit, we denote the accumulated amount
at time t by a(t), which is called the accumulation function. Thus, if the initial
principal is A(0) = k, then
A(t) = k × a(t).
This assumes that the same accumulation function is used for the amount function
irrespective of the initial principal.

1.2 Simple and Compound Interest

Equation (1.1) shows that the growth of the accumulated amount depends on the
way the interest is calculated, and vice versa. While theoretically there are
July 10, 2017 10:31 Financial Mathematics for Actuaries, 2nd Edition 9.61in x 6.69in b3009-ch01 page 3

Interest Accumulation and Time Value of Money 3

numerous ways of calculating the interest, there are two methods which are com-
monly used in practice. These are the simple-interest method and the compound-
interest method.
For the simple-interest method, the interest earned over a period of time is
proportional to the length of the period. Thus the interest incurred from time 0
to time t, for a principal of 1 unit, is r × t, where r is the constant of proportion
called the rate of interest. Hence the accumulation function for the simple-interest
method is
a(t) = 1 + rt, for t ≥ 0, (1.2)
and
A(t) = A(0)a(t) = A(0)(1 + rt), for t ≥ 0. (1.3)
In general the rate of interest may be quoted for any period of time (such as a
month or a year). In practice, however, the most commonly used base is the year,
in which case the term annual rate of interest is used. In what follows we shall
maintain this assumption, unless stated otherwise.
Example 1.1: A person borrows $2,000 for 3 years at simple interest. The rate
of interest is 8% per annum. What are the interest charges for year 1 and 2? What
is the accumulated amount at the end of year 3?
Solution: The interest charges for year 1 and 2 are both equal to

2,000 × 0.08 = $160.

The accumulated amount at the end of year 3 is

2,000 (1 + 0.08 × 3) = $2,480.

For the compound-interest method, the accumulated amount over a period of

time is the principal for the next period. Thus, a principal of 1 unit accumulates to
1 + r units at the end of the year, which becomes the principal for the second year.
Continuing this process, the accumulation function becomes

a(t) = (1 + r)t , for t = 0, 1, 2, · · · , (1.4)

and the amount function is

A(t) = A(0)a(t) = A(0)(1 + r)t , for t = 0, 1, 2, · · · . (1.5)

Two remarks are noted. First, for the compound-interest method the accumu-
lated amount at the end of a year becomes the principal for the following year.
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4 CHAPTER 1

This is in contrast to the simple-interest method, for which the principal remains
unchanged through time. Second, while (1.2) and (1.3) apply for t ≥ 0, (1.4) and
(1.5) hold only for integral t ≥ 0. As we shall see below, there are alternative ways
to define the accumulation function for the compound-interest method when t is
not an integer.

Example 1.2: Solve the problem in Example 1.1 using the compound-interest
method.

Solution: The interest for year 1 is

2,000 × 0.08 = $160.

For year 2 the principal is

2,000 + 160 = $2,160,

so that the interest for the year is

2,160 × 0.08 = $172.80.

The accumulated amount at the end of year 3 is

2,000 (1 + 0.08)3 = $2,519.42.

Compounding has the effect of generating a larger accumulated amount. The

effect is especially significant when the rate of interest is high. Table 1.1 shows
two samples of the accumulated amounts under simple- and compound-interest
methods. It can be seen that when the interest rate is high, compounding the interest
induces the principal to grow much faster than the simple-interest method.
With compound interest at 10%, it takes less than 8 years to double the invest-
ment. With simple interest at the same rate it takes 10 years to get the same result.
Over a 20-year period, an investment with compound interest at 10% will grow
6.73 times. Over a 50-year period, the principal will grow by a phenomenal 117.39
times. When the interest rate is higher the effect of compounding will be even more
dramatic.
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Interest Accumulation and Time Value of Money 5

Table 1.1: Accumulated amount for a principal of $100

5% interest 10% interest

Year Simple Compound Simple Compound
interest ($) interest ($) interest ($) interest ($)

