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Paper A N
Mock Solution for Sept 2023
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CM1A – MOCK EXAM SOLUTION
Q1)
(12)
12 × 1000 × (𝑎50:55: 20⌉
)
13 13 13 13
= 12000 ([(𝑎̈ 55 − 24) − 𝑣 20 20𝑝55 (𝑎̈ 75 − 24)] − [(𝑎̈ 50:55 − 24) − 𝑣 20 20𝑝50:55 (𝑎̈ 70:75 − 24)])

= 12000((17.668 − 4.201) − (16.367 − 3.099))

= 2388

Q2)
Effective Calculations half Yearly

𝑖1∗ = (1 + 𝑖1 )0.5 − 1 = 2.9563% 𝑖2∗ = (1 + 𝑖2 )0.5 − 1 = 1.9804%

𝑖1∗ − 0.02 𝑖2∗ − 0.02

𝑖1′ = = 0.93755% 𝑖2′ = = −0.01922%
1.02 1.02

250 1.0220
𝑃𝑉 = [𝑎20⌉ @𝑖1′ + 𝑎 @𝑖 ′ ] = 8526.46
1.02 (1 + 𝑖1∗ )20 20⌉ 2

OR

Effective Calculations half Yearly

𝑖1∗ = (1 + 𝑖1 )0.5 − 1 = 2.9563% 𝑖2∗ = (1 + 𝑖2 )0.5 − 1 = 1.9804%

𝑃𝑉 = 250[𝑣1 + 1.02𝑣12 + ⋯ + 1.0219 𝑣120 ] + 250 × 1.0220 𝑣120 [𝑣2 + 1.02𝑣22 + ⋯ + 1.0219 𝑣220 ]

1 − (1.02𝑣1 )20 20 20
1 − (1.02𝑣2 )20
= 250𝑣1 + 250 × 1.02 𝑣1 𝑣2 = 8526.46
1 − 1.02𝑣1 1 − 1.02𝑣2

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CM1A – MOCK EXAM SOLUTION
Q3) i)

0≤𝑡<6

𝑡
0.005 2 𝑡
∫ 0.04 + 0.005𝑠 𝑑𝑠 = [0.04𝑠 + 𝑠 ] = 0.04𝑡 + 0.0025𝑡 2
0 2 0

𝐴(0, 𝑡) = exp{0.04𝑡 + 0.0025𝑡 2 }

𝐴(0,6) = 𝑒 0.33

6≤𝑡<8

𝑡
0.015 2 𝑡
∫ 0.16 − 0.015𝑠 𝑑𝑠 = [0.16𝑠 − 𝑠 ] = −0.69 + 0.16𝑡 − 0.0075𝑡 2
6 2 6

𝐴(0, 𝑡) = 𝑒 0.33 × exp{−0.69 + 0.16𝑡 − 0.0075𝑡 2 } = exp{−0.36 + 0.16𝑡 − 0.0075𝑡 2 }

𝐴(0,8) = 𝑒 0.44

8≤𝑡
𝑡
∫ 0.04 𝑑𝑠 = [0.04𝑠]𝑡8 = 0.04𝑡 − 0.32
8

𝐴(0, 𝑡) = 𝑒 0.44 × exp{0.04𝑡 − 0.32} = exp{0.12 + 0.04𝑡}

exp{0.04 + 0.0025𝑡 2 } 0≤𝑡<6

2
𝐴(0, 𝑡) = {exp{−0.36 + 0.16𝑡 − 0.0075𝑡 } 6 ≤ 𝑡 < 8
exp{0.12 + 0.04𝑡} 8≤𝑡

ii)
15 15
0.01𝑡
𝑃𝑉𝑡=0 = ∫ 45𝑒 exp{−0.12 − 0.04𝑡} 𝑑𝑡 = 45𝑒 −0.12 ∫ 𝑒 −0.03𝑡 𝑑𝑡
10 10

15
−0.12
𝑒 −0.03𝑡
= 45𝑒 [ ] = 137.282
−0.03 10

𝑃𝑉𝑡=4 = 137.282𝐴(0,4) = 167.677

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CM1A – MOCK EXAM SOLUTION
Q4)
i. 96 = 4𝑎3⌉ + 100𝑣 3

