Financial Mathematics Imi Gjlinmlaya Gfublishing Gjlouse Mumbai Delhi Bangalore Hyderabad Chennai Ernakulam Nagpur Pune Ahmedabad Lucknow

FINANCIAL
MATHEMATICS
A.. LENIN JOTHI

Department of Management
Kasturi Ram College of Higher Education
GGSIP University, Delhi
ImI
GJlinmlaya GFublishing GJlouse
• MUMBAI • DELHI. BANGALORE • HYDERABAD • CHENNAI
• ERNAKULAM • NAGPUR • PUNE • AHMEDABAD • LUCKNOW
(ii)
ISBN : 978-81-84885-85-9
©Author
No part of this book shall be reproduced, repin~ or translated for any purpose whatsoever without
prior permission of the publisher in writing.
IFIRST EDITION :2009

Published By Mrs. Meena Pandey
for mMALAYA PUBLISIUNG HOUSE, PVT. LTD.
"Ramdoot", Dr. Bhalerao Marg, Girgaon, MUMBAI-400004
Phones: 23860170 / 23863863, Fax No. : 022-23877178
Email: [email protected]
Website: www.himpub.com
IBranch Offices I
Delhi "Pooja Apartments", 4-B, Murari Lal Street, Ansari Road, Darya Ganj,
NEW DELm-110002
Phones: 011-23270392, 011-23278631, Fax: 011-23256286
E-mail: [email protected]
Bangalore No. 16/1 (Old 12/1), 1st Floor, Next to Hotel Highlands, Madhava Nagar,
Race Course Road, Bangalore-560 000, KARNATAKA.
Ph. : 22281541, 22385461, Telefax: 080-22286611
Hyderabad No. 3-4-184, Linampally, Besides Raghavendra Swamy Matham,
Kachiguda, Hyderabad-500027, ANDHRA PRADESH.
Ph. : 040-655501745; Fax: 040-27560041
Chennai No. 85/50, Bazullah Road, T. Nagar, Chennai-600017, TAMIL NADU.
Phone: 044-281440/28144005, E-mail: [email protected]
Ernakulam No. 39/104A, Lakshmi Apartment, Karikkamuri Cross Road,
Ernakulam, Cochin-682011, KERALA.
PHONE: 0484-2378012, 2378016, E-mail: [email protected]
Nagpur Kundanla1 Chandak, Industrial Estate, Ghat Road,
Nagpur-440018, MAHARASHTRA. .
Phones: 2738731, 3296733, Telefax: 0712-2721215
Pune No. 527, "Laksha" Apartment, First Floor, Mehunpura, Shaniwarpeth,
(Near Prabhat Theatre), Pune-411030, MAHARASHTRA.
Phones: 020-24496333/24496333/24496323
Ahmedabad No. 114, Shail, 1st Floor, Opp. Madhu' Sudan House,
C.G. Road, Navrang P'.Ira, Ahmedabad-380009, GUJARAT.
Mobile: 9327324149, E-mail: [email protected] .
Lucknow C-43, Sector-C, Aliganj, Lucknow-226024, UITAR PRADESH
Telefax: 0522-2339329, E-mail: [email protected].
I Typeset at Time~ Printogaph~s I

.-
Printed at ~I Shri Krishna offsetPress Delhi-93
Page
1. Permutation and Combination 1
2. Logarithm 32
3. Simple Interest 49
4. Compound Interest 56
5. Nominal and Effective Rates of Interest 76
6. Equation of Value 88
7. Discount 99
8. Depreciation 114
9. Bills of Exchange 126
10. Immediate Annuity 142
11. Annuity Due 177
12. Deferred Annuity 198
. 13. Perpetuity and General Annuity 215
14. Amortisation of Loan 235
15. Sinking Fund 250
16. Leasing, Capital Expenditure and Bond 263
17. Theory of Probability 278
~8. C~nstrucio of Mortality Table 303
, 19. A 'Complete Mortality Table 315
20. Probabilities on Survival and Death 332
21. Well-known Mortality Tables 349
22. Rate-making in Insurance 370
23. Determination of Net Single Premium. 382
24. Determination of Net Level Premium 403
25. Determination of Premium. for Annuity Plans 424
26. Determination of Gross Premium. 447
27. Credibility Theory 458
APPENDICES
Table I Logarithm Tables 464
Table II Amount of Re. 1 at Compound Interest 468
Table III Present Value of Re. 1 at Compound Interest 477
Table IV Amount of an Annuity of Re. 1 486
Table V Present Value of an Arinuity of Re. 1 495
Table VI Value of eX and e-« 504
Table VII LIC (1970 - 73) Ultimate Table 508
Table VIII: Hm Table (Makeham Graduation) 510
Table IX Area under the Standard Normal Curve 512
Permutation 'and Combination
INTRODUCTION
It is often necessary to calculate the number of different ways in which something can be
done or can happen. In this chapter, we shall study some techniques of answering some
counting problems without actually counting or listing all of them. These techniques are
useful in determining the number of different ways of arranging or selecting different items.
FUNDAMENTAL PRINCIPLE OF COUNTING

PRINCIPLE I : ADDITIVE PRINCIPLE
This principle states that: Let A and B be two events that cannot occur simultaneously.
Then if A can occur in rn ways and B can occur in n ways, it follows that the number of ways
in which either A or B can occur in m + n.
This plinciple can be generated, for more than two events, as follows:
"If one event can happen in ml ways, following which another event can happen in m2
ways, following which another event can happen in rna ways and so on that all events, in
succession can happen in ml + m2 + rn3 + ...... different ways.
For example, in a class room there are 20 boys and 15 girls. If the teacher wants to select
either a boy or a girl to represent the class, the number of ways in which the teacher can
perform the selection is 20 + 15, i.e., 35 ways.
PRINCIPLE II : MULTIPLICATION PRINCIPLE

This principle states that: If an event can happen in 'm' different ways following which
another event can happen in 'n' different ways, then both event in succession can happen in
exactly 'rnn' different ways.
2 FINANCIAL MATHEMAnCS
This principle can also be generalised, for even more than two operations, as follows:
If an event can happen in 'ml' different ways, following whh:h another event can happen
in 'm2' different ways, following which another event can happen in 'm3' different ways and
so on, then all event in succession can happen in exactly ml x m2 x m3 x ...... different ways.
For example, in a class room there are 20 boys and 15 girls. If the teacher wants to select
one boy and one girl to represent the class, the number of ~ays in which the teacher can
perform the selection is 20 x 15, i.e., 300 ways.
Consider the following illustration: \
There are 3 stations X, Y and Z and 3 routes to go from X to Yand 2 routes from X to Z.
This is shown in the following figure:
Route 1 R ()
I X e:'·9 yCo~ jr-----'z

Route 3 Route (b)
A person can go from station X to Y in three different ways and from Y to Z in 2 different
ways.
By the fundamental principle of counting, the number of ways for a person to go from X
to Z is 3 x 2 =6, i.e., (1, a), (1, b), (2, a), (2, b), (3, a) and (3, b).
E:x;ample 1 : There are eight doors in the college hall. In how many ways can a student
enter the college hall through one door and come out through a different door?
Solution : The student can enter the hall in 8 ways and corresponding to each way of
entering, there are only 7 ways of coming out, since he has to come out through a different
door.
Hence the required number of ways = 8 x 7 = 56.
Example 2 : Given 7 flags of different colours, how many different signals can be
generated if a..signal requires the use of two flags, one below the other ?
Solution : The upper flag can be anyone of the 7 flags and the lower flag can be anyone
of the remaining 6 flags.
:. Required no. of signals which can be generated = 7 x 6 = 42.
Example 3 : A customer forgets a four-digit code for an Automatic Teller Machine (ATM)
i1t a bank. However, he remembers that this code consists of digits 3, 5, 6 and 9. Find the
largest possible number of trials necessary to obtain the correct code.
SQlution : The digits are 3, 5, 6 and 9.

rio. of ways of choosing first digit == 4
PERMUTATION AND COMBINA TlON 3
No. of ways of choosing second digit = 3

No. of ways of choosing third digit = 2
No. of ways of choosing fourth digit = 1
. . Total number of ways of choosing four digits = 4 x 3 x 2 x 1 = 24
. . In all there could be 24 codes and customer would have to try 24 trials to obtain the
correct code.
Example 4 : A coin is tossed three times and the outcomes are recorded. How many
possible outcomes are there ?
Solution : In a single toss of a coin, there are 2 possible outcomes. Either 'Head' of 'tail'
can appear on the upper-most face. Therefore, when a coin is tossed three time, number of
possible outcomes are 2 x 2 x 2 = 23 = 8.
The possible outcome are
HHH, HHT, HTH, HTT, THH, THT, TI'H, TTT
Example 5 : How many 3-digit numbers can be formed from the digits I, 2, 3, 4 and 5,if
(a) repetition of digits is allowed? (b) repetition of digits is not allowed ?
Solution: Total number of digits = 5

(a) When repetition of digits is allowed:
Unit's place can be filled by anyone of the five digits
. . No.. of ways to fill units place = 5
Since the repetition is allowed, the ten's place can also be filled by anyone of the
five digits.
" No. of ways to fill the 10's place = 5
'I'he 100's place can also be filled by anyone of the five digits.
No. of ways to fill the 100's place = 5
This is shown as follows :
100's 10's 1's
5 5 5
. . The required number of 3-digit numbers = 5 x 5 x 5 = 125
(b) When repetition is not allowed:
Unit's place can be filled by anyone of 5 digits
:. No. of ways to fiU units place"= 5
Since repetition is not ellowed, there are only 4 choices
:. No. of ways to fiU10's place = 4
Now only 3 digits are left
:. No. of ways to fiU100's place = 3
4 FINANCIAL MATHEMA TICS
This is shown as follows:

100's 1O's l's
3 4 5
. . The required number of 3-digit numbers =5 x 4 x 3 =60
Example 6 : How many 3-digit even numbers can be formed using the digits 1, 2, 3, 4,
and 5, if
(a) repetition of digits is allowed? (b) repetition of digits is not allowed?
Solution:
Tota.l number of digits =5 (i.e. 1, 2, 3, 4, 5)
Total number of ev.en digits =2 (i.e., 2, and 4)
(a) When the repetition is allowed:
100's 10's l's
5 5 2
No. of ways to fill unit's place =2
No. of ways to fill10's place =5
,'. Required number of 3-digit even number =2 x 5 x 5 = 50
(b) When the repetition is not allowed :
100's 10's l's
3 4 2
No. of ways to fill unit's place =2
No. of ways to fi1l10's place =4
No. of ways to filllOO's place =3
:. required number of 3-digit even numbers =2 x 4 x 3 =24
Example 7 : How many 3-digit numbers can be formed from the digits 0, 1, 2, 3, and 4, if
.a I repetition is allowed? (b) repetition is not allowed?
Solution:
Total number of digits = 5
~a) When repetition is allowed:
100's 10's l's
4 5 5
'0' cannot be placed in 100's place while forming 3-digit number
.. No. of ways to fill100's place =4
PERMUTA TlON AND COMBINA TlON 5
No. of was to filll's place =5

· . required number of 3-digit numbers =4 x 5 x 5 =100
(b) When repetition is not allowed:
100's 10's 1's
4 4 3
No. of ways to fi1l100's place =4
Now 4 digits are left
: .. No. of ways to filll0's place = 4
Now 3 digits are left
· . No. of ways to fill l's place = 3
· . required number of 3-digit. number =4 x 4 x 3 =48
Example 8 : How many different numbers below 1000 can be formed form the digit.'!! 3, 4,
6, 7 and 8, if:
(a) no digit is repeated? (b) digits can be repeated ?
Solution : The numbers less than 1000 can be :

(i) One-digit numbers (ii) Two-digit numbers (iii) Three-digit numbers.
(a) No digit is repeated:
(i) One digited numbers are 3, 4, 6, 7 and 8. These are 5 numbers.
(ii) No. of ways of filling unit's place =5

No. of ways of filling ten's place =4
:. No. of 2 digited numbers =5 x 4 =20.
(iii) No. of ways of filling unit's place =5
No. of ways of filling ten's place =4
No. of ways of filling hundred's place = 3
.. No. of 3 digited numbers = 5 x 4 x 3 = 60
Total numbers =5 + 20 + 60 =85.
(b) Digits can be repeated:
(i) One digited numbers = 5
(ii) No. of ways of filling unit's place = 5

No. of ways of filling ten's place = 5 (.: Repetition is allowed)
. . No. of 2 digited numbers =5 x 5 =25
(iii) No. of ways of filling unit's place =5
No. of ways of filling ten's Jllace =5
No. of ways of filling hundred's place =5
.. No. of 3 digited numbers =5 x 5 x 5 =125
Total numbers =5 + 25 + 125 =155.
6 FINANCIAL IfATHEliA ncs
Example ~ : Ten people compete in a race. In now many ways the first three prices can be
distributed ? - -
Solution: First price goes to anyone of the 10 people

Second price goes to anyone of the remaining 9 people
Third price goes to any of the remaining 8 people
:. No. of ways to distribute the prices =10 x 9 x 8 =720.
Example 10 : How many automobile license plates can be made. if the inscription on each
contains two different letters followed by three different digits ?
Solution: Out of 5 inscriptions, first 2-are of different letters (out of 26) and the other 3
are of different digits (out of 10).
No. of ways of 1st inscription = 26
No. of ways of 2nd inscription =25
No. of ways of 3rd inscription =10
No. of ways of 4th inscription =9
No. of ways of 5 th inscrip.tion. =8
.. Total number of license plates =26 x 25 x 10 x 9 x 8 =4,68,000.
L A hall has 3 entrances and 4 exits. In how many ways can a man enter and-exit from
the hall? [Alls. 12]
2. In a railway compartment, 6 seats are vacant on a bench. In how many ways can 3
passengers sit on them? [ADs. 120]
3. If there are 20 steamers playing between places A and B. in how many ways could
the round trip from A be made if the return was made on (a) the same steamer, (b) a
different steamer. [ADs. (a) 20, (b) 380]
4. There are 5 routes between city X and city Y. In how many different ways can a man
go from city X to city Y and return, if for return journey:
(a) any of the routes is taken (b) the same routes is taken
(c) the same route is not taken. [ADs. (a) 25, (b) 5, (c) 20]
5. Four coins are tossed simultaneously. In how many ways can they fall? [Ans. 32]
6. In how many ways can 4 students draw water from 4 taps, if no tap remain unused?
[ADs. 24]
7. It has been decided that the flag of a newly formed forum will be in the form of three
blocks one below the other, each coloured different. If there are five different colours
on the whole to choose from, how many such designs are possible? [ADs. 60]
8. Given 6 flags of different colours, how many different signals can be generated, if a
signal requires the use of two flags, one below the other? [ADs. 30]
9. For a set of 6 true. or false questions no student has written all correct answers and
no two students have given the same sequence of aJ).swer. What is the maximum
number of students in the class for this to be possible? [ADs. 63]
10. A team consists of 6 boys and 4 girls and the other has 5 boys and 3 girls. How many
single matches can be arranged between the two terms, when a boy plays against a
boys and a girls plays against a girl ? [ADs. 42]
U A class consists of 20 girls and 15 boys. In how many ways can a president, vice
president, treasurer and secretary be chosen if the treasurer must be a girls, the
secretary must be a boy and a student may not hold more than one office?
[Ans. 31680]
12. How many four digit numbers can be formed out of the digits 1, 2, 3, 4, 5, and 6,
when no digit is repeated in the same number? [Ans. 360]
13. How many three digit numbers can be formed without using the digits, 1, 2, 3, 4 ?
[Ans.180]
14. From the numbers 1, 2, 3, 4, 5, and 6, how many 3-digit odd numbers can be formed
when (a) the repetition' of the digits is allowed, (b) the rep~tion of the digits is not
allowed. [Ans. (a) 180, (b) 60]
15. How many words (with or without meaning) of four distinct letters of the English
alphabet are there? . [Ans. 358800]
16.. Find the number of possible even numbers which have three digits? [Ans. 450]
17. How many numbers can be formed using the digits 1, 2, 3, and 9, if repetition of
digits is not allowed? [Ans. 64]
18. How many 6-digit telephone number can be constructed if each number starts with
32 and no digit appears more than once? [Ans. 1680]
19. How many 2-digit even numbers can be formed from the digits 1,2,3,4 and 5, if
(a) the repetition of digits is allowed (b) the repetition of digits is not allowed. .
, [Ans. (a) 10, (b) 8]
20. How many 3-letter code words are possible using the first 10 letters of English
alphabet, if (a) no letter can be repeated? (b) letters are repeated?
[Ans. (a) 720, (b) 1000]
2L How many numbers are there between 100 and 1000 in which all the digits are
distinct? [Ans. 648]
22. How many number are there between 100 and 1000 such that every digit is either 2
or 9 ? [Ans. 8]
23. How many numbers are there between 100 and 1000 which have exactly one of their
digits as 7 ? [ADs. 225]
24. Twelve students compete'in a race. In how many was can the first three prices be
distributed? [Ans.1320]
25. In how many ways can 4 different prizes be awarded among 6 contestants, so that a
contestant may receive: (a) at most one prize, (b) any number of prizes.
LAns. (a) 360, (b) 1296]
FINANCIAL MATHEMATICS
26. A number oflock on a suitcase has 3 wheels each labelled with ten digits from 0 to 9.
If opening of the lock is a particular sequence of three digits with no repeats, how
many such sequences will be possible. ? [ADs. 720]
27. The licence plates for vehicles registered in Delhi consists 'of 3 letters from English
alphabet followed by 1, 2, 3 or 4 digits. The letter on the extreme left has be 'D'. For
the I-digit number plates the number '0' is not allowed. For others, the digits and the
letters of course can repeat ~ut the number should be significant. Determine the
possible number of licence plates. [ADs. 6759324]
28. A code word is to consist of two distinct English alphabet followed by two distinct
numbers from 1 to 9. For example GH 79 is.a code world. How many such code words
are possible? [ADs. 46800]
FACTORIAL NOTATION
There are some occasions when we wish to consider the product of fIrst n natural
numbers. The continued product of first n natural numbers (beginning with 1 and ending
with n) is called n-factorial or factorial n and is denoted by n ! or Ill..
Thus,
n! = 1. 2. 3 ... , (n - 1) . n
For example,
5 I = 1 x 2 x 3 x 4 x 5 =120·
. ,3 ! = 1 x 2 x 3 =6
Remarks :
(a) O! = 1 (b) 1!;= 1 (c) n! = (n - 1) ! x n
for example 7 ! =7 x 6 !
Example 11 ; Evaluate the following :

91 12! 61
(a) 77' (b) 7! 51 ' (c) 2)(41
Solution:
9!
(a) 7f = 9 x 87!x 7 ! -_ 9 x 8 -- 72
12 ! 12-x 11 x 10 x 8 x 9 x 7 ! _ 792
(1)) 7! 5! :;: 7!x1x2x3x4x5 -
(c.) 2 6x !4! 6 x 5 x ~! =15

= 2)( 4 !
Example 12 : Which of the following statements are correct

(a) 2! + 3 ! =5 ! (b) (4!) (2 !) =81
(c) 5(41)=(5)(4)1 6!
(d ') 21= 3 I
.
PERMUTA TlON AND COMBINATION 9
Solution:
(a) 2 ! + 3 ! = (2 x 1) + (3 x 2 x 1) = 2 + 6 = 8
5 ! = 5 x 4 x 3 x 2 x 1 = 120
:. 2! + 3! 06 5!
(b) (4 !) (2!) = (4 x 3 x 2 x 1) x (2 x 1) = 24 x 2 = 48
8 ! = 8 x 7 x 6 x 5 x 4 x 3 x 1 = 40320
:. (4!) (2 !) 06 8 !
(c) 5 x (4!) = 5! 06 20 !
.. 5 (4!) ¢ 20!
~ _ 6 x 5 x 4 x 3 x 2 ! _ 360
(d)
2! - 2! -
3! = 3x2x1=2
6! 063 I
.. 2T .
PERMUTATION
An arrangement in a definite order of a number of things taking some or all of them at !:l
time is called a permutation. The total number of permutations of n distinct things taking r
(1 s r s n) at a time is denoted by npro or by P(n, r).
The number of permutations ofn thlDgs taking r at a time is given by

nPr = n (n - 1) (n - 2) ...... r factors, 1 s r s n.
Alternatively I nPr =(n iIiil ,Is r s n.
Remark 1. The number of permutations of "n' different thinks taking at R time is equal
to n!
npn=( :!)I=no;=n!
n n. .
Remark 2. It should be noted carefully that in nPn one count only those permutation in
which repetition of things is not allowed.
Remark 3. The number of all permutation of "n' different objects taking r at a time,
when a particular object is always included in each arrangement is
r.n-1Pr _ 1
Remark 4. The number of all permutations of "n' different objects taking r at a time,
when a particular object is always excluded in each arrangement is
n-lPr
Example 13 : Evaluate the following:

(a)1P 3, (b) 6P4
10 FINANCIAL MATHEMATICS
Solution:
7 71 71 7x6x5x4! 0
(a) , Pa = (7 _' 3) ! =4t = 41 =21
Alternatively, 7Pa = 7 x 6 x 5 = 210
6n _ 6 I _ ~ _ 6 )( 5 x 4 x 3 x 2 1 _ 360
(b) r 4 - (6 _ 4) I - 2 ! - 2! -
Alternatively 6'1'4 = 6 )( 5 x 4 x 3 = 360
Example 14 : If 5P (5, r) =2P (6, r -I), find r.
Solution: Given that

6Pr = 2. 6Pr _ 1
5! -2 6i
(5 - r)! - . 6 - (r -1) !
5! _ 2 61
(5-r)l- . (7-r)!
51 -2 6x51
(5 -r) I - . (7 -r)(6-r)(5 -r) I
1 _ 2x6
- (7-r)(6-r)
=> (7 - r)(6 - 1') = 12
=> . (7 - r)(6 - r) = 4)( 3
=> (7 - r)(6 - r) = (7 - 3)(6 - 3)
... r= 3
Example 16 :If 16"'P3 =13. ",+lPa. find n.
Solution :
16 . nPa = 13. 11, + IPa
n! (n + 1) I
=> 16 . (n _ 3) I = 13· (n + 1- 3) I
n! (n + I)!
=> 16 . (n _ 3) I = 13· (n - 2) !
16' n! _ 13. (n'+ 1) n I
=>
(n - 3)! - (n - 2)(n - 3) 1
16 _ 13 (n + 1)
=>
- (n-2)
=> 16 (n - 2) = 13 (n + 1)
=> . 3 n = 45 => n = 15
... n = 15
PERMUTATION AND COIIBINA TlON 11
Example 18 : Prove thatnPr = n-IPr + r. n-1Pr _ l
Solution:
RHS = n-1Pr+r.n-1Pr_l
(n - 1) ! (n - 1) !
- +r
- (n - 1 - r) ! (n - 1- (r - 1» !
(n - 1) ! (n - 1) !
-
- (n - r -1) !
+r (n - r)!
= (n - 1) ! [(n _ rl_ 1) + (n ! ~ r) !]
_ ( 1) , [ (n - r) r]
- n- . (n-r)(n-r-1)! +'(n-r)!
= (n - 1) ![(~ ~ ~\ + (n ~ r) !] = (n - 1) ! 1~n- ~ ~ ~ ]
n n (n-1)!
=(n - 1) ! (n _ r) ! = (n - r) !
n!
=(n _ r) ! =nPr =LHS.
Hence proved.
Example 17 : In how many ways can five children stand in a queue?
Solution: Number of ways in which 5 children stan~ in queue

=Number of ways in which 5 children can be arranged among themselves
=5P5 =5! [.,' nPn=n!]
=5 x 4 x 3 x 2 x 1 =120.
The required number of ways is 120.
Example 18 : S-even persons are participating in a race. In how many can the first three
prizes be own ?
Solution: Total number of participant n =7

No. of prizes r =3
.. The required number of ways = 7P3 =7 x 6 x 5 = 210
The required no. of ways =210.
Example 19 : (a) It is required to seat 5 men and 4 women in a row so that the women
occupy the even places. How many such arrangements are possible ?
(b) If it is required to seat 5 men and 2 women in a row so that the women occupy the even
places, how many such arrangements are possible ?
Solution:
(a) Total number of position =9
No. of even positions =4

and No. of women =4
Given that the women occupy even places.
:. No. of ways to arrange the women =4P4 =4! =4 x 3 x 2 x 1 = 24
No. of remaining position =5
No. of persons to be occupied =5 (men)
:. No. of ways to occupy the remaining positions =5P 5 = 5 ! =5 x 4 x 3 x 2 x 1 = 120
:. No. of ways to occupy all 9 position =24 x 120 =2880
: .. Required number of arrangements = 2880
(b) Total number of positions = 7
No. of even positions =3 (2nd , 4th , and 6th)
No. of women =2
Given that women occupy the even places.
:. No. of ways to arrange the women =3P2 = 3 x 2 = 6
No. of remaining position = 5
No. of remaining persons = 5 (men)
.. No. of ways to occupy the remaining positions
= 5P5 = 5 ! = 5 ! = 5 x 4 )( 3 x 2 x 1 = 120
. . The number of ways to occupy all 7 positions =4 x 120 =720
. . Required number of arrangement of 720
Example 20 : In how many ways can 6 exam papers can be arranged so that the best and
the worst papers are never placed iogether ?
Solution:
Total number of papers = 6
No. of best papers =4
No. ofwors:, papers =2
First we arrange the best papers.
No. of ways to arrange the best papers =4p 4 = 4 ! = 24
There are 5 places for the worst papers as shown in the following figure.
xBxBxBxBx
No. of ways in which the worst papers can be arranged = 5P 2 = 5 x 4 =20
No. of arrangements of all 6 papers =24 x 20 =480
The required number of arrangements = 480.
Alternative Method:
No. of ways in which ail 6 papers can be arranged with out any restriction = 6!
Now, coniider the t.wo worst papers as one units.
:. No. of units to be arranged =5 (i.e. 4 + 1)
No. of ways to arrange this 5 units = 5 !
PERMUTATION AND COMBINA TlON . 13
In each such arrangements, the worst papers can be arranged among themselves in 2 !
ways.
The number of ways in which the worst papers are placed together is 5 ! x 2!
The number of arrangement in which the worst papers never place together
= Total no.
of possible arrangement - The no. of arrangement in which they are
placed together.
=6!-5!x2!
=6x5!-5!x2 [.: 2! =2]
= 5! [6 - 2] = 5 ! x 4 = 120 x 4 = 480
The required number of arrangement =480
Example 21: A family of 4 brothers and:J sisters is to be arranged for a photograph in

one row. In how many way~ can the.y be seated if
(aJ all sisters sit together? (bJ no two sisters sit together?
Solution:
Given, No. of brothers =4
No. of sisters =3
(a) We take 3 sisters as one unit
No. of units to be arranged = 4 + 1 =5
No. of ways to arrange all units =5 !
No. of ways to arrange all sisters among themselves =3 !
The number of ways in which all sisters sit together
= 5 ! x 3 ! = 120 x 6 = 720
The required no. of arrangements = 720.
(b) First we arrange 4 brothers
No. of ways to arrange the brothers =4!
xBxBxBxBx
There are 5 places in which 3 sisters can be seated.
.. No. of ways to arrange the sisters = 5P3
.. No. of ways in which all can be seated
= 5 ! x 5P 3 = 60 x 24 = 1440
The required no. of arrangements = 1440.
Example 22 : A team has 7 players. In how many ways they can be seated in a row, if the
captain sits in the middle seat ?
Solution : Since the captain is fixed in the middle seat, the remaining six players can be
seated in the remaining six seats in 6 ! was, i.e., 720 ways.
Example 23 : In how many ways can 5 English 4 Tamil and 2 Hindi books can be
arranged if the books of each different language are kept together?
Solution: We take 5 English books as one unit; 4 Tamil books as one unit; and 2 Hindi
books as one unit.
No.' of ways to arrange 3 units =sPs =3 !
Now we arrange each language books among themselves.
No. of ways to arrange English books =5P5 =5 !
No. of ways to arrange Tamil books =4P4 =4!
No. of ways to arrange Hindi books = 2P 2 ="2!
.. No. of ways to arrange all books = 3 ! x 5! x 4! x 2 ! = 6 x 120 x 24 x 2 = 34560
:. The required no. of arrangements =34560.
Example 24 : How many four digit numbers are there with distinct digits 1.
Solution: There are 10 digits (0, 1, 2, ... , 9).