1 105.00 105.00 110.00 110.00

2 110.00 110.25 120.00 121.00
3 115.00 115.76 130.00 133.10
4 120.00 121.55 140.00 146.41
5 125.00 127.63 150.00 161.05
6 130.00 134.01 160.00 177.16
7 135.00 140.71 170.00 194.87
8 140.00 147.75 180.00 214.36
9 145.00 155.13 190.00 235.79
10 150.00 162.89 200.00 259.37

1.3 Frequency of Compounding

Although the rate of interest is often quoted in annual term, the interest accrued to
an investment is often paid more frequently than once a year. For example, a sav-
ings account may pay interest at 3% per year, where the interest is credited monthly.
In this case, 3% is called the nominal rate of interest payable 12 times a year. As we
shall see, the frequency of interest payment (also called the frequency of com-
pounding) makes an important difference to the accumulated amount and the total
interest earned. Thus, it is important to define the rate of interest accurately.
To emphasize the importance of the frequency of compounding we use r (m)
to denote the nominal rate of interest payable m times a year. Thus, m is the
1
frequency of compounding per year and m year is the compounding period or
conversion period.
1
Let t (in years) be an integer multiple of m , i.e., tm is an integer representing
the number of interest-conversion periods over t years. The interest earned over the
1 1
next m year, from time t to t + m , is

1 a(t)r (m) 1 2
a(t) × r (m) × = , for t = 0, , ,··· .
m m m m
July 10, 2017 10:31 Financial Mathematics for Actuaries, 2nd Edition 9.61in x 6.69in b3009-ch01 page 6

6 CHAPTER 1

1
Thus, the accumulated amount at time t + m is

  
1 a(t)r (m) r (m) 1 2
a t+ = a(t)+ = a(t) 1 + , for t = 0, , ,··· .
m m m m m

By recursive substitution, we conclude

 mt
r (m) 1 2
a(t) = 1 + , for t = 0, , ,··· , (1.6)
m m m

and hence
 mt
r (m) 1 2
A(t) = A(0) 1 + , for t = 0, , ,··· . (1.7)
m m m

Example 1.3: A person deposits $1,000 into a savings account that earns 3%
interest payable monthly. How much interest will be credited in the first month?
What is the accumulated amount at the end of the first month?
Solution: The rate of interest over one month is
1
0.03 × = 0.25%,
12
so that the interest earned over one month is
1,000 × 0.0025 = $2.50,
and the accumulated amount after one month is
1,000 + 2.50 = $1,002.50.


Example 1.4: $1,000 is deposited into a savings account that pays 3% interest
with monthly compounding. What is the accumulated amount after two and a half
years? What is the amount of interest earned over this period?
Solution: The investment interval is 30 months. Thus, using (1.7), the accumu-
lated amount is  
0.03 30
1,000 1 + = $1,077.78.
12
The amount of interest earned over this period is
1,077.78 − 1,000 = $77.78.


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Interest Accumulation and Time Value of Money 7

Example 1.5: Solve the problem in Example 1.4, assuming that the interest is
paid quarterly.
Solution: The investment interval is now 10 quarters. With m = 4, the accumu-
lated amount is  
0.03 10
1,000 1 + = $1,077.58,
4
and the amount of interest earned is $77.58.

When the loan period is not an integer multiple of the compounding period (i.e.,
tm is not an integer), care must be taken to define the way interest is calculated
over the fraction of the compounding period. Two methods may be considered.
First, we may extend (1.6) and (1.7) to apply to any tm ≥ 0 (not necessarily an
integer). Second, we may compute the accumulated value over the largest integral
interest-conversion period using (1.7) and then apply the simple-interest method
to the remaining fraction of the conversion period. The example below illustrates
these two methods.

