UNIVERSITY OF RUHUNA
DEPARTMENT OF MATHEMATICS
[Link] Degree in Financial Mathematics and Industrial Statistics
MFM 3123 : Life Insurance (LEVEL III)
Problem Sheet :01 Semester I, 2023
Try to do all problems
1. (a) $1,000 is deposited into a savings account that pays 3% interest with monthly com-
pounding. What is the accumulated amount after two and a half years?
(b) Let the interest rate be 6% and the time interval be [2,3]. Find i3 and d3 for a
compound interest method.
(c) How much interest on interest is earned in an account by the end of 5-years if
Rs.1000,000 is deposited and account earning 4% compounded continuously? (un-
der compound interest method)
(d) A person deposits $1,000 into a savings account that earns 3% interest payable monthly
compounding. What is the accumulated amount at the end of the first month?
(e) The discount rate of a 3-month Treasury Bill is 6% per annum. What is the annual
effective rate of interest? What is the accumulated value of 1 in 2 years?
2. (a) If a fund accumulates at force of interest δ(t) = 0.02t, find the annual effective rate of
interest over 2 years and 5 years.
(b) You deposit 1000 in an account earning 6% compounded continuously. How long will
it take to double your money?
(c) Given a rate of interest 10% compounded semi-annually, determine force of interest.
3. (a) Suppose you want to have $500,000 by the time you reach 50 years, and suppose that
you are 20 years old today. If you can earn 5% p.a. on your funds, how much would
you have to invest today to reach your goal?
(b) Suppose I want to withdraw $5000 at the end of five years and withdraw $6000 at
the end of six years, leaving a zero balance in the account after the final withdrawal.
If I can earn 5% p.a. on my balances, how much must I deposit today to satisfy my
withdrawal needs?
4. (a) You want to deposit amounts in the bank at the end of each quarter from 2014 till
2017, so that you have Rs.1259.71 in your account on 1 January 2018. Calculate how
large each of your payments would need to be if the bank compounds quarterly at 8%
p.a.
(b) You will deposit 10,000 in a bank at the beginning of this year and the following two
years. At the end of two years, you will retire and want to withdraw a level payment P
starting at the beginning of year 4 and continuing for 5 years. The bank pays interest
at a rate of i = 8% . What is P?
5. (a) An annuity immediate has a first payment of 100 and increases by 100 each year until
payments reach 500. There are 10 further payments of 500. Find the present value at
6.5%.
(b) An annuity provides for 15 annual payments. The first is 200, each subsequent is 5%
less than the one preceding it. Find the accumulated value of annuity at last payment,
i = 9%.
(c) Given i = 10%, find the present value of the sequence of payments
(1.05, 1.052 , 1.053 , . . . , 1.0510 )
. Payments are made at the beginning of the period.
(d) Suppose the annuities are paid 100 per year continuously at the rate of interest is 6%
over 15 years.(δ = 4%)
(i) Find the present value of this annuity.
(ii) Find the accumulated value of this annuity.
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