The 1000's place cannot be filled with o.
No. of ways to fill the 1000's place =9
The remaining 3 places can be filled with any three of the remaining 9 digits.
No. of ways to fill the remaining places =9Pa
No. offour digits numbers with distinct digits = 9 x 9Pa = 9 x 9 x 8 x 7 = 4536
Required no of four digit numbers :i,4536.
Example 25 : How many 3-letter words can be made using the letters of the word
"DELH1".
Solution: No. ofletters in the word 'DELHI' =5

No. of 3-letter words =5Pa = 5 x 4 x 3 = 60
Required no. of words is 60.
Example 26: How many 3-letter words can be made using the letters of the word
"ORIGINAL", if
(a) 'N is always included in all words ?
(b) 'N is always excluded in all words ?
(c) the word starts with 'N ?
Solution: No. ofletters in the word 'ORIGINAL' is 8 and all letters are distinct.
(a) No. of ways to arrange 'N = 3
After arra,nging 'N two places and 7 letters are left.
No. of ways to arrange the remaining 2 places =7P2
PERMUTATION AND COMSINA nON 15
No. of words in which N is always included =3)( 7P2 =3)( 7 )( 6 =126

Required number of words is 12'6.
(b) If 'N' is excluded, No. of ways in which the retnaining 7 letters' can be arranged
taking three at a time =7Pa =7 x 6 )( 5 =210
Required number of words = 210
(c) If the 3-letter word starts with 'N,
No. of ways to arrange 'N =1
No. of ways to fill the,remaining 2 places =7P2
.. No. of 3-letter words starting with 'N =1 x 7P2 =1 )( 7 )( 6 =42
:. Required number of words is 42.
Example 27 : In how many ways can the letters of the word 'STRANGE be a"anged so
that
(a) the vowels are never separated
(b) the vowels never come together, and
(c) the vowels occupy only the odd places.
Solution:
No. ofletters of the word 'STRANGE' =7
No. of vowels in the word =2 (A and E)
:. No. of consonants in the word = 5
(a) We take the two vowels as one unit
No. of units to be arranged =6 (5 + 1)
No. of ways to arrange the 6 units =6P6 =6!
No. of ways to arrange the vowels among themselves =2P2 =2 !
N o. of arrangements in which vowels are never separated = 6.! 2! =720 )( 2 =1440
. . The required number of arrangements = 1440
(b) First we arrange the consonants
No. of ways to arrange the consonants = 5P5 = 5 !
xC)(CxC)(CxCX
There are 6 places in which vowels can be arranged
No. of ways to arrange the vowels =6P2
No. of arrangements in which the vo~els never come together
=5 ! x 6P 2 =120 x 6 x 5 =3600
The required number of arrangements is 3600.
(c) lolElolElolElo\
No. of odd places =4
The two vowels are to occupy any two of these 4 odd places.
No. of ways to arrange the vowels =4P2
Now the remaining 5 places can be filled with the 5 consonants
No. of ways to arrange the consonants = 5 !
The no. of arrangements in which the vowels occupy odd places
4P 2 x 5 ! = 4 x 3 x 120 = 1440
The required number of arrangements is 1440.
L Evaluate
(a) 4P 3 (c) 20P 4 (d) 9P9
[Ans. (a) 24, (b) 30, (c) 116280, (d) 362880]
2. Show that lOP 3 = 9P 3 + 3 9P2
3. (a) Find n, if2 np3 = n + IP3 and n;> 2. [Ans. n = 5]
(b) Find n, ifnps = 3 nP5' [Ans. n = 8]
4. (a) Find r, ifl5Pr_l : ISPr _ 2 = 3: 4 [Ans.14]
(b) Find r, if5Pr = sPr _ 1 (Ans.4]
5. (a) Show that nPn = 2. nPn _ 2
(b) Show that nPr = n. n -IPr _ 1
6. Eight children are to be seated on a bench. In how many ways can the children be
seated? [Ans. 40320]
·7. From among the 20 teachers of a college, one director and one dean are to be
appointed. In how many ways can this be done? [Ans. 380]
8. From a pool of 12 candidates, in how many ways can we select president, vice
president, secretary and a treasurer, if each of the 12 candidates can hold any office
? [Ans.11880]
9. Six candidates are called for interview to fIll four posts in an office. Assuming that
each candidate is fit for each post, determine the number of ways in which the four
posts can be filled? [Ans.360]
10. In how many ways can 6 boys and 5 girls be arranged for a group photograph, if the
girls are to sit on chairs in a row and the boys are to stand in a row behind them?
[Ans.86400]
lL When a group photograph is taken, all the 5 teachers should be in the first row and
all the 8 students should be in the second row. If the two corners of the second row
are reserved for the two talent students, interchangeable only between them, and if
the middle seat of the front row is reserved for the principal, how many
arrangements are possible? [Ans.34560]
12. In how many ways can 5 boys and 3 t..rls be arranged in a row so that no two girls
may sit together? [Ans.14400]
PERMUTATION AND COMBINATION 17
13. There are 8 students appearing in an examination of which 3 have to appear in a

Mathematics paper and the remaining 5 in different subjects. In how many ways can
they be made to sit in a row, if no two candidates in Mathematics sit next to each
other. [Ans.14400]
14. Six men and four women are to sit in a row so that the 'women occupy the even
places. Find the number of all possible arrangements. [Ans. 86400]
15. How many signals can be given with 6 flags of different colours such that:
(a) exactly three flags can be used for a signal?
(b) at most three flags are to be used for a signal ?
(c) at least three flags are to be used for a signal ?
(d) any number of flags may be used for a signal ?
[Ans. (a) 120, (b) 156, (c) 1920, (d) 1956]
16. In how many ways can 9 examination papers be arranged so that the best and the
worst papers never come together? [Ans. 282240]
17. A family of 5 brothers and 3 sisters is to be arranged for a photograph in one row. In
how many ways can they be seated, if
(a) all sisters sit together?
(b) no two sisters sit together? [Ans. (a) 4320, (b) 14400]
18. How many 6 digit telephone numbers can be constructed if each number starts with
35 and no digit appears more than once? [Ans. 1680]
19. How many different numbers between 100 and 1000 can be formed using the digits
0,1,2,3,4,5, and 6 assuming that, in any number, the digits are not repeated. How
many ofthese will be divisible by 5 ? [Ans. 180, 55
20. Find the number of 4-digit numbers that can be formed using the digits 1, 2, 3, 4, 5 if
no digit is used more than once in a number. How many of these numbers will be
even? [Ans. 120, 48]
21. How many numbers of six digits can be formed from the digits 1, 2, 3, 4, 5, and 6 (no
digit being repeated). How many ofthese are divisible by 5 ? [Ans. 720, 120]
22. How many numbers greater than 4000 can be formed with the digits 2, 3, 4, 5, and 6
when no digit is repeated? [Ans. 192]
23. How many numbers lying between 2000 and 4000 can be formed with the digits 1, 2,
3, 4, 5, 6 ? [Ans. 120]
24. Ritu wa~ts to arrange 3 English, 2 Hindi and 4 French books on a shelf. If the books
on the same subject are different, determine:
(a) the number of possible arrangements.
(b) the number of possible arrangements, if all the books on a subject are to be
together. [Ans. (a) 362880, (b) 1728]
25. Find the number of ways in which 8 different books can be arranged on a shelf so
that 2 particular books are
(a) always together. (b) never together. [Ans. (a) 10080, (b) 30240]
26. Find the number of permutations of 8 things taking 5 at a time in which 2 particular
things are always
(a) included. (b) excluded. [Ans. (a) 2400, (b) 720]
27. The letters of the word TUESDAY are arranged in a line, each arrangement ending
with letter S. How many different arrangements are possible? How many of them
start with letter D ? [Ans. 720, 120]
28. In how many ways can the letters of the word 'FRACTION' be arranged so that no
two vowels are together? [Ans.14400]
29. How many words can be formed from the letters of the word 'DAUGHTER' so that
(a) The vowels always come placed together?
(b) The vowels are never placed together? [Ans. (a) 4320, (b) 36000]
30. How many different words can be formed of the letters of the word "COMBINE" so
that:
(a) vowels always remain together? (b) no two vowels are together?
(c) vowels may occupy odd places? [Ans. (a) 720, (b) 1440, (c) 576]
31. In how many ways can the letters of the word 'TOWER' be arranged so that the
letters '0' and 'E' occupy only even places? [Ans. 12]
32. How many words can be formed out of the letters of the word 'PECULIAR' beginning
into 'P' and ending with 'R' ? How many of them will have 'P and 'R' at end places?
[Ans. 720, 1440]
33. How many permutations can be made out of the letters of the word 'TRIANGLE' ?
How many of these:
(a) begin with T? (b) end with E ?
(c) begin with T and end with E ? (c)T and E occupy the end places?
[Ans. 40320, (a) 5040, (b) 5040, (c) 720, (d) 1440]
34. How many different words can be formed of the letters of the word 'MALENKOV' so
that:
(a) the first letter is a vowel? (b) no two vowels are together?
(c) vowels may occupy odd places? (d) vowels being always together?
[Ans. (a) 15120, (b) 120, (c) 2880, (d) 4320j
35. How many different words containing all the letters of the word 'LOGARITHM' can
be formed? How many of these:
(a) begin with 'L'? (b) end with 'M' ?
(c) begin with 'L' and end with 'M' ? (d) have 'L' and 'M' in end places?
(e) begin with 'LOG' ? (f) end with 'THM' ?
(g) have vowels together? (h) have no vowels together?
(i) have vowels in the end places?
(j) have vowels and consonants in their relative position?
(k) have vowels in odd places? (l) have vowels in even places?
(m) have vowels in 2nd, 3 rd and 4th places?
[Ans. 362880, (a) 40320, (b) 40320, (c) 5040, (d) 10080, (e) 720, (j) 720, (g) 30240,
(h) 151200, (i) 8640, (j) 4320, (k) 43200, (l) 17280, (m) 4320]
PERMUTATIONS WHEN ALL OBJECTS ARE NOT DISTINCT

In problems of counting, sometimes repetitions are allowed in the arrangements of
objects or distinctions between some of the objects are ignored.
The number of permutations of n things taken all at a time, when p things are of one
kind, q of second kind, r of third kind and so on is given by
n!
p!q!r! ......
For example consider the word 'SEE'.
We take first E as El and second E as E2
The word has 3 letters, and the number of permutations in which 3 letters can be
arranged is 3 !, i.e., 6 [SE 1E 2, SE2Ev E 1SE 2, E 1E 2S, E 2E 1S, E 2SE 1]
Clearly,
SE 1E 2 }. C<EE
SE 2E 1 IS C'
E 1SE 2 }. ESE
E 2SE 1 IS
and :~ } is EES
Thus, no. of ways in which the letters of the word 'SEE' can be arranged is 3, i.e., ~ :.
Example 28 : How many different arrangements can be made by using 4 red and 3 black
identical balls?
Solution
No. of red balls =4
No. of black balls = 3
Total no. of balls = 7
. . 7! 5040
No. of ways m whIch they can be arranged =4: ! 3! = 24 x 6 =35
:. The required no. of permutations is 35.
Example 29: In how many ways can the letters of the following words can be arranged?
(a)APPLE (b) ASSASSINATION (c) PERMUTATION
Solution:
(a) In the word APPLE, there are 5 letters in which P occurs two times.
20 FINANCIAL AfATHEAfAncS
· . The no. of permutations of this word =; : = 1:0 =60

· . The Required number of permutations is \60.
(b) In the word ASSASSINATION, there are 13 letters in which A occurs 3 times, S
occurs 4 times, I occurs 2 times and N occurs 2 times .
. , No. of ways the letters of this word can be arranged =3 ! 41~d! 2! =10810800
., The required number of permutations =10810800
(c) In the word PERMUTATION
There are 11 letters in which T occurs two times
., The number of ways the letters of this word can be arranged = ~\! = 19958400
· . The required no. of permutation is 19958400.
Example 30 : In how many of the distinct permutations of the letters in the word
'MATHEMATICS' do the vowels occur together?
Solution. : In the word 'MATHEMATICS', there are 11 letters in which 4 letters (A, E, A,
I; are vowels and remaining seven are consonants.
Taking 4 vowels as one unit, we have 8 (i.e. 7 + 1) units to be arranged in which 'M'
occurs twice and 'T' occurs twice.
.. No. of ways in which the 8 units can be arranged = 2 ~ ~ ! = 10080
In the single unit of 4 vowels, 'A' occurs twice

. . No. of ways in which the vowels can be arranged among themselves =: : =12
Total number of arranges in which the vowels occur together =10080 x 12 =120960
:. The required number of permutations is 120960.
Example 31 : In how many of the distinct permutations of the letters in the word
"MISSISSIPpr, do the four rs not come together?
Solution. : In the word MISSISSIPPI, there are 11 letters in which I occurs four times, S
occurs four times and P occurs twice.
Total number of permutations =(4 !) t1!~ (2 !) = 34640.
Now we lind the permutations in which 4 I's are together. For this we treat 4 I's as one
unit. Therefore: we have to find the arrangements of 8 units (I I I I), M, S, S, S, S, P, P
Here S occurs 4 times and P occurs 2 times
No. of permutations =4~ ~ ! =840

PERMUTATION AND COMBINA
;
TlON 21
:. No. of permutations in which aliI's do not come together =34650 - 840 =333810.
The required number of permutations is 33810.
Example 32 : How many different words can be formed with the letters of the word
HARYANA ? How many of these :
(a) have Hand N together? (b) begin with H and end with N ?
(c) have vowels together?
Solution:
In the word HARYANA, there are 7 letters in which A occurs thrice.
7!
.. No. of arrangements =3! =840
Required number of arrangements is 840.
(a) Taking Hand N as one unit, we have 6 (5 + 1) units to be arranged in which A is
repeated thrice.
· 6! 720
N o. 0 f ways to arrange t he 6 umts =3! =6 =120
No. of ways to arrange Hand N among themselves =2 ! =2
:. No. of arrangements in which Hand N are together =120 x 2 =240
:. Required number of arrangements =240
(b) No. of ways to arrange Hand N =1 ! xI! =1
No. of ways to arrange remaining 5 letters =: :=20
.'. The required number of arrangements =1 x 20 =20
(c) Taking 3 vowels together as one unit, we have 5 (4 + 1) units.
No. of ways to arrange the 5 units =5! =120
No. of ways to arrange the vowels among themselves =3
3'
i =1
. . Total no. of arrangements =120 x 1 =120
:. The Required number of arrangements = 120
'Example 33: How many (6-digit) numbers greater than 4,00,000 can be formed using
the digits 0, 3, 3, 4, 4, 5.
Solution: There are 6 digits (0, 3, 3, 4, 4, 5).

We have to use all 6 digits to form the number.
'the number greater than 400000 will have either 4 or 5 at the extreme left.
If 4 occupies the extreme left, the remaining 5 place can be filled with 0, 3, 3, 4, 5
Here 3 occurs twice
5! 120
. . No. of such arrangements =2f ="2 =60
If 5 occupies the extreme left, the remaining 5 places can be filled with 0, 3, 3, 4, 5.
Here 3 repeats twice and 4 repeats twice.

5! 120
· . No. of such arrangement =2 ! 2 ! = 2 x 2
=30
·. Total number of arrangements =60 + 30 =90
· . Required number of 6-digit numbers is 90.
CIRCULAR PERMUTATION'
The circular permutations are permutations of certain things in the form of a circle.
For example, ABC, BCA, and CAB are three different linear permutations, but round a
circle these three different arrangements give only one circular permutation ABC read in the
anticlockwise direction. In circular permutations, there is neither a beginning nor an end.
It is illustrated in the following figure:
A c B
All the three figures represents only one arrangement in which B is in the right side of A
and C is in the left side of A.
Let x be the required number of circular permutations. To each one of these x circular
permutations, there corresponds n linear permutations starting from each one of n things in
the circular permutations and read in the anticlackwise direction.
.. All circular permutations give rise to x.n linear permutations.
x. n = n!
x n' =(n -
= -' 1) !
n
Thus, the number of circular permutations of n different things is given by (n - 1) !
In circular permutations, the permutations are always read in anti-clockwise direction.
Example 34 : In how many ways can 7 persons sit in a round table?
Solution: The number of circular permutations of n different objects is given by (n - 1) !

No. of ways in which 7 persons can sit in a round table is (7 -1) ! i.e., 6 ! i.e. 720
Example 35 : Four men and four women sit around a round table. In how many ways
they can be seated so that
(a) no two women sit together ? (b) all women sit together ?
Solution: No. of men =4

No. of women =4
PERMUTATION AND COMBINATION 23
(a) First four men can be seated around the round table. M
:. No. of ways to arrange the men = (4 -1)! = 3 !
There are 4 places in between the men.
.. No. of ways to arrange the women = .p. =4!
.. No. of arrangement in which no women sit together
M M
=3 ! x 4 ! =6 x 24 =1444
. . Required number of arrangements is 144. M
(b) Taking women as one unit, there are 5 (= 4 + 1) units to be arranged.
No. of ways in which 5 units can be arranged in circular form = (5 -1) ! = 4!
No. of ways to arrange the women among themselves = 4 !
. . No. of arrangements in which all women sit together =4 ! x 4 ! =24 x 24 =576
:. Required number of arrangements is 576.
\
Example 36 : There are 5 men and 4 women to sit around a round table. In how many
ways can they sit so that no two women sit together
Solution
First, we arrange 5 men around the round table.
:. No. of ways to arrange the men =(5 -1)! =4! M
There are 5 places in between the men.
.. No. of ways to arrange the women =5P.
.. No. of ways in which no two women sit together =4! x 5P. M
. =24 x 5 x 4 x 3 x 2 =2880
. . Required number of arrangement is 2880.
Example 37: Three boys and three girls are to be seated around a table in a circle.
Among them, the boy X does not want any girl neighbour and the girl Y does not want any
boy neighbour. How many such arrangements are possible ?
Solution: No. of boys = 3
No. of girls =3
Seating arrangement is shown in the figure.
Boy X (B 1) will have boys as neighbours
:. No. of ways to arrange the remaining two boys =2!
Girl Y (~) will have girls as neigbours
.. No. of ways to arrange the remaining two girls =2 !
. . Total no. of arrangements =2 ! x 2 ! =2 x 2 =4
. . Required number of arrangements is 4.
L There are 5 red, 4 white and 3 blue marbles in a bag. These are drawn one by one
and arranged in a row. Assuming that all the 12 marbles are drawn, determine the
number of different arrangements. [Ans. 27700]
2. In how many ways can 4 red, 3 yellow and 2 green discs be arranged in a row, if the
discs of the same colour are indistinguishable? [ADs. 1260]
3. In how many different ways, can the letters of the following words be arranged?
(a) COMMERCE (b) ALLAHABAD [ADs. (a) 5040, (b) 7560]
4. In how many different ways can the letters of the following words be arranged:
(a) MOON (b) NOON [ADs. (a) 12, (b) 6]
5. Find the number of different words beginning with P which can be formed by using
the letters of the word 'PERMUTATION'. [ADs. 1814400]
6. How many different signals can be transmitted by arranging 3 red, 2 yellow and 2
green flags on a pole? (Assume that all the 7 flags are used to transit a signal).
[Ans.21O]
7. In how many ways can 5 flags, in which 3 are red, one is white and one is blue, be
arranged one below the other, if flags of one-colour are not distinguishable? [Ans. 20]
8. In how many ways can the letters of the word 'MANWINDER' be arranged so that
(a) A and D may always be together? (b) A and D may never be together?
[Ans. (a) 40320, (b) 141120]
9. How many words can be formed with the letters of the word 'PARALLEL' so that all
L's do not co~e together? [ADs. 3000]
10. How many different words can be formed with the letters of the word CAPTAIN? In
how many of these C and T are never together? [Ans. 2520, 1800]
1L If the different permutations of all the letters of the word EXAMINATION are listed
as in a dictionary, how many items are there:n this list before the first word starting
with E ? [ADs. 907200]
12. Find the number of different words which can be formed by using all the letters of
the words INSTITUTION. In how many of them :
(a) the three Ts are together? (b) the first two letters are the two Ns ?
[Ans. 554400, (a) 30240, (b) 10080]
13. Find the number of arrangements which can be made from the letters of the word
ALGEBRA without altering the positions of the vowels and consonants. [ADs. 72]
14. How many words can be formed by arranging the letters of the word 'UNIVERSITY'
so that the vowels remain together? [Ans. 60480]
15. Find the number of arrangements that can be made out of the letters of the word
COMBINATION. In how many of these, vowels occur together?
[Ans. 4989600,75600]
16. How many six digited numbers can be formed by using the digits I, I, I, 2, 2, 3 ?
How many of these are greater than 3,OO,OOO? [Ans. 60,10]
17. How many number can be formed with the digits I, 2, 3, 4, 3, 2, 1 so that the odd
digits always occupy the odd places. [Ans. 18]
18. How many numbers greater than a million can be formed by using the digits 4, 6, 0,
6, 7, 4, 6 ? [ADs. 360]
19. How many numbers greater than 50,000 can be formed by using the digits 3, 5, 6, 6,
7,9? [ADs. 48]
20. Four persons, A, B, C and D are to be seated at a circular table. In how many ways
can they be seated ? [ADS. 61
21. In how many ways can 8 persons form a ring? [ADs. 5Q40]
22. In how many ways can 7 people be arranged at a round table so that 2 particular
persons may be together? [ADs. 240]
23. In how many ways can 5 persons A, B, C, D and E sit around a circular table, if
(a) B and D sit next to each other? (b) A and D do not sit next to each other?
[ADs. (a) 12, (b) 12]
24. In how many ways can 6 boys be arranged at a round table so that two particular
boys may be together? [ADs. 240]
25. There are six gentlemen and four ladies to dine at a round table. In how many ways
can they sit among themselves so that no two ladies are together? [Ans. 43200]
26. In how many ways can 5 gentlemen and 5 ladies be seated at a round table so that
no two gentlemen are together? [ADs. 2880]
27. The chief ministers of 11 states of India meet to discuss the current issues. In ho~
many ways can they seat themselves at a ,round table so that the chief ministers of
states X and Y sit together? [ADs. 725760]
28. In how many ways 11 members of a committee sit at a round table so that the
secretary and the joint secretary are always the neighbours of the president?
[ADs. 80640]
COMBINATION
A selection (group) of a number of things taking some or all of them at a time is called a
combination. The selections are different from permutations in the sense that in a
permutation, the order of things is taken into consideration whereas in case of selection, the
order of things is immaterial and we consider only the things which are occurring in a
selection. For example, ab and ba are two distinct permutations but same selection.
The total number of combinations of n distinct things taking r(1 s; r s; n) at a time is
denoted by nCr or by C(n, r).
Consider the following example:
The permutation of 3 things x, y, z taking 2 at a time are:
xy, yx, xz, zx, yz, zy
But the combination of 3 thing x, y, z taking 2 at a time are :

xy yz xy
3C2 =3
xy and yx represents the same combination and two different permutations.
Thus permutations are arrangements in definite order, whereas combinations are
'selections' in which order of objects does not matter.
The number of combinations of n things taking r at a time is equal to

n!
nCr =r.'(n _ r.
)" 1 S; r s; n.
Let the required number of combinations of n things taken r at a time be x.
Take one of these combinations. It contains r things which can be arranged among
themselves in r ! ways. Thus, one combination gives rise to r ! permutations.
Total number of permutations ofn things taken r at a time =npr.
nPr
or x=-, r.
nP 1 n!
nC - -r - - . - - - =(n n! ]
r - r! - r! (n - r) ! [ .: nPr _ r) !
_
Hence nC
r
=r!_ (nn_!_
- r)!
Remark 1: nCn =1
Proof: nC
n
= n! _~ _n !- 1
n ! (n - n) ! - n ! 0 ! - n ! -
P f nC n! =(n - n'r). ! r -nC

roo: n-r =(n _ r) ! (n - (n - r»! !- r
Remark 3: nCo =1
n! n!
Proof: nCo = 0'. (n _ 0) ., =-1- , =1
.n.
'. C 1) (n - 2) ...... r terms. C nPr
Remark 4 n r = n (n - 1 . 2 3 . ..... r. ' J.e. n r =-,
r.
Remark 5. The number of combinations of n different objects taken r at a time in such a
way that a particular object is always included is n-lCr _ 1•
Remark 6. The number of combinations of n different objects taken r at a time ion such
a way that a particular object is always excluded is n -lCr
Example 38 : Evaluate the following:

(a) 7C3 (b) 25C4 (c) 42C39
Solution:
(a) 7~6 x5 =35

lx2x3
(b) 25C l x 24 x 23'x 22 =12650

= 251x2x3x4
(c) 42C
39 = 42C42-39-_ 42C3-_ 421x2x3
x 41 x 40 -
-
11480
PERMUTATION AND COMBINA nON 27
Example 39 : Prove that if nand r natural members such that 1 ;$ r ;$ n, then

nCr + nCr _ 1 =n+ 1Cr
Solution:
- n!
- (r - 1) ! (n - r)!.
[1
x -+
r
1]
n- r +1
n! [n-r+1+r]
= (r - 1) ! (n - r)! r (n - r + 1)
= (r - 1) ~ ~n - r) ! [r (nn_+r ~ 1) ]
(n + 1) n !
=r(T' - 1) ! (n - r + l)(n - r) !
= (n + 1) ! = n + lC =RHS
r ! (n - r + 1) ! r
nCr + nCr _ l = n + lCr •
Example 40: In how many ways can a committee be selected from 15 persons, if
committee is to have
(a) 3 members ? (b) 13 members?
Solution
(a) Total no. of persons = 15
. 15 x 14 x 13
No. of ways ofselectmg 3 people = l5Ca = 1 x 2 x 3 =455
Required number of ways is 455
(b) No. of ways of selecting 13 people l5C la = l5C15 la =15C2 1~: ~4 =105
:. Required number of ways is 105.
Example 41 : Find the number of ways of selecting 9 balls from 6 red balls, 5 white balls,
5 blue balls, if each selection consists of 3 balls of each colour.
Solution:
No. of red balls =6
No. of white balls =5
No. of blue balls = 5 r
No. of ways to select 3 red balls =6Ca

No. of ways to select 3 white balls =5Ca
No. of ways to select 3 blue balls =6e 3

.. No. of ways to select 9 balls =6e3 x 6e3 x 6e3 =20 x 10 x 10 =2000
:. Required number of ways is 2000.
Example 42 : A committee of 5 members is to be formed out of 6 men and 4 ladies. In

how many ways can this be done if
(a) exactly two women are included? (b) at least two women are included ?
(c) at most two women are included ?
Solution:
Total No. of men =6
Total No. of women =4
(a) If exactly two women are to be selected, then only three men can be selected.
.. No. of ways to select 2 women =4C2
No. of ways to select 3 men =6C3
.. No. of ways to select the committee of5 = 4C2 x 6C3 = 6 x 20 = 120
.. Required number of ways is 120.
(b) If at least two women are to be selected, the no. of women may be 2, 3, or 4.
The committee may consist as follows:
Women Men
2 3
3 2
4 1
No. of ways to select the committee of 5 members
=(4C 2 x 6C3 ) + (4C 3 x 6C2) + (4C4 x 6CI )
=(6 x 20) + (4 x 15) + (1 xl) =120 + 60 + 1 =181
(c) If at most two women are to be selected, then number of women may be 0, 1 or 2
Selection in made as follows:
Women Men
o 5
1 4
2 3
. . rfo. of ways to select the committee of 5 members
=(4CO x 6C6 ) + (4CI x 6C4) + (4C2 x 6C3)
= (1 x 6) + (4 x 15) + (6 x 20) = 6 + 60 + 120 = 186
PERMUTATION AND COMBINA nON 29
Example 43 : In how many ways can a student choose a programme of 5 courses if 9

courses are available and 2 courses are compulsory for every student? .
Solution:
No. of courses available =9
No. of courses in the programme = 5
Since two papers are compulsory, these papers have to be always included. Remaining 3
papers are to selected from 7 courses.
9- 2C 7 7x6x5
. . No. 0 f ways to seIect 5 courses = 5- 2 = C3 = 1 x 2 x 3 = 35
. . Required number of ways is 35
Example 44 : In how many ways can we select a cricket eleven from 15 players in which
only 5 players can bowl, if the team must include exactly four bowlers ?
Solution:
No. of players = 15
No. of bower =5
The term contains 11 players in which number of bowlers are 4.
:. No. of ways of selecting 4 bowlers =5C4
The remaining 7 player are selected from 10 players in 10C7 ways
.. No. of ways in which the team is selected = SC4 x lOC7 = 5 x 120 = 600
Example 45 : A team of 8 players is to be selected from a group of 12 players and one of

the player is then to be selected as captain and an~ther as vice-captain. In how many ways
can the team be selected ?
Solution:
No. of ways in which 8 players can be selected from 12 players is 12CS•
In selection of captain and vice-captain, the order of selection does matter.
.. No. of ways in which the captain and vice-captain are selected from 8 players in SP2
.. No. of ways in which the team IS selected = 12CB x sP2 = 495 x 56 = 27720
Example 46 : The English alphabet has 5 vowels and 21 consonants. How many words
with two different vowels and two different consonants can be formed from the alphabet?
Solution: To form four-letter words, first we have to select 2 vowels and 2 consonants.
.. No. of ways of selecting 2 vowels =5C2
No. of ways of selecting 2 consonants = 21C2
After selecting 2 vowels and 2 consonants, we arrange the four letters to form 4-letter
words.
.. No. of ways to arrange the 4 letters = "P"
=4!
.. No. of 4-letter words =5P 2 x 21C2 x 4 ! = 10 x 210 x 24 = 50400
.. Required numbers of words is 50400
•#3#1 jte k1 #---)

L Evaluate:
(a) 9C4 (b) 15C14 (c) 20C20 (d) 24C3
[Ans. (a) 126, (b) 15, (c) 1, (d) 3036]
2. Find n if
(a) nCB =nC6 (b) 12 nC2 : 2nC3 [Ans. (a) 14, (b) 5]
3. Find n, if
(a) 2nc 3 : 7C 2 =12 : 1 [Ans. (a) 5, (b) 19]
4. Show that :
(a) r.nCr=n.n-1Cr _ 1 (b) nCr+nCr+l=n+1Cr+l (c) nCrxrCs=nCsxn-sCr_s
5. In how many ways can a team of 3 boys and 3 girls be selected from 5 boys and 4
girls? [Ans. 40]
6. How many selection of 4 books can be made from 8 different books? [Ans.70]
7. How many different committees can be formed consisting of 4 men and 3 women out
of 7 men and 5 women? [Ans. 350]
8. From a class of 25 students, 10 are to be chosen for an excursion party. There are
three students who decide that either all of them will join or none of them will join.
In how many ways can the 10 students be chosen? [Ans.651244]
9. A boy has 3 library tickets and 8 books of his interest are in the library. Of these
books, he does not want to borrow Business Mathematics, unless Financial Maths is
also borrowed. In how many ways can he choose the three books to be borrowed ?
[Ans.41]
10. In how many ways can 5 members forming a committee out of 10 be selected so that:
(a) two particular members must be included?
(b) two particular members must not be included? [Ans. (a) 56, (b) 56]
1L In how many ways can a football team of 11 players be selected from 15 players?
How many of these will
(a) include one particular player?
(b) exclude one particular player? [Ans. 1365, (a) 1001, (b) 364]
12. A committee of 7 is to be formed from 9 boys and 5 girls. In how many ways can this
be done when the committee contains
(a) exactly 3 girls? (b) at least 3 girls? [Ans. 1260, (b) 1716]
PERMUTA TlON AND COMBINA TlON 31
13. The question paper on Mathematics and Statistics contains 10 questions divided into
two groups of 5 questions each. In how many ways can an examinee select 6
questions taking at least two questions from each grOUp? [ADs. 200]
14. From 4 officers and 8 jawans, in how many ways can 6 be chosen (a) to include
exactly one officer? (b) to include at least one officer? [ADs. (a) 224, (b) 896]
15. Out of 6 boys and 4 girls, a committee of 6 is to be formed. In how many ways can
this be done if the committee contains:
(a) exactly 2 girls? (b) at least 2 girls? (c) at most 2 girls?
[ADs. (a) 90, (b) 185, (c) 115]
16. How many committees of 5 members each can be formed with 8 officials and 4 non-
official members in the following cases:
(a) each consists of 3 officials and 2 non-official members?
(b) each consists of at least two non-official members?
(c) a particular official members is never included?
(d) a particular non-official member is always included?
[ADs. (a) 336, (b) 456, (c) 462, (d) 330]
17. Out of 7 consonants and 4 vowels, how many words can be made each containing 3
consonants and 2 vowels? [Ans. 25200]
18. How many words containing 4 consonants and 3 vowels can be formed from 6
consonants and 5 vowels? [ADs. 756000]
19. Among 20 members of a cricket club, there are two 'wicket-keepers and 5 bowlers. In
how many ways can eleven players be chosen so as to include only one of the wicket-
keepers and atleast three bowlers? [ADs. 54054]
20. A box contains 2 different white balls, 3 different black balls and 4 different red
balls. In how many ways can 3 balls be drawn from the ~ox if at least one black ball
is to be included in the draw. [ADs. 64]
Logarithm
INTRODUCTION
Baron John Napier (1550-1617) a Scottish Mathematician (Scotland near Edinburgh)
invented logarithms in 1614 to reduce the tedious calculations which were linked with
mathematics and astronomy in those days. Henry Briggs (1556-1630), a contemporary of
Napier, introduced the. common (decimal) logarithms. Before the development of electronic
calculators and computers, logarithms were extensively used to facilitate numericaJ
calculations. Logarithms have not lost its significance even today. It facilitate numerical
calculations.
DEFINITION
Let a be a positive real number such that a .. 1. If am = b, then we say that logarithm of b
to the base a is m and write it as loga b =m.
Thus, I am = b ¢> loga b = m. I
The statement am = band loga b = m are equivalent statements, the first in the
exponential form and the second in the logarithm form.
Since a is a positive real number, it may be noted that b is also a positive real number.
Thus, we define the logarithms of only a positive real number to a base which is also a
positive real number, other than 1.
(i) loga b is read as logarithm of'b' to the base 'a'.
(ii) 'log' is the abbreviation of the word 'logarithm'.
Following examples illustrate how an exponential form is converted into the logarithm
form and vice versa.
LOGARITHM 33
(i) 53 =125 .. logs 125 =3
(ii) 5-3 = 1~5 .. logs 1~5 = -3

(iii) 10-2 = 0.01 .. log10 0.01 = -2
(iv) V64 = 8 => 64 1/2 = 8 => log1l2 8 = 64
Graph of a Logarithmic Function
The graph of the function f(x) =as is as shown in Fig. By reflecting this graph across the
line y = x we obtain the graph of F(x) = lo~ x. It is important to remember that y = lo~ x and
x = a) describe the same function while y = as is the related exponential function. Note that
the domain of a logarithmic function is the set of all positive real numbers.
y y=ax y=x
x=ay
or
y=log.x
X' X
Y'
Remarks :
(a) Since b 1 = b, 10gb b = 1 i.e., logarithm of any number to the same base is 1.
(b) Since b O =1, 10gb 1 =O. It means that logarithm of 1 to any base is zero.
(c) As the number increases the corresponding logarithm also increases i.e., m > n
implies log m > log n.
(d) Logarithms with base 10 are called common logarithms. While denoting the common
logarithms, we de not write the base 10.
Example 1: Write the following in the form of logarithms.