Example 1.6: What is the accumulated amount for a principal of $100 after 25
months if the nominal rate of interest is 4% compounded quarterly?
Solution: The accumulation period is 253 = 8.33 quarters. Using the first
method, the accumulated amount is
 
0.04 8.33
100 1 + = $108.64.
4

Using the second method the accumulated amount after 24 months (8 quarters) is
 8
0.04
100 1 + = $108.29,
4
so that the accumulated amount after 25 months is
 
1
108.29 1 + 0.04 × = 108.65.
12

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8 CHAPTER 1

It can be shown that the second method provides a larger accumulation function
for any non-integer tm > 0 (see Exercise 1.41). As the first method is easier
to apply, we shall adopt it to calculate the accumulated value over a non-integral
compounding period, unless otherwise stated.
At the same nominal rate of interest, the more frequent the interest is paid, the
faster the accumulated amount grows. For example, assuming the nominal rate of
interest to be 5% and the principal to be $1,000, the accumulated amounts after 1
year under several different compounding frequencies are given in Table 1.2.
Note that when the compounding frequency m increases, the accumulated
amount tends to a limit. Let r̄ denote the nominal rate of interest for which com-
pounding is made over infinitely small intervals (i.e., m → ∞ so that r̄ = r (∞) ).
We call this compounding scheme continuous compounding. For practical pur-
poses, daily compounding is very close to continuous compounding.
From the well-known limit theorem (see Appendix A.1) that
 r̄ m
lim 1 + = er̄ (1.8)
m→∞ m
for any constant r̄, we conclude that, for continuous compounding, the accumula-
tion function (see (1.6)) is
  
r̄ mt r̄ m t
a(t) = lim 1 + = lim 1 + = er̄t . (1.9)
m→∞ m m→∞ m

We call r̄ the continuously compounded rate of interest. Equation (1.9) provides

the accumulation function of the continuously compounding scheme at nominal
rate of interest r̄.

Table 1.2: Accumulated amount for a principal of $1,000

with nominal interest rate of 5% per annum

Frequency of Accumulated
interest payment m amount ($)
Yearly 1 1,050.00
Quarterly 4 1,050.95
Monthly 12 1,051.16
Daily 365 1,051.27
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Interest Accumulation and Time Value of Money 9

1.4 Effective Rate of Interest

As Table 1.2 shows, the accumulated amount depends on the compounding fre-
quency. Hence, comparing two investment schemes by just referring to their nom-
inal rates of interest without taking into account their compounding frequencies
may be misleading. Different investment schemes must be compared on a common
basis. To this end, the measure called the effective rate of interest is often used.
The annual effective rate of interest for year t, denoted by i(t), is the ratio of the
amount of interest earned in a year, from time t − 1 to time t, to the accumulated
amount at the beginning of the year (i.e., at time t − 1). It can be calculated by the
following formula

I(t) A(t) − A(t − 1) a(t) − a(t − 1)

i(t) = = = . (1.10)
A(t − 1) A(t − 1) a(t − 1)

For the simple-interest method, we have

(1 + rt) − (1 + r(t − 1)) r

i(t) = = ,
1 + r(t − 1) 1 + r(t − 1)

which decreases when t increases.

For the compound-interest method with annual compounding (i.e., m = 1), we
have (denoting r (1) = r)

(1 + r)t − (1 + r)t−1
i(t) = = r,
(1 + r)t−1

which is the nominal rate of interest and does not vary with t. When
m-compounding is used, the effective rate of interest is
 tm  (t−1)m
r (m) r (m)
1+ − 1+  m
m m r (m)
i(t) =  (t−1)m = 1+ − 1, (1.11)
m
r (m)
1+
m

which again does not vary with t. Note that when m > 1,
 m
r (m)
1+ − 1 > r (m) ,
m

so that the effective rate of interest is larger than the nominal rate of interest.
July 10, 2017 10:31 Financial Mathematics for Actuaries, 2nd Edition 9.61in x 6.69in b3009-ch01 page 10