Try 6% RHS = 94.654

Try 5% RHS = 97.2768
Interpolation gives
97.2768 − 96
𝑖 ≈ 0.05 + 0.01 × = 0.0546 ≈ 5.5%
97.2768 − 94.6540

ii. Let 𝑖𝑛 = spot rate for term 𝑛

104
Then 96 = 104𝑣 𝑎𝑡 𝑖1 → 1 + 𝑖1 = → 𝑖1 = 8.333%
96

104 104
96 = 4𝑣𝑖1 + 104 𝑣𝑖22 → (1 + 𝑖2 )2 = = → 𝑖2 = 6.145%
96 − 4𝑣𝑖1 96 − 3.69231

iii. Let the forward rate be 𝑓1,1

(1 + 𝑖2 )2 = (1 + 𝑖1 ) (1 + 𝑓1,1 )

→ 1.061452 = 1.08333 × (1 + 𝑓1,1 ) → 𝑓1,1 = 0.04 = 4%

iv. The three-year gross redemption yield is a complex form of weighted average of the three spot
rates.
The one- year spot rate is over 8%, the two-year spot rate is over 6% and the gross redemption
yield is 5.5%. Therefore, the three year rate must be less than 5.5% if the weighted average is
5.5%.

Q5)

Profit
Year 𝑡 𝑞𝑥 𝑝𝑥 (𝑡−1)𝑝𝑥 𝑁𝑈𝐶𝐹𝑡
Signature
1 0.01 0.99 1 -50.2 -50.2
2 0.01 0.99 0.99 -43.1 -42.7
3 0.01 0.99 0.9801 -32.1 -31.5
4 0.01 0.99 0.9703 145.5 141.2

i. PV of profit@ 6%
= −50.2𝑣 − 42.7𝑣 2 − 31.5𝑣 3 + 141.2𝑣 4
= −47.4 − 38.0 − 26.4 + 111.8
=0
→ 𝐼𝑅𝑅 = 6%

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CM1A – MOCK EXAM SOLUTION

ii.
32.1
2𝑉 = = 31.3
1.025
1𝑉 × 1.025 − 𝑝𝑥 × 2𝑉 = 43.1

1𝑉 = 72.3
Revised cashflow in year 1 = −50.2 − 𝑝𝑥 × 1𝑉 = −50.2 − 71.6 = −121.8
And NPV of profit = −121.80⁄1.06 + 111.8 = −3.1

iii. As expected, the NPV after zeroization is smaller because the emergence of the non-unit cash flow
losses have been accelerated and the risk discount rate is greater than the accumulation rate.

Q6)

𝐸𝑃𝑉 = 1000(𝐴̅40 + 𝑣 20 20𝑝40 𝐴̅60 + 𝑣 40 40𝑝40 𝐴̅80 )

𝑣 20 20𝑝40 = 0.430037
𝑣 40 40𝑝40 = 0.111294
𝐸𝑃𝑉 = 519.012
Alternatively
̅1
𝐸𝑃𝑉 = 1000𝐴40:20⌉ 1
+ 2000𝑣 20 20𝑝40 𝐴̅60:20⌉ + 3000𝑣 80 40𝑝40 𝐴̅80

1 1
𝐸𝑃𝑉 2 = 10002 2𝐴̅40:20⌉ + 20002 𝑣 40 20𝑝40 2𝐴̅60:20⌉ + 30002 𝑣 80 40𝑝40 2𝐴̅80

𝑣 40 20𝑝40 = 0.196263
𝑣 80 40𝑝40 = 0.0231813
𝑣 40 20𝑝60 = 0.118114
1
2
𝐴̅40:20⌉ = 1.040.5 ( 2𝐴40 − 𝑣 40 20𝑝40 2𝐴60 )
1
2
𝐴̅60:20⌉ = 1.040.5 ( 2𝐴60 − 𝑣 40 20𝑝60 2𝐴80 )

𝐸𝑃𝑉 2 = 283927.35
𝑉𝑎𝑟 = 𝐸𝑃𝑉 2 − (𝐸𝑃𝑉 )2 = 14553.9

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CM1A – MOCK EXAM SOLUTION
Q7)
i. Investment A: The gross rate of return per annum effective is clearly 10%. The net return is therefore
(1 − 0.4) × 10% = 6% per annum effective.

Investment B: The investment will accumulate to £1𝑚 × 1.110 = £2.5937𝑚 at the end of the ten
years.
1 = 2.59374 (1 + 𝑖 )−10 − 0.4(2.59374 − 1)(1 + 𝑖 )−10
1 = 1.95625 (1 + 𝑖 )−10
(1 + 𝑖 )10 = 1.95625
𝑖 = 6.94%

Investment C: Again, the investment will accumulate to £2.5937m at the end of 10 years. However, the
indexed purchase price is subtracted from the value of the investment in this case.
1 = 2.59374 (1 + 𝑖 )−10 − 0.4(2.59374 − 1 × 1.0410 )(1 + 𝑖 )−10
1 = 2.59374 (1 + 𝑖 )−10 − 0.4 × 2.59374 (1 + 𝑖 )−10 + 0.4 × 1.0410 × (1 + 𝑖 )−10
1 = 2.14834 (1 + 𝑖 )−10
(1 + 𝑖 )10 = 2.14834
𝑖 = 7.95%

ii. All investments give a gross return of 10% per annum effective. Investment B gives a higher return than
A because the tax is deferred until the end of the investment as capital gain tax is paid and not income
tax. Investment C gives higher return than investment Because the tax is only paid on the real return
over the 10 year period which is lower than the nominal return.

Q8)

i. The gross future loss random variable is

50000 [1 + 𝑏 (𝐾40 + 1)] 𝑣 𝑇40 + (𝐼 − 𝑒) + 𝑒𝑎̈ 𝐾40+1⌉ + 𝑓𝑣 𝑇40 − 𝑃𝑎̈ min(𝐾40+1 ,25)⌉

ii. The annual premium P is given by

𝑃𝑎̈ [40]: 25⌉ = 50250 𝐴̅[40] + 1250 (𝐴𝐼
̅̅̅)[40] + 300 + 25 (𝑎̈ [40] − 1)

13.29 𝑃 = 6361.402 + 4961.065 + 300 + 362.35

𝑃 = £901.79

iii. The required reserve is

= 64000 𝐴̅50 + 1500 (̅̅̅
𝐼𝐴)50 + 35 𝑎̈ 50 − 901.79 × 𝑎̈ 50:15⌉

= 21477.56 + 13093.196 + 610.54 − 10147.84

= £25033.32
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CM1A – MOCK EXAM SOLUTION
Q9)

i.
∑𝑡 𝑡𝐶𝑡 𝑣 𝑡
Duration =
∑𝑡 𝐶𝑡 𝑣 𝑡
0.16 (𝐼𝑎)3⌉ + 0.20 (𝐼𝑎)10⌉ + 12𝑣 3 + 50𝑣10
=
0.16 𝑎3⌉ + 0.20 𝑎10⌉ + 4𝑣 3 + 5𝑣10
46.2264
= = 5.742 𝑦𝑒𝑎𝑟𝑠
8.05015

ii. Present Value of new portfolio per unit nominal = 1⁄𝑖

Volatility of new portfolio per unit nominal
𝑑 1
(𝑖 ) 1
= 𝑑𝑖 ⁄1 =
𝑖
𝑖

Duration of new portfolio, applying above equation is

1 + 𝑖 1.06
= 𝑉𝑜𝑙𝑎𝑡𝑖𝑙𝑖𝑡𝑦 × (1 + 𝑖 ) = = = 17.66 𝑦𝑒𝑎𝑟𝑠
𝑖 0.06

iii. Present Value of Existing Bonds £ 8.05013 𝑏𝑛

Let the nominal value of new bonds issued be X
Present Value of New Bonds
0.05𝑋
= 0.05𝑋𝑎∞⌉ =
0.06
0.05𝑋
= 0.8 × 8.05013
0.06
𝑋 = £ 7.728 𝑏𝑛

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