(a) 2 5=32 (b) 54 = 625
(c) l(Tl =0.1 (d) x-'Y =z
3
(e) ,,125 =5
Solution:
(a) 2s =32 .. 10g2 32 = 5
(b) 54 = 625 .. logs 625 = 4
(c) 10-1 = 0.1 .. IOg10 0.1 =-1
34 FINANCIAL MATHEMAncS
(d) x-Y =z 108'.% z =-y

"3
(e) "125 =5 <=> 1251/3 =5 <=> 10g125 5 = 113
Example 2 : Write the following in the form of exponent
(a) log525 = 2 (b) IOg10 1000 = 3
(c) log8256 =8/3 (d) log10 (0.0001) =-4
(e) log343 7 =43
Solution:
(a) 10g5 25 =2 <=> 52 =25
(b) 10g10 1000 =3 <=> lOS = 1000
(c) logs 256 =8/3 ~ 8813 = 256
(d) 10g10 (0.0001) =-4 <=> 10"-4 =0.0001
(e) 10g3437 =113 ~ 3431/3 =7
Example 3: Find the value of each of the following:
(aJ lOg4128 (b) log2..f32
Solution:
(a) Let x =log4 128
[.: 128 = 27]
2x= 7
7
Thus, 10g4 128 =2" .
(b) Let x =log2v'32

2X = v'32 ~ 2x = (32)1tl
2 X
= (2 5 )112 ~ 2x =2512 ~ X =5/2
Thus, 10g2V32 = 5/2.
Example 4 : If loga 8 =x, find a x / 3
Solution:
loga 8 = x ~ aX =8
-= (a x )113 = (8)113 ~ a x/3 = 2
Thus, axl3 =2
LAW OF LOGARITHMS
Many problems in computation are rendered less laborious by use of the logarithms as a
tool. Certain laws for operating with logarithms will be developed.
LOGARITHM 35
(a) Law of Product: The logarithm of the product of two numbers is equal to the sum
of the logarithms of those numbers.
i.e., Ilogo (mn) = logo m + lo~ n.)
Proof. Let lo~ m = x and 108'0 n = y

Now logom=x ~ a%=m
and logo n = y ~ al = n
mn =a%. al =a%+Y
By def. of logarithm,
logo mn = x + y = logo m + lo~ n
Extending the law to the product of more than two numbers, we have
logo (m x n x p x q x ...... ) = logo m + 108'0 n + lo~p + 108'0 q + ......
(b) Law of Quotient : The logarithm of the quotient of two numbers is equal to the
logarithm of numerator minus logarithm of denominator.
i.e., logo (~) = logo m - 108'0 n.
Proof. Let 108'0 m = x and logo n == y

Now logo m = x ~ rr = m
and logo n == y ~ al == n
m a%
-==-=a%-Y
n aY
.. By def. of logarithm, 108'0 (~ ) == x - y = 108'0 m -108'0 n.
(c)Law of Exponent: The logarithm of a number m raised to the power n is equal to n

times the logarithm of that number.
i.e., iloga mn = n 108'0 m. I
Proof. Let 108'0 m = x, then aX = m.
then
. . By def. of logarithm, 108'0 (mn) == nx = n 108'0 m.

(d) Changing the base. The logarithm of a number N to the base b is equal to the
product of its logarithm to the base a and the logarithm of a to the base b.
i.e., 110gb N = logo N x 10gb a I
Proof. Let 108'0 N == u ~ N =aU
and ,10gb a "=v ~ a = b fl
:. N =aU =(bfl)U [.: a =bll )
38 FlNANClALIlA1HEMATlCS
=> N = bUll => log"N = uv

=> 10gb N = lolfcJ N x 10gb a
It is also expressed in the following form.
logb N
10ggN=--
10gb a
Corollary. Putting N = b in the above result
1086 b 1 \
logo b = 10gb a = 10gb a [.,' 10gb b =1]
Thus
1
loggb=--
10gb a
Or
logo b x 10gb a = 1.
Thus, we have
Let m, n and a be positive numbers, a ,. 1, then
L logo (mn) = logo m + logg n
2. logo (~ ) = 101fa m -logg n
3. logo mn = n logo m and
Example 5 : Find the value of each of the following :

4
(a) 10810 V100 (b) 106327v729
v'64
(c) 1082 VB
Solution:
4 1
(a) IOglOV100 = loglO(100)1I4 =4 IOglO 100
1 1 1 1 1
= 41og10 (10)2 = 4 x 2 IOglO 10 = 2"loglO 10 = 2" x 1 = 2" . [.,' 10glO 10 = 1]
4 1
Hence, 10glO V 100 = 2"
(b) log3 27 V729 = log327 + log3V729

6
= log327 + log3 ~ = log333 + log33612 = 3 log33 + 2" log3 3 = 3(1) + 3(1)
=3 + 3 =6 " [.,' log3 3 =1]

Hence, log3 27V 729 =6
LOGAIIITHII 37
(c) 10g2
v'64
VB = 10g2V'6i -10g2-.f8
= 10g2...[7iJ -10lf2 VZJ =.log2 2&'2 = log2' 2 - i ~ 10g2 2

3 3 3
= 3(1) - 2' (1) = 3 - 2' = 2' .
V'6i 3
Hence, log2 VB = 2'
Eumple 8 : Find the value of each of the following :
(a) lo
~n
[121"14641] 8
(bl lo
.., ~J
T4VB
42
VT33l .
Solution. :
121 "14M1] . 3
(a) 10gn 3 = logn 121 + logn V14641 -logn V'I33I
[ V'I33I
3
= 10gn 112 + 10g1 ~ -logu VIP" = 2 logu11 + 10gnl14tZ -log1111
4
= 2(1) + 2'logn 11- 1 = 2 + 2 - 1 = 3 [.,' 10gn 11 = 1]
Hence, log" 1213 "14641] = 3

[ ,,1331
.~
(b) log2' ~ 1'lt = 10g2~ -log2 4 2 -log2y'S
41'VD
S
= 10g2;;2'1-1012 2" -log2{21
= IOC2 2 213 - 4 10g2 2 -10g2 23/2
2 3
= 3'10g2 2 -4(1)-210g22
;.. ! (1) _ 4 _ ! (1) _ ! _4 _! _ 4 - 24 - 9 __ 29 .

-2 2 -3 2"':" 6 - 6
_s/'l
V'* ,,29
Hence 10g2 ---:"'="'-1'-a = - -6
4 2 .vS
Eumple 7 : Evaluate l064 [log2 {(log2logS 81))}.

38 FINANCIAL MATHEIIAnCS
= IOg4 [lOg2 {lOg2 (logs 3 4)}] = IOg4 [log2 {log2 (4 logs 3)}] = IOg4 [lOg2 {lOg2 4}]
= IOg4 [lOg2 {lOg2 22}] = IOg4 [lOg2 {21og2 2}] = IOg4 (log2 2) = IOg4 1 = O.
Hence,log4[log2{(log2(lOg, 81)}] =0
Example 8 : Show that:

(a) Slog 3 + log 9 = log 2187 (b) 5log3 -log 9 =log 27
Solution:
(a) L.H.S. =5 log 3 + log 9 =log 35 + log 9
= log 2343 + log 9 = log (243 )( 9) = log 2187 = R.H.S.
Hence proved.
(b) L.H.S. =5 log 3 -log 9 =log 35 -log 9
= log 243 -log 9 = log (2:3 ) = log 27 = R.H.S.
Hence proved.
1 . 1
Example 9 : Show that: 3 log 4 + 2 log 5 - '3 log 64 - "2log 16 =2.
Solution: L.H.S. = 3 log 4 + 2 log 5 - ~ log 64 - ~ log 16

=log 4 3 + log 52 -log (64)113 -log (16)~
= log 64 + log 25 -log 4 -log 4
64)( 25')
= log ( 4)( 4 = log (4)( 25) = log 100
= log (10)2 = 2 log 10 = 2 )( 1 = 2 = R.H.S.
Example 10 : Simplify ~ log 8 + 6 log ~ - ~ log ~
Solution: a2 log 8 + 6 log V2 - '21 log 4'1

3
(1 )~
=a2 1 1
log 2 + 6 log 2 113 -'2 log 22 =log (2 )213 + log (2 113
3 3 )6 -log 22
1
=log 2 3 II 213 + IOg2 113 II 6 -log 22 II ~ =log 22 + log 22 -log '21
= log [2~ 22] = log [22 )( 22 )( 2] = log 2 5 = 5 log 2
2 1
Hence a 3
log 8 + 6 log V2 -'2 log 114 =5 log 2.
I.OGARrrHM 39
x+y 1
Example 11 : [flog -2- = 2" (log x + log y), show that x = y.
x+y 1
Solution: Given: log-2- = '2 (log x + logy)
x+y 1 x+y
=> log -2- = 2'log (xy) = log (xy)1I2 => -2- = VxY
=> (x + y)2 = 4xy => (x - y)2 = 0
=> x-y = 0, i.e., x =y.
Example 12 : Find the value of x :

(a) 2 log x + log 4 =log 64 (b) 2 log (x + 4) =log 49
Solution:
(a) 2 log x = log 64 -log 4
=> 2 log x = log (~) => 2 log x = log 16
1 1
=> log x = 2'log 4 2 => logx='2x2Iog4
=> log x = log 4 => x=4
(b) 2 log (x + 4) = log 49

1 1
=> log (x + 4) = '2 log 49 => log (x + 4) = 2'log 72
1
=> log (x + 4) = '2 x 2 log 7 => log (x + 4) = log 7
=> x+4=7 => x=3
Example 13 : Solve the following equation:

log (x- 6) + log (x-3) =2 log 2
Solution: log ~ - 6) + log (x - 3) = 2 log 2

" log (x - 6) (x - 3) = log 22
=> log (x - 6) (x - 3) = 4
=> (x - 6) (x - 3) = 4
=> x2 - 9x + 18 - 4 = 0
=> x 2 -9x+ 14= 0
" (x - 7) (x - 2) =0
=> x-7=0 orx-2=0
=> x =7 or x = 2.
40 FINANCIAL AlA THElIA TICS
L Write the following in the form of logarithm:

(a) 3 5 =243 (b) 8-2 =1164
,
(c) 1()-6 =0.00001 (c) VI6 =2
2. Write the following in exponential form :
(a) log61296 = 4 (b) logs 243 = 5
(c)log625 5 =114 (d) 10glOO 0.01 = -1
3. Find the value of the following:
(a) logo a' (b) logs 27
(c) log~ 2401
4. Inog (x 2 - 4x + 5) = 0, find the value ofx. [Ana.x =2]
5. Find the values of the following:
s s
(a) 10gl0 V100 (b) log7V343 [Ana. (a) 3/2, (b) 1]
1210g10 10
6. Find the value of 2 10gl0 100 [ADs. 3]
7. Given 10gl0 2 =0.3010 and 10gl0 3 =0.4771, Evaluate the following:

(a) 5/2 log 4 (b) log 600 [Ana. (a) 1.5050, (b) 2.7781]
8. Find the value of log2 [log210g210g2 (65536)]. [Ana. 1]
9. Show that: 4 log 5 + 2 log 4 =4
10. Evaluate the following without using log table:
(a) log 7 + log ll-log 77 (b) 210g10 5 + 10gl0 8 -1I210g10 4
9 35 15
1L Show that log 7 + log 6-log"2 = 0 [Ana. (a), (b) 2]
12. Prove that
10 2 5 . 81
7 log "9 - 2 log 24 + 3 log 80 =log 2
. . log 3 + log 5 + log 8
13. Simplify: log 4 + log 30 . [Ans.I]
14. Prove that log (~!) + log (::) -log (~:) =log 3
. 81 3 2 9
15. SImply 2 log 8- 4 log 2' + 610g g + log 16 . [ADs. 0]
16. Solve for x :

(a) log x + log (x - 9) = 1 (b) log 16 =x log 2 [Ana. (a) 10, (b) 4]
17. Solve: Log 2 + log (x + 2) -log (3x - 5) =log 3 [Ana. x = ;9]

LOGARITHM 41
18. Solve for x :

logx 4 + lo&: 16 + lo&: 64 = 12 [ADs. 2)
19. Find the value of x solving the equation:
log4 (x + 3) + log4 (x - 3) =2 [ADs. 5]
COMMON LOGARITHM
Logarithms to the base 10 are called common logarithms. The common logarithms are
most frequently used for computation. If the base is not indicated in the. logarithm, it is
understood that the base is 10. In other words 10glO x can be simply written as, log x. From
this moment onwards we discard the subscript 10 from the word 'log'.
Standard form of a number. Ifm is a positive real number, we can write m =n x loP,
where pEl and 1 ~ n < 10. This form is called the standard form of m.
Consider the following examples:
(a) 2372 =2.372 x lOS
(b) 425 =4.25 x 1()2
(c) 8.241 =8.241 x 100
(d) 0.8241 =8.241 x 10-1
(e) 0.006652 = 6.25 x 10"3
When a number written in this form, we say that it has been written in the standard
form.
We have m = n x loP, where n is between 1 and 10. Then we find
log m =log (n x loP) ::= log n + p log 10 =log n + p
Remarks:
l~n<O
log 1 ~ log n < log 10

=> 0 ~ log 11 < 1
This log n is between 0 and 1.
:. log n will be in the form ofO.xxxx
Example 14 : Write the following numbers in the standard form :

(a) 7321 (b) 7.802 (c) 0.0037
(d) 463.2 (e) 0.3253
Solution:
(a) 7321 =7321
1000 x 1000 =7.321 x lOS
:. Standard form = 7.321 x 103 .
(b) 7.802 =7.802 x 100.
:. Standard form =7.802 x 100 •
42 FINANCIAL AfATHEAfAnCS
(c) 0.0037 = (0.0037 x 1000) x 10-3 =3.7 x 10-3

:. Standard form = 3.7 x lO-S.
(d) 463.2 =463.2

100 x 100 =4.632 x 10
2
:. Standard form =4.632 x 102 •

(e) 0.3253 =(0.3253 x 10) x 10-1 =3.253 X 10-1
:. Standard form = 3.253 x 10-1 .
CHARACTERISTIC AND MANTISSA

We have noticed: log m =log n + p
Here p is an integer and 1 :s; n < 10. When log m has been expressed as p + log n, where p
is an integer and 0 :s; log n < 1, we say thatp is the 'characteristic' of log m and that log n
is the 'mantissa'. Mantissa is never negative and is always less than 1. If we can find the
characteristic and the mantissa of log m we have to just add them to get log m.
To find the characteristic
If m is a positive number, the characteristic of log m is given by the following two rules:
Rule 1. If m > I, count the number of digits in the integral part of m and subtract 1 from
it to get the characteristic.
Rule 2. If m < 1, count the number of zeroes immediately after the decimal point and
add 1 to it. The number so obtained with a negative sign gives the characteristic.
Note: If the characteristics is negative, say -3, it can be denoted as 3, when we add with
the mantissa.
Consider the following examples:
(a) log 327.5 = log 3.275 x 102 = 2 + log 3.275
Comparing with log m =P + log, we get the characteristics oflog 327.5 is 2.
(b) m =0.0003275
log m =log 0.0003275 =log (3.275 x 10"4) =-4 + log 3.275
:. Characteristic is -4. (written as 4)
To find the mantissa of logarithm
We know that log m =p + log n where log n is the mantissa.
The mantissa of log m is calculated from the table of logarithms. For finding the
mantissa of the logarithm of a number, we disregard the decimal point in the given number.
We follow the procedure given below to find the mantissa of the logarithm of a number:
1. Locate the first two digits of the given number in the left-hand column headed by N.
If the given number has only one digit, we replace it by a two-digit number obtained by
adjoining zero to the right of the number. Thus, 5 is to be replaced by 50 for finding the
mantissa ...
2. Locate the entry in the row obtained earlier in the column headed by the third digit
in the number whose logarithm is being found out.
LOGARnHM 43
3. Locate now the entry in the same row, and in the column headed by the fourth digit
in the given number in the table of proportional parts, and add the entry now obtained to the
entry obtained earlier.
4. The sum of the two entries obtained is the mantissa of the logarithm of the given
number.
Consider the following example:
Let m =0.0002745 =2.745 x 10-'
log m =- 4 + log 2.745
From the table oflogarithm, mantissa oflog 2.745 = 0.4386
Thus, log 0.0002745 =4.4386
Example 16: Using log table, find the logarithms of the following numbers:
(a) 1270 (b) 0.00001379 (c) 2.307 (d) 0.0075 (e) 750
Solution:
(a) 1270 =1.270 x lOS
log 1270 =3 + log 1.270
Characteristics of log 1270 =3
From the table oflogarithm, log 1.270 is 0.1038
.. log 1270 =3.1038.
(b) 0.00001379 = 1.379 x 1Q-6
log 0.00001379 =- 5 + log 1.379
Characteristics of log 0.00001379 is -5.
From the table oflogarithm, log 1.379 =0.0792
log 0.00001379 =5.0792
(c) 2.307 =2.307 x 100
log 2.307 =0 + log 2.3027
Here, the characteristics is 0
From table oflogarithm, log 2.307 =0.3630.
(d) 0.0075 =7.5 x 10--3
log (0.0075) =-3 + log 7.5
log 0.0075 =3.8751
(e) 750 =7.5 x 1()2
log 750 =2 + log 7.5
Characteristic oflog 750 is 2
.. log 750 =2.8751.
44 . FINANCIAL MATHEIIA7ICS
ANTILOGARITHM
Antilogarithm is used to find the number whose logarithm is given.
The number m, whose logarithm is x, is called the antilogarithm ofx and is written as m
=antilogx.
Thus, if log m =x, then m =antilog-,.
Antilogarithms are calculated by using the antilogarithm tables.
The following procedure is followed to find antilogarithm of a given logarithm:
1. While finding antilogarithm, we take into consideration only the mantissa (i.e., the
positive decimal part).
2. In the antilogarithm tables, in the first column (left-hand side), we locate the row
containing the first two digits in the number.
3. In this row, and the column headed by the third digit in the number, we locate the
entry.
4. In this row, and the column headed by the fourth digit in the number in the tables of
proportional parts, we locate the entry.
5. We add the two entries obtained earlier. Then we insert the decimal point at a
suitable place so that the rule of characteristic is followed. This gives us the
antilogarithm of the given number.
Ezample 18 : Fin~ the antilogarithm of the each of the following :

(a) 0.0905 (b) 2.051 (c) 2.35 (d) 1.301 (e) ~.653
Solution. :
(a) 0.0905 = 0 + 0.0905
From the table of Antilogarithm,
antilog (0.09054) = 1.230
antilog (0.0905) = 1.230 x 10° = 1.230
(b) 2.051 = 2 + 0.051

From the table of antilogarithm,
antilog (0.051) = 1.125
:. antilog (2.051) = 1.125 x 102 =112.5
•
(c) 2.35 = -2 + 0.35
antilog (0.35) = 2.239
:. antilog (2.35) = 2.239 x 10-2 = 0.02239
(d) 1.301 = 1 + 0.301

LOGARITHM 45

antilog (0.301) = 2.000
:. antilog (1.301) = 2.000 x 101 =20
(e) 3.653 = -3 + 0.653
antilog 0.653 = 4.4498
:.antilog {a.653) = 4.498 x 1()-3 =0.004498.
Example 17: Using logarithm, evaluate the following:

(a) 4.382 (b) 2.632
3.738 0.0045
(c) "42.36 (d) (0.724)3
(e) 0.0064 x 1.507 (f) 6.45 x 981.4
Solution. :
4.382
(a) Let
x = 3.738
Then log x = log (:~)
= log 4.382 -log 3.738
= 0.6417 - 0.5726 =0.0691
.. x = antilog (0.0691) =1.172;
4.382
.. 3.738
= 1.172
2.632
(b) Let x = .0045
.. log x -_ (2.632)
.0045
= log 2.632 -log .0045
= 0.4203 - 3.6532 =-1 + 1.4203 - (-3 + 0.6532)
= -1 + 3 + (1.4203 - 0.6532) =2 + 0.7671 =?.7671
x = antilog (2.7671) =584.09.
2.632
0.0045 = 584.09
(c) Let x = (42.36)112
Then log x = 2"1 log (42.36) =2"1 (1.6269) = 0.8134
x = antilog (0.8134) =6.507.
" 4236 = 6.507 .
(d) Let x = (0.724)3

Then log x = log (0.724)3
= 3 log (0.724) =3(1.8597)
= 3 (-1 + 0.8597) =3(-0.1403) =- 0.4209
=-1 + 0.5791 =1.5791
x = antilog (1.5791) =0.3794 )( 10-1 =0.3794.
(0.724)3 = 0.3794
(e) Let x = .0064)( 1.507
log x = log .0064 + log 1.507
= 3.8062 + 0.1780 =-3 + 0.8062 + 0.1780 =3.9842
x = antilog (3.9842) =.009642.
. . 0.0064)( 1.507 =0.009642
(f) Let x = 6.45)( 981.4
log x = log (6.45)( 981.4)
= log 6.45 + log 981.4 =0.8096 + 2.9919 =3.8015
x = antilog (3.8015) = 6331.0.
. . 6.45 x 981.4 = 6331.0
Example 18 : Using logarithm evaluate

7.93 x 0.0054
0.0981
Solution:
7.93 x .0052
Let x = .0981
7.93 x .0052]
Then log x = I og [ .0981
= log (7.93) + log (.0052) -log (0.981)
= 0.8993 + -3.7160-2.9917
-
= 0.8993 + (-3 + 0.7160)-(-2 + 0.9917)

= (-3 + 2) + (0.8993 + 0.7160 - 0.9917)
. = -1 + (1.6153 - 0.9917) =I + 0.6236 = (1.6236)
x = antilog (1.6236) =0.4204.
. (25.36)2 x 0.4569
Example 19 : Fmd the value of 847.5
· L t (25.36)2 x 0.4569
S o I ution: e x = 847.5
LOGARITHM 47
Then Iogx =Iog [ (25.36)2 0.4569]

847.5
X
= log (25.36)2 + log (0.4569) -log (847.5)

= 2 log (25.36) + log (0.4569) -log (847.5)
= 2(1.4041) + (1.6599) - (2.9282) =(2.8082 + 1.6599) - 2.9282
= 2.4681- 2.9282 =-0.4601
= 1 + 0.5399 = 1,5399
x = antilog (1.5399) =0.3466.
3.279 x (1.207)112
Example 20: Using logarithm, Evaluate (120000)113
S I' Le 3.279 x (1.207)112

o ution : tx = (120000)1/3
Taking log of both sides, we get
3.279 x (1.207)1I2}
log x = log { (120000)113
= log 3.279 + 2"1 log (1.207) - 1

slog (120000)
= 0.5157 + 2"1 x 0.0817 - S1 (5.0792)

= 0.5157 + 0.04085 - 1.69306 =0.55655 - 1.69306 =-1.1365
= -2 + 2 -1.1365 = 2.8635
x = antilog (2.8635) = .073030.
'#33immi-1
L Write the following in standard form :
(a) 2348 (b) 23.48 (e) 0.0002348
(d) 2.348 (e) 234800 (f) 0.02348
[Ans. (a) 2.348 x 10 , (b) 2.348 x 101, (e) 2.348 x 10"4, (d) 2.348 x 100,
3
(e) 2.348 x lOS, (f) 2.348 x 10-2]
2. Write the following numbers in decimal form :
(a) 7.317 x 10"-4 (b) 7.317 x 101 (e) 7.317 x 1()4
(d) 7.317 x 100 (e) 7.317 x 10-2
[Ans. (a) 0.0007317, (b) 73.17, (e) 73170, (d) 7.317, (e) 0.07317]
3. Using log table find the logarithms of the following numbers:
(a) 12.70 (b) 0.0012
(e) 431.5 (d) 1.123
[Ans. (a) 1.1038, (b) 3.0792, (e) 2.6350, (d) 0.0504]
4. Find the antilogarithm of each of the following:

(a) 2.5428 (b) 0.752
(c) 6.123 (d) 1.301
[Ana. (a) 0.03489, (b) 5.649, (c) 1327000, (d) 0.2000]
6. Using logarithm table, find the value of each of the following:
(a) 0.0001 x 0.027 x 38.9 x 50.2 (b) 30.30 x 4.5 x 5.2
(c) 2.432 x 37.81 x 5.38 [Ana. (a) 0.0005272, (b) 708.9, (c) 494.8]
6. Using logarithm, evaluate the following:
(a) °o~:; (b) ~i°:'

(c) (11.34)113 (d) V1.96
[Ana. (a) 0.06457, (b) 0.0002497, (e) 2.247, (d) 1.401]
7 U' I bl al (23.5)2 (0.523)3 [Ana. 90.20]
• SlUg og ta e ev uate 1 _ (0.352)2
8. Find the fIfth roof of 78.62 by using logarithm. [Ana. 2.394]
1.121 x 3.378 x (0.5678)2 . I ·th
9 • E valuate (0.8123)2 usmg ogan m. [Ans.1.85]
8.25 )( 4.63
10. E val uate 2.18 [Ans. 13.92]
U Using logarithm, find the value of
41.32 x 20.18
[Ana. 8.106]
12.69
3
12. Evaluate V8.34.x (3.12)2 [Ana. 0.4995]-
(4.312)3 x V24.3
Simple Interest
INTRODUCTION
Every human being irrespective of their profession, deals with money either as a
borrower or as a lender. Business organisations implement new ideas through new projects
for expansion, diversification or moderisation. The entire operation is based on the concept
that money belonging to one may be used by others and can be returned within a designated
future date. The question which immediately arises in mind is whether the value of money
borrowed today will remain same after one year. Answer is ·'no'. Because money has time
value (i.e a rupee today is worth more than a rupee tomorrow). Money can be employed
productively to generate returns. For example, suppose that you have deposited Rs. 1,000 in .
a saving bank account and the bank pays 6% per annum return. Then, the amount
accumulated at the end of the year will be Rs. 1,060. The use of money bears the cost of
interest. Interest plays so important role in business that many individuals and agencies are
eng~d directly or indirectly in the business of lending money. The goal of this chapter is to
study about the types of interest and the computation of simple interest.
INTEREST
Interest is the consideration for the use of invested or borrowed money. For example,.
suppose that Mr. X borrows a particUlar sum of money from Mr. Y. Then Mr. X has to pay
certain amount to Mr. Y for the use of this money. This amount is called Interest. The money
borrowed is called the principal. When Mr. X return his indebtedness to Mr. Y, he has to pay
back both the principal and the interest. Interest is of two kind:
(i) Simple Interest
(ii) Compound Interest
In case of simple interest, the interest earned in not added back to the principal amount
whereas in compound interest, the interest earned is added back to principal, thus to form a
new principal for the new term. Interest at the end of every term is calculated and added to
the amount at the beginning of that term. This new amount will be treated as tile principal
for the new term. In simple interest, principal will remain same for every term.
In the succeeding sections of this chapter, we will elaborately study the formulas and
application of simple interest. Now let us briefly discuss the difference between simple
interest and compound interest by means of an illustration. Suppose that a person invests
Rs. 10,000 for 3 years at 8% simple interest per annum. The year by year interest calculation
is shown in the following table:
Year Principal at the Interest for the year Amount at the end of
beginning of every year every year
1 Rs.10,000 8% of 10,000 = Rs. 800 Rs.10,800
2 Rs.10,000 8% of 10,000 =Rs. 800 Rs.11,600
3 Rs.10,000 8% of 10,000 =Rs. 800 Rs.12,400
Amount accumulated at the end of 3 years is Rs. 12,400, so the total interest earned for
the three year taken together is Rs. 2,400 (Rs. 12,400 - Rs. 10,000). Now suppose that the
same amount Rs. 10,000 is invested at 8% per annum but compounded annually. Then the
calculation of interest is as follows :
Year Principal at the Interest for the year Amount at the end of
beginning of every year every year
1 Rs.10,000 8% of 10,000 =Rs. 800 Rs.10,800
2 Rs.10,800 8% of 10,800 =Rs. 864 Rs.11,664
I 3 Rs.11,664 8% of 11,664 =Rs. 933.12 Rs. 12,597.12
Total amount accumulated at the end of 3 years is Rs. 12,597. The total interest earned
in this case is Rs. 2,597.12. It should be noted that compound interest is always more than
simple interest.
SOME BASIC TERMS

(a) Principal Amount. This is the amount about to be invested or loaned. If a person
apply for a bank loan of Rs. 20,000, this amount is referred to as the principal amount to be
borrowed. Similarly, if XYZ Ltd. purchased a new machine for Rs. 3,00,000, this is the
principal amount invested on the machinery. It is denoted by 'P'.
(b) Number of Years (t). This is the tirrle period (in years) over which an amount of
money is..invested or borrowed.
(c) Conversion period (n). This is the number of times over which interest is
compounded on a given principal. In many cases, interest is calculated more than once in a
year. For example, in personal loans, interest is calculated on monthly basis but in case of
SIMPLE INTEREST 51
savings bank account interest is compounded on half-yearly basis. "n' is determined using the
following relation :
n = m xt
where m is the number of conversions per year. Thus, if certain principal is invested for 10
years and interest is compounded quarterly, then the number of conversion periods will be
40. It should be noted that n equals t, only when interest is compounded annually.
(d) Rate of Interest (r). This is the proportionate amount charged for the use of the
principal. It is defined as the interest charged for keeping Rs. 100 for 1 year. So the rate of
interest is always expressed as a percentage rate per annum. However, for the purpose of
calculation, interest rate is written in equivalent decimal form: r = 7% as r = 0.07; r = 12%
as 0.12 and so on.
(e) Interest per Conversion Period (i). We have already discussed that the rate of
interest (r) is the percentage rate per annum. What will be the interest rate, if the interest is
compounded more than once in a year? The interest rate "i' depends upon the number of
conversion periods per year "i' is calculated as follows:
. r
l = --
m
Thus, ifthe interested is calculated at 10% per annum but compounded quarterly then
4
i = 0 1 = 0.025 or 2.5%
If the number conversions per year is one, then i =r.

