SCHOOL OF BUSINESS, ECONOMICS AND MANAGEMENT

BAS240-Financial Mathematics I

END OF SEMESTER FINAL EXAMINATION

MONDAY, 9TH DECEMBER, 2024

09:00-00:12 HOURS

Time allowed: 3 HOURS Plus 5 Minutes Reading Time

Instructions to Candidates:
(1) Read the instructions very carefully.
(2) Check that you have the correct examination paper in front of you.
(3) There are FIVE questions in this paper. Answer ANY FOUR questions.
(4) All questions must be answered in the answer booklet provided only.
(5) No books, files or mechanical/ electronic aids are permitted in the examination
room. Students are permitted to use a non-programmable electronic calcula-
tor. Tables for Actuarial Examinations (2002) shall be provided.
(6) Begin answering each question on a new page.
(7) Write down the number of questions that you have answered on the cover of
the examination answer booklet provided.
(8) There shall be NO communication among students during the examination.
Any students caught doing this will be disqualified.

DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SO.

1
QUESTION ONE

(a) Use the actuarial tables to find the values of the following at 8%:
(i) δ
(ii) i/i(2)
(iii) a 10
(iv) s 13
[4 marks]
(b) Calculate the following functions at i = 9%:
(4)
(i) a 3
[4 marks]
(4)
(ii) ä 4
[4 marks]
(iii) s̄ 10
[4 marks]
(c) A payment of K2, 000 is due in 4 years’ time. Calculate the present value using the
following:
i Simple interest of 3% pa.
[2.5 marks]
ii Simple discount of 3% pa.
[2.5 marks]
(d) Zaone Investment LTD is considering an investment with the following characteris-
tics:
* a lump sum of K100, 000 to invest now, or
* K55, 000 to invest in one year’s time and another K55, 000 to invest in two years’
time.
If all investments are assumed to earn interest at a rate of 7% pa effective, as an
actuary, advise Zaone Investment LTD about the option they should choose if they
intend to withdraw the money after:
(i) 4 years
(ii) 2 years.

[4 marks]

[Total: 25 marks]

2
QUESTION TWO

(a) The practical work of the actuary often involves the management of various cash-
flows. Describe two cashflows, one positive and one negative, that will occur in the
next month where one of the parties involved in the cashflow is
(i) the employee
[4 marks]
(ii) the employer
[4 marks]
(b) K500, 000 is invested in a Zanaco account that pays nominal interest of 8% pa con-
vertible half-yearly. Calculate the accumulated amount in the account after 3 years.

[4 marks]

(c) A payment of K800, 000 is due in 5 years’ time. Calculate the present value of this
payment using an interest rate of 9% pa convertible monthly.

[4 marks]

(d) A bank account credits interest using the force of interest

3t2
δ(t) = .
t3 + 2
A deposit of K250, 000 is made in the account at time t = 0. Find the amount of
interest earned by the account
Z from the
 end of 4th year until the end of 8th year.
t
Hint: First, find A(t) = exp δ(s)ds .
0

[4 marks]

(e) Complete the table below by writing either YES or NO

Absolute amount of
Contract payments known in Timing of payments
advance? known in advance?
Zero-coupon bond
Fixed-interest security
Index-linked security
Call deposit
Equity

[5 marks]

[Total: 25 marks]

3
QUESTION THREE

(a) (i) State an important feature of simple interest.

[2 marks]
(ii) At what rate of simple interest will K500 accumulate to K615 in 2.5 years?

[3 marks]

(b) Zaone’s Investment account balance at various times is as follows:

1 January 2023 1 July 2023 1 January 2024

K5, 000 K5, 100 K5, 300

Calculate the effective six-monthly rate between 1 January 2023 and 1 July 2023.

[3 marks]

(c) (i) Find the present value of an annuity for 9 years payable quarterly in arrears if
the effective interest rate is 7% pa.

[3 marks]

(ii) A payment of K1 is made at the beginning of each week for 1 year.

By approximating these weekly payments as a continuously payable annuity,
and assuming that there are 52.18 weeks in a year, calculate the present value
of these payments, using an effective rate of interest of 8% pa.

[4 marks]

(d) Calculate the annual effective rate of discount that is equivalent to a rate of interest
of 4% pa convertible monthly.

[4 marks]

(e) Fund A is invested at an effective annual interest rate of 3%. Fund B is invested at
an effective annual interest rate of 2.5%. At the end of 20 years, the total in the two
funds is K10, 000. At the end of 31 years, the amount in Fund A is twice the amount
in Fund B. Calculate the total in the two funds at the end of 10 years.

[6 marks]

[Total: 25 marks]

4
QUESTION FOUR

(a) Define the following terms:

(i) Annuity
[2 marks]
(ii) Present value
[2 marks]
(b) In each of the following circumstances, state whether the calculations should use a
money or real rate of interest.
(i) A teacher wants to invest an amount of money now to buy a new car in one
year’s time. Today’s list price of the car is available.
(ii) An old man wants to invest a lump sum today in order to provide his children
with a fixed income of K25, 000 pa for the rest of their lives.
(iii) A man buys a zero-coupon bond that will provide him with K100, 000 in 10
years’ time. He is trying to calculate an appropriate purchase price.
[3 marks]
(c) A bank account pays an effective annual interest rate of 10% over 5 years. Calculate
the equivalent:
(i) effective two-yearly interest rate
[3 marks]
(ii) effective annual discount rate
[3 marks]
(d) Suppose an investor invests K720 for two years at a compound interest rate of 10%
p.a. Find the amount returned.

[3 marks]
(4)
(e) Determine the value of s̈ 20 if an effective rate of interest is 7 12 % per annum.

[4 marks]

(f) 100 is deposited into an account at the beginning of every 4-year period for 40 years.
The account credits interest at an annual effective rate of i. The accumulated value
in the account at the end of 40 years is X, which is 5 times the accumulated amount
at the end of 20 years. Calculate X.

[5 marks]

[Total: 25 marks]

5
QUESTION FIVE

(a) Suppose a financial instrument pays a nominal interest rate of 2 21 % p.a. convertible
every 2 years.
(i) What is the effective interest rate over 2 years.
[2 marks]
(ii) What is the equivalent effective annual interest rate?

[2 marks]

(b) Find the amount returned after 91 days given that the interest rate on a 91 day
K10, 000 investment is:
(i) simple 6% per annum;
[3 marks]
(ii) nominal 6% per annum compounded daily;
[3 marks]
(iii) nominal 6% per annum compounded continuously.
[3 marks]
NB: For all three cases, assume the year has 365 days.

[4 marks]

(c) Zaone Investment LTD has 3 outstanding loans: loan 1 is cleared by a repayment of
K300 in 2 years, loan 2 by a repayment of K150 in 4 years and loan 3 by a repayment
of K500 in 5 years. Suppose interest is being charged at a nominal rate of 5% p.a.
payable every 6 months.
(i) What single payment in 6 months’ time will pay off all 3 loans?
[4 marks]
(ii) At what time could a repayment of K950 clear all 3 debts (to the nearest
month)?

[4 marks]

[Total: 25 marks]

END OF EXAMINATION PAPER