10 CHAPTER 1

For continuous compounding, we have

exp(r̄t) − exp[r̄(t − 1)]
i(t) = = er̄ − 1, (1.12)
exp[r̄(t − 1)]
which again does not vary with t.
As the effective rate of interest for the compound-interest method does not vary
with t, we shall simplify the notation and denote i ≡ i(t), which is given by (1.11)
or (1.12). The effective rate of interest shows how much interest is earned in one
year with a 1-unit investment. It is an appropriate standardized measure to com-
pare interest-accumulation schemes with different compounding frequencies and
nominal rates of interest.
Example 1.7: Consider two investment schemes A and B. Scheme A offers 12%
interest with annual compounding. Scheme B offers 11.5% interest with monthly
compounding. Calculate the effective rates of interest of the two investments.
Which scheme would you choose?
Solution: The effective rate of interest of Scheme A is equal to its nominal rate
of interest, i.e., 12%. The effective rate of interest of Scheme B is
 
0.115 12
1+ − 1 = 12.13%.
12
Although Scheme A has a higher nominal rate of interest, Scheme B offers a higher
effective rate of interest. Hence, while an investment of $100 in Scheme A will
generate an interest of $12 after one year, a similar investment in Scheme B will
generate an interest of $12.13 over the same period. Thus, Scheme B is preferred.


Another advantage of the effective rate of interest is that, for investments that
extend beyond one year, the calculation of the accumulated amount can be based
on the effective rate without reference to the nominal rate.
Example 1.8: For the investment schemes in Example 1.7, calculate the accumu-
lated amount after 10 years on a principal of $1,000.
Solution: The accumulated amount after 10 years for Scheme A is
1,000 (1 + 0.12)10 = $3,105.85,
and that for Scheme B is
1,000 (1 + 0.1213)10 = $3,142.09.
Note that in the above example, the accumulated amount of Scheme B is calculated
without making use of its nominal rate.