(f) Accumulated Amount (A). Amount is the sum of the principal and the interest.
Some authors use the term 'sum' and denote it by'S'.
A=P+I
SIMPLE INTEREST
Simple interest is generally used only for short-term investments or borrowings which
are often of less than one year. It is payable on principal only. For example, simple interest
on Rs. 1,000 at a rate of 6% per annum will be Rs. 60 every year through out the entire
period.
Let P be the principal at a simple rate of interest r% per annum for a period of't' years.
The interest charged at the end of t years is
!I=Pxrxt!
The amount at the end of t years is given by :

A=P+I
~ A=P+Prt
~ 1 A =P (1 + rt) !
52 RNANCIAL MATHEMATICS
Given any three of the four variable A, P, r and t, we can solve for the fourth
t.e. I p=~;rt1
Remark. For any transaction, if the transaction is to made for less than one year, the
time may be given in months, weeks or days. Since in simple interest formula, 't' represents
the number of years, the given time, if it is not in years, should be converted into year.
K 30
K days =365 years 30 days =365 years
K 12
K weeks =52 years 12 weeks =52 years
K 4
and. K months =12 years 4 months = 12 =1/3 years.
Example 1 : Find the amount at 6% Simple Interest of Rs. 1,200

(a) in 2 years. (b) in nine months.
Solution: Given principleP =Rs. 1,200

Rate of Interest r =6% =0.06
(a) In 2 years:
Amount A =P (1 + rt)
= 1,200 (1 + 0.06 x 2) = 1,200 (1 + 0.12)
= 1,200 (1.12) = Rs. 1,344
.. The amount is Rs. 1,344.
(b) In 9 months:
9 3
t =9 months =12 year =4" years
A = 1,200 (1 + 0.06 x 3/4)
= 1,200 (1 + 0.045) = 1,200 (1.045) =Rs. 1,254
.. Amount is Rs. 1,254
Example 2: Mr. X borrowed Rs. 7,500 on 2@hMarch 1966 from a corporate bank at a
rate of 8% p.a. If he wanted to clear the account on 'Ph June 1966 then what amount would he
have to pay to bank ?
Solution: P = Rs. 7,500

r = 8% i.e. 0.08
73 1
t = 73 days or 365 yr. =5" yr.
Amount A = P (1 + rt)
SIMPLE INTEREST 53
= 7,500 (1 + 0.08 x ~) = 7,500 (1 + 0.016)
= 7,500 (1.016) =Rs. 7,620

. . The amount is Rs. 7,620.
Example 3 : What time will be required for a sum of money to double itself at 5% simple
interest?
Solution: Let P be the principal. Given that the sum is double of its principal
:. S =2 P ... (1)
Let t be the time, r =5% or 0.05
S =P(1 +rt) ... (2)
(1) =(2) ~ 2P =P (1 + rt)
~ 2=1+rt
~ rt= 1
Substituting r =0.05, we get
0.05 t =1
~ t =20 years
. . 20 years are required to get the sum doubled.
Example 4 : Mr. Ram deposited Rs. 1O,0{)0 in a saving bank account which pays 10%
simple interest. He makes two more deposits of Rs. 15,000 each, the first at the end of 3
months and the second in 6 months. How much will be in the account at the end of the year, if
he makes no other deposits and no withdrawals during this time ?
Solution: In case of the deposit ofRs. 10,000

principle, P = Rs.10,000
time, t = 1 yr.
rate of interest, r = 8%:: 0.08
Amount is given by
A = p(1 + rt)
Here 'AI = 10,000 (1 + 0.08 x 1)
-= 10,000 (1.08) =Rs. 10,800
Two deposit of Rs. 15,000 are made at the end of 3 months and 6 months respectively. In
case of 3 months, the amount will remain in the account for remaining 9 months.
9 3
.. .t = 12 =i years
P = Rs. 15,000
A2 =' 15,000 (1 + 0.08 x'~)
A2 = 15,000 (1.06) = Rs. 15,900

In case of 6 months, the amount will remain for 6 months (1 year - 6 months)
6 1
t = 12 ='2 years
P = Rs. 15,000.
A3 = 15,000 (1 + 0.08 x 112)
A3 = 15,000 (1.04) = Rs. 15,600
Total amount = Al + A2 + A3
= 10,800 + 15,900 + 15,600 = Rs. 42,300
.. At the end of the year, Rs. 42,300 will remain in the account.
Example 5 : A shopkeeper borrowed Rs. 20,000 from two money tenders. For one loan he
paid 12% simple interest and for the other 14% simple interest per annum. After one year, he
paid Rs. 2,560 as total interest. How much did he borrow from each money lender?
Solution: Let the shopkeeper borrows Rs. P from money lender 1 at 12%.
Then amount borrowed from money lender 2 with be Rs. (20,000 - P) at 14%.
Interest is given by
I = Prt
Interest paid to money lender 1,
h = P x 0.12
Interest paid to money lender 2,
12 = (20,000 - P) x 0.14
Given that total interest paid is Rs. 2,560.
.. I} + 12 = 2,560
~ 0.12 P + 0.14 (20,000 -P) = 2,560
~ 0.12 P + 2,800 - 0.14 P = 2,560
~ 0.02P= 240
~ P = 12,000
.. 20,000 - P = 8,000 .
Money borrowed at 12% = Rs. 12,000
Money borrowed at 14% = Rs. 8,000
Example 6 : What percentage of simple interest must a person get on his investment of
Rs. 25,000, if he wants his investment to grow to Rs. 26,500 in 6 months?
Solution: Here P = Rs. 25,000

A = Rs. 26,500
6 1
t = 12 = '2 years
We know that I =A-P
Here I = 26,500 - 25,000 = Rs. 1,500
SIMPLE INTEREST 55
Simple interest I is given by

I = Prt
I
r =
Pt
1,500
Here r = -25-,0-0-'-0-x-(-l/-2) = 0.12 = 1?%
. . Required simple interest rate =12%.
L Find the simple interest and amount on an investment of Rs. 5,000 for 3 years, ifthe
interest is calculated at 4% simple interest per annum. [Ans. Rs. 600, Rs. 5,600]
2. At what rate will Rs. 1,500 yield Rs. 25 simple interest in 8 months? [Ans.2.5%]
3. What principal wi~l Ii
amount to Rs. 645 in years at 5% simple interest?
[Ans. Rs. 600]
4. What time will be required for a certain sum of money to double itself at 10% simple
interest?
[Ans. 10 years]
5. How much should an investor deposit now in a Bank to get Rs. 20,000 in 3 months, if
bank calculates 9% simple interest? [Ans. Rs. 19,560]
6. How long will Rs. 3,000 take to amount to Rs. 3,300 at 4% simple interest ?[Ans.
2.5 years]
7. Ram borrowed Rs. 5,000 from Shy am at 8% simple interest. After 9 months again he
borrowed Rs. 2,000, promising to return the entire indebtedness at the end of two
years. What amount Shy am will get from Ram? [Ans. Rs. 8,000]
8. Suresh borrowed Rs. 830 from Vikas at 12% rate of interest for 3 years. He then
added some more money to the borrowed sum and lend it to Deepak for the same
time at 14% simple interest. If Suresh gains Rs. 93.90 in the whole transaction, find
the sum lent by him to Deepak.
[Ans.935]
9. A certain amount of money was invested at 8% simple interest and after 9 months
an equal amount was invested at 10% simple interest. Find the period in which the
amount in each case becomes Rs. 52,000. How much money was invested in each
3
case? [Ans. 3"4 yrs. , Rs. 40,000)
Compound Interest
INTRODUCTION
The second method of calculating interest is the compound interest method where the
interest earned by an invested amc;mnt of money (principal) is reinvested so that it too earns
interest. In this concept, the interest earned on the initial principle becomes a part of
principal for the next period. At the beginning of every period, the principal will be the sum
of the principal of the previous period and the interest earned on that principal. For
instance, suppose that interest is converted annually. Then the principal for third year will
be the sum of the principal for the second year and the interest for second year. Thus, in case
of compound interest, interest is converted into principal and hence there is interest on
interests. In this chapter, we study the method of computation of compound interest, present
value and future value of investments, and etc.
COMPOUND INTEREST
An understanding of compound interest is very important for every common man, since
every one has to think of investing money. Let us see an example to know how the concept of
compound interest works out. Assume that Mr. A deposits Rs. 5,000 in a savings bank
account for 3 years at 10% per annum compounded annually.
Principal at the beginning of first year =Rs. 5,000
Interest for first year = 5,000 x 0.1 = Rs. 500
:. Amount at the end of first year =(Rs. 5,000 + 500) =Rs. 5,500
This is the principal for the second year.
Interest for second year = 5,500 x 0.1 = Rs. 550
:. Amount at the end of second year = (Rs. 5,500 + 550) =Rs. 6,050.
COMPOUND INTEREST' 57
This is the principal for third year.

Interest for third year = 6,050 x 0.01 =Rs. 605
:. Amount at the end of third year =(Rs. 6,050 + 605) =Rs. 6,655
This is the amount Mr. A will receive at the end of third year against the investment of
Rs.5,000.
The total amount due at the end of the last period is called the compound amount. The
difference between the compound amount and the original principal is called compound
interest.
Compound Interest = Compound Amount - Initial principal
Interest may be compounded annually, half-yearly, quarterly, monthly or at any other
regular periods of time. This time between two successive computation of interest is called
the conversion period.
The number of times over which the interest is compounded in one year is known as
frequency of conversion. For example, if the interest is compounded quarterly, then the
conversion period will be 3 months and the frequency of conversion is 4, i.e., 4 times in a
year.
It should be noted that regardless of the frequency of conversion, interest rates are
generally quoted as an annual nominal rate. So if the interest is compounded more than once
in a year, then the stated annual interest rate' should be converted into the rate per
compounding (or conversion) period. As we have discussed earlier in the preceeding chapter,
the rate per conversion period is found by dividing the annual nominal rate by the number of
conversion periods in a year.
To understand conversion period and rate per conversion period more precisely, go
through the following table, in which the rate per conversion period equivalent to a nominal
rate of 12% compounded is given.
Conversion period Frequencies of conversion (m) Rate per conversion period i =(r I m) %
Annually 1 12% =0.12
Semi-annually 2 12% _ 0.12_ 0 06

2 - 2 -.
12% _ 0.12 _ 0 03
Quarterly 4 4 - 4 - .
12% _ 0.12 _ 0 01
Monthly 12 12 - 12 - .
Weekly 52 12% _ 0.12 _ O' 0023

52 - 52 - .
12% 0.12
Daily 365 365 = 365 =0.00333
I
FORMULA FOR COMPOUND INTEREST
Let P be the principal earning interest compounded m times a year at a rate of i per
period. Let "n' be the number of conversion periods.
Then,
The amount at the end of first conversion period
A 1 =P+Pi=P(I+i)
The amount at the end of second conversion period
A2 = P (1 + i) + P (1 + i) i =P (1 + i) (1 + i) =P (1 + i)2
The amount at the end of third conversion period
= P (1 + i)2 + P (1 + i)2 i = P (1 + i)2 (1 + i) = P (1 + i)3
The amount at the end of the nth period =P (1 + i Y'

He.1ce, the compound amount A of a principal P at the end of n conversion periods at the
rate of interest of i per conversion period is given as follows:
1A =P (1 + i)n I, n =m x t, i = :
Where
P - Principal amount invested or borrowed
A - Compound Amount accumulated
r - Rate of interest per annum
- Rate of interest per conversion period
m - Number of conversion periods per year
n - Total umber of conversion periods
t -- Number of year.
It should be noted that the principal amount P is invested for t years at annual rate of r
and interest is compounded m times in a year. So the above formula for compound amount
can also be given by
Compound interest may be obtained by using the following formula:

Compound Interest I =A - P
Example 1 : Find the compound interest earned from Rs. 16,000 for 3 year at 12~ per
annum?
Solution: Here, P = Rs.16,000

1
rate of interest, r = 12~ =0.125
no. of periods, n = 3
Interest compounded annually .., =r
Amount A = P (1 + i)"
COMPOUND INTEREST 59
A = 16,000 (1 + 0.125)3 = 16,000 (1·423828)

= Rs. 22,781.25
Now Compound Interest I =A - P
=22,781.25 -16,000 =Rs. 6,781.25
:. Interest paid is Rs. 6,781.25
Example 2 : If Rs. 1, '750 is invested at 9% per annum interest for 10 years and interest is
compounded half-year, find the amount and interest.
Solution: P = Rs. 1,750 and r = 9% = 0.09

Interest is calculated half-yearly.
i = ~ = 0.045 and n = 10 'I( 2 = 20
Amount A = P (1 + i)lI
A = 1,750 (1.045)20
Let x = (1.045)20
log x = 20 log 1.045 = 20 x 0.0191 =0.3820
x = antilog (0.03820) =2.41
Now, A = 1,750 x 2.41 = 4,217.50
Interest, 1= S-P
= 4,217.50 -1,750 =Rs. 2,467.50
.. The amount is Rs. 4,217.50, and interest is Rs. 2,467.50
Example 3 : To what amount Rs. 10,000 accumulate in 6 year, if invested at 8%

compounded quarterly? [1.02)24 = 1.60B4J.
Solution: P = Rs. 10,000, and r = 8% =0.08

Rate of interest as per conversion period
,. = 4"r =40.08 =0.02 and n =6 x 4. 24

Amount A = P (1 + i)lI
A = 10,000 (1 + 0.02)24 =10,000 (1.02)24
= 10,000 x 1.6084 =Rs. 16,084
Example 4 : Find the rate of interest, if the sum of money will double itself in 10 years by
investing at compound interest.
Solution: Let P be the principal.

Let the rate of interest b~ r.
60 RNANCIAL MATHEMAncS
Interest is compounded annually, r = i and n = 10

Given that the amount will be doul>led in 10 years.
i.e. A = 2P
But A = P (1 + i)n
2P = P (1 + i)lO => 2 =(1 + i)lO
Taking log on both sides
log 2 = 10 log (1 + i)
I (1 .) - log 2 _ 0.0310 - 0 0301
og + £ - 10 - 10 - .
Now, 1 + i . = antilog (0.0301)
1 + i = 1.072
i = 0.072 = 7.2%
:. The required rate of interest is 7.2%
Example 5 : At what rate per annum compound interest will Rs. 5,000 amount to
Rs. 9,035 in 5 years if the interest is calculated quarterly?
Solution: P = Rs. 5,000, and A = Rs. 9,035

Let r be the rate of interest per annum.
Interest is calculated quarterly.
i = ~ andn= 4x5=20
.A = P (1 + i)n
9,035 = 5,000' (1 + i)20
(1 + J')20 _ 9,035
- 5,000
(1 + 0 20 = 1.807
20 log (1 + i) = log 1.807
I og (1 + £') -- log 20
1.807 _ 0.2570 - 0 0129
- 20 - .
1 + i = antilog (0.0129) = 1.030
i = 1.030 - 1 = 0.030
£
.
= 4r => r =4.~, .
r = 4 x 0.030 = 0.012
r = 12%
. . The required rate is 12%.
Example 6 : In how many years an amount will triple itself at 11% compound half
yearly?

r = 11%=0.11
Interest is compounded haIfyearly.
i = ~= 0.055
Given, A = 3P
But, A = P (1 + i)"
3P = P (1 + i)"
3P = P (1 + 0.055)"
3 = (1.055)"
n log (1.055) = log 3
log 3
n = log 1.055
0.4771
n = 0.0233 = 20.555
Now, No. of years t =nl2
t = 10.28 approx.
.'. Number of years is approximately 10.28 years.
Example 7 : The difference between compound interest and simple interest on a certain
sum of money invested for 3 years at 6% per annum is Rs. 110.16. What is that amount
invested?

Interest is compounded annually.
.. t = n = 3 and i = r = 6% = 0.06
Simple interest II = Prt
.. II = P x 0.06 x 3 = 0.18P
Compound interest 12 =A- P
I 2 =P(I+i)n-P
12 = P (1.06)3 - P
Given that 12 - II = 110.16
=> P (1.06)3 -P - 0.18 P =110.16
=> 1.191016P-P-0:18P= 110.16
=> 0.011016 P = 110.16
P = Rs. 10,000
.. The amount deposited is Rs. 10,000.
Example 8 : The amounts for a certain sum with compound interest at a certain rate in
two years and in three years are Rs. 8,820 and Rs. 9,261 respectively. Find the rate and sum.
Solution: Let P be the principal amount and i be the rate of interest.

Amount A = P (1 + iY"
At the end of two years, A =Rs. 8,820
.. . 8,820 = P (1 + i )2 ... (1)
At the end of three years, A =Rs. 9,261
" 9,261 =P (1 + i)3 ... (2)
Dividing (2) by (1), we get
9,261 P (1 + i)3
8,820 = P (1 + i)2
=> 1.05 = 1 + i
=> i = 0.05 = 5%
Now, substituting i = 0.05 in equation (1) we get,
8,820 =P (1.05)2
=> 8,820 =P x 1.1025 => P =Rs. 8,000
.. Required rate is 5% and principal is Rs. 8,000.
Example 9 : A certain sum of money is invested at 4% p.a. compound annually. The

interest for 2nd year is Rs. 25. Find the interest for:Jrd year.

A = P(l + iY"
Amount at the end of 1st year =P (1.04)
Amount at the end of 2nd year =P (1.04)2
Interest for 2nd year =Amount the at the end of 2nd year - Amount at the end of 1st.
Given interest for second year is Rs. 25.
25 = P (1.04)2 - P (1.04)
=> P (1.04) (1.04 - 1) = 25
=> P (1.04) (0.04) = 25 ... (1)
rd
Amount at the end of 3 year = P (1.04)3
Interest for 3rd year = Amount at the end of 3rd year - Amount at the end of 2nd year
:. Interest for 3 rd year = P (1.04)3 - P (1.04)2
= P (1.04)2 [1.04 -1]
= P (1.04)2(0.04)
=P (1.04) (1.04) (0.04) =25 x 1.04 [using (1)]

= Rs. 26.
. . Interest for third year is Rs. 26.
Example 10 : Mr. X wants to make an investment of Rs. 20,000 in one of the two banks
that fetch the return after 6 years. Bank A offers 8% interest compounded annually and Bank
B offers 7.8% compounded semi-annually. Which Bank should be chosen, so that Mr. X will
get maximum return ?
Solution: Amount is given by

A = P (1 + i)n
In case of Bank A :
P = Rs. 20,000, and r = 8% =0.08
.. ~ = r =0.08 and n = 6
Amount At = 20,000 (1.08)6
At = 20,000 x 1.586874
At = Rs.31,737.48
In case of Bank B :
P = Rs. 20,000, and r = 7.8% =0.078
Interest is compounded semi-annualy.
.. .0.078 = 0 .039 an d n = 6 x 2 = 1 2
= 2"r = -2-
~
Amount A 2 = 20,000 (1.039)12

A2 = 20,000 x 1.582656
A2 = Rs. 31,653.12
Since AI> A 2 , Mr. X should invest in Bank A to get maximum return.
Example 11 : Lal deposited an amount of Rs. 50,000 in two different Banks A and B,
dividing the amount into two investments. Bank A calculates -interest at a rate of 7% per
annum and Bank B calculates interest at the rate of 6% per annum convertible semi-
annually. At the end of 3 years, he received Rs. 10,632.35 as the return on his investment.
What amount he has deposited in both Banks ?
Solution: Let Rs. X and Rs. Y be the amounts deposited in Bank A and Bank B
respectively.
Total investment is Rs. 50,000
X + Y = 50,000 ... (1)
Compound interest is given by
I = A - P where A =P (1 + i)n
Interest earned from Bank A :

11 = X(1.07)3_X
=> 11 = 1.225043 X-X
11 = 0.225043X
Interest earned from Bank B :
12 = (1.03)6 Y - Y
12 = 1.194052 Y - Y
12 = 0.194052 Y
Total interest earned I =11 + 12
:. 1= 0.225043 X + 0.194052 Y
It is given that total interest received is Rs. 10,632.35
:. 0.225043 X + 0.194052 Y = 10632.35 ... (2)
Solving (1) and (2) we get,
X = Rs. 30,000 and Y =Rs. 20,000.
Rs. 30,000 and Rs. 20,000 are the' sums deposited in Bank A and Bank B
respectively.
INTEREST COMPOUNDED CONTINUOUSLY

If a principal of P is invested for t years at an annual rate of r and interest is
compund~ m times a year, then the interest rate per conversion period i is ~ and there are
mt conversion periods. The compound amount A at the end of t years becomes -
A=p(l+~rt m,
It is well known that if the interest is compounded more frequently, the compound
amount will become larger for a fixed principal, time period and annual interest rate. One
may think that the compound amount will be increased by indefinitely increasing the
frequency of compounding, i.e., m -+ 00. But there is an upper limit on the compound interest
that can be achieved in this way.
When interest is so computed that the iIlterest per year gets larger and larger as the
number of compounding periods increases continuously, i.e., 'm -+ 00, we say that interest is
compounded continuously. Thus, in case of continuous compounding of interest, the amount
A is given by
. mt
A = PLim
m .....
(1 + ~)m
oo
r )~xrt
A = PLim
m-+ oo
( 1+-
m
COMPOUND INTEREST
Til,
Let x = --:
r
as m - 00, x- 00.
A = Pert
Thus, the compound amount A for a principal amount P after t years at an annual
interest rate of r compounded continuously is given by
I A=Pert I
Remark. Value of e =2.718; log e =0.4343
Example 12: A person deposits Rs: 5,000 in a bank which pays interest at 11% p.a.
compounded continuously. How much amount will be in his account after 10 years? (e l .l =
3.0042)
Solution: P = Rs. 5,000, r =11% =0.11, t =10 years

Amount S=P.e rt
= 5,000. eO.ll )( 10
::: 5,000 . el.1 = 5,000 x 3.0042 = 15,021
Example 13 : What is the amount after 5 years, if Rs. 10,000 is invested at 8%

compounded
(a) annually? (b) semi-annually? (c) quarterly?
(d) monthly? and (e) continuously?
,
Solution: P =Rs. 10,000, r =8% =0.08 and t =5 years
(a) lfinterest is compounded annually:
Amount A = P (1 + i)'l
i = r = 0.08 and n =t = 5
Amount A = 10,000 (1 + 0.8)5 =10,000 x 1.469328 =Rs. 14,693.28
:. The amount is Rs. 14,693.28

(b) If interest is compounded semi-annually:
. r 0.08
, = "2= 2=0.04
n = 2 x 5 =10
Amount A= 10,000 (1.04)10
= 10,000 x\1.480244 = Rs. 14,802.44
:. The amount is Rs. 14,802.44.
(c) If interest is compounded quarterly:
; - !... - 0.08 _ 0' 02
--4-4-·
n = 4 x 5 =20
Amount A = 10,000 (1.02)20
= 10,000 x 1.485947 = Rs. 14,859.47
.• The amount is Rs. 14,859.47
(d) If interest is compounded monthly:
. r 0.08 00
, = 12 = 12 = O. 667
n = 12 x 5 =60
Amount A = 10,000 (1.00667)60
.=. 10,000 x 1.490142 =Rs. 14901.42
:. The amount is Rs. 14,901.42
(e) Ifinterest is compounded continuously:
Amount A = Pert
A = 10,000 eO.08x5
A = 10,000 x eM
A = 10,000 x 1.4918 :::: E,s. 14,918
. .. The amount is Rs. 14,918.
Example 14 : An amount of Rs. 5,000 is invested at an annual rate of 9% compounded

continuously. How long it will take to this principal to amount to Rs. 8,580 ?
Solution: Compound AmountA =P e t

Given that P = Rs. 5,000, r = 9% =0.09, A = Rs. 8,580
Substituting these values,
8,850 = 5,000 e 0.09 t
8,580
eo.o9t = 5 000 ~ eo.09t = 1. 716
,
Taking log on both sides,

log eo.o9t = log 1.716
0.09 x t x log e = log 1.716
0.09 x t x 0.4343 = 0.2345
0.2345
Example 15 : A sum of Rs. 4,000 is deposited in a savings bank account that fetches Rs.
885.60 as compound interest at a rate. of r% per annum, compounded continuously after 4
years. Find r.
Solution: Principal P = Rs. 4,000

Compound InterestA - P = Rs. 885.60
.. A = 4,000 + 885.60 =Rs. 4,885.60
Given that t =·4-
It is to find the rate of interest r.
Compound Amount A = Pert
Substituting the values, we get
4,885.60 = 4,000 e 4r
4r 4,885.60
~
e = 4,000 ~ e4r =1.2214
log e4r = log 1.2214
4r log e = log 1.2214
4 )( r x 0.4343 = 0.0867
r = 0.05 =5%
.. The required rate of interest is 5%.
PRESENT VALUE
Every one plans for future. One may think of his son's education, or daughter's marriage
for the future of his children. When making such kinds of future plans, we must know well in
advance what amount should be invested to receive the certain designed sum in the future. -
This original principal to be invested is called present value or the capital value of the
desined amount.
Thus, if money is worth 'i' per conversion period, the present value of the compounded
amount A due in 'n' conversion periods is the principal 'P' which is invested now at the rate
of'i' per period. We derive the formula from the compound interest formula.
We know that A =P (1 + i'r
~ P=A (1 +irn
Thus the present value of amount A due n conversion periods hence at the rate of'i' per
period is given by
I .P =A (1 + i~ I
I The quantity (1 + ii", denoted by 'v', is called the discount factor. v represents the
present value of Re. 1 due n periods hence at the rate of i per period.
I It should be noted that P and A represent the value of the same obligation at different
dates. P is the present value of a given obligation while A is the future value of the same
obligation. The difference between the two amounts is known as compound interest or
compound discount. .
i.e., compound discount:;: A - P
To derive the formula for the present value in case of interest compounded continuously,
we solve the formula for the compound amount.
CompOund amount is given by
A=Perl ~ P-=:Aert
Thus, the present value of compound amount A due a~ the end of t years at the annual
rate of r compounded continuously is given by .
I P=Ae-rt I
Example 16 : Find the present value of Rs. 300 at rate of interest of 6% per annum
payable 5 years hence.
Solution: Hence P = Rs. 300

i = r =6% =0.06
n :;: 5
Present value is given by
P = A (1 + i)"-n
P :;: 300 (1.06)-5:;: 300 (0.74726)
=Rs. 224.18
The required present value is Rs. 224.18.
Example 17 : How much should be invested at 5% per annum so that after 3 years the
amount will be Rs. 8,000, when the interest is compounded (a) annually? (b) half-yearly?
(c) quarterly? and (d) continuously?
$olution: Here P = Rs. 8,000, r = 5% =0.05, t =3 years.

(a) In case of interest compounded annually:
i = ~ = 0.05 and n = t = 3
Present value P = A (1 + i)-n
p = 8,000 (1.05)-3
P = 8,000 (0.86384) = Rs. 6,910.70
.. Amount to be invested is Rs. 6,910.70
(b) In case of interest compounded semi-annually:
!. - 0.05 _ 0 025
= 2- 2 - .
n = 2xt=2x3=6
Present value P = 8,000 (1.025~
P = 8,000 (0.8623) = Rs. 6,898.40
:. Amount to be invested is Rs. 6,896.40
(c) In case of interest compounded quarterly:
. r 0.05
, = 4"= 4=0.0125
~ = 4 x t = 4 x 3 = 12
Present value P = 8,000 (1.0125)-12
P = 8,000 (0.86151) = Rs. 6,892.10
:. Amount to be invested is Rs. 6,892.10
(d) In case of interest compounded continuously:
Present value P = A e-rl
P = 8,000 e-O·06 II 3 = 8,000 x e-O. 16
P = 8,000 x 0.86071 =Rs. 6,885.68
., Amount to be invested is Rs. 6,885.68.
Example 18: What is the present value of Rs. 15,000 due after 5 years from now if the
interest is comgounded continuously at the rate 'of interest of 6% ?
Solution: Here P = Rs. 15,000, t = 5 years, r = 6% = 0.06

'A
Present value P = A e-rt = rl
e
Substituting the values,
15,000 p_ 15,000
P = eO.06116 => - eO. 3
Let x = eO.3
log x = 0.3 log e .= 0.3 x 0.4343
log x =
0.13029
x = antilog (0.13029)
x = 1.3496
15,000
P = 1.3496 = Rs. 11114.40
The present value is Rs. 11,114.40.

VARYING RATE OF INTEREST

In the previous sections, we have assumed that the rate of interest is fiXed through out
the duration of the transaction. But practically the interest rates' change frO!!! time to time
due to the policy of the Banks or any other financial institution or the decisions taken by the
Government. Thus, a bank that charges the rate of interest at 8% per annum, may increase
it to 9% or reduce to 7% in the future.
The compound amount at changing rates is calculated as follows:
Suppose that a principal o{Rs. P is deposited in a bank and the bank compounds interest
at 'ii' per conversion period for nl periods.
Then the compound Amount will be P (1 + ilf l •
We assume that suddenly the interest rate is increased to i2 per conversion 'period and
the deposit is withdrawn at the end of another n2 period.
:., The compound amount at the end ofnl + n2 periods will be
A =P (1 + il)nl (1 + i 2 )nz
In this manner, we can calculate the compound amount, if the interest rate gets changed
any number of times.
Example 19 : A person deposited Rs. 1,000 in a bank at 5% compounded annually. After

5 years the rate of interest increased to 6% and after four more years, the rate of interest was
further increaS'ed to 7%. The money wa~ withdraw at the end of 12 years. What 'amount he
will get when he withdraws his deposit after 12 years ? •
Solution: For first.5 years

i = r =5% = 0.05, P = Rs. 1,000, n =5
Amount after 5. years
A = P (1 + i)n
A = 1,000 (1 + .05)5 = 1,000 (1.05)5
A = 1,000 (1.27628) = Rs. 1276.28
After 5 years, for next 4 years
=r = 6% = 0.06, P = Rs. 1,276.28, n = 4
Amount after 9 years
A = 1276.28 (1 + 0.06)4
= 1276.28 (1.06)4
=1276.28 x 1.26248 =Rs. 1611.28
.
After 9 years i = r = 7% = 0.07
Amount is withdrawn at the end of 12 years
. . n =3, P =Rs. 1,611.28
Amount after 12 years, A = 1611.28 (1 + 0.07)3
= 1611.28 (1.07)3
= 1611.28 x 1.225 = Rs. 1973.83
.. The amount the end of 12 years is Rs. 1973.83.
Example 20 : Mr. X deposited Rs. 10,000 in State Bank of India. The bank calculates the
interest at 8% p.a. compounded semi-annually. After 5 years, he again deposits an amount of
Rs. 8,000 in his account. The bank has increased the rate of interest from 8% to 10% at the
end of 8th year. If he withdraws the total amount at the end of 10 years, what amount will
have been accumulated in his account ?
Solution: Incp.se of deposit of Rs. 10,000 :

Rate of interest is 8% for first 8 years and 10% for next two years.
For first 8 years,
P = Rs. 10,000, r = 8% = 0.08
Interest compounded semi-anually,
.. i = b 08 = 0.04, and n = 8 x 2,= 16
2
Amount is given by A = P (1 + iY"
.. Amount at the end of 8 years
A = 10,000 (1 + 0.04)16
A = 10,000 (1.04)16
A = 10,000 (1.872792) = Rs. 18,727.92
This is the principal for 9th year
.. For next two years
P = Rs. 18,727.92, r = 10% = 0.10, n = 2 x 2 = 4
. _ 0.10_
, - 2 - 005 .
Amount at the end of 10th year
A = 18,727.92 (1 + 0.05)4
= 18,727.92 (1.05)4
= 18,727.92 x 1.2155 = Rs. 22,763.90 ... (1)
In case of deposit of Rs. 8,OOO/or 5 years starting from (Ph year:

Interest rate is 8% for first 3 years, and 10% for next two years.
For first three years
P = Rs. 8,000, r =8% = 0.08, n = 3 x 2 = 6
. - 0.08 -004
,- 2 "
A = 8,000 (1 + .04)6 = 8,000 (1.04)6
= 8,000 (1.2597) = Rs. 10,017.69
72 FINANCIAL AlA THEAIA TICS
This is the principal for 9th year.

.. For next two years
P = Rs. 10,077.69, r = 10% = 0.10, n = 2 x 2 = 4
. _ 0.10 _ 005
,- 2 - .

