SCHOOL OF MATHEMATICAL SCIENCES

COMPUTER BASED TEST FOR B SC (HONS) IN ACTUARIAL STUDIES

ACADEMIC SESSION : APRIL 2021 SEMESTER

SUBJECT : CM1

EXAMINATION : JULY 2021

TIME ALLOWED : 1 HOUR AND 45 MINUTES + 10 MINUTES READING

TIME

INSTRUCTIONS TO CANDIDATES

There are THREE (3) questions printed on FIVE (5) pages excluding the cover page.

ANSWER ALL QUESTIONS.

All answers must be completed in the EXCEL workbook provided.

At the end of the exam, submit the excel workbook with your Student ID, rename the
file as “studentID.xls”.

IMPORTANT NOTES TO CANDIDATES

Materials Allowed
Standard Items : Pen, Pencil, Ruler, Eraser or Correction Fluid
Special Items : Zoom, webcam, Non Programmable Calculators

It is your responsibility to ensure that the internet browser is ONLY to be used to download
the question paper and other relevant materials and to upload your file on eLearn.
School of Mathematical Sciences CM1 / July 2021

Question 1 (Total: 17 marks)

A man borrows a housing loan of RM300,000 (at the beginning of Year 2021) from a bank for
20 years, to be paid back by monthly installments (with the first payment made at the end of
January 2021). In the first year, the bank charges an interest rate of 2.5%, followed by the
second year of 3%. From then onwards the interest rate will be 5%. All rates quoted are nominal
rates of interest compounded monthly. The bank calculates the installments based on the
outstanding balance of the loan and therefore in each month of the first year, the man pays a
level payment of RMX; and he pays a level payment of RMY each month in the second year;
and eventually a level payment of RMZ for the remaining months.

(a) Determine the values of X, Y and Z.

(3 marks)

(b) Find the outstanding balance of the loan at the beginning of Year 2022 and 2023.

(4 marks)
(c) What are the interests paid in the first two years?
(2 marks)

(d) Suppose another bank offers the man a fixed interest of 4% nominal monthly.
Determine whether he should accept this offer. Justify your answer.
(4 marks)

(e) Suppose r is the fixed nominal rate of interest compounded monthly such that the total
payments made under this interest is the same as 12X + 12Y + 216Z. Find r.
(4 marks)

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School of Mathematical Sciences CM1 / July 2021

Question 2 (Total: 8 marks)

Suppose you invest in a project. You paid the initial contribution of RM1,000 at t = 0, and
followed by yearly contributions of RM100, from t = 1 through t = 20. You are expected to
receive RMQ starting from t = 5 through t = 20. Immediately after the last cash flow at t = 20,
you withdraw the investment.

(a) Find the net present value at interest 10% per annum if Q = 666.
(1 mark)

(b) Find the internal rate of return of this investment if Q = 666.

(2 marks)

(c) Find Q if the internal rate of return is 10% per annum.

(2 marks)

(d) Suppose the internal rate of return (IRR) is equal to 0. Find the value of Q and discuss
in brief one implication when this happen (i.e., when IRR = 0).
(3 marks)

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School of Mathematical Sciences CM1 / July 2021

Question 3 (Total: 25 marks)

Consider a 25-year term endowment insurance policy issued to a life aged 40, which covers for
total and permanent disability (TPD), death and survival benefits. The life insurance company
wish to carry out a profit test on this policy. The following information are provided to conduct
profit testing:

Reserve basis
Mortality 150% of mortality rate in “Mortality”
Interest 4% per annum
Surrender None
Expenses 5% of each premium

Mortality basis – see tab “Mortality”

Interest basis – see tab “Interest” in terms of spots interest rates for investment yields

Please refer to “Appendix” for the additional information for profit testing based on your
Student ID number. Based on the information given in the “Appendix”, answer below questions
in the excel workbook provided.

(a) Determine the reserves for all policy years for this policy by using both prospective and
recursive methods. Comments on both answers.
(6 marks)

(b) Calculate the profit margin for this policy.

(10 marks)

(c) Assuming the mortality basis follows Gompertz mortality with B = 0.0002 and
c = 1.07 instead.

(i) Calculate the revised reserves using prospective method only;

(4 marks)
(ii) Calculate the revised profit margin;
(3 marks)
(iii) Explain briefly on your answer in part (c)(ii) and (b).
(2 marks)

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School of Mathematical Sciences CM1 / July 2021

Appendix

Set 1: For Student ID ends with an odd number

Benefits

Event Descriptions
Death Sum assured of RM100,000 payable at the end of the year of death.

Total & permanent Sum assured of RM100,000 payable at the end of the year of TPD.
disability (TPD)

Survival Sum assured of RM100,000 payable upon survival at the end of

the policy.

Surrender Surrender value of 40% of total premiums paid to date is payable

at the end of the year of surrender.

Assumptions

Event Descriptions
Death Follows 100% of mortality rate in “Mortality”.

Total & permanent Follows 15% of mortality rate in “Mortality”.

disability (TPD)

Surrender 15% for year 1, 10% for year 2, 5% for year 3 and 1% thereafter.

Risk Discount Rate 5% per annum

Expenses 20% of premium plus 500 for year 1; 5% of premium plus 100 in
the renewal years.

Settlement expenses RM1,000 payable at the end of the year of death.

for death claim

Premium RM2,862.40 payable at the beginning of each year throughout the

term of the policy.

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School of Mathematical Sciences CM1 / July 2021

Set 2: For Student ID ends with an even number

Benefits

Event Descriptions
Death Sum assured of RM200,000 payable at the end of the year of death.

Total & permanent Sum assured of RM200,000 payable at the end of the year of TPD.
disability (TPD)

Survival Sum assured of RM200,000 payable upon survival at the end of

the policy.

Surrender Surrender value of 50% of total premiums paid to date is payable

at the end of the year of surrender.

Assumptions

Event Descriptions
Death Follows 120% of mortality rate in “Mortality”.

Total & permanent Follows 10% of mortality rate in “Mortality”.

disability (TPD)

Surrender 20% for year 1, 15% for year 2, 5% for year 3 and 2% thereafter.

Risk discount rate 8% per annum

Expenses 15% of premium plus 300 for year 1; 6% of premium plus 50 in

the renewal years.

Settlement expenses RM2,000 payable at the end of the year of death.

for death claim

Premium RM5,724.80 payable at the beginning of each year throughout the

term of the policy.

--END OF PAPER--

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