Other documents randomly have
different content
418
“So art, whether it be painting or sculpture, poetry or music,
has no other object than to brush aside the utilitarian symbols,
the conventional and socially accepted generalities, in short,
everything that veils reality from us, in order to bring us face to
face with reality itself” (Laughter, p. 157). It is true that if we
read further on this page, and elsewhere in Bergson, we will be
able to see that there is for him in art and in the spiritual life a
kind of intelligence and knowledge. But it is difficult to work out
an expression or a characterisation of this intelligence and this
knowledge. “Art,” he says, “is only a more direct vision of
reality.” And again: “Realism is in the work when idealism is in
the soul, and it is only through ideality that we can resume
contact with reality” (ibid.).
419
It is only fair to Bergson to remember that he is himself aware
of the appearances of this dualism in his writings, that he
apologises as it were for them, intending the distinction to be,
not absolute, but relative. “Let us say at the outset that the
distinctions we are going to make will be too sharply drawn,
just because we wish to define in instinct what is instinctive,
and in intelligence what is intelligent, whereas all concrete
instinct is mingled with intelligence, as all real intelligence is
penetrated by instinct. Moreover [this is quite an important
expression of Bergson’s objection to the old “faculty”
psychology], neither intelligence nor instinct lends itself to rigid
definition; they are tendencies and not things. Also it must not
be forgotten that ... we are considering intelligence and instinct
as going out of life which deposits them along its course”
(Creative Evolution, p. 143).
420
He talks in the Creative Evolution of a “real time” and a “pure
duration” of a real duration that “bites” into things and leaves
on them the mark of its tooth, of a “ceaseless upspringing of
something new,” of “our progress in pure duration,” or a
“movement which creates at once the intellectuality of mind
and the materiality of things” (p. 217). I have no hesitation in
saying that all this is unthinkable to me, and that it might
 indeed be criticised by Rationalism as inconsistent with our
highest and most real view of things.
421
He admits himself that “If our analysis is correct, it is
consciousness, or rather supra-consciousness that is at the
origin of life” (Creative Evolution, p. 275).
422
“Now, if the same kind of action is going on everywhere,
whether it is that which is striving to remake itself, I simply
express this probable similitude when I speak of a centre from
which worlds shoot out as rockets in a fireworks display—
provided, however, that I do not present [there is a great idea
here, a true piece of ‘Kantianism’] this centre as a thing, but as
a continuity of shooting out. God thus defined has nothing of
the already made. He is unceasing life, action, freedom.
Creation so conceived is not a mystery; we experience it in
ourselves when we act freely” (Creative Evolution, p. 262).
423
See p. 155, note 1.
424
It is somewhat difficult, and it is not necessary for our
purposes, to explain what might be meant by the “Idealism” of
Bergson—at least in the sense of a cosmology, a theory of the
“real.” It is claimed for him, and he claims for himself that he is
in a sense both an “idealist” and a “realist,” believing at once
(1) that matter is an “abstraction” (an unreality), and (2) that
there is more in matter than the qualities revealed by our
perceptions. [We must remember that he objects to the idea of
qualities in things in the old static sense. “There are no things;
there are only actions.”] What we might mean by his initial
idealism is the following: “Matter, in our view, is an aggregate
of images. And by ‘image’ we mean [Matter and Memory, the
Introduction] a certain existence which is more than that which
the idealist calls a representation, but less than that which the
realist calls a thing—an existence placed half-way between the
‘thing’ and the ‘representation.’ This conception of matter is
simply that of common sense.” ... “For common sense, then,
the object exists in itself, and, on the other hand, the object is
 in itself pictorial, as we perceive it: image it is, but a self-
existing image.” Now, this very idea of a “self-existing image”
implies to me the whole idealism of philosophy, and Bergson is
not free of it. And, of course, as we have surely seen, his
“creative-evolution” philosophy is a stupendous piece of
idealism, but an idealism moreover to which the science of the
day is also inclining.
425
There is so much that is positive and valuable in his teaching,
that he is but little affected by formal criticism.
426
Cf. “We have now enumerated a few of the essential features
of human intelligence. But we have hitherto considered the
individual in isolation, without taking account of social life. In
reality man is a being who lives in society. If it be true [even]
that the human intellect aims at fabrication, we must add that,
for that as well as other purposes, it is associated with other
intellects. Now it is difficult to imagine a society whose
members do not communicate by signs,” etc. etc. (Creative
Evolution, p. 166). Indeed all readers of Bergson know that he
is constantly making use of the social factor and of “co-
operation” by way of accounting for the general advance of
mankind. It may be appropriate in this same connexion to cite
the magnificent passage towards the close of Creative
Evolution in which he rises to the very heights of the idea