A = 10077.69 (1 + 0.05)4= 10077.69 (1.05)4
= 10077.69 (1.2155) =12249.43 ... (2)
Total Amount = (1) + (2) = Rs. 22,763.90 + Rs. 12,249.43 =Rs. 35,013.33
:. Mr. X will receive Rs. 35,013.33 at the end of 10 years.
Example 21 : To what sum will Rs. 2,000 amount in 8 years if invested at 6% effective
rate for the first 2 years, at ~% compounded semi-annually for the next 8 years at 6%
compounded continuously thereafter ?
Solution: P = Rs.2,000
For first 2 years:
r = i = 6% = 0.06, and n = 2
Amount is given by A = P (1 + i'Y'
A = 2,0004:1. + 0.06)2 = 2,000 (1.06)2
A = Rs.2,247.20
For next 8 more years :
P = Rs. 2,247.2 and r = 6% = 0.06
Interest is calculated semi-annually.
.. i = i =0.03, and n = 3 x 2 =6
A = 2,247.20 (1.03)6 =Rs. 2683.27
For last 3 years:
P = Rs. 2,683.27 and r = 6% = 0.06
Interest is calculated continuously.
A ~ Perl
= 2683.27 x eO•06 3 = 2683.27 x eO•18
Ie
= 2683.27 x 1.1972 =Rs. 3212.42

Amount at the end of 8th year is Rs. 3,212.42.
L Find the compound amount and compound interest of Rs. 1,00,000 invested for 6
years at 8% compounded quarterly. [ADs. Rs. 1,60,843, Rs. 60,843]
2. !fRs. 1,000 is invested at an annual rate of interest of 15%, what is the amount after
5 years if the interest is compounded monthly? [ADs. Rs.2107.18]
S. Find the compound amount of Rs. 2,000 for four years at 6% converted (a) annually,
(b) semi-annually, (c) quarterly, and (d) monthly. '
[~. (a) Rs. 2524.95, (b) Rs. 2,533.54, (c) Rs. 2,537.97, (d) Rs. 2,540.97]
4. An amount of Rs. 50,000 is deposited into a savings bank account that pays at the
rate of 6% p.a. What amount will be there in the account, if the interest is
compounded (a) annually, (b) quarterly, and (c) monthly?
[ADs. (a) Rs. 1,60,300, (b) Rs. 1,62,000, (c) Rs. 1,65,500]
5. Find the compound interest for a sum of Rs. 700 invested for 15 years at 8%
compounded semi-annually. [Ans. Rs. 1570.37]
8. In how many years an investment of Rs. 5,000 will amount to Rs. 7,000, if it is
invested at 8% compounded quarterly? [ADs. 4.25 years]
7. At what rate per cent per annum compound interest will Rs. 2,000 amount to Rs.
3,000 in 3 years, if the interest is reckoned half-yearly? [ADs. 14%]
8. In how many years will an amount double itself at 12.2% compounded annually?
[ADs. 6.02 years]
9. At what rate per cent will Rs. 40,000 yield Rs. 13,240 compound interest in 3 years?
, [ADs. 10%]
10. How long will it take for a principal to double if the money is worth 12% compounded
monthly? [ADs. 5.84 years]
lL A sum of money is put at compound interest for two years at 20% per annum. It
would fetch Rs. 482 more, if the interest is payable half-yearly than if it is payable
yearly. Find the sum. [ADs. Rs. 20,000]
12. The difference between simple interest and compound interest on a sum for 3 years
at 5% per annum is Rs. 76.25. Find the sum. [Ans. Rs. 10,000]
18. The difference between simple interest and compound interest on a sum of money
invested for 4 years at 5% per annum. is Rs. 150. find the sum. [Ans. Rs. 9677 .40]
14. A person aged 22 has contributed Rs. 25 to his provident fund during the current
month. What will this particular contribution amount to by the time he retires at age
60, assuming a rate of interest 7% p.a. ? [ADs. Rs. 326.98]
15. The compound interest on Rs. 8,000 in two years at certain rate is Rs. 820 and in
three years, it is Rs. 1,261 at the same rate. Find the rate of interest. [Ans.5%]
18. Mr. X deposited Rs. 10,000 in a savings account for 3 years offering progressive rate
of interest. Bank pays 10% per annum compounded semi-annually for the first year,
12% per annum compounded quarterly for the second year and 13% per annum
compounded continuously for the third year. Find the amount at the end of 3 years.
[ADs. Rs. 14,131.14]
17. If Rs. 2,000 is deposited in a savings account that earns interest at an annual rate of
6% compounded continuously, what is the value of the account after 3 years?
[ADs. Rs. 2,107.18]
18. At what rate will a principal amount triple itself in 12 years, if the interest is
• compounded continuously? [ADs. 9.15%]
19. How much should be invested at 6% per annum so that after 4 years, the amount
will be Rs. 25,000, when the interest is compounded continuously? [ADs. Rs. 19,655]
20. How long will it take for Rs. 4,000 to account to Rs. 7,000, if it is invested at 7%
.
compounded continuously? ' [ A D s . 8 years]
21. In how many years a principal amount P will become double, if money is worth 6%
compounded continuously? [ADs. 11.5 years]
22. Mr. A deposited Rs. 5,000 in a bank which calculates interest continuously. After 10
years, the amount accumulated was Rs. 15,020. At what rate bank calculated
interest? [ADs. 11%]
23. The' population of a town is 8,00,000. During the first year, the population increased
by 25%. During the second year, the population increased by 20%. During the third
year, the population increased by 10%. Find the population ofthe town after 3 years.
[ADs. 13,20,000]
24. A sum of Rs. 2,000 is invested at a rate of interest of 5% per annum. After 7 years,
the rate of interest was changed to 5% per annum convertible half-yearly. After a
further period of 3 years, the rate was again changed to 6% J>er annum convertible
quarterly. What is the accumulated value at the end of 15 years from
commencement? [ADs. Rs. 4,395.61]
25. What is the present value of Rs. 500 due at the end of 10 years, the rate of interest
being 5% p.a. for the first four years from now and 6% convertible half-yearly for the
next 6 years? [ADs. Rs. 288.51]
26. A sum of Rs. 1,000 is due at the end of 10 years 6 months. The present interest rates
are 7% per annum but it is expected that there will be a fall in the" rates after 6 years
bringing down the rate to 6% per annum. Find the present value of the sum of money
under these assumption. [ADs. Rs. 512.65]
27. The difference between the accumulated values of a sum of money accumulated for
10 years at an effective rate of 4% per annum and the accumulated value ofthe same
sum of money over the same period at 4% per annum payable quarterly is Rs. 150.•
Find the sum. [ADs. Rs. 17,401] ,
28. A promises to pay B a sum of Rs. 200 at the end of 3 years and another Rs. 400 at the
, end of 5 years from now. What immediate cash payment should B accept in lieu of
the above payments, if interest is compounded at 5% per annum? [ADs. Rs. 486.18)
29. Mr. Singh wants to accumulate Rs. 50,000 after 20 years for the purpose of his
daughter's marriage. How much money should be set a side now, if interest is
compounded continuously at an annual rate of 5% ? [Ans. Rs. 18,394]
30. Find the present value of Rs. 2,500 due after 4 years, if the interest rate is 6% per
annum compounded (a) annually, (b) quarterly, (c) monthly, and (d) continuously.
[ADs. (ci) Rs. 2,137, (b) Rs. 1,974.72, (c) Rs. 1,980.98, (d) Rs. 1,965.40]
31. A person invests a certain sum of money in a bank paying interest 5% effective and
plans to receive Rs. 5,000 in 5 years. What is the compound discount of this
investment? [ADs. Rs. t082.4]
32. What is the year zero deposit at 8% per annum compounded quarterly to obtain a
compound amount of Rs. 1,00,000 after 5 years? How much interest will be earned
during this period? [ADs. Rs. 67,297.15, Rs. 32,702.85]
33. Find the compound interest (compounded annually) on Rs. 10,000 for four years at
10% for the first year, 12% for the second year, 14% for the third year and 15% for
. the fourth year. [Ans. Rs. 6,uiI.52]
34. Which yields the higher rate of interest---a fixed deposit in a bank which giv~s Rs.
1,629 after 5 years for every Rs. 1,000 deposited or a National savings certificate
which gives Rs. 1,901 after 6 years for Rs. 1,000? [ADs. FD : 10.24%, NSC : 11.28%]
35. Mr. A has a right to receive an amount of Rs. 1,000 at the end of 12 years from now.
This right has been sold to Mr. B for a present value calculated at the rate of 8% per
annum. The money thus received was invested by Mr. A in a deposit account at 9%
per annum payable half-yearly. After 8 years the account had to be closed and then
Mr. A invested the amount available at 6% per annum in another bank. How much
has Mr. A gained or lost in. this transaction, as at the end of 12 years?
[ADs. Gain ofRs. 13.90]
•
Nominal and Effective Rates
of Interest -~ - - - ~-
INTRODUCTION
The value of money inves~d at an annual rate of r per annum compounded more than
once in a year will be more than the value of money at r per annum compounded annually.
This is because interest compounded more than one period will itself earn interest during
subsequent period. For example, value of Rs. 100 at 6% per annum compounded
semiannually is 100 (1.03)2, i.e. Rs. 106.09, while the value of the same principal at 6%
compounded annually is 100 (1.6) i.e. Rs. 106. So the effective return is Rs. 6.09. In this
chapter, we discuss the concept of effective rate and how effective r~te is applied in
comparing different investment alternatives.
NOMINAL AND EFFECTIVE RATE

In transactions involving compound interest, the stated annual rate of interest is called
nominal rate of interest. The actual percentage by which money grows during a year is
called effective rate of interest. In other words, the effective rate is the simple interest rate
that is equivalent to the nominal compound interest rate. Effective rates are also called
annual yields or true interest rates. It should be noted that in case of effective rate of
interest, interest is compounded only once in a year.
Let us understand the concept of nominal and effective rate of interest with a suitable
example.
Let Rs. 100 be invested for one year at 10% compounded quarterly.
Here 10% is the nominal rate of interest.
. NOMINAL AND EFFECTIVE RATES OF INTEREST n
The amount after one year is
A = 100 ( 1 + T
010)4
=100 (1.025)4 =Rs. 110.38
.. The actual interest earned on Rs. 100 is Rs. 10.38 in one year.
We say that the effective rate in this case is 10.38%.
Now at 10.38% per annum rate of interest, compounded annually,
A =100 (1 + 0.1038) =100 (1.1038) =Rs. 110.38.
Thus it is obvious that for a principal of Rs. 100, the amount at a rate of 10.38%
compounded annually is equivalent to the amount at a rate of 10% compounded
, . quarterly.
We therefore say that the effective rate' is 10.38% and the corresponding nominal rate is
10% (compounded quarterly).
RELATION BETWEEN EFFECTIVE RATE AND NOMINAL RATE

Let r e be the effective rate of interest and r be the corresponding nominal rate
compounded 'm' times in a year.
Let P be the principal invested.
Let i be the rate of interest per conversion period.
. r
Therefore t=-
m
At re effect rate of interest, the amount after one year is given by
Al =P (1 + re) ... (1)
At r compounded m time in a year, the amount after one is given by
A2=p(1+~r ... (2)
The amount at re effective is equivalent to the amount at r compounded m times a year.

= A2
r
.. Al
~ P(1 + re) = p( 1 + ~
re = (1 + ~ r- 1
Thus, the relation between nominal rate and effective rate is given by
Using this relation, we can find the effective rate equivalent to)he--no-minal rate r
compounded m times a year, i.e. equivalent to rate i per conversion period.
In the above relation, interest is compounded 'm' times a year at r nominal rate of
interest. Now we derive the relation between the nominal rate and effective rate, if the
nominal rate is r compounded continuously.
If the interest is compounded continuously at r per annum nominal rate, the effective
r~
rate of interest is given by
re =~ [ (1 + ~ 1]
re = m_oo
Lim (1 + !...)m
m
-1
re =~ [ (1 + ~ fr- 1
re =[ ~o (1 + ~ )~r -1'
r-
1
re = [Lim (1 + !... )(~ 1

m-oo .m
~ re = [Lim
x-o
(1 + x)1!% r- 1 Let x =-mr .
as m _oo,x-O
~ re = er - l
Thus the relation between the effective rate and nominal rate in case of nominal rate r
compounded continuously is given by-
I re =er -11
The nominal rate r compounded continuously and equivalent to a given effective rate, r e ,
is called the force of interest.
Remark 1 : If the conversion period is one year, at r nominal rate of interest, that is, if
m =1, then the effective rate equals nominal rate.
re = (1+~r -1
re = (l+ff -1=I+r-l=r m= 1
Thus, re = r.
Remark 2 : The effective rate of interest depends only on the nominal rate r and the
number of conversion periods in a year 'm' but is independent of the principal P.
Remark 3 : The effective rate can be a useful guide for comparing alternative invest-
ment opportunities available to an individual.
NOMINAL AND EFFECTIVE RATES OF INTEREST 79
Example 1 : Find the effective rate of interest corresponding to 8% nominal rate

compounded quarterly.
Solution: Nominal rate of interest, r= 8% = 0.08

Interest is compounded quarterly.
.. No. of conversions per year m =4 and mr = 40.08 = 0.02 = 4
Effective rate of interest re = (1 + ~ r-1
re =. (1 + 0.02)4 - 1 = (1.02)4 r 1
= 1.0824 - 1 = 0.824 = 8.24%
The required effective rate is 8.24%.
Example 2 : Find the effective rate equivalent to the normal rate of interest 6%
compounded continuously.
Solution: In case of continuous compound interest, the effective rate is given by

re =er -1
Here r = 6% = 0.06
re = eo.6 -1
re = 1.0618 - 1 = 0.0618 = 6.18%
:. The effective rate of interest is 6.1%.
Example 3 : Find the effective rate of interest equivalent to the nominal rate 9%
converted (a) semi-annually, (b) quarterly, (c) monthly and (d) continuously.
Solution:
(a) In case of Semi-annual conversion:
r
The effective rate re equivalent to the nominate r converted m time a year is given by
re = (1 + ~ -1
Given that r = 9% = 0.09
.. Here, interest is compounded semi-annually,
m =2
re = (1 + 0~9r -1
re - (1.045)2 - 1
re = 1.0920 - 1 = 0.920 = 9.2%
. . The effective rate is 9.2%.
(b) In case of quarterly conversion:
r-1
m=4
re (1
= + 0~9
re = (1.0225)4 - 1
re = 1.0931 - 1 =0.0931 =9.31%
:. The effective rate is 9.31%
(c) In case of monthly conversion:
r
m = 12
2
.. re = ( 1 + °i~9 - 1
re = (1.0075)12 -1
re = 1.0938 - 1 =0.0938 =9.38%
The effective rate is 9.38%.
(d) In case of interest converted continuously:
The effective rate of interest r e equivalent to the nominal rate r compounded
continuously is given by
re = er -1
Here re = eO.09 - 1
re = 1.0942 - 1 = 0.0942 = 9.42%
Example 4: Find the force of interest corresponding to the effective rate 6%.
Solution: The force of interest r corresponding to the effective rate re is given y

re = er -1
Here re = 6% = 0.06
0.06 = er -1
er = 1.06
Taking log on both sides we get
r log e = log 1.06
r (0.4343) = .0253
0.0253
r = 0.4343 = 0.583 = 5.83%
The force of interest is 5.83%.
Example 5 : Find the nominal rate compounded quarterly which is equivalent to the
effective rate 6%.
r-1
Solution: The relation between the nominal rate and effective rate is given by
re = (1 + ~
Here re = 6% = 0.06 and m=4
" 0.06 = (1+~r-

=> (1 +~r = 1.06
Taking log on both sides, we get
4 log ( 1 + ~) = log 1.6
=> 4 log (1 + ~) = 0.0253

=> log ( 1 + ~) = .0063
=> 1+ ~ = antilog (0.0063)

r
1+ 4" = 1.0146
r
=> 4" = 0.146
=> r == 0.0584 = 5.84%
. . The nominal rate is 5.84%.
Example 6 : Which is the better investment from the stand point of the investor: 6.2%
compounded semi-annually or 6% compounded monthly.
r
Solution: The effective rate (r e) corresponding to the nominal rate r is given by
re :: (1 + ~ -1
In case of 6.2% compounded semi-annually:
m == 2, amd r =6.2% = 0.062
Here re = (1 + 0.~62 r - 1
= (1 + 0.031)2 - 1 =(1.031)2 - 1
= 1.06296 - 1 == 0.6296 = 6.3%
In case of interest compounded monthly:
r = 6% =0.06 and m == 12
0.06)12
re = ( 1 + 12 -1
= (1.005)12 - 1 = 1.06168 - 1
= 0.06168 = 6.17%.
The effective rate of interest corresponding to the nominal rate 6.2% compounded semi-
annually is greater.
:. The first investment (6.2%) is better investment.
Example 7 : When is a better investment : 7.8% compounded semi-annually or 8%

compounded annually.
Solution: In case of 7.8% compounded semi-annually:

The effective rate 're' corresponding to the nominal rate r is given by
re = (1 + ~r-1
Here r = 7.8% = 0.078 and m = 2
., re = (1 + .0;8f -1
=> re = (1.039)2 - 1
=> re = 1.0795 -1 = 0.0795 = 7.95%.
In case of 8% compounded annually:
Here r = 8%
If the nominal rate r is compounded annually, then the effective rate re =r
re = r = 8%
Here, the effective rate of interest corresponding to the nominal rate of interest 8%
compounded annually is greater than the effective rate corresponding to the nominal rate
7.8% compounded semi-annually.
:. 8% compounded annually is better investment.
Example 8 : Find the nominal rate compounded monthly equivalent to 5% compounded

semi-annually.
Solution: Let r be the nominal rate compounded monthly.

The effective rate 'r e', corresponding to the nominal rate converted m times a year is
r
given by
re = (1 + ~ -1
.. In case of r compounded monthly
m = 12 and re = (1 + ;2 r-
1 ... (1)
In case 5% compounded semi-annually,

r = 5% =0.05 and m =2
re ~ (1 + 0~5 r-1
=> re = (1.025)2 - 1 ... (2)
Given that (1) is equivalent to (2)
.. ( 1 + ;2 f2 - 1 = (1.025)2 - 1
=> ( 1 + ;2) 12 = (1.025)2

12 log ( 1 + ~2) = 2 log 1.025
=> 12 log ( 1 + ;2 ) = 2 x 0.0107

2x 0.107
=> log ( 1 + ;2) = 12
r
=> 1+ 12 = antilog (0.0018)
r
1+ -
12
= 1.004
r
=>
12 = 0.004 => r = 0.048 =4.8%
:. The required nominal rate is 4.8%.
Example 9 : What nominal rate compounded quarterly will be equivalent to 10%

compounded continuously ?
Solution: Let r be the nominal rate compounded quarterly.

The effective rate r e, corresponding to the nominal rate r converted m times a year is
given by
re = (1 +: r-1
In case of r compounded quarterly
m =4
re = (1 + i 1 r- ... (1)
The effective rate re, corresponding the nominal rate r converted continuously is given by
re = er -1
In case of 10% compounded continuously
r = 10% =0.10
.. re = eO. 10 - 1 ... (2)
Given that (1) is equivalent to (2)
.. (1+~r- = eO.1o-1
::;.
(1 +~r = eO.1O
4 log (1+~) = 0.10 x loge
=> 4 log ( 1 + ~) = 0.10 x 0.4343

=> log ( 1 + ~) = 0.0!343 =0.0109
r
1 + 4" = antilog (0.0109)
r r
1 + 4" = 1.0254 => 4" = 0.0254
r = 0.1016 = 10.16%
The nominal rate is 10.16%.
Example 10: A money-lender charges interest at the rate of 10 paise per rupee per month,
payable in advance. What effective rate of interest does he charge per annum?
Solution : The money lender charges interest at the rate of 10 paise per rupee per
month, payable in advance.
Therefore, 10 paise may be treated as interest on 90 paise for one month.
· 10 1
.. The interest rate per month t =90 =9" .
r 1
i.e.
12 9
The effective rate re corresponding to the nominal rate r is given by
re = :r
(1 + -1
Here m = 12
NOlllNAL AND EFFECnVE RATES OF INTEREST 85
=> re + 1 = ( 190 )12

log (1 + re) = 12 log (~O)

=> log (1 + r,) = 12 [log 10 -log 9]
=> log (1 + re) = 12 (1 - 0.9542)
=> log (1 + re) = 12 (0.0458)
=> log (1 + re) = 0.5496
=> 1 + re = antilog (0.5496)
=> 1 + re = 3.545
re =, 2.545 =254.5%
The effective rate is 254.5%
Example 11 : A deposited an amount in a bank for 10 years at the effective rates of

interest 3% per annum for 4 years, 4% per annum for next 4 year and 5% per annum for the
last two years. B deposited the same amount in an another bank at a constant rate of interest
compounded semi-annually. After 10 years if both A and B get same accumulate amount, at
what rate of interest B deposited his money ?
Solution: Let Re. 1 be the principal.
The amount is given by A = P (1 + i)n
For A, the Amount after 10 years is
Al = 1 (1.03)4 (1.04)4 (1.05)2 ... (1)
Let r be the rate of interest for B.
Interest compounded semi-annually,
For B, the amount after 10 years is

A2 = 1 (1 + i)20 = (1 + i)20 ... (2)
To get same accumulated amount,

(1) = (2)
=> (1 + i)2o = (1.03)4 (1.04)4 (1.05)2
=> (1 + i)20 = 1.4516
20 log (1 + i) = log (1.4516)
. 0.1620
log (1 + l) = 20 = 0.0081
1+i = antilog (0.0081)

1+i = 1.019
i = 0.019 =1.9%
r = 2 x i =2 x 1.9 =3.8%
Rate of interest for B is 3.8%.
L Find the effective rate of interest corresponding to 12% nominal rate compounded
monthly. [ADs. 12.68%]
2. What is the effective rate which is equivalent to a nominal rate 10% per annum
compounded semi-annually? - [ADs. 10.25%]
3. Find the effective rate equivalent to the nominal rate 5% compounded continuously.
[Ans. 5.13%]
4. Find the effective rate equivalent to the nominal rate 8% compounded continuously.
[ADs. 8.3~]
5. Find the effective rate-equivalent to the nominal rate of 7%, converted (a) quarterly, •
(b) monthly and (c) continuously. [Ans. (a) 7.19%, (b) 7.22%, (c) 7.25%]
6. Find the effective rate equivalent to the nominal rate 6% converted (a) monthly, (b)
continuously. [ADs. (a) 6.16%, (b) 6.18%]
7. Find the force of interest corresponding to the effective rate 8%. [ADs. 7.69%]
8. What annual rate compounded continuously is equivalent to an effective rate of 5% ?
[ADs. 5.82%]
9. Find the force of interest corresponding to the effective rate 9%. [ADs. 8.61%]
10. Find the effective rate of interest corresponding to nominal rate of 5% per annum
compounded (i) semi-annually, (ii) quarterly, and (iii) monthly.
[ADs. (i) 5.06%, (ii) 5.09%, (iii) 5.12%]
1L A certain bank offers an interest rate of 6% per annum compounded annually. A
competing bank compounds its interest continuously. What nominal rate should the
competing bank offer so that the effective rates of the two banks will be equal ?
[ADs. 5.82%]
12. Find the nominal rate compounded monthly equivalent to the effective rate 12% per
annum. [Ans. 11.4%]
13. Which is a better investment from the stand point of the investor: 4% per annum
compounded quarterly or 4.1% effective? [ADs. 4.1% effective]
14. Which is better from the stand point of investor: 6.1% converted quarterly or 6%
converted continuously? [Ans. 6.1 quarterly]
15. Which is a better investment: 5.5% compounded semi-annually or 5% compounded
monthly? [ADs. 5.5 semi-anually]
, .
NOMINAL AND EFFECnVE RATES OF INTEREST 87
16. Bank 'A' offers interest at an annual rate of 9.1% compounded semi-annually, and
bank 'B' offers interest at 9% compounded monthly. Which Bank offers the better
deal? [Ans. Bank B]
17. Find 'the nominal rate compounded quarterly equivalent to 6% compounded semi-
, annually. . [Ans. 5.92%]
18. What nominal rate of. interest compounded monthly will ,be equivalent to 8%
compounded continuously? [Ans.8.04%]
19. Find the compound interest compounded semi-annually equivalent to 9%
compounded monthly. [Ans.9.18%]
20. A money lender charges interest at the rate of 5 paise .per one rupee per quarter,
payable in advance. What effective rate does he change per annum? [Ans.22.8%]
21., A money lender charges interest at the rates of 10 rupees per 100 rupees per half
year, payable in advance. What effective rate of interest does he charge per annum?
[Ans. 23.5%]
22. A deposits an amount in a bank for 16 years at the effective rates of interest 3% per
annum for 10 years, 4% per annum for 4 years and 5% per annum for the last two
years. B deposits the same amount in another bank at a constant force of interest.
After 16 years if both A and B get same accumulated amount, at what rate of
interest B deposited his money? [Ans.3.43%]
23. What do you mean by nominal rate of interest? How does it differ from effective rate
of interest ? Establish the relationship between the nominal and effective rate of
interest (a) when compounded m times a year and (b) when compounded
continuously? When will nominal rate be equal to effective rate of interest?
~=-
Equation.
----
of Value
--------- ------=--=--=-=--=-==--=_--==--=-_-.J
INTRODUCTION
We have so far' discussed the kinds of interest as well as the method bf converting
nominal value into effective rate. By using effective rate, we generally compare different
investment alternatives. We have also seen that money has time value. A sum of money
today will not be the same in value tomorrow. The question now is how to find the value of a
certain financial at a future date which is equivalent to some other obligation(s). Answer is
the equation of value. In this chapter, we study the concept of equation of value in a detailed
manner.
EQUATION OF VALUE
Money has different values at different times. In business transactions, different sums
are flowing at different points of time. Such flows can be equated at a particular point of
time. An equation of value is an equation which states that the sum of the values, on a given
date, of one set of obligations is the same as the sum of values, on this date, of another set of
obligations. The date chosen for comparing the values of two sets of obligations is called the
focal date or comparison date.
The equation of value is given by,;
Sum of the values ('~ one set of } {sum ofthe values of another set of
obligations (old ebligations) on focal date = obligations (new obligations) on focal date
Let'Rs. x be a non-interest bearing debt which is due at some specified time. The value of
this debt at the due date is of course Rs. x. Suppose that money is worth i per period. If the
debt is not repaid on due date and paid 'n' periods after due date, then the value of the
money is of course more than Rs. x and is found by multiplying x by (1 + i)'t. But if the debt is
EQUATION OF VALUE 89
repaid 'n' periods before due date, then the value of the money is less than Rs. x and is found
by multiplying x by (1 + iT".
Thus,
(a) Value ofRs. x, n periods after due date at the rate i per period is x (1 + f)".
(b) Value ofRs. x, n periods before due date at at the rate i per period isx (1 + xT".
Remark:
(a) Focal date is decided on by the lender and the borrower. In case of only one new
obligation, the due date is the focal date. If there are more than one new obligations,
then focal date is generally the due date of the last obligation.
(b) The flows of money involved may be involving simple interest or compound interest.
Simple interest is used only if it is mentioned in the problem, otherwise it is treated
as compound interest.
(c) It should be noted that if two set of obligations have equal values on one date, then
they will have equal values on any other date, provided rate of interest is same for
each obligations.
(d) If the interest is calculated on the basis of simple interest, the conversion should be
based on the methods of conversion which we have discussed in the chapter: Simple
Interest.
(e) If the problem is to find the focal date, or the number of periods of conversion
.
(months/years), we assume that the focal date is today .
Example 1: A man borrowed Rs. 10,000 from a money lender at 9% simple interest and
agreed to make two equal payments, one due in 6 months and the other in 12 months. Find
the payment at the end of 12 months.
Solution: Let Rs. x be the amount of equal payment.

Focal date is 12 months.
r =9% =0.09
The old obligations and new obligations are shown in the following table:
Old Value of each at New Obligations Value of each at
Obligations focal date focal date
Rs. 10,000 now 10,000 (1.09) Rs. x at the end of 6 months x (1 + (0.09) x 1/2)
Rs. x at the end of 12 months x
The equation of value is given by :
Sum of the values of old Obligations} _ {sum of the values of new obligations
at focal date - at focal date
:. The equation is:
10,000 (1.09) = x (1.045) + x
~ 10,900 = 2.045 x
~ x = Rs. 5,330.07
.. Payment at the end of 12 years is Rs. 5,330.07.
Example 2 : A man owes Rs. 2,000 due in 2 months, Rs. 1,000 due in 5 months and Rs.
1,BOO due in 9 months. He wishes to discharge his obligations by two equal payments due in 6
and 12 months respectively. Find the equal payments if money is worth 6% simple interest
and at the end of 1 year is the agreed focal date.
Solution: Let Rs. x be the equal payments.

The focal date is 1 year.
Rate of interest is 6% simple interest.
The old obligations and new obligations are shown in the following table :
Old Value of each at New Value of each at
Obligations focal date Obligations focal date
Rs. 2,000 due in 2 months 2,000 [ 1 + (0.06 x ~) ] Rs. x due in 6 x [ 1 + (0.06 x ;2) ]
months
Rs. 1,000 due in 5 months 1,000 [ 1 + ( 0.06 x ;2) ] Rs. x in 1 year x
Rs. 1,800 due in 9 months 1,800 [ 1 + ( 0.06 x ;2) ]

Sum.ofthe values of old Obligations} _ {sum of the values of new obligations
:. The equation is
2,000 [ 1 + (0.06 x ~) ] + 1,000 [ 1 + ( 0.06 x ;2)]
+ 1,800 [ 1 + (0.06 x ;2) ] =x [ 1 + (o.~ x ;2) ] + x
2,000 (1 + 0.05) + 1,000 (1 + 0.035) + 1,800 (1 + 0.015) =x (1 + 0.03) + x

(2,000 x 1.05) + (1,000 x 1.035) + 1,800 (1.015) =X (1.03) + x
2,100 + 1,035 + 1,827 = 2.03 x
2.03 x =4,962
x = 2,444.33
The installment amount is Rs. 2,444.33.
Example 3 : What single payment 5 years hence will discharge the debt of Rs. 800 and
Rs. 500 in 3 years and 9 years respectively, ifth~ money is worth 6% compounded quarterly?
Solution: Let Rs. x be the amount due in 5 years

The focal date = 5 years
r = 6% ..
.
£ =4"r =40.06 =o. 015
The old obligations and new obligations are shows in the following table:
Value of each at Value of each at

Old Obligations New Obligations
focal date focal date
800 due in 3 years 800 (1.015)2 x 4 X at the end of 5 years
500 due in 9 years 500 (1.015)- 4 x 4 X

Sum of the values of old ObligatiOns} _ {sum of the values of new obligations
The equation is : 800 (1.015)8 + 500 (1.015)-16 =X
=> .. x = 900.8 + 394.94
=> x =Rs. 1,295.74
The required payment is Rs. 1,295.74.
Example 4 : A debt of Rs. 5,000 due in five years is to be repaid by a payment of Rs.
2,000 now and a second payment at the end of 6 years. How much should the second payment
be if the rate of interest is 6% compounded quarterly ?
Solution: Let Rs. x be the second payment.

The focal date is 6 years.
Rate of interest r = 6% = 0.06.
.. ; - !:.. - 0.06
~-4 4 -_ 0 .015
The old obligations and new obligations are shown in the following table.:
Value of each Value of each at

at focal date focal date
Rs. 5,000 due in 5 years 5,000 (1.015)4 Rs. 2,000 now 2,000 (1.015)6 x 4
Rs. x at the end of 6 years x

Sum of the values of old obligations } _ {sum of the values of new obligations
5,000 (1.015)4 = 2,000 (1.015)6 x 4 + X
=> 5,306.82 = 2,859.01 + x
x =5,306.82 - 2,859.01
=> x == 2,447.81
The second payment is Rs. 2,447.81
92 FINANCIAL AlA THEMAncS
Example 5 : Mr. X owes Rs. 1,000 due in 1 year and Rs. 3,000 due in 4 years. He agrees
to pay Rs. 2,000 today and the reminder in 2 years. How much he pay at the end of 2 years if
the money is worth 5% compounded semi-annually ?
Solution: Let Rs. x be the final payment due at the end of 2 years.
r =5% =0.05
Interest is calculated half-yearly
.. i = 0~5 =0.025
The old obligations and the new obligations are shown in the following table.
Value of each at Value of each at
Rs. 1,000 due in 1 year 1,000 (1.025)1" 2 Rs. 2,000 today 2,000 (1.025)2" 2
Rs. 3,000 due in 4 years 1,000 (1.025)- 2" 2 Rs. x due in 2 years. x
The required equation
.. 1,000 (1.025)2 + 3,000 (1.025)-4 =2,000 (1.025)4 + x
1,050.625 + 2,717.852 = 2,207.626 +x
3,768.477 = 2,207.626 + x
x =Rs. 1,560.85
. . The amount to be paid is Rs. 1,560.85.
Example 6 : A debt of Rs. 2,000 due in 2 years and Rs. 3,000 due in 7 years is to be
repaid by a single payment of Rs. 1,000 now and 2 equal payments which are due 1 year from
now and 4 years from now. If the interest rate is 6% compounded annually, how much will be
the equal payments ?
Solution: Let Rs. x be the equal payment.

