Four topics, weighted by the share of marks they carry. Pricing and reserving is the largest, at 35%.
Topic 1
Theory of interest rates, 25%
Topic 2
Equation of value and its applications, 20%
Topic 3
Decrement and multiple life models, 20%
Topic 4
Pricing and reserving, 35%
What the topics cover
Questions can draw on any part of the syllabus in any session, so prepare across all of it.
Area
Syllabus objectives
Interest, discount and the force of interest
1.1 to 1.3
Cashflows and annuities
1.4 to 1.6
Term structure, duration and immunisation
1.7 to 1.8
Equations of value and loans
2.1 and 2.2.1
Bonds, equities and property
2.2.2 to 2.2.5
Project appraisal
2.3
Life tables, assurances and annuities
3.1 and 3.2
Two-life functions
3.3
Multiple-state and multiple-decrement models
3.4 and 3.5
Future loss and gross premiums
4.1 and 4.2.1
Reserves and mortality profit
4.2.2 to 4.3
Profit testing and unit-linked reserves
4.4 and 4.5
Try a question
Discount and interest on a promissory note
Paper A style · Interest rates · Straightforward · 6 marks
A finance company buys a promissory note that will pay £25,000 in exactly one year. It pays £23,850 for the note today.
(i)
Calculate the effective annual rate of discount earned by the company, as a percentage to 4 decimal places.
1 mark
(ii)
Calculate the effective annual rate of interest earned, as a percentage to 4 decimal places.
1 mark
(iii)
Explain by general reasoning why d=iv, where v=1/(1+i), and verify that your answers to (i) and (ii) satisfy this relationship.
2 marks
(iv)
The company's alternative is to lend at an effective rate of interest of 4.9% a year. Calculate the maximum price it should pay for the note, to the nearest penny, and comment on whether the purchase at £23,850 is attractive.