[Schopenhauer and Hartmann had it before him, and also
before the socialists and the collectivists] of humanity’s being
possibly able to surmount even the greatest of the obstacles
that beset it in its onward path: “As the smallest grain of dust
[Creative Evolution, pp. 285–6] is bound up with our entire
solar system, drawn along with it in that undivided movement
of descent which is materiality itself, so all organised beings,
from the humblest to the highest, ... do but evidence a single
impulsion, the inverse of the movement of matter, and in itself
indivisible. All the living hold together, and all yield to the same
tremendous push. The animal takes its stand on the plant, man
bestrides animality, and the whole of humanity, in space and in
time, is one immense army galloping beside and before and
 behind each of us in an overwhelming charge to beat down
every resistance and clear the most formidable obstacles,
perhaps even death.”
427
Cf. p. 160 and p. 262.
428
He comes in sight of some of them, as he often does of so
many things. “It is as if a vague and formless being, whom we
may call, as we will [C.E., p. 281], man or superman, had
sought to realise himself, and had succeeded only by
abandoning a part of himself on the way. The losses are
represented by the rest of the animal world, and even by the
vegetable world, at least in what these have that is positive
and above the accidents of evolution.”
429
From what has been said in this chapter about Bergson, and
from the remarks that were made in the second chapter about
Renouvier and the French Critical Philosophy, the reader may
perhaps be willing to admit that our Anglo-American
Transcendental philosophy would perhaps not have been so
abstract and so rationalistic had it devoted more attention, than
it has evidently given, to some of the more representative
French thinkers of the nineteenth century.
430
We must remember that nowhere in his writings does Bergson
claim any great originality for his many illuminative points of
view. He is at once far too much of a catholic scholar (in the
matter of the history of philosophy, say), and far too much of a
scientist (a man in living touch with the realities and the
theories of the science of the day) for this. His findings about
life and mind are the outcome of a broad study of the
considerations of science and of history and of criticism. By
way, for example, of a quotation from a scientific work upon
biology that seems to me to reveal some apparent basis in fact
(as seen by naturalists) for the “creative evolution” upon which
Bergson bases his philosophy, I append the following: “We
have gone far enough to see that the development of an
organism from an egg is a truly wonderful process. We need
 but go back again and look at the marvellous simplicity of the
egg to be convinced of it. Not only do cells differentiate, but
cell-groups act together like well-drilled battalions, cleaving
apart here, fusing together there, forming protective coverings
or communicating channels, apparently creating out of nothing,
a whole set of nutritive and reproductive organs, all in orderly
and progressive sequence, producing in the end that orderly
disposed cell aggregate, that individual life unit which we know
as an earthworm. Although the forces involved are beyond our
ken, the grosser processes are evident” (Needham, General
Biology, p. 175; italics mine). Of course it is evident from his
books that Bergson does not take much account of such
difficult facts and topics as the mistakes of instinct, etc. And I
have just spoken of his optimistic avoidance of some of the
deeper problems of the moral and spiritual life of man.
431
“This amounts to saying that the theory of knowledge and
theory of life seem to us inseparable [Creative Evolution, p.
xiii.; italics Bergson’s]. A theory of life that is not accompanied
by a criticism of knowledge is obliged to accept, as they stand,
the concepts which the understanding puts at its disposal: it
can but enclose the facts, willing or not, in pre-existing frames
which it regards as ultimate. It thus obtains a symbolism which
is convenient, perhaps even necessary to positive science, but
not a direct vision of its object.”
432
I more than agree with Bergson that our whole modern
philosophy since Descartes has been unduly influenced by
physics and mathematics. And I deplore the fact that the “New
Realism” which has come upon us by way of a reaction (see p.
53) from the subjectivism of Pragmatism, should be travelling
apparently in this backward direction—away, to say the very
least, from some of the things clearly seen even by biologists
and psychologists. See p. 144.
433
As I have indicated in my Preface, I am certainly the last
person in the world to affect to disparage the importance of the
thin end of the wedge of Critical Idealism introduced into the
English-speaking world by Green and the Cairds, and their first
followers (like the writers in the old Seth-Haldane, Essays on
Philosophical Criticism). Their theory of knowledge, or
“epistemology,” was simply everything to the impoverished
condition of our philosophy at the time, but, as Bergson points
out, it still left many of us [the fault perhaps was our own, to
some extent] in the position of “taking” the scientific reading of
the world as so far true, and of thinking that we had done well
in philosophy when we simply partly “transformed” it. The really
important thing was to see with this epistemology that the
scientific reading of the world is not in any sense initial “fact”
for philosophy.
 INDEX