The focal date is 4 years
i = r = 6% = 0.06
The old obligations and now obligations are shown in the following table:
I Value of each at Value of each at

._---
Rs. 2,000 due in 2 years 2,000 (1.06)2 Rs. 1,000 now 1,000 (1.06)4
Rs. 3,000 due in 7 years 3,000 (1.06)-3 Rs. x in 1 year x (1.06)3
Rs. x due in 4 years x I
The equation of value is given by:

. . The required equation
2,000 (1.06)2 + 3,000 (1.06)-3 =1,000 (1.06)4 + X (1.06)3 + X
=> 2,247.2 + 2,518.86 = 1,262.48 + 1.19lx + x
=> 2.191 x = 3,503.58
x = 1,599.01
The equal payment is Rs. 1,599.01.
Example 7 : Mr. X agrees to pay Rs. 800 due in 2 years without interest and Rs. 300 due
in 9 years with 6% annual effective rate of interest. He wishes to repay these debts in 2 equal
installments due 4 years and 5 years respectively. If money worth 4% converted semi-
annually, how much should each installment be ?
Solution: Let Rs. x be the amount of equal installments.

r = 4% = 0.04
Interest is compounded semi-annually.
i =~= 0.02.
Value of each at Value of each
focal date at focal date
Rs. 800 due in 2 years 800 (1.02)3 x 2 Rs. x due in 4 years x (1.02)1 x 2
Rs. 300 due in 9 years with 300 (1.06)9 (1.02)4 x 2 Rs. x due in 5 years x
6% effective rate interest [i.e.
300 (1.06)9]
.. The equation is
800 (1.02)6 + 300 (1.06)9 (1.02)-8 = X (1.02)2 + X
=> 800 (1.12616) + 30 (1.68948) (0.85439) =1.0404x + x
=> 900.93 + 432.59 = 2.0404 x
=> 1,333.52 =2.0404 x
x =Rs. 653.56
The required amount is Rs. 653.56.
Example 8 : Mr. X secured two loans from a bank: one for Rs. 8,000 due in 3 years and
another one for Rs. 15,000 due in 6 years, both at an interest rate of 10% per annum
compounded semi-annually. The bank has agreed to allow the two loans to be consolidated
into one loan payable in 5 years at the same interest rate. What amount will Mr. X be
required to pay the bank at the end of 5 years?
Solution: Let Rs. x be the amount to be repaid by Mr. X.

r = 10% = 0.10
. r 0.10
.. l ='2 =-5- =0.05
The old obligations and the new obligations are shown in the following table:
Value of each at Value.of each
Old Obligations New
Obligations
Rs. 8,000 due in 3 years @ 8,000 (1.05)6(1.05)4 Rs. x at the end x
10% p.a. compounded semi- of5 years
annually i.e. 8,000 (1.05)6
Rs. 15,000 due in 6 years @ 15,000 (1.05)12 (1.05)-2
10% p.a. compounded semi-
annually i.e. 5,000 (1.05)12
:. The equation is:
8,000 (1.05)6 (1.05)4 + 15,000 (1.05)12 (1.05)-2 =X
=> 8,000 (1.05)10 + 15,000 (1.05)10 = X
=> 8,000 (1.62889) + 15,000 (1.62889) = x
13,031.12 + 24,433.35 = x
x = 37,464.47
Mr. X has to pay Rs. 37,464.47.
Example 9 : A debt of Rs. 1,500 due in 3 years without interest, Rs. 2,000 due in $ years
with 8% p.a. compounded half-yearly and Rs. 5,000 due in 7 years with 7% annually effective
rate of interest is to be repaid by 3 equal installments due 3 years, 4 years, 5 years,
respectively. If the money is worth 6% convertible quarterly, how much should be each
installment ?
Solution: Let Rs. x be the amount of"each installments.

The focal date is 5 years
r = 6% = 0.06
Given that interest is compounded quarterly

0.6
.. ,. = 4'r = "4 = O. 0 15
The old objection and new obligations are shown in the following table:
Old Obligations Value of each at New Value of each
focal date Obligations at focal date
Rs. 1,500 due in 3 years 1,500 (1.015)2 x 4 Rs.x due in 3 x1.015)2x 4
without interest years
Rs. 2,000 due in 5 years at 8% 2,000 (1.04)10 Rs. x due in4 x (1.015)1 x 4
compounded half yearly years
interest [i.e. (2,000 (1.04)10]
Rs. 5,000 due in 7 years at 7% 5,000 (1.07)7 (1.015)-2 x 4 Rs. x due in 5 x
effective rate [i.e. 5,000 (,1.07)7 , years
1,500 (1.015)8 + 2,000 (1.04)10 + 5,000 (1.07)7 (1.015)-8 =x (1.015)8 + x (1.015)4 + x
1,689.73 + 2,960.48 + 7127.35 = 1.1264x + 1.0613x + x
11,777.56 = 3.1877x
11,777.56
x = 3.1877
x = Rs. 3,694.69 '" .
.. The required amount is Rs. 3,694.69
Example 10 : A debt of Rs. 3,000 which is due 6 years from now is instead to be paid off
by 3 payments: Rs. 500 now, Rs. 1,500 in 3 years and final payment ofRs. 475 at the end ofn
years. The rate of interest is 6% effective. Find the value of n. .
Solution: Let the focal date be today

i = r = 6% = 0.06
Value of each at Value of each
Rs. 3,000 due in 6 years 3,000 (1.06~ 500 now 500
1,500 in 3 years 1,500 (1.06)-3
475 in en' years 475 (1.06)-n

. . The equation is
3,000 (1.06)-6 =500 + 1,500 (1.06)-3 + 475 (1.06)-'1
= 3,000 x 0.705 =500 + 1,500 x 0.8396 + 475 (1.06)-n
=> 2,115 = 500 + 1,259 + 475 (1.06)-'1
= 475 (1.06)-n = 356
356 475
(1.06)-'1 =475 => (1.06)n =356
= {1.06)n = 1.3343
n log 1.06 = log 1.3343
log 1.3343
n =
log 1.06
0.1252
n = 0.0253
n = 4.95 .. 5 years
The value of n is 5 years
1 A man borrowed Rs. 10,000 from a money lender at 8% simple interest and agreed to
pay Rs. 5,000 of loan in 6 months. What payment one year from now will settle the
debt? [Ans. Rs. 5,600]
2. Mr. X purchased a television for Rs. 6,000. He paid Rs. 500 cash down and agreed to
pay the balance at 5% simple interest. If he paid Rs. 3,000 three months after
purchase and Rs. 1,500 six months later, what final payment one year after the date
of purchase will discharge his obligations? Assume that the focal date is at the end
of 12 months. [Ans. Rs. 1,125]
3. Ram borrows Rs. 50,000 now and agrees to repay Rs. 10,000 in 2 months and Rs.
15,000 in 6 months. What final payment should he make at the end of 18 months to
settle down his indebtness, at 12% simple interest, assuming that the focal date is
today? [Ans. Rs. 31,829.27]
4. At 5% simple interest, find the value of the following obligations : Rs. 2,000 due
today, Rs. 5,000 due in 6 months with interest 6% per annum and Rs. 1,000 due in 1
year with interest at 8% per annum.
(a) use today as the focal date.
(b) use 1 year from today as the focal date. [Ans. (a) Rs. 17,310.10, (b) Rs. 18,178.75]
5. Mr. X owes Rs. 500 due in 2 months, Rs. 1,000 due in 5 months and Rs. 1,500 due in
8 months. He agrees to pay two equal payments, one due in 6 months and the other
due in 10 months. Find the payment, if money is. worth at 6% simple interest and at
the end of 10 months is the agreed focal date. [Ans. Rs. 1,514.85]
6. X owes Y Rs. 1,000 due in 6 months without interest and Rs. 2,000 with interest for
1 ..
1"2 years at 4% due in 9 months. Yagrees to accept 3 equal payments, one due today,
another in 6 months and the third in 1 year. Find the equal payments using 1 year
from today as focal date, if money is worth 5% to Y. [Ans. Rs.1,031.38]
7. A debt of Rs. 4,000 due 3 years hence and another Rs. 10,000 due 8 years hence are
to be repaired by a single payment 4 years hence. If the rate of interest is 6% per
annum effective, how much is this payment? [Ans. Rs. 12,160.94]
8. A debt of Rs. 200 due 2 years hence and another of Rs. 500 due 7 years hence are to
be paid off by a single payment 3 years hence. If the rate of interest is 5% per annum
effective, how much is this payment? [Ans. Rs. 621.35]
9. A debt ofRs. 10,000 due in 4 years is to be repaid by a payment ofRs. 3,000 now~d
a second payment at the end of 6 years. How much should be the second payment, if
the rate or interest is 8% compounded quarterly? [Ans.. Rs./ 6,891.28]
10. A debt of Rs. 30,000 which is due 6 years from now is to repaid by three payments:
Rs. 5,000 now, Rs. 15,000 in 3 years and a final payment at the end of 5 years. If the
interest rate is 6% compounded annually, how much is the final payment?
[Ans.4,756.76]
1l A man owes Rs. 10,000 due in 1 year and Rs. 30,000 due in 4 years. He agrees to pay
Rs. 20,000 today and the remainder in 2 years. How much must he pay at the end of
2 years if money is worth 5% compounded semi-annually? [Ans. Rs. 15,608.4]
12. A loan of Rs. 50,000 due 5 years from now and Rs. 50,000 due 10 years from now is to
be repaid by a payment of Rs. 20,000 in 2 years, a payment of Rs. 40,000 in 4 years
and a final payment at the end of 7 years. If the "interest rat~ is 5% compounded
annually, how much is the final payment? [Ans. Rs. 26,486.4]
13. Mr. X agrees to pay Rs. 20,000 due in 3 years without interest and Rs. 40,000 due in
6 years with rate of interest 4% per annum compounded semi-annually. He wishes to
repay these debts in 2 equal installments at the end of 1 year and 3 years
respectively. If money is worth 4% effective, what equal payment Mr. X has to
repay? [Ans. Rs. 31,273]
14. A owes B two sums of money: Rs. 1,000 plus interest at 7% compounded annually
which is due in 5 years and Rs. 2,000 + interest at 8% compounded semi-annually
which is due in 7 years. If both debts are paid off by a single payment at the end of 6
years, find the amount of payment if the money is worth 6% compounded quarterly.
[Ans. Rs. 4,751.73]
15. A man owes Rs. 8,000 due in 2 years with out interest and 3,000 due in 9 years with
6% annual effective rate of interest. He wishes to repay these debts in two equal
installments due 4 and 5 years hence, respectively. If money is worth 4% converted

semi-annually how much should each installment be ? [~. Rs. 6535.58]
1& A debt of Rs. 10,000 which is due today is to be tePaid by 4 equal yearly payments. If
the interest rate is 5% compounded quarterly, how much should be each installment
be:
(a) if the first installment is given today?
(b) . if the first installment is given 1 year from today?
[ADs. (a) Rs. 4,029.32, (b) Rs. 3,860.40]
17. The sum of Rs. 2,000, 3,000 and 4,000 are due at the end· of 2, 4 and 8 years
respectively. It is proposed to replace this series of payments by a single sum of Rs.
9,000 payable at the end of en' years. The rate of interest 10% p.a. effective. Find the
value of n. [ADs. 5.04 years]
18. Mr. X browses Rs. 50,000 due 5 years from now and Rs. 50,000 due 10 years from
now. This obligation are to repaid by the following agreements : a payment of Rs.
20,000 in 2 years, a payment of 40,000 in 4 years and a payment of Rs. 26,500 in en'
years. If the interest rate is 5% compounded annually, find the values of n ?
[ADs. 7 years]
./
Discount
INTRODucnON
It is a common practice in business that money lenders require the borrowers eO make a
note bearing no interest until after maturity and discount this note immediately, giving the
borrov;er only the net proceeds. In other words, amount borrowed is given to the borrower
after deducting the discount at a certain rate of discount. Discount plays a major role in'
financial transactions. In this chapter, we discuss the method of calculating discount,
compare nominal and effective rate of discounts, and establish the relation between rate of
interest and rate of discount.
DISCOUNT
A discount is ,a deduction allowed on a financial obligation. When the value of an
obligation is known at some future data, the proeess of finding its value at some earlier date
is known as discounting. The rate of discount is the per cent of the maturity value charged
as bank discount for a discount period of unit length of time. One year is generally taken as
the unit length of time. A special case of discounting an obligation is that of finding its
present value when its maturity value is known. The present value (the money received by
the borrower) is commonly referred to as the net proceeds. .
Consider the following example. Suppose a man requests a loan of Rs. 300 from a bank,
promising to repay the loan in one year. If the bank charges 10% annual discount, the bank
deducts Rs. 30 (10% ofRs. 300) from Rs. 300 and pays only Rs. 270 to the borrower, although
the borrower is said to have obtained a loan of Rs. 300. The amount Rs. 270 is the
present value of Rs. 300 or the net proceeds and Rs. 30 is the bank discount. At the end of
the year, the borrower has to repay Rs. 300. Here the borrower is said to pay the interest in
advance.
100 FINANCIAL MATHEIIAncS
Thus, the above transaction is described as follows : The borrower receives Rs. 300 but
immediately return Rs. 30 to the bank as 10% interest (in advance) on Rs. 30 and repays the
loan amount Rs. 300 at the end of the year.
SIMPLE DISCOUNT
Simple discount is computed in much the same way ~s simple interest, with the
exception that it is based on the amount \,ather than the principal.
Let P = proceeds/present value (amount received by the borrower).
d = discount rate per year.
t = time in years that proceeds will be held.
A = the value of obligation (amount to be paid at the end of t years).
By Definition, simple discount (D is computed as follows:
Simple discount, D =Amount x Discount rate x Time
:. Simple discount, D =Adt
The prqceeds received by the borrower is given by :
P = Amount - Simple discount
P = A-Adt
I P = A(l-dt) I
Example 1 : Find the simple discount and the present value of Rs. 2,000 loan for six
months at 8%.
Solution: Given A =Rs. 2,000, t =6 months = 112 years, and d =8% =0.8
Simple Discount is given by
D = Adt
D = 2,000 x 0.8 x 1/2
D = Rs.80.
Present Value is given by
P = A (l-dt)
P = Rs. 2,000 (l - 0.08 x 1/2)
P = 2,000 (l - 0.04) =2,000 (0.96) =Rs. 1,920
P = Rs.l,920
Alternatively, P =A - D
.. P = 2,000 - 80 =Rs. 1,920
PRESENT VALUE AT DISCOUNT RATE

The present value of an obligation discounted as bank discount is given by
IP = A(l-d)" I
DISCOUNT 101
where A = The value of obligation at the end of 'n' period.

P = Present Value of obligation.
d = Discount rate per period.
n = Number of periods.
Clearly, the discount is given by
I D=A-P\
Example 2 : Find the present value and discount on Rs. 3,000 due' in 4 years at 8%
discount rate, discounted annually.
Solution: The present vale is given by

P = A (I-d)"
Here A = Rs. 3,000
The sum is discounted annually
.. n = 4 and, d = 8% = 0.08
.. P = 3,000 (1 - 0.8)4
~ P = 3,000 (0.92)4 =3,000 x 0.71639
P = 2,149.18
The preset value is Rs. 2,149.18.
The discount is given by
D = A:"'P
D = 3,000 - 2,149.18
D = 850.82
.. Discount is Rs. 850.82
Example 3 : Find the present value and discount on Rs. 2,000 due til 4 years at 8%
discount rate, convertible half-yearly.
Solution: The present value is given by

P = A (1 -d)"
Here A = Rs. 2,000
Discount'Rate = 8% =0.08
t = 4 years
Sum is discounted half-yearly
.
n = 4 x 2 =8 and d = 20.08 =o.04
P = 2,000 (1 - 0.04)8
P = 2,000 (0.96)8 =2,000 (0.72139)
P = 1,442.78
Thus; the present value is Rs. 1,442.78.

D = A-P
Here D = 2,000 -1,442.78
D = 557.22
The discount is Rs. 557.22
Example 4 : If the present value of Rs. 6,000 due in 2 years at a certain nominal rate of
discount, convertible quarterly is Rs. 5,536.47. Find the rate of discount.
Solution: Given A = Rs. 6,000

Let d be the rate of discount.
Present value P = Rs. 5,536.47
No. of years =2
The sum is discounted quarterly
.. n=2x4=8
. d
Rate of discount per quarter =4"
The present value is given by

P = A (l-d)n
Here
5,536.4 7 = 6,000 ( 1 - ~ r
=> (1- ~ r = 0.922745
Taking log on both sides we get,
8 log ( I, - ~) = log (0.922745)

d'
=> 8 log ( 1- 4") = -1 + 0.9650 =-0.0350
=> log ( 1 _ ~) = -O.~350 = -0.004375
=> log ( 1 - ~) = -1 + 1 - 0.004375 =-1 + 0.995625
1 - ~ = antilog (-1 + 0.9956)

1- ~ = 0.9900
DISCOUNT 103
d
4 = 0.01
d = 0.4=4%
The rate of discount is 4%.
DISCOUNT CONVERTIBLE CONTINUOUSLY

We now derive the formula for the present value of an obligation discountable at a rate
of discount d continuously.
Suppose that a loan of Rs. A is repayable after t years and the discount is convertible m
times a year.
Let d be the nominal rate of discount. Then the present value of Rs. A due in t years at
the nominal rate of discount d, convertible 'm' times a year is given by
d }mlCt
P = A ( 1-;-
, In case of continuous discounting, the present value P is given by
P = !:~[A (1-!ft]
P = A[ m-..CIO
Lim (1_E£)mt]
m
P= !:~ (1 _! tmt ~)]

t
A[ lC ( -
P= A [ !:i~o (1-! t ilC -4t]

P =A[[ ~!D. (1 + (:) ),l"'r]
d
= --
r
Let x asm-co x-O
m
Lim (1 + x)~
t
P =A [ m-O
P = Ae-d'
, Thus, the present value of an obligation of Re. A due in t years at d nominal rate of
discount convertible continuously is given by
I P= Ae~1
Example 5 : What is the present value of Rs. 2,000 due after 5 years from now if the
discount is convertible continuously at a discount rate of 8%.
Solution: The present value of Rs. A due in t years at d rate of discount, convertible
P = Ae-4t
Here A= Rs. 2,000, d = 8% = 0.08 and t=5

.. P= 2,000 e-O· 08 x 5
=> P= 2,000 e-O· 4O
=> p= 2,000 x 0.67032 = 1,340.64
" The present value is Rs. 1,340.64.
Example 6 : At what rate of discount convertible continuously the present value Rs. 3,000
due in 7 years will be Rs. 2,123 ?
Solution: Let d be the rate of discount, convertible continuously. The present value of
Rs. A due in t years at d discount convertible continuously is given by
P'= A e-dt
Here P = Rs. 2,123, A = Rs. 3,000 and t = 7 years
.. 2,123 = 3,000 e-7d
2,123
=> e-7d = 3000 = 0.7077
, ,
Taking log on both sid~ we get

-7 d log e = log 0.7077
d = _ log (0.7077)
7loge
d = - (-0.1502)
7 x 0.4343
0.152
d = 3.0401 = 0.0494 = 4.94%
The rate of d,iscount is 4.94%.
NOMINAL AND EFFECTIVE RATE OF DISCOUNT

In situations where discount is converted more frequently than once each year, the
stated rate of discouht if) called a nominal rate of discount and the rate of discount actually
obtained during the year is called the effective rate of discount. In the later case, the rate of
discount is always convertible annually.
Consider the following example: The discount on a maturity value of Rs. 100 due in one
year at a rate of 8% per annum is Rs. 8 and the proceeds are Rs. 92 (i.e. Rs. 100 - Rs. 8).
Suppose that the same rate of discount is convertible semi-annually.
Then the present value ofRs. 100 due in one year would be 100 (1- 0.04)2 =92.16.
:. The actual discount obtained on this obligation of Rs. 100 at the end of one year is
Rs. (100 - 92.16) =Rs. 7.84.
We say that the effective rate in this case is 7.84%.
Now at 7.84% rate of discount, convertible per annum, the present value we get is
P = 100 (1- 0.0784) = 100 (0.9216) = Rs. 92.16.
Thus for a maturity value of Rs. 100 after one year, the net proceeds at a 7.84% rate of
DISCOUNT 105
discount, convertible annually is equivalent to the net proceeds discounted at a rate of 8%,
convertible half-yearly.
Therefore, we say that the effective rate of discount is 7.84% and the corresponding
nominal rate of discount is 8% convertible semi-annually.
Let de denote the effective rate of discount corresponding to the nominal rate of discount
d, convertible m times a year.
Let A be the maturity amount at the end of 1 year.
At de effective rate of discount, the present value is given by
Pl = A (l-d e ) ... (1)
!r ..
At d nominal rate of discount, convertible m time a year, the present value is given by
P2 =A (1 - (2)
Equating the equations (1) and (2), we get
1-de (1-
= !r
de = 1- (1- !r
Thus, the relation between the nominal rate of discount and effective rate of discount is
given by
Now, we derive the relation between the nominal rate of discount, convertible
continuously and the effective rate of discount.
In case of nominal rate d convertible continuously, the effective rate de is given by
de = !:~ [1- (l-!r]

de 1- (l-ELr
= Lim
m-loOO m
de = 1- m-oo (1-- Lim d tx-d

-d
m
de = 1- !:~o [(l-!r~]d
-d
de = 1_!:~ [(1_! )dlm ]
-1
=> de = 1- e -d
Thus, the effective rate of discount equivalent to the nominal rate of discount,
convertible continuously is given by
I de = 1- e-d I
106 FINANCIAL IfATHEIfAncS
Remark 1 : The nominal rate of discount d compounded continuously and equivalent to

a given effective rate of discount re is called the force of discount.
Remark 2 : If the conversion period is one year at d nominal rate of discount, then the
effective rate of discount will be equal to the nominal rate of discount.
If the conversion period is one year, then m = 1
de = 1- (1-!r
de = 1-(1-1f =l-(1-d)=d
.. ' de = d .
Remark 3 : The effective rate of discount (de) depends only on the nominal rate of
discount (de) and the number of conversion periods in a year (m). It is independent of the
maturity value A.
Example 7 : Find the effective rate of discount equivalent to the nominal rate of discount
9% converted monthly.
Solution:
Here nominal rate of discount d = 9% = 0.09
Discount is converted monthly
.. m = 12
The effective rate equivalent to the nominal rate of discount d is given by
de = 1- (l-!r
Here de =1- (1 - °i~9 f2
de = 1 - (0.9925)12 = 1- 0.9136 = 0.0864
de = 8.64%
Example 8 : Find the effective rate of discount equivalent to the nominal rate 5%
convertible continuously.
Solution : The effective rate of discount equivalent to a nominal rate of discount

de = 1- e-d
Here d = 5%,= 0.05
de = 1 - e-O·05 = 1 - 0.95123 = 0.04877
de = 4.88%
DISCOUNT 107
Example 9 : Find the nominal rate of discount, c.onvertible semi-annually equivalent to

the effective rate of discount 6%.
Solution : The effective rate of discount de equivalent to a nominal rate of discount is

given by
de = 1-(1-!r
Here m =2 and de =6% =0.06
0.06 = 1- (1-~r
(1 - ~ r =1- 0.06 =0.94
2 log ( 1 - ~) = log 0.94 =log (9.4 x 10-10 )
~ 2 log (1 - ~) = -1 + 0.9731 =-0.~269

~ log (1- ~) = -0.01345 =-1 + 0.98655
~ 1- ~ = antilog (-1 + 0.98655)
1- d2" = 9.6939 x 10-1 =0.96939
d
2" = 0.03061
d = 0.03061 x 2 =0.06121 =6.12%
.. The nominal rate is 6.12%.
Example 10 : What nominal rate of discount convertible continuously, will be equivalent

to the effective rate of discount 7% ?
Solution : The effective rate of interest, equivalent to a nominal rate of discount d,

de = 1-e-<l
Here de = 7% = 0.07
0.07 = 1 - e-<l
e~ = 0.93
1
ed = 0.93 = 1.0752
d log e = log 1.0752
d -- logloge
1.0752 _ 0.03140 - 0 0723
- 0.4343 - .
d = 7.23%
Example 11 : Find the nominal rate of discount convertible half-yearly which is

equivalent to the nominal rate of discount 8% convertible quarterly.
Solution : The effective rate of discount equivalent to a nominal rate of discount,

convertible m times a year is given by
de = 1-(1-!r
Let d 1 be the required nominal rate of discount.
At 8% nominal rate of discount, convertible half-yearly, the effective rate of discount is
de = 1- ( 1- d21)2 ... (1)
r ..
At 8% nominal rate of discount convertible quarterly, the effective rate of discount is
de = 1- (1 - 0~8 (2)
r r
Given that the effective'rates of discount (1) and (2) are equivalent.
.. 1 - (1 - ~l =1- (1 - 0~8
~ (1- ~l r (1- 0~8r =
~ (1 - r ~l = (0.98)4 =0.9224
Taking log o.n both sides, we get
2 log (1 - ~l) = log (0.9224)
~ 2 log (1 -d21) = ~.0351
~ log (1 _ ~l) = ~.351 = _ 0.0176
d1
1- 2 = antilog (~.0176)
d1
~ 1- 2 = 0.9603
d1
2 = 0.0397
DISCOUNT 109
d 1 = 2 x 0.0397 =0.0794 = 7.94%

The nominal rate of discount is 7.94%.
Example 12 : The amount of Re. 1 in 2 years at a certain nominal rate of interest plus the
present value of Re. 1 due in 2 years, at the same nominal .. rate of discount, both rates
convertible half-yearly, is 2.01080162. Find the rate of discount. .
Solution: Let r be the nominal rate of interest convertible half yearly.

.. i = rl2
Given that this is also the nominal rate of discount.
:. The amount of Re. 1 in 2 years = (1 + i)4 and the present value of Re. 1 due in 2
years =(1 - i)4 .
Given that
(1 + i)4+ (1- i)4 = 2.01080162
=> 2i4 + 12i2 + 2 = 2.01080162
=> 2i4 + 12i2 - 0.01080162 = 0
=> i4 + 6i 2 - 0.00540081 = 0
--6 ± V36 + 0.02160324
=> i2 = 2
--6 ± V36.02160324
=> i2 = 2
--6 ±6.0018
=> i2 2 =
Rejecting the negative values, we get
;2 _ --6 + 6.0018 _ 0.0018 _ 0 009
~- 2 - 2-'
i = 0.03
r = 2 x i = 2 x 0.03 =0.06 = 6%
The rate of discount is 6%.
DISCOUNT TO COMPOUND INTEREST

The present value of a sum of money payable at a future date is called the discounted
value of the amount due at the future date. The difference between the amount due at the
future date and its present value is called the discount over this period.
The present value or capital value of an amount A discounted for n period at a rate of
interest i per period is determined using the compound interest formula. The present value
of Rs. A due in n periods discounted at i rate of interest per period is that principal which is
invested now at an interest rate of i per period.·
:. The present value of an amount A discounted for It periods at a rate of interest i per
period is given by
I P =A I
,..----------,
(1 + i)-n
(1 + iT" is called the discount factor.
110 RNANCIAL MATHEMAnCS

D = A-P
~ D =A-A(l+iJ"'l
~ D = A (1- (1 + iT"")
Discount obtaining using this relation is referred to as compound discount.
It should be noticed that instead of rate of discount, if the rate of interest is given to find
the discount, we use the above formula, derived from compound interest formula.
Example 13 : Determine the present value of Rs. 5,000 due in 5 years from now invested
at 8% compounded annually. What is the compound discount of this investment?
• Solution: The present value is given by

P = A (1 + i)-n
Here A = Rs. 5,000
i = r = 8% = 0.08 and n = t = 5
P = 5,000 (1 + 0.08)-6
P = 5,000 (1.08)-5 = 5,000 (0.68058) = 3402.90
. . The present value is Rs. 3,402.90.
The compound discount is given by
D = A-P
D = 5,000 - 3,402.90 = 1,597.10
.. The compound discount is Rs. 1,597.10.
RELATIONSHIP BETWEEN RATE OF DISCOUNT AND RATE OF

INTEREST
From the discussion made so far, it is obvious that discount and interest are ~wo
different ways of looking at the same problem of discounting. For example, the discount on
an obligation of Rs. 100 due in one year at the rate of discount of 6% per annum is Rs. 6 and
the net proceeds are Rs. 94.
However the same Rs. 6 may be treated as the interest on Rs. 94 for one year. nus,
the rate of interest per annum corresponding to 6% per annum rate of discount will be 6.38%
(:4 x 100 ).
Present value of Rs. 100 at 6.38% rate of interest convertible annually is Rs' 94.
Present value of Rs' 100 at 6% rate of discount convertible annually is Rs' 94.
Thus, 6% per annum rate of discount is equivalent to 6.38% per annum rate of interest.
Now we derive the relation between the rate of interest and the rate of discount.
Let Re. 1 is payable after one year.
Let d and r be the rate of discount and the rate of interest convertible annually
respectively ..
DISCOUNT 111
The present value of Re. 1 due in 1 year at d annual rate of discount is given by
PI =1 (1- d)l =1 - d ... (1)
The present value ofRe. 1 due in one year at r annual rate of interest is given by
. 1
P 2 = 1 (1 + r)-l =1 + r ... (2)
The present value PI is equivalent to the present value P 2•
1
1-d= -
l+r
d = 1 - - 11 = l+r-l r
+r l+r =l+r
Thus, we get
~
~
This relation is used to find the rate of discount correspondig to the rate of interest 'r'.
1
Again, 1-d = l+r
1
l+r=--
I-d
1 l-(1-d) d
r = 1_d- 1 = I-d = I-a
Thus, we get
Ir=l~d\'
This relation is used to find the rate of interest corresponding to the rate of discount d.
Example 14 : Find the rate of discount corresponding to a rate of interest 6%.
Solution": The rate of discount d corresponding to a rate of interest r is given by

r
d = 1 +r
Here r = 6% =0.06
0.06 0.06 0 6
d = 1 + 0.06 =1.06 = .58 =5.66%
The rate of discount is 5.66%.
Example 15 : Find the rate of interest corresponding to a rate of discount of 8%.
Solution: The rate of interest r, corresponding to a rate of discount d is given by

d
r- - -
- I-d
Here d = 8% = 0.08
112 FINANCIAL MA THEMATICS
0.08 0.08
r = 1- 0.08 = .92 =0.8696 =8.7%
The rate of interest is 8.7%
L Find the simple discount and the present value of Rs. 5,000 loans for 4 month at 9%
rate of discount. [ADs. Rs. 150, Rs. 4,850]
2. Find the rate of discount at which present value of a loan of Rs. 6,000 for one year
will be Rs. 5,400. [ADs. 10%]
3. The proceeds of a Rs. 2,000 loans for one year at simple discount were Rs. 1,800.
What was the simple discount rate. . [ADs. 10%]
4. Find the present value and discount on Rs. 10,000 due in one year at discount rate
4% convertible quarterly. [ADs. Rs. 9,603, Rs. 397]
5. Find the present value and discount on Rs. 6,000 due in 2 years at 4% convertible
quarterly. [ADs. Rs. 5,536.47, Rs. 463.53]
6. Find the present value and discount on Rs. 6,000 due in 3 years at 4% effective rate
of discount. [Ans. Rs. 5,308.42, Rs. 691.58]
7. If the present value of Rs. 1,000 due in 3 years at a certain nominal rate of discount,
convertible semi-annually is Rs. 832.97, find the rate of discount. [ADs. 6%]
8. If the present value of Rs. 3,000 due in 2 years at a certain effective rate of discount
is Rs. 2,707. Find the rate of discount. [ADs. 5%]
9. Find the effective rate of discount equivalent to the nominal rate of discount 5%
convertible monthly. [ADs. 4.88%]
10. Find the effective rate of discount equivalent to the nominal rate of discount 6%
convertible continuously. [Ans. 5.82%]
. lL What effective rate will be equivalent to the nominal rate of discount 8%, convertible
(a) quarterly?, (b) semi-annually? [Ans. (a) 7.76%, (b) 7.84%]
12. What effective rate of discount will be equivalent to the nominal rate of discount 12%
convertible (a) semi-annually? (b) quarterly? (c) monthly? and (d) continuously?
[Ans. (a) 11.64%, (b) 11.47% (c) 11.36%, (d) 11.31%]
13. The amount of Re. 1 in 2 years at a certain nominal rate of inter~s plus the present
value of Re. 1 due in 2 years, at the same nominal rate of discount, both rates
convertible half-yearly, is 2.00480032. Find the rate of discount. [Ans.4%]
14. The amount ofRe. 1 in one year at a certain nominal rate of interest plus the present
value of Re. 1 due in one year, at the same nominal rate of discount, both rates
convertible quarterly is 2.00480032. Find the rate of discount. [Ans. 8%]
15. Find the nominal rate of discount convertible quarterly which is equivalent to the
effective rate of discount 6%. [ADs. 6.12%]
16. What is the nominal rate of discount convertible continuously, which is equivalent to
the effective rate of discount 5% ? [ADs. 5.16%]
DISCOUNT 113
17. Find the nominal rate of discount convertible half-yearly which is equivalent to the
nominal rate of discount 9% convertible quarterly. [Ans. 8.92%]
18. Find the nominal rate of discount convertible quarterly which is equivalent to the
nominal rate of discount 12% convertible monthly. [Ans. 11.88%]
19. Which nominal rate of discount, convertible monthly will be equivalent to the
effective rate of discount 7%? ; [Ans.7.2%]
20. Find the present value of Rs. 5,000 due after 4 years from now at a rate of rate of
discount ofRs. 6%, convertible continuously. [Ans. Rs. 3,933.15]
21. What is the present value of Rs. 4,000 payable at the end of 7 years at 5% rate of
discount, convertible continuously. [Ans. Rs. 2,818.76]
22. At what rate of discount the present value of Rs. 2,000 payable after 5 years from
now will be Rs. 1,340.64, if the discount is convertible continuously. [Ans.8%]
23. Find the rate of interest convertible continuously, if the present value of Rs. 8,000
due in 4 years will be Rs. 5,362.56. [Ans.10%]
24. The present value of an obligation of Rs. 7,000 due in n year at a rate of discount of
7% convertible continuously is Rs. 5,290.46. Find n. [Ans. 4 years]
25. Find the rate of discount corresponding to a rate of interest of (i) 5%, (ii) 8%, and (iii)
10%. [Ans. (i) 4.76%, (ii) 7:41%, (iii) 9.09%]
26. Find the rate of interest corresponding to a rate of discount of (i) 4%, (ii) 7% and (iii)
9%. [Ans. (i) 4.17%, (ii) 7.53%, (iii) 9.89%]
27. Distinguish between nominal rate of discount and effective rate of discount.
Establish the relation between the nominal rate of discount and effective rate of
discount (a) when convertible m times a year and (b) when convertible continuously.
Under what condition, nominal rate of discount will be equivalent to effective rate of
discount?
28. What do you mean by force of discount?
29. Establish the relation between rate of discount and rate of interest.
-~
Depreciation -~ --- -
INTRODucnON
Buildings, machinery, equipments of all kind, furniture, fixtures, computer, automobiles,
electronic items are examples of assets that will last for more than one year, but will not last
in.definitely. Value of such asses decreases year by year, on account of wear and tear,
exposures, and etc. During each accounting period, a portion of the cost of these assets is
being indirectly used up. The portion being used up is reported as depreciation on the income
statement of a business concern. It is, therefore, very important for a financial analyst to
know how to calculate depreciation. In this chapter, we shall discuss various methods of
computing depreciation for a depreciable asset.
DEPRECIATION
The decrease in the value of an asset, which cannot be made by current repairs is called
depreciation.
The value of depreciable assets at the end of its useful life is called the scrap value.
The difference between the original cost of the asset at the time of purchase and the
scrap value at the end of its life is called the total depreciation of the asset. It is also known
as wearing value of the asset.
The depreciation is generally computed on yearly basis, i.e., on the basis of every
financial year. Computation of annual depreciation depends on the following factors: the
original cost, the useful life, and the scrap value of the machine.
One should not be confused with the scrap value and the book value. Scrap value of an
asset is the value at end of the life of that asset where as book value of an asset is the value
of the asset at a given date, i.e., at the end/beginning ofa particular. financial year.
DEPRECIATION 115
Following are the major methods of computing 'the depreciation:

