The University of Melbourne

Centre for Actuarial Studies

Department of Economics
Financial Mathematics II
Mid-term Semester 2
2014

Preamble
Time allowed: 50 − x minutes
Reading time: x minutes, you choose x ≥ 0
Total number of pages: 2
This exam contributes 10 % to the total assessment in this subject

Student Number
Calculator Make (e.g. Casio, Sharp)
Calculator Model (e.g. EL-533)

Instructions to invigilators
No books, lecture notes, dictionaries or other personal materials such as handbooks are
allowed in the examination room. This paper is to remain in the examination room.
Candidates must write the make and model number of their calculator above. A calculator
used must be one of the following Casio FX82 (with or without any suffix), Casio FX83
(with or without any suffix), Casio FX85 (with or without any suffix), Sharp EL531 (with
or without any suffix), Texas Instruments BA II Plus (with or without any suffix), Texas
Instruments TI-30 (with or without any suffix). Only one model of calculator may be
used.

Instructions to candidates
The paper should be inserted in the back of the examination script book at the end of the
examination. The number of marks allocated is shown at the end of each question. The
total number of marks is 10. Attempt all questions. Electronic calculators may be used.
However, calculators that can be programmed to store or retrieve text or formulae, or
that have been tampered with since manufacture are prohibited. Fill in the form above.
It is the responsibility of the student to ensure that any calculator they use complies with
University and Centre requirements. Copies of this paper will not be held by the Baillieu
Library.

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Questions
Question 1. We have to pay an annuity of $ 50,000 a year for 20 years
with the first payment in one year. Interest rates are a flat annual rate of
2%. What amounts of zero-coupon bonds with maturities of 5 and 20 years
would you hold to immunize your portfolio?
3 marks
Question 2. An investment fund has the 2013/2014 financial year account
details in the below table. Estimate the internal rate of return using Hardy’s
approximation. Express your answer as a percentage with 3 decimal places.

Cash flow Amount

Funds 01/07/2013 1, 250, 000
Funds 30/06/2014 1, 425, 700
Investment Income 17, 500
New Contributions 125, 000
Administration Expenses −27, 500

2 marks

Question 3. It is 1st January 2013. Let X be a freshly issued two-year fixed

coupon bond paying 8% per annum half-yearly. Its first coupon is in 182
days and the following one is in 365 days. Its gross redemption yield is 9%
convertible half-yearly. Let Y be a freshly issued two-year fixed coupon bond
paying 9% per annum yearly. Its gross redemption yield is 9% convertible
yearly. Both bonds have principal one million dollars.
Assuming a force of interest of 9% for the next 18 months, price a con-
tract such that on the 1st February 2014, the holder must give up one unit
of X and receive one unit of Y. Give brief justification.

5 marks

End of Examination

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