Absolutism, 13, chap. viii.

Action, 91 n., 105, chap. iv.
Activity-Experience, 105, 109
Alexander, S., 163
Anti-Intellectualism, 73, 239
Appearance and Reality, 84
Arcesilaus, 155
Aristotle, 155
Armstrong (Prof.), 49 n.
Attention, 119
Augustine, 107
Avenarius, 41

Bain, 120
Baldwin, J. M., 156, 110 n.
Bawden (Prof.), 17, 85
Belief, 64, 65, 229 n., 251
Bergson, 72, 104, 126
Berthelot, 117
Blondel, 32, 34
Bosanquet, B., 110, 185, chap. viii.
Bourdeau, 26, 133 n., 193
Boyce-Gibson (Prof.), 154
Bradley, F. H., 74, 75, 91
Browning, R., 117
Brunschvig, 30
Bryce, James, 193
Butler, 119

Caird, E., 112

Carlyle, 125
Chesterton, W. K., 117, 156
Cohen, 48 n.
Common-sense Beliefs, 7
Common-sense Philosophy, 117
Comte, 120
Contemplation, 96
Cornford, 184
Curtis (Prof. M. M.), 22

Dawes-Hicks (Prof.), 163

De Maistre, 170
Descartes, 66, 121
Desjardins, P., 37
Dewey, J., 16, 17, 37, 62, 147, 173, 175
Du Bois Reymond, 110
Duncan (Prof.), 122
Duns Scotus, 119

Eleutheropulos, 43
Elliot, H. S. R., 66
Epicureanism, 118
Eucken, 39, 154
Ewald (Dr.), 44, 48

Flournoy, 180
Fouillée, 37 n.
Fraser, A. C., 112
Futurism, 26

Geddes, P., 123

Goethe, 195, 215
Gordon, A., 152–3
Green, T. H., 199
Gregory (Prof.), 24

Inge (Dean), 29, 31

Invention, 192

James, W., 3, 4, 24, 35, 39, 45, 50, 65, 135, 182, 192 n.
Jerusalem, W., 43
Joachim, 56
Jones, Sir H., 56
Joseph, 57

Kant, 119, 121, 247

Kant and Hegel, 183
Knox (Capt.), 15

Lalande, A., 29, 33, 164

Lankester (Sir R.), 167
Lecky, 70
Leighton (Prof.), 133
Le Roy, 31
Locke, 61, 119
Lovejoy (Prof.), 49

MacEachran (Prof.), 49 n.
Mach, 40
Mackenzie, J. S., 112
Maeterlinck, 90
Mallarmé, 214
Marett, 160
Mastermann, G. F. G., 118
M’Dougall, 104
McTaggart, J. M. E., 92
Meaning, 21, 51, 149
Mellone, 57
Merz, 157
Münsterberg, 46

Natorp, 48
Needham (Prof.), 101, 260
New Realism, 53
Nietzsche, 118, 139, 151

Ostwald, 40, 41

Pace (Prof.), 187

Paleyism, 247
Papini, 24, 135
Pascal, 119
Pater, W., 124
Peirce, 3, 22
Perry (Prof.), 53, 185
Perry, Bliss, 171, 179
Plato, 57, 61, 121, 150, 151
Pluralism, 87
Poincaré, 30
Pradines, 36 n.
Pragmatism, and American philosophy, 49, chap. vii.;
and British thought, 54;
and French thought, 28;
and German thought, 38;
and Italian thought, 23;
 a democratic doctrine, 105;
its ethics, 136;
its pluralism, 162;
its sociological character, 164, 262;
its theory of knowledge, 131;
its theory of truth, 127;
its theory of reality, 135
Pratt (Prof.), 51, 127

Radical Empiricism, 85
Renan, 110
Renouvier, 29
Rey, 31
Riley, W., 26 n.
Ritzsche, 45
Royce, J., 54
Russell, B., 61, 66 n., 169

Santayana, 171, 181, 190

Schellwien, 44
Schiller, F. C. S., 12, 14, 16, 132, 133
Schinz, 192 n.
Schopenhauer, 28, 119, 151, 260
Seth, James, 14 n.
Seth-Haldane, 260
Shaw, Bernard, 124
Sidgwick, H., 56, 118, 119 n., 140
Sigwart, 42
Simmel, 44
Spencer, 41 n.
Starbuck, 28
Stoicism, 118
Stout, G. F., 55
Subjective Idealism, 259

Taylor, A. E., 57, 77, 78, 199 n., 219

Teleology, 88, 198
Tertullian, 119
Theism, 215 n.
Themistius, 155
Thompson, J. H., 144
Titchener, 157
Truth, 59, 81, 163
Tufts, 147
Tyndall, 110

Vaihinger, 39

Walker, L. J., 31
Ward, James, 30, 55, 143, 162
Wells, H. G., 123
Westermarck, 145
Windelband, 46, 150
Wollaston, 224

Printed by R. & R. Clark, Limited, Edinburgh.

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