(a) Diminishing Balance Methods.
(b) Straight Line Method
(c) Sum-of-the-year Digits Method.
Among the above three methods, Diminishing Balance Method is commonly used in
business.
DIMINISHINO BALANCE METHOD
'\
By this method, the annual depreciation is a constant percentage of the book value of the
depreciated asset at the end of the preceding year. This method is also known as constant
percentage method or Reducing balance method. The constant percentage must be
determined so that the book value of the asset at the end of its estimated' life is reduced to
the scrap value.
We have already seen that to increase some value by 100 i % we need to calculate the
quantity 1 + i and if this is done n times, we have to calculate (1 + iY'. A similar argument is
applied if we need to decrease some value by 100 i %. Here we need to calculate 1 - i and if
this is done n times, we have to calculate (1 - i)n
Let r be the rate (constant percentage) of depreciation and C be the original cost of the
asset.
At the end of the first year, the depreciation is Cr and the book value =C - Cr =C (1 - r)
At the end of the second year, the depreciation is C(1- r) r and the book value
=C (1- r) - C (1- r) r =C (1- r)(1- r) =C (1- r)2
Thus, if the life of the machine is n years, at the end of n years, the book value
=C (1_r)n
The book value at the end of the life of the asset is known as scrap value.
Thus, the scrap value S at the end ofn years for an asset of original cost C, depreciation
being calculated r per annum is given by
I S =C (1 - rY' I
The Total depreciation = C - S
Remark 1 : To find the depreciation charge for a particular year, say kthyear, calculate
the depreciation on the book value at the end of the (k - 1)th year. Another way to find the
depreciation for a particular year, say kth year, simply s~btrac the book value of the asset at
the end of kth year (i.e. C (1 - r)th) from the book value at the end the (k - 1)th year [i.e. C
(l-r)k-l].
Remark 2 : Changing rate of depreciation : The rate of depreciation may get changed
from time to time. If the rate of depreciation is rl% for first nl years and r2% for next n2 year
and so on and rk% for the last nk years, then the depreciate value of an asset worth C at end
of n years (n =nl + n2 + ... nk) is given by
S =C (1- r1r1 (1 - r2)n 2 ...... (1 - rk)n k
Example 1 : A machine, the life of which is estimated to be 10 years, cost Rs. 10,000.
Calculate the scrap value at the end of its life, depreciation on the reducing balance method
being charged at 10% per annum. .
Solution: The scrap value of an asset is given by

S=C(l-r)n
Here, Cost of machine, C = Rs.10,000
Rate of depreciation, r = 10% =0.10
Life of the machine, n = 10 years
S = 10,000 (1 - 0.10)10
=> S = 10,000 (0.90)10 = 10,000 (0.348678) =3486.78
. . The scrap value is Rs. 3,486.78.
Example 2 : A machine is being depreciated in such a way that the value of the machine
at the end of any year is 90% of the value at the beginning of the year. The actual cost of the
machine is Rs. 20,000. Calculate scrap value if the machine, if the estimated useful life of the
machine is 6 years.
Solution: The value of the machine at the end of any year is 90% of the value of the
machine at the beginning of the year.
That is, 10% of the value is the depreciation for a year.
.. r=10%=0.10
Number of years n = 6
Cost ofthe machine C =Rs. 20,000
The scrap value of an asset worth Rs. Cat r% rate of depreciation at the end ofn years is
given by
S=C(1-r)n
:. Here S = 20,000 (1 - 0.10)6
S =20,000 (0.90)6 =20,000 (0.531441)
S = 10,628.82
.. The scrap value is Rs. 10,628.82.
Example 3. A machine is purchased for Rs. 10,000. Depreciation is calculated at 8% per

annum for first 3 years and after that 10% per annum for next 7 years, depreciation being
calculated on the diminishing value. Find the value of the machine after 10 years.
Solution: Value of an asset worth C at the end of nl + n2 years with depreciation rates
of rl% for nl years and r2% for n2 years is given by
S = C (1- rl) nl (1 - r2)n2
Here nl = 3 years and n2 = 7 years
DEPRECIATION 117
and rl = 8% = 0.08 and r2 = 10% = 0.10
The cot of the machine C =Rs. 10,000

.. S = 10,000 (1- 0.08)3 (1- 0.10)7
S = 10,000 (0.92)3 (0.90)7
S = 10,000 (0.778688) (0.4782969)
S = 3,724.44
.. Value of the machine after 10 years is Rs. 3,724.44.
Example 4. A machine costing Rs. 80,000 depreciates at a constant rate of 8% per

annum. The life of the machine is estimated to be 15 years.
(a) What is the value of the machine after 7 years ?
(b) What is the depreciation charge for 10th year?
Solution: (a) Value of the machine after n years is given by S = C (1- r)lI
Rate of Depreciation r = 8% = 0.08
Cot of the machine C = Rs.80,000
n = 7 years
S = 80,000 (1- 0.08)7
=> S = 80,000 (0.92)1 =80,000 (0.5578466)
S = 44627.73
.. The value of the machine after 7 years is Rs. 44,627.73.
(b) Depreciation charge for kth year =Value of the machine at the end of(k _l)th year-
Value of the machine at the end of kth year.
Here k = 10 years
.'. Depreciation charge for 10th year
= Value of the machine at the end of 9th year
- Value of the machine at the end of 10th year.
Value of the machine at the end of 9th year =80,000 (1- 0.08)9
=80,000 (0.92)9
=80,000 (0.47216136)
=37,772.91
Value ofthe machine at the end of the lOthyear =80,000 (1- 0.08)10
=80,000 (0.92)10
= 80,000 (0.43438845)
=34,751.08
:. The depreciation charge for 10th year
= 37,772.91- 34,751.08 = 3,021.83
The required depreciation charge is Rs. 3,021.83.
118 FINANCIAL AlA THEMA TICS
Example 5. A machine depreciates at the rate of 8% of its value at the beginning of a

year. The machine was purchased for Rs. 1,00,000 and the scrap realised when sold was
Rs. 43,440. Find the number of years the machine was used.
Solution: Let n be the number of years the machine was used.

The scrap value at the end of the life of an asset is given by
S =C(l-r)"
Here scrap value S = Rs. 43,440
Cost of the machine C = Rs.1,OO,OOO
Rate of depreciation r = 8% =0.08
Substituting the given values we get
43,440 = 1,00,000 (1 - 0.08)"
43,440
~ (0.92)" = 1,00,000 = 0.4344
n log 0.92 = log 0.4344
log 0.4344
~ n=
log 0.92
n = 1.63789 =-0.36211 =10

1.96379 -0.03621
n = 10 years
. . The life of the machine is 10 years.
Example 6. A machine' depreciates at the rate of 7% of its value at the beginning 01 a

year. If the machine was purcha3ed for Rs. 8,500, what is the minimum number of years at'
the end of which the worth of the machine will be less than or equal to half of its original cost
price?
Solution: The depreciated value is given by

S = C(1-r)"
Cost of the machine C ~ Rs. 8,500
According to the given condition,
'1
8,500 (1 - 0.07)n :SO .2 (8,500)
1
~ (1 - 0.07)" :SO '2
~ (0.93)" :SO 0.5
n log (0.93) :SO log 0.5
DEPRECIATION 119
log (0.5)
=> n ~ log (0.93)
1.69897 -0.30103
=> n ~ _ = -0 03152 = 9.6 years
1.96848 .
" The minimum number of years =9.6 years.
Example 7. A machine costing Rs. 5,600 will depreciate to a scrap value of Rs. 1,951 in
10 years. Given that the depreciation is calculated using diminishing balance method, find
the rate of annual depreciation.
Solution: Let r be rate of annual depreciation.

The scrap value is given by
S = C (1-rY'
Here, Scrap value S = Rs. 1,,951
Cost of machine C = Rs. 5,600
No. of years n = 10
Substituting these value in the formula, we get
1951 = 5,600 (1- r)10
=> (1 - r )10 = !:~ =0.3484

10 log (1- r) =log 0.3484
_ ) _ log (0.3484)
=> I og (1 r - 10
=> log (1- rr = I.5:~08 = -O'i~792 = -0.045792 = 1.954208
=> (1- r) = antilog (1.954208)

=> 1- r = 0.8999
=> r = 1 - 0.8999 = 0.1001 = 10%
The rate of depreciation is 10%.
Example 8. A machine depreciates at the ratio of 8% per annum for the first 3 years and
then 6% per annum for the next four years. [fthe value of the machine is Rs. 8,000 initial:y,
lind the average rate of depreciation and the depreciated value of the machine at the end of
the 7th year.
Solution: The scrap value at two different ratio of depreciation is given by

S = C (1 - r1)nl (1 - r2)n
Here, rl = 8% = 0.08 and n1 = 3
r2 = 6% = 0.06 and n2 = 4
cost of machine C =Rs. 8,000
S = 8,000 (1 - 0.08)3 (1 - 0.06)4

S = 8,000 (0.92)3 (0.94)4
S = 8,000 (0.78688) (0.780749) = 4,863.68
The depreciate value of the machine is Rs. 4,863.68.
Let r be the average rate of depreciation.
At r% rate of depreciation Rs. 8,000 depreciate to Rs. 4,863.68 is 7 years
. . 8,000 (1- r)7 = 4,863.68
(1 - r )7 -- 4,863.68 - 0 6079
8,000 - . 6
7 log (1- r) = 1.78390 =-0.2161

- 0.2161 -
log (1 - r) = 7 = -0.03087 = 1.96913
1- r = antilog (1.96913)
1 - r = 0.93132
r = 1 - 0.93132 = 0.06868 = 6.87%
The average rate is 6.87%.
Example 9. A machine depreciates each year by 10% of its value at the beginning of the
year. At the end of 4th year, its value is Rs. 1,31,220. Find its original value.
Solution: Let C be the original value.

The scrap value is given y
S :-: C (1-rY'
Here Scrap value S = Rs.1,31,200
Depreciation rate r = ~.O% =0.10
No. of years n. =4
1,31,220 = C (1- 0.1)4
1,31,220 = C (0.90)4
1,31,20 1,31,22
= C = (0.90)4 = 0.6561 = Rs. 2,00,000.
. . Original value of the machine is Rs. 2,00,000.
Example 10. XYZ Ltd. purchases a machinery which costs Rs. 20,000 now. The useful
life of the machine is 9 years and the annual rate of depreciation is 6% per annum,
depreciation being L'alculated on diminishing balance method. After 8 years the existing
machine has to be replac~d by a new one which will cost 25% more than the initial cost of the
machine. What amount the company will require at the end of 9th year to replace the existing
machine by a new one ?
DEPRECIATION 121
Solution:
Cost of machine C = Rs. 20,000
Life of machine n = 9 years
The scrap value is given by
8 =C (1- rY'
8 =20,000 (1 - 0.06)9
8 = 20,000 (0.94)9
8 = 20,000 (0.5729948) = 11,460
. . The value of the machine at the end of 9th year is Rs. 11,460.
The cost of new machine at the end of 9th year = Initial cost + 25% of the initial cost
=20,000 + 25% of 20,000
=20,000 + 5,000 =Rs. 25,000
The amount required to rePlace} The cost of } {scrap value of
the old machine = new machine - the old machine
:. The required amount is Rs. 13,540 =Rs. 25,000 - Rs. 11,460 =Rs. 13,540.
STRAIGHT LINE METHOD

In the diminishing balance method, the depreciation for one year will not be the same as
that of the previous year. The depreciation was calculated on constant percentage. By
straight line method, the annual depreciation of an asset is found by dividing the total
depreciation by the number of years in its estimated useful life.
Thus, by straight line method depreciation per year is calculated as follows:
D=--
C-8
n
In this method, the depreciation for every year will be unique through out the life of the
asset.
Example 11. A machine costing Rs. 30,000 is expected to have a useful life of 5 years and
a final scrap value of Rs. 10,000. Using straight line method, find the annual depreciation
and construct the depreciation schedule.
Solution: Using straight line method the annual depreciation is given by:
C -8
D=--
n
Here C = Rs. 30,000,8 =Rs. 10,000 and n = 5 years
D =3,000 ~ 10,000 =4,000
.. The annual ~eprciaton is Rs. 4,000.

The book value at the beginning of the 1st yp.al' is P'i;. 30,000. Depreciation for 1st year is
Rs.4,000.
122 FINANCIAL MA THEMA TICS
.. The book value at the beginning of the 2nd year is Rs. 26,000 (Rs. 30,000 - Rs. 4,000).
Depreciation for second year is Rs. 4,000.
:. The book value at the beginning 3rd year is Rs. 22,000 (Rs. 26,000 - Rs. 4,000)
In this manner, we calculate the book value of the machine at the beginning of every
year. These are shown in the following table:
Year Bank value at the Depreciation Accumulated Value of machine
beginning of the for that year Depreciation at the end of the
year year
1 Rs.30,000 Rs.4,000 Rs. 4,000 Rs. 26,000
2 Rs.26,000 Rs.4,000 Rs. 8,000 Rs. 22,000
3 Rs.22,000 Rs.4,000 Rs.12,000 Rs. 18,000
4 Rs.18,000 Rs.4,000 Rs.16,000 Rs. 14,000
5 Rs.14,000 Rs.4,000 Rs.20,000 Rs. 10,000
Example 12. A machine costing Rs. 50,000 has a useful life of 4 years and the machine
has no scrap value at the end of its life. Using the straight line method, find the annual
depreciation.
Solution: Using straight line method, the annual depreciation is given by

D=--
c-s
n
Hence C =Rs. 50,000, S =0 and n =4 years
.. D = 50,~ - 0 50,~ = 12,500
.. ~he annual depreciation is Rs. 12,500.
SUM-OF-THE-YEARS-DIGITS METHOD
By this method, a greater fraction of the cost of the asset is depreciated in earlier years
of the life of the asset. The fraction of the asset to be depreciated each year is determined by
putting the digit of the year in reverse order over the sum of the digits of the life period.
For Example if the life of the asset is 4 years, then the depreciation for each year is
calculated in the ratio 4 : 3 : 2 : 1.
In other words, the depreciation is calculated in the order ;0 ';0 :0 and ;0'
Example 13. A machine which costs Rs. 20,000 is expected to have a useful life of5 years
and a scrap value of Rs. 5,000. Find the annual depreciation and form a depreciation
schedule using sum-of-the-years-digits method.
Solution: Cost of the machine C =Rs. 20,000

Scrap value S =Rs. 5,000
No. of years n=5
DEPRECIA TlON 123
. . Total depreciation for five years = Rs. 20,000 - Rs. 5,000 = Rs. 15,000.
The annual depreciation is calculate in the ratio 5: 4 : 3 : 2 : 1
"th d 5 4 3 21
£.e. In e or er 15' 15' 15' 15' 15
Now we prepare the depreciation schedule
Years Fraction ofASBets Annual depreciation Accumulated
to be depreciated depreciation
5 5
1 -
15 15 x 15,000 =Rs. 5,000 Rs. 5,000
2 -4 4
15 x 15,000 =Rs. 4,000 Rs. 9,000
15
3 -3 3
15 x 15,000 =Rs. 3,000 Rs.12,000
15
4 -2 2
15 x 15,000 =Rs. 2,000. Rs.14,000
15
5 -1 1
15 x 15,000 =Rs. 1,000 Rs.15,000
15
L A machine, the life of which is estimated to be 15 years, costs Rs. 40,000. Calculate
the scrap value at the end of its life, depreciation on the diminishing balance system
being calculated at 10% per annum. [ADs. Rs. 8,236]
2. A machine costing Rs. 5,000 depreciates at a constant rate of 5%. If the estimated
useful life of the machine is 15 years, determine its scrap value. [ADs. Rs. 2,316]
3. A machine, the life of which is estimated at 10 years, costs Rs. 6,000. Calculate the
scrap value at the end of its life, depreciation on the reducing balance system being
charged 7% per annum. [ADs. Rs. 2,904]
4. A machine is be.ing depreciated in such a way that the value of the machine at the
end of any year is 95% of the value at the beginning of the year. The actual cost of
the machine is Rs. 15,000. Calculate the scrap value of the machine, if the estimated
useful life of the machine is 8 years. [Ans. Rs. 9,951.31]
5. An asset is purchased for Rs. 10,000. It is depreciated at a constant rate of 6% for the
first 4 years and after that 10% for the next 6 years. Find the value of the asset after
a period of 10 years. [Ans. Rs. 4,149.76]
6. A machine depreciates at the rate of 10% pel' annum for the first two years and then
7% per annum fo. the next three years, depreciation being calculated on the
diminishing value. If the value of the machine is Rs. 10,000 initially, find the
depreciated value of the machine at the end of the 5th year? [ADs. Rs. 6,515.60]
7. An item costing Rs. 50,000 depreciates at a constant rate of 8% per annum. The
useful life of the machine is 10 years. What is the depreciation charge for the 8th
year? [Ans. Rs. 2,231.39]
8. A machine costing Rs. 30,000 depreciates at a constant rate of 12% per annum,
depreciation being calculate on the diminishing value.
(a) What is the value of the machine after 5 years?
(b) What is the depreciation charge for the 7th year?
[Ans. Rs. 15,832, (b) Rs. 1,671.86]
9. A machine costing Rs. 5,000 depreciates at a constant rate of 5% per annum. What is
the depreciation charge for the 5th year? [Ans. Rs. 203.50]
10. An item being depreciated in such a way that the value of the item at the end of any
year is 90% of the value at the beginning of the year. The cost of the item is Rs.
40,000 and it was sold eventually as waste material for Rs. 15,000 at the end of its
life. Obtain the number of years the item was in use. [Ans. 9.3 years]
1L A machine depreciates at the 10% of its value at the beginning of the year. The
machine was purchased for Rs. 44,000 and the scrap value realised when sold was
Rs. 25,981.56. Find the number of years the machine was used. [Ans. 5 years]
12. A machine depreciated at the rate of 8% of its value at the beginning of a year. If the
machine was purchased for Rs. 15,000, what is the minimum number of complete
years at the end of which the worth of the machine will not exceed (215)th of its
original value. [Ans. 11 years]
13. A machine depreciates at the rate of 10% per annum rate of depreciation. If the
purchasing price of the machine is Rs. 10,000, what will be the minimum number of
completed years at the end of which the worth of the machine will be less than or
equal to quarter of its original cost price? [Ans. 13.16 years]
14. A machine worth Rs. 12,000 is depreciated at the rate of 10% per annum. It was sold
eventually as waste metal for Rs. 200. Find the number of years during which the
machine was in use. [Ans. 38.84 years]
15. An article, the life of which is estimated to be 10 years, costs Rs. 10,000. The scrap
value realised at the end of its life is Rs. 3,483.37. If the depreciation is calculate on
the diminishing balance method, what is the rate of annual depreciation?
[Ans.10%]
16. A machine costing Rs. 8,000 would reduce to Rs. 2,000 is 8 years. Find the rate of
yearly depreciation, given that the depreciation is calculated using diminishing
balance method. [Ans. 15.91%]
17. An asset costing Rs. 2,000 will depreciate to a scrap value of Rs. 160 in 10 years.
Find the rate of depreciation. [Ans. 22.33%]
18. A machine depreciates at the rate of 10% per annum for the first two years and then
7% per annum for the next three years, depreciation being calculated on diminishing
value. If the value of the machine be Rs. 10,000 initially, find the average rate of
depreciation and the depreciate value of the machine at the end of 5 th year.
[Ans. Rs. 6,515.29, 8.2%]
19. What the average rate of depreciation equivalent to 9% annual rate of depreciation
for 3 years and 7% annual rate of depreciation for next 2 years, if the depreciation is
calculated for 5 years. [Ans.8.22%]
DEPRECIATION 125
20. A machine depreciates each year by 10% of its value at the beginning of the year. At
the end of 2nd year, its value is Rs. 5,536.47. Find its original value. [Ans. Rs. 6,000]
21. The value of a machine depreciates at the rate of 11 % annually. If its present value
is Rs. 38,440, find its value three years age. [Ans. Rs. 54,527.22]
22. A machine costing Rs. 60,000 has a useful life of 5 years. The scrap value is Rs.
20,000. Using straight line method, find the annual depreciation and construct a
schedule for depreciation. [Ans. Rs. 8,000]
23. An asset costing Rs. 12,000 is expected to have a useful life of 6 years and a scrap
value ofRs, 3,000. Find the annual depreciation charge using straight line method.
[Ans. Rs. 1,500]
24. A machine costing Rs. 10,000 is expected to have a useful life of 5 years. It is
assumed that the scrap value is nil. Using straight line method, find the annual
depreciation charge. • [Ans. Rs. 2,000]
25. A machine costing Rs. 25,000 is expected to have a useful life of 4 years. It is
assumed that the scrap value at the end of 4th year is Rs. 5,000. find the annual
depreciation and prepare the depreciation schedule using sum-of the years-digit
method. [Ans. Rs. 8,00, Rs. 6,000, Rs. 4,000 and Rs. 2,000]
26. An asset costs Rs. 3,000. The useful life of the asset is 5 years and there is no scrap
value. Find the annual depreciation and prepare a depreciation schedule using sum-
of-the-years-digit method. [Ans. Rs. 1,000, Rs. 800, Rs. 600, Rs. 400, Rs. 200]
27. A computer whose cost is Rs. 4,40,000 will depreciate to a scrap value of Rs. 24,000
in 5 years.
(a) If the reducing balance method of depreciation is used, find the depreciation rate.
(b) What is the book value of the computer at the end of the third year?
(c) How much more would the book value be at the end ofthe third year, if straight
line method of depreciation has been used ?
[Ans. (a) 44.11%, (b) Rs. 76,816.59, (c) Rs. 1,13,583]
28. A company buys a computer for Rs. 1,25,000 and houses it in a specially constructed
suite at a cost ofRs. 20,000.
(a) If the computer depreciates at 25% (reducing balance) and the suite appreciates
5% compound, what is the book value of the suite and the computer after 5 years,
(b) Taking computer and suite together and using the reducing balance method,
what is the overall depreciation rate? [Ans. (a) Rs. 55,188.71, (b) 17.57%]
29. ABC Ltd. purchases a machine which cost Rs. 12,000 now. The useful life of the
machine is 10 years. The rate of depreciation is 6%, depreciation being calculate on
diminishing balance method. What is the scrap value of the machine at the end of its
life? If after 10 years, the existing machine has to be replaced by a new machine
which cost 20% more than the cost of the old machine, what amount will be required
at the end of the 10th year to replace the old machine by a new one? [Ans.7,936.62]
Bills of Exchange
INTRODUCTION
Companies due to competition in the market sell their goods on credit and give some
time to the buyer to pay the amount before the expiry of some specified time period. This
period is known as credit period. To ensure that the seller or creditor will receive his amount
on or before the expiry of credit period, he writes a formal instruction to purchaser or debtor
to make the payment of the certain specified amount on or before the expiry of credit period
to him or to· anyone else according to his instruction. This formal document is known as the
Hll of exchange. In this chapter, we discuss the method of discounting a bill of exchange.
BILL OF EXCHANGE
A bill of exchange is defined as follows :
"A bill of exchange is a written document or undertaking by the debtor to the creditor for
paying a certain sum of money on a specified future date."
In otherwords, a bill of exchange is a negotiable instrument by which one person
undertakes to pay another person a certain sum of money at a future date. Bill of exchange
is always drawn by the creditor ordering the debtor to pay the amount specified in it at the
end of a specified period.
A bill of exchange contains three parties viz. drawer, drawee and payee. The drawer is
the person who writes or prepares the bill. The creditor is the drawer of the bill. The drawee
is the person who has to pay amount specified in the bill. The debtor is the drawee of the bill.
The payee is the person to whom the payment is to be made. In many cases, the drawer and
payee are the same. The drawer or the payee who is in possession of the bill is called the
polder of the bill.
BILLS OF EXCHANGE 127
Bills are generally prepared by the drawer and sent to the drawee for his acceptance. If
the bill is accepted, the drawee writes the word accepted on the bill, with his signature and
date. When such an acceptance is written on the bill, it becomes a bill of exchange. Cheque,
bank draft and etc., are examples of bills of exchange. A cheque is a bill of exchange drawn
on a banker and payable on demand. A bank draft is a bill of exchange drawn by one bank on
another and payable on demand.
The place of payment should be specified 0 the bill of exchange. If it is not mentioned,
then payment should be made at the address of the drawer written in the bill. A bill of
exchange must be written on a stamped paper of the court. If it is written in an ordinary
paper, it should bear stamps. Stamps are fixed according to the amount of the bill.
The fixed period after which the payment of the bill is made is called the term of the bill.
If the payment of a bill is to be made after 3 months, we say that the term of the bill is 3
months.
DUE DATE AND LEGALLY DUE DATE

The date of writing the bill must be clearly mentioned on the bill, because due date is to
be calculated on the basis of this date. The date on which the payment of the bill is due is
called the date of maturity or due date.
It should be noted that the date of acceptance of a bill may not be the same as the date
on which the bill is drawn or prepared.
There are two kinds of bill of exchange.
(a) Bill of exchange after date
(b) Bill of exchange after right.
In bill of 3xchange after date, the date of maturity is counted from the date of drawn of
the bill. On the other hand, in case of bill of exchange after sight, the date of maturity is
counted from the date of acceptance of the bill.
Three days are generally added to the due date or maturity date to get the legally due
date. These three days are called days of grace.
For example, consider a bill drawn on 27th November 2001 for a term of 3 months. We
have 3 months from 27 th November 2001 and 3 days of grace. Therefore the maturity date is
27th February 2002. The legally due date is 2nd March, 2002.
BANKER'S DISCOUNT AND TRUE DISCOUNT

The drawer or the payee of a bill of exchange is entitled to receive the payment after a
fixed period of time. In otherwords, he has to wait for the payment till the bill becomes
legally due. If he needs the money immediately, he can get the bill discounted from a bank
or can endorse it to the third party to settle his dues.
Discountmg a bill of exchange means encashing the bill before the due date form a bank.
For discountil1g the bill, the drawer or the holder of the bill transfers the possession and also
the ownership ofthe bill to the bank.
If the drawer or holder of a bill presents the bill for cash payment to a banker or a bill
broker, the banker will deduct some amount form the bill. In fact, the banker charges certain
rate of interest on the sum due. This interest is known as banker's discount.
Thus Banker's Discount is defined as follows:
"The interest on the bill value or the face value (i.e. the amount mentioned in the bill)."
If a bill of face value of Rs. P is discounted at the rate of r per annum for t years, then the
banker's discount at simple interest is the interest on Rs. P at the rate of r per annum for t
years.
Thus the banker's discount is given by
I Banker's Discount =Prt I
Note: 't' is the time period between the date of discounting and the legally due date. If
this time period is in months, weeks, or days it should be covered into years.
True discount is defined as follows:
"True discount is the interest on the present value of a bill of exchange."
If a bill of face value Rs. P is discounted at the rate of r per annum for t years, then the
P
interest on its present value V = 1 + rt is the true discount.
.. True discount =Interest on V at the rate of r per annum for t years

. d·
.. True Iscount =
TT Prt
= 1 + rt vrt
Thus the true discount is given by
·
T rue D Iscoun t
= 1Prt
+ rt
The difference between the banker's discount and the true discount is called banker's
gain. Thus the bankers gain is given by
Banker's gain = Prt -lP:~t
Remark:
Prt
Banker gain =Pvt- - -
1+ rt
=Prt [1 __
1] 1 + rt
=Prt[~] 1 + rt
= (~)rt .1 + rt
. . Banker's gain =(True discount) rt
Thus Banker's gain is the interest on true discount. It is also obvious that the banker's
gain is greater than the true discount.
Example 1: Find the banker's discount and true discount on a bill of Rs. 20,000 due 4
months at 5% per annum.
Solution: Present· Value of AmountP = Rs. 20,000

No. of Years t = :2 = 0.3333 years
Rate ofInterest r = 5% = 0.05
Banker's Dis.count = Prt
= 20,000 x 0.05 x 0.3333 = 333.30
:. Banker's Discount is Rs. 333.30
True Dibcount is given by
·
True Olscount Prt
=l+rl
. 333.30 333.30
True 01Rcount =.1 + 0.01667 = 1.01667 = 327.83
:. True Discount is Rs. 327.83.
The Banker's Discount is Rs. 333.30 and The True Discount is Rs. 327.83.
Example 2 : Mr. X received from Mr. Y acceptance for Rs. 8,000 on 1st June 2007 for 3
months. He got the acceptance discounted at 6% per annum at his bank after one month. How
much amount was received by him from the bank after discounting the bill ?
Solution: Present Value of Amount P = Rs. 8,000

(3 -1) 2
No. of Years t =}2= 12 = 0.167 years
Rate of interest r =6% = 0.06
Banker's Discount is given by
Bank's Discount = Prt
=8,000 x 0.06 x 0.167
=80.16
. . Banker's Discount is Rs. 80.16
Amount Received by X after discount = Rs. (8,000 - 80.16) =Rs. 7,919.84
The Net Amount Received by X after discount is Rs., 7,919.84.
Example 3 : Find the True Discount and Banker's gain on a bill for Rs. 2,550 due in 4
months hence at 7% per annum. .
Solution: Present Value of Amount P = Rs. 2,550

4
No. of Years t =12 =0.3333 years
Rate of Interest r = 7% = 0.07
Ban~er's Discount is given by
Banker's Discount =Prt
=2,550 x 0.07 x 0.3333
=59.49
Banker's Discount is Rs. 59.49
Now, True Discount is given by
Prt
True Discount
1 + rt
_ 2,550 x 0.07 x 0.3333
- 1 + 0.07 x 0.3333
59.49
-1 + 0.0233
=58.13
True Discount is Rs. 58.13.
Now, Banker's gain is given by ,
Bank's gain =Banker's Discount - True Discount
= Rs. (59.49 - 58.13)
= Rs. 1.36
The Banker's gain is Rs. 1.36.
Example 4: A bill of Rs. 45,000 drawn on March 27,2008 at 8 months was discounted
on August 18, 2008 at 6% per annum. How much did the banker charge and what did the
holder receive ?
Solution : Date of Drawing the bill =March 27, 2008

Duration or term of the bill =8 months
Due Date is give by
= 27 March 2008 + 8 months + 3 days of Grace
=27 November 2008 + 3 days of Grace
= 30 November, 2008
Date of Discounting the bill is August 18, 2008
Now, Number of days form the date of discounting to the due date is calculate as
follows:
~3 days + 30 days + 31 days + 30 days =104 days
For AUgust] [For September] [For October] [For November] =104 da
[ Month Month Month Month ys
Present Value of Amount P =Rs. 45,000
104
No. of Years t =365 = 0.285 years
Rate of Interest r = 6% = 0.06
Banker's discount is given by
Banker's discount =Prt
= 45,000 x 0.06 x 0.285 =769.50
Banker'oS Discount is Rs. 769.50
Discounted value of the bill is given by
Discounted value of the bill =Present Value of Amount - Banker's Discount
=P -Prt
= Rs. (45,000 -769.50)
=Rs. 44,230.50
Discounted value of the Bill is Rs. 44,230.50.
Example 5 : The Bankers gain on a bill due 6 months hence at 8% per annum is Rs. 50.
Find the face value of the bill.
Solution : Let the face value of the bill be Rs: P.

6
No. of Years t=12 =0.5 years
Rate of Interest r =8% = 0.08
Banker's gain =Rs. 50
Banker's gain is given by
Banker's gain = Banker's Discount - True Discount
P
Banker's gain = Prt -1 rt 2
Now, substituting the values, we get
P x 0.08 x 0.5
P x 0.08 x 0.5 - 1 + 0.08 x 0.5 =50
0.04 P - °i~: =50
0.0416P - 0.04 P = 52
0.0016P = 52
P = 32,500
Hence, the face value of the bill is Rs. 32,500.
Example 6: The difference between the True and bankers discount on a bill due after 4
months at 7% interest is Rs. 500. Find
(i) The True Discount
(ii) The Banker's Discount

(iii) The face value of the bill.
Solution: Let Rs. P be the face value of the bill.

4
No. of Years t=12 =0.3333 years
Rate of interest r =7% =0.07
. . Banker's Discount is given by
Banker's Discount = Prt
=P x 0.07 x 0.3333
=0.023331P ... (1)
Prt
True Discount = - -
1 + rt
P x 0.07 x 0.3333
=1 + 0.07 x 0.3333
0.023331P
... (2)
= 1.023331
Now, Given that
Banker's discount - True Discount =Rs. 500
0.023331P
So, 0.023331P - 1.023331 == 500
~ 0.023875335P - 0.023331P = 511.67
~ 0.000544335P = 511.67
~ P =9,39,991
., The face value of the bill is Rs. 9,39,991.
Now putting P = Rs. 9,39,991 in eq. (i) and (ii)
Banker's discount = Prt
=9,39,991 x 0.07 x 0.3333
=21,930.93
:. The Banker's Discount is Rs. 21,930.93
True Discount is given by
·
True D Iscount = 1Prt
+ rt
0.023331 x 939991
=
1.023331
=21,430.92
. . True Discount is Rs. 21,430.92.
Example 7: A bill of exchange drawn on February 4, 2004 a.t 4 months after date was
discounted on March, 26, 2004 at 8% per annum. If the banker's discount is Rs. 400, find the
face value of the bill .
Solution: Let the face value of the bill be Rs. P

Rate of Interest r =8% =0.08
Now, nate of Drawing the bill is February 4,2004
Tenn of the bill =4 months
Legally due date of the bill =7th June, 2004
nate of Discounting the bill =March 26, 2004
Number of days from date of discounting to the due date as follows:
=5 days + 30 days + 31 days + 7 days =73 days
[March] [April] [May] [June]
Thus, we get
73 1
=
No. of years t 365 ="5 =0.2 year
Banker's Discount = Prt
=P )( 0.2 )( 0.08
=0.016P
Given that Banker's Discount is Rs. 400.
.. 0.016P = 400
400
P = 0.016 =2,500
Hence, the face vahle of the bill is Rs. 2,500.
Example 8: The banker's discount calculated for one year is 26 times his gain. Find the
rate of interest.
Solution : Let the rate of interest be r per rupee per annum and the face value of the bill
beRs.P. .
. . Banker's Discount for. one year =Pr
Banker's gain =Prt - 1~

Banker's gain for one year =Pr - t: r
It is given that for one year, Banker's Discount is 26 times the banker's gain.
.. Pr =·26 (pr- /: r)
1 = 26 (1 - 1 ~ r)
1+r = 26r
25r =1
1
r = 25 = 0.04
Hence, the required rate oflnterest = (i5 'x 100 )% =4%

:. The required Rate of interest is 4% per annum.
Example 9: A bill of Rs. 1,500 drawn on May 3 for 6 months was discounted on August
25 for a cash payment of Rs. 1,479, find the rate of interest charged by the bank.
Solution.: Bill discounted for a cash payment ofRs. 1,479.

Date of drawing the bill is May 3.
Term of the bill is 6 months.
Due date of the bill is November 6.
Date of discounting is August 29.
.. Number of -days from the date of discounting (i.e. August 29) to due date (i.e.
November 10) calculated as follows:
= 6 days + 30 days + 31 days + 6 days = 73 days
[ A!:st] [sep~:br] [o:~er] [No!~ber]

Present value of amount P = Rs. 1,500
73
No. of years t = 365 = 0.2 yF..ars.
Let the interest be r per rupee per annum.
:. Banker's discount =Prt
= 1,500 x r x 0.2
=300r ... (i)
It is given that the bill was discounted for a cash payment of Rs. 1,479.
.. Banker's Discount = Rs. [1,500 -1,479]
=Rs. 21 ... (ii)
From (i) and (ii), we get
300r = 21
21
r = 300 = 0.07
r = 7%
So, the rate of Interest is charged by the Bank is 7% per annum.
Example 10 : A bill for Rs. 21,900 drawn on 10 July, 2006 for 6 months was discounted
for Rs. 21,720 at 5% per annum. On what date was the bill discounted?
Solution : Rate of interest r =5% =0.05

Face value of the billP =Rs. 21,900
Discount value of the bill =Rs. 21,720
=
Banker's Discount Face value of the bill- Discount value of the bill
= Rs. (21,900 - 21,720) = Rs. 180 ...(i)
Date of drawings the bill is July 10, 2006
Duration of the bill = 6 months
:. Due Date of the bill is January 13, 2007
Let the bill be discounted 't' years prior to its due date at 5% per annum.
Banker Discount is given by
Banker's Discount =Pre
Rate of InterelSt r =5% =0.05
:. Banker's Discount =21,900 )( 0.05 )( t
=
1,095t ... (ii)
From (i) and (ii), we get
l,095t = 180
180
t = 1,095 years
180
t =1095 )( 364 days
t =60 days
Thus, the bill was discounted 60 days prior to its legally due date i.e. 13 January, 2007.
Hence, the bill was discounted on 14th November 2006.
Example 11: [fthe banker's gain on a bill is (~)th of the banker's discount; t.l,.e rate of
interest being 10% per annum (simple), find the expired period of the bill.
Solution : Let 't' years be the expired period of the bill and Rs. P be the face valu~ ''If the
bill.
Rate ofInterest r = 10% = 0.10
Banker's Discount =Pre =Pt)( 0.10 ... (i)
True Discount =1~t

Pt)( 0.10
... (ii)
=1 + t )( 0.10
Now, Banker's gain .is given by

Banker's gain =Banker's Discount - True Discount
Pt x 0.10
=Pt x 0.10 - 1 + t x 0.10
(Pt x 0.10) x (1 + t x 0.10) - (Pt x 0.10)
= (1 + t x 0.10)
.. .(iii)
It is given that
Banker's gain =~ (Banker's discount)
(Pt x 0.10) x (1 + t x 0.10) - (Pt x 0.10) _! p' 010

~ (1 + t x 0.10) - 9x tx .
10
~ 8 (1 + 0.1t) = 9 ~ t ='8 =1.25 year
Hence, the expired period of the bill is 1.25 year.
Example 12: A man holds a bill for Rs. 9,600 which is due for payment.after 9 months.
After 4 months, however, he sells the bill to a broker who charges 5% per annum. The man
then invests the discounted value of the bill in a security where rate of Interest is such that he
does not suffer any loss on discounting the bill, find the rate of interest percent per annum of
the security.
Solution : Since the bill is' due for payment after 9 months and the bill is discotmted
after 4 months, the bill has 5 months to run for maturity.
=(9,600 x 0.05 x 0.4167) , [.; P :2

=Rs. 9,600, t = years, r =1~0 ]
=200.02
. . Banker's Discount ;~ Rs. 200.02
Thus, the Discounted value of the bill =Rs. (9,600 - 200.02) =Rs. 9,399.98
Let this discounted value -qfthe bill be invested in security at r per annum.
Interest earned on security for 5 months =9,399.98 x r x 0.4167
Since the man does not suffer any loss in discounting the bill and then investing the
discounted value in the security. Therefore,
Interest on discounted value in the security =Banker's Discount
~ 9,399.98 x r x 0.4167 = 200.02
200.02
r = 0.4167 x 9,399.98 =0.0511 = 5.11%
The rate of interest on the security is 5.11%.

Example 13: A Banker discounts a bill for a certain amount which has 32 days to run
before it matures legally at 5%. The discounted value of the bill is Rs. 7,268. Find the face
value of the bill ?
Solution : Let the face value of the bill be Rs. P
32
No. of years t =365 =0.0877 years
= P x 0.5 x 0.0877
=0.004385P
Given that the discounted value =Rs. 7,268
~ P - 0.004385P = 7,268
=> 0.995615P = 7,268
=> P = 7,300
:. The face value of the bill is Rs. 7,300.
Example 14: The Banker's Discount and True Discount on a Certain sum of money due 3
months hence are Rs. 515 and Rs. 500 respectively. Find the sum of money and rate of
interest?
Solution : Let the face value be Rs. P and the rte of interest be r per rupee per annum.
Given that
3 1
No. of years t = 12 = 4" years =0.25 years.
Banker's discount =Prt
=Pr x 0.25
. Prt Pr x 0.25
True DIscount = 1 + rt = 1 + 0.25r
It is given that banker's discount = .Rs. 515 and True Discount = Rs. 500.
Prx 0.25
.. Pr x 0.25 =515 and 1 + 0.25r =500
515
.. 1 + 0.25r =500
515
=> 1 + 0.25 r =500 =1.03
=> 0.25r =0.03
=> r = 0.12 = 12%
:.rate of interest is 12%
Now, P x 0.12 x 0.25 = 515
P = Rs. 17166.67
The sum of money is Rs. 17,166.67
Example 15 : A merchant has a 3 months bill for Rs. 4,000 which his broker discounts at
5%. Find the rate of interest, if at least he should earn on the discounted value so that he may
not suffer any loss by discounting the bill.
Solution : Let the required rate of interest be r.

Broker's Discount is given by
where Present value of amount P =4,000
Rate ofinterestr =5% =0.05
3
No. of year t = 12 = 0.25 years
Broker's discount =4,000 x 0.05 x 0.25 =50
Broker's discount is Rs. 50
Discounted value =Rs. (4,000 - 50) =Rs. 3,750.
Then, The Broker's Discount =Interest on Discounted Value.
~ 50=3,750xO.25xr
50 50
r =3950 x 0.25 =987.5 =0.0506 =5.06%
Hence, the required rate of interest is 5.06%.
Example 16: Find the rate of percent at which the true discount on a bill legally due in 9
months will be exactly the same as the banker's discount at 7% per annum?
Solution : Let Rs. P be the face value of the bill legally due in 9 nioth~ time and r be
the interest rate of per annum.
9 3
No. of years t =12 =4" =0.75 years
True Discount is given by
Prt
True Discount = 1 + rt
P x r x 0.75
=1+0.75xr
0.75 Pr
= 1 + 0.75r
Now, we find Banker's Discount on a bill of Rs. P due in 9 months at 7%.
-"'- Banker's Discount =Prt
=P x 0.07 x 0.75 [.: r =7% =0.07]
=0.0525P
It is given that, True Discount =Banker's Discount

075Pr
0.0525P =1 + 0.75r
0.0525P (1 + 0.75r) =0.75Pr
0.0525P + 0.039375Pr =0.75 Pr
0.0525P = 0.75Pr - 0.039375Pr
0.0525P = 0.710625 Pr [Divide both sides by P]
0.0525 = 0.710625r
0.0525
r = 0.710625 = 0.07387
r = 7.39%
.. The rate of percent is 7.39%.
L Find the banker's discount and true discount on a bill of Rs. 12,200 due 4 months at
5% per annum. [ADs. Rs. 203.33, Rs. 200]
2. Find the true discount and banker's gain on a bill for Rs. 1,550 due 3 months hence
at 6% per annum. [Ans. Rs. 22.91, Rs. 0.34]
3. A bill of Rs. 80,000 drawn on May 27, 2008 at 6 month is discounted on August 8,
2000 at 6% per annum. How much does the banker charge and what does the holder
receive? [ADs. Rs. 1,499.19, Rs. 78,500.81]
4. A bill of exchange for Rs. 1,000 was drawn on the 3rd April, 2000 payable 3 months
after date. It was discounted on 15th April, 2000 at 4~ per annum. What was the
discounted value of the bill? [ADs. Rs. 990.45]
5. The banker's gain on a bill due 4 months hence at 4% per annum is Rs. 50. Find the
sum. [Ans. Rs. 2,85,000]
6. The true discount and banker's gain on a certain bill of exchange due after a certain
time are respectively Rs. 700 and Rs. 17.50. Find the face value of the bill.
[ADs. Rs. 28,700]
7. The difference between the true and banker's discount on a bill due after 3 months at
5% interest is Rs. 100. Find (a) the true discount, (b) the banker's discount and
(c) the face value of the bill. [Ans. (a) Rs. 8,000; (b) Rs. 8,100; (c) Rs. 6,48,000]
8. If the banker's gain on a bill due 6 months hence at 8% per annum is Rs. 600, find
the true discount, banker's Discount and the amount of the bir~ ?
[Ans. Rs. 15.000;Rs. 15,600; Rs. 3,90,000]
9. A bill of exchange drawn on February 4, 2007 at 6 months after date was discounted
on March 27, 2000 at 10% per annum. If the banker's discount is Rs. 600, find the
face value of the bill. [ADs. Rs. 16,466.25]
10. A bill was drawn on 25 th July, 2008 at 7 months after sight and was accepted 0 pre-
sentation on 8th August, 2008. It was discounted on the 30th August, 2008 at 7% per
annum interest to realise Rs. 7,920. Find the value of the bill. [ADs. Rs. 8,224.42]
140 FINANCIAL 'MATHEMATICS
1L The banker's discaunt calculated for 2 year is 28 times his gain. Find the ·.rate of
interest. [ADs. 1.82%]
12. The banker's discount and the true discount on a bill due 8 months hence are Rs. 500
and Rs. 400 respectively. Find the rate
, percent and the-amount of the bill.
[ADs•. 37.5%; Rs. 2,000]
13. A bill of Rs. 10,000 drawn on May 7 -for 7 months was discounted on August 19,
following, for a cash payment of Rs. 9,880. Find the rate of interest charged by the
bank. - [Ans. 3.88%]
14. A bill for Rs. 4,650 was drawn on 8 March, 2008.at 7 months. It was discounted on 18
May, 2008 and the holder of the bill received Rs. 4,497. What rate of interest did the
baker charge? . [ADs. 5%]
15. A bill is drawn for Rs. 5,050 on June 20 at five months. It is discounted on September
11 at 5% per annum. How much does the holder of the bill received and what is the
banker's gain in the transaction? [ADs. Rs. 4990.50; Rs. 50]
th
•
16. A bill for Rs. 2,000 drawn on 20 Dec. 1995 at 6 moths is discounted on 11th April,
1996. If the payment made by the broker is Rs. 1,978, pnd the rate of interest. Find
also the rate the banker gets on this money.. . [ADs. 5.5%, 5.56%]
17. A bill for Rs. 1,800 drawn on 24th September 2008 due 6 months hence was encashed
in a bank at 5% for Rs. 1,782. Find out the date on which it was encashed '1 -
[ADs. 13 January 2009]
18. The difference between banker's discount and true discount on a certain sum for 3
years 4 months at 5% per annum is Rs. 12.50. Find the sum. [ADs. Rs. 525]
.
19. The banker's discount and True discount on a certain sum of money for 20 months
are Rs. 64 and Rs. 60 respectively at the same rate. Find the sum and the rate per
cent. [Ans. Rs. 960, 4%]
20. A bill ofRs. 2,525, drawn on January 13, 2007 at 8 months credit was discounted on
5th July at 5% per annum. Find the banker's discount and gain in this transaction.
[Ans. Rs. 25.25; Re. 0.25]
21. A bill of exchange ofRs. 2,000 drawn on January 6,2008 at 4 months was discounted
on March 28, 2008. If the banker's discount at 5% per annum is Rs. 1,008, find the
face value of the bill. [Ans. Rs. 1,75,200]
22. A bill of exchange of Rs. 2,000 drawn on 14 March for 8 months is discounted on 2nd
August at 5% per annum. How much does the banker charges? [ADs. Rs. 29.32]
23. th
A bill of exchange of Rs. 2,000 drawn on 15 March, 2008 for 6 months is discounted
on 15th May, 2008 at 5% per annum. How much does the bank charge?
[ADs. Rs. 34.52]
24. st
A received from B acceptance for Rs. 30,000 on 1 March, 2007, at 4 months. A got
the acceptance discounted at 6% per annum at his bank after 1 month. How much
was received by A from the bank after discounting the acceptance? [ADs. Rs. 29,550]
25. The holder of a ill for Rs. 17,850 received Rs. 357 less than the amount of the bill by
having it discounted at 5% per annum. For how many more days the bill has still to
run ? [ADs. 146 days]
26. Rajesh draws a bill on Ramesh for Rs. 6,400, payable after 5 months. Ramesh
accepts it and returns it to Rajesh. The bill is discounted by Rajesh from a bank for
Rs. 6,000 on the same day. Find the rate at which the bill was discounted by the
bank. [Ans. 15% per annum]
27. A bill of exchange drawn on January 4,2005 at 5 months was discounted on March
26,2005. If the banker's discount at 3% be Rs. 603.60, find the face value of the bill.
[Ans. Rs. 1,00,600]
28. A bill of exchange for Rs. 27,335 was drawn on 7th April, 2008 payable 7 months after
date. It was discounted on the 20th May, 2008 at 7% per annum. What was the
discounted value of the bill ? [Ans. Rs. 26,422.84]
29. The true discount and banker's gain on a certain bill of exchange due after a certain
time are respectively Rs. 50 and Re. 0.50. Find the face value of the bill.
[Ans. Rs. 5,050]
th
30. A bill was drawn on 15 May, 1999 at 8 months after date and was discounted on
August 25,1999 at 6% per annum. If the banker's gain on the basis of simple interest
is Rs. 18, for what sum was the bill drawn. [Ans. Rs. 32,000]
31. What is the face value of a bill discounted at 5% per annum 73 days earlier than the
date of maturity, the banker's gain being Rs. 10 only? [Ans. Rs. 1,01,000]
32. One bill ofRs. 5,000 due on June 13 and another for Rs. 4,000 due on August 25 ,are
both discounted with a banker on April 1. If the difference between the two discounts
is Rs. 30, find the rate of interest at which the discount is calculated. [Ans. 5% p.a.]
33. The banker's discount and the true discount on a bill due 4 months hence are Rs. 210
and Rs. 200 respectively. find the rate of per cent and the amount of the bill.
~Ans. 15%, Rs. 4,200]
34. A bill was drawn on April 14, 2008 at 8 months after date and was discounted on
July 24, 2008 at 5% per annum. If the banker's gain on the basis of simple interest is
Rs. 20, for what sum was the bill drawn? [ADs. Rs. 51,000]
35. Calculate the banker's gain on a bill of Rs. 18,500 due in 7 months at 9% per annum.
[ADs. 48.45]
36. A bill for Rs. 50,000 drawn on January 18, 2002 at 9 months was discounted at a
bank on January 18,2002 at 9 months was discounted at a bank on which the date of
discounting is March 28, 2002, the rate of interest being 6% per annum. How much
did the holder receive? [Ans. Rs. 48,299]
37. If the banker's gain on a bill due 3 months hence at 5% per annum is Rs. 1,500. Find
the True Discount, Banker's Discount and the amount of the bill.
[ADs. Rs. 40,000; Rs. 40,500; Rs. 32,40,000]
Immediate Annuity
INTRODUCTION TO ANNUITY
In our daily life, we see a lost of transactions taking place, like sales or purchase of
goods, renting or hiring, borrowing or lending of money and etc. Some of these transactions
involving money are sometimes done by a single payment at a future date. But not many
people are in a position to deposit a large sum of money at one time in an account. They
make the payments in instalments over a period of time. For example, a customer, instead of
paying the entire price of Rs. 20,000 for a refrigerator, many pay a part of it, say Rs. 5,000
initially and remaining in equal monthly instalments. These instalment are so determined
that they compensate the seller for his waiting time and are based on compound interest
rate.
If a depositor makes equal deposits at regular intervals, he is contributing to an annuity.
So by an annuity, we mean a sequence of equal periodic payments made at equal intervals of
time. The payments may be generally made weekly, monthly, quarterly, half-yearly or
yearly. For example, premium for a life insurance policy may be made in equal instalments
periodically, say semi-annually. The equal monthly payment that a retired person receives
in the form of pension is another example of annuity. Even bank loans are repaid in equal
instalments, say monthly, over a period of time. All these transactions have a common thing
equal payments at equal intervals of time. In this chapter, we discuss various kinds of
annuities and study in detail the present value and future value concepts of immediate
annuity.
ANNUITY: DEFINITION
An annuity is defined as follows:
"An annuity is a sequence of equal payments made at equal intervals of time."
IMMEDIATE ANNUITY 143
The term annuity is derived from the Latin word 'annum'. Although this word indicates
that payments must be annual, its meaning in practice, has been broadened to include any
periodic payment of a fixed amount made at a regular interval which may be more or less
than one year. The person obligated to make such payments is called annuitator where as
the person entitled to receive such payments is called annuitant.
SOME BASIC TERMS

(i) Period Payments
The size of each payment of an annuity is called the periodic payment or periodic rent of
the annuity.
For example, if a sequence of payments of Rs. 2,000 is made at the beginning of every
month, then we say that it is annuity with periodic payment of Rs. 2,000.
(ii) Payment Date
The date oolby which a periodic payment is to be made is called payment date.
For example,. if a bank asks a borrower to pay the monthly instalment against a
personal loan on 5th of every month this date will be the payment date.
(iii) Payment Period
The period of time elapsing between two successive payment dates of an annuity is
called its payment period or payment interval or rent period. .
For example, if a sequence of payments is to be made on 1st January every year, then it
is an annuity with payment period of one year. The payment period of an annuity can be a
year, an half-year, a quarter, a month, a week and etc.
(iv) Term
The total time from the beginning of the first payment period to the end of the last
payment period is called the term of an annuity.
For example, if a series of payments was made on 1st January every year from 1990 to
1999, it is an annuity with a 10-year term and payment period of one year.
It should be noted that the term of an annuity can also be a certain number of months.
For example, if a loan is to be repaid in 6 equal monthly instalments, then it is an annuity
with 6-months term and payment period of one month.
(v) Amount or Future Value
It is the sum of all the payments made and the interest earned on them at the end of the
term of the annuity.
In other words, the amount of an annuity is the sum of the terminal or future values 0 f
each of the periodic payments. Here, the term terminal value means the sum of the
payments made and the interest earned on that payment.
(vi) Present Value or Capital Value
The present value or capital value of an annuity is the sum of the present values of all
the payments.
In other words, the present value of an annuity is the amount of money that must be
invested now to purchase the payments due in future.
TYPES OF ANNUITIES
There are many types of annuities which are classified based on different factors.
(i) Annuities based on their Term
Following are the types of annuities which are classified based on the term of the
annuity:
(a) Annuity Certain
(b) Contingent Annuity
(c) Perpetual Annuity
(a) Annuity Certain

An annuity payable for a certain fixed term is called Annuity certain. This kind of
annuity begins and ends on certain fixed dates. The term of an annuity is fixed and so its
payments extend over a fixed period oftime.
The payment for hike-purchase of durables like Television, Refrigerator, Car, etc. are
usually annuity certain, because the buyer knows the specified dates on which the
instalments are to be made and the number of instalments to be made. Repayment of bank
loan and Bank recurring deposits are also annuity certain.
(b) Contingent Annuity
Contingent annuities one whose payments continue for a period of time which depends
on the happening of an event the date of which cannot be accurately foretold. If the
contingency did not happen at all, then the periodic payments should be paid till the end of
designated term.
For example, payment of life insurance premium is contingent annuity. Whenever the
insured .person dies, the payment of premium is stopped.
(c) Perpetual Annuity
A perpetual annuity, simply perpetuity is an annuity whose payments continue forever
(infinite number of years). In perpetuity, the beginning date is known but the terminal date
is not known, because the term of this annuity is infinite.
For example, in endowment funds of trusts the principal amount is not touched and the
interest earned is used for welfare activities. Since the principal is not touched, a certain
sum is received periodically forever.
(ii) Annuities based on Payment Date
Following are the types of annuities classified based on the payment interval and time of
payment:
(a) Ordinary or Immediate Annuity
(b) Annuity Due
(c) Deferred Annuity.
(a) Immediate Annuity

An ordinary annuity or immediate annuity is an annuity, in which every periodic
payment is made at the end of the corresponding payment period.
Even though, the first payment is made at the end of the first payment period, the term
of an ordinary annuity begins with the beginning of the first payment period and ends on the
day 'of the last payment.
For example, repayment of a bank loan is an ordinary annuity.
It should be noted that an ordinary annuity is an annuity certain but the converse may
not be true.
(b) Annuity Due
If each payment of annuity is made at the beginning of the corresponding payment
period is called annuity due.
Here, even though the last payment is made at the beginning of the last payment period,
the term of an annuity due ends at the end of the last payment period. The term of an
annuity due begins on the day, the first payment is made.
For example, a saving scheme of five years in which equal deposits are made at the
beginning of each year is an annuity due. In this annuity every payment is an instalment,
the first payment earns interest for five years, the second for four years and the last for one
year.
Payment of premium for a life insurance policy is the most precise example for annuity
due. In life insurance, the first premium is to be made at the commencement of the policy.
(c) Deferred Annuity

Deferred stands for postponed. A deferred annuity is an annuity in which the first
payment is postponed for a period of time whi~ is equivalent to a certain number of
payment periods.
In deferred annuity, the term begins after the expiry of this postponed period. This
period is called period of deferment. It is understood from the above discussion that in
deferred annuity the term is known but postponed for a certain number of intervals.
A deferred annuity can either be a deferred ordinary annuity or a deferred annuity due.
But it is genr~y an ordinary annuity.
For example, when a house building loan is given by an employer to an employee,
generally the repayment in equal instalments by the employee does not start thereof but
may begin after some time, say five years after the loan is sanctioned. The interval of five
years is called the deferred period.
(iii) Annuities based on Payment Period and Conversion Period

Annuities based 0:1 payment period and conversion period are classified as follows:
(a) Simple Annuity
(b) Complex Annuity
(a) Simple Annuity

An annuity in which the payment period coincides with the interest conversion period is
called simple annuity.
For example, consider an annuity of Rs. 1000 payable at the end of every quarter,
interest being calculated at 8% per annum cotrtpounded quarterly. Here payment is made at
the end of every quarter and inter~ is also compounded on quarterly basis. This kind of
annuity is called simple annuity.
(b) Complex Annuity

. An annuity in which payment period differs from the interest conversion period is called
a complex annuity.
For example, suppose that a man deposits Rs. 500 at the end of every month in an
account and the bank calculates interest at 6% per annum compounded half-yearly. This
kind of annuity is called complex annuity. In this case, payment period is one month
whereas the interest conversion period is six months. In other words, six periodic payments
are made in one interest conversion period.
(iv) Annuities based on the Period Payment

Annuities based on the amount of periodic payment are classified as follows:
(a) Uniform Annuity
(b) Variable Annuity
(a) Uniform Annuity

If the periodic payment are all equal through out the term of the annuity, then the
annuity is called uniform annuity. It is also known as fixed annuity.
Annuities are generally uniform, since equal payment are made at equal time interval.
For example, repayment of a personal loan is a uniform annuity. The debtor is to repay the
loan in equal instalments.
(b) Varial)le Annuity
It the periodic payment of an annuity changes every year or every payment period, then
the annuity is called variable annuity.
Penson plan is an example of variable annuity. Certain additional features may also be
added to the plan. The annuity may increase as a result of vested bonuses, if the plan is a
participating one.
CHARACTERISTICS OF AN ANNUITY
• Annuity is a recurring payment of fixed amount, i.e., a periodic payment.
• Annuity is payable at an equal interval of time, either annually, semi-annually,
quarterly or the like.
• Annuity is paid against a lump sum received at present or a compound amount
receivable after a certain period.
• Annuity is paid either to discharge an existing obligation instalmentwise or to create

a fund to be accumulated in future.
• If the annuity is paid against a lump sum received at present, then every payment
will contain interest for the outstanding principal and the sum of all instalments
(periodic payments) will be more than the present value. The difference is the total
interest paid.
• If the compound amount (Future value) is receivable after a certain term, then every
periodic payment will bring interest and the sum of the instalments will be less than
the future value. The difference is the total interest received.
• Annuity is paid either at the beginning or at the end of each period.
• In annuity, every payment is a case of compound interest. To find the future v~lue
(or present value) of an annuity, future or present. value of every periodic payment is
calculated on the basis of compound interest and the sum is found out.
• Annuity is paid on the basis of a contract by one party called annuitator to another
party called annuitant.
DIFFERENCE BETWEEN COMPOUND INTEREST AND ANNUITY

• In case of compound interest, a lump sum (principal) is paid only once. But incase of
annuity, a series of equal period~c payments are payable (or receivable) at equal
interval of time.
•
• The purpose of investment under compound interest system is to crate a heavy fund
at the end of a certain term to meet an obligation. But the purpose of investment
under annuity system is to create a heavy fund through periodic contribution of
small amounts to meet an obligation.
• Compound interest system operates without any element of annuity system, but
annuity system cannot operate with out the element of compound interest system.
• Annuities can be classified into different types based on the payment date, payment
interval and etc. But there is no such classification in case of compound interest.
• In case of compound interest system, the rate of interest may vary from time to time.
But in case of annuity system, interest is generally compounded at an agreed fixed
rate of interest.
• In case of multiple investments under compound interest, the investments need not
to made at equal time intervals. But instalments should be made at equal time
intervals in the annuity system.
Note: In this chapter, we will study the concept of ordinary annuity in .detail and
succeeding chapters are devoted for annuity due, differed annuity and perpetuity.
ORDINARY (OR IMMEDIATE) ANNUITY

As we have discussed earlier in this chapter, in an ordinary annuity, the periodic
payments are made at the end of each payment period. We consider ordinary annuities that
