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IAI Actuarial Core Principles · Actuarial Mathematics for Modelling · Financial instruments and insurance contracts as cashflow models

A bond pays Rs 500 at the end of each year for 3 years and Rs 10,000 at the end of year 3. In cashflow-model terms, which statement best describes the instrument from the investor's viewpoint?

The investor pays the price at time 0 and then receives certain inflows of Rs 500, Rs 500 and Rs 10,500 at times 1, 2 and 3. The coupons and redemption payment coincide at time 3, and nothing depends on survival or on continuous payment.

  1. AA single outflow at time 0 followed by a series of certain inflows of Rs 500, Rs 500 and Rs 10,500 at times 1, 2 and 3Correct
  2. BA stream of inflows at times 0, 1, 2 and 3 of Rs 500 each plus Rs 10,000 at time 0
  3. COnly one inflow of Rs 11,500 at time 3
  4. DA contingent cashflow that depends on the survival of the investor
  5. A continuous payment stream of Rs 500 per year

Explanation

The investor pays the price at time 0 and receives Rs 500 at times 1 and 2 and Rs 500 plus Rs 10,000 = Rs 10,500 at time 3. The payments are certain and discrete, not contingent, continuous or a single lump sum.

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