IAI Actuarial Core Principles · Actuarial Mathematics for Modelling · Financial instruments and insurance contracts as cashflow models
An insurer promises Rs 1,00,000 at the end of the year of death of a life aged 40, if death occurs within 1 year. The probability of death within the year is 0.002 and the effective annual interest rate is 5%. What is the expected present value, to two decimal places?
The expected present value is Rs 190.48. The benefit of Rs 1,00,000 is paid with probability 0.002 at the end of the year, giving an expected payment of Rs 200, which is discounted by one year at 5 per cent.
- ARs 200.00
- BRs 190.48Correct
- CRs 210.00
- DRs 95.24
- Rs 2,000.00
Explanation
EPV = 100000 x 0.002 / 1.05 = 200/1.05 = 190.48. Rs 200 ignores discounting, Rs 210 multiplies by 1.05 instead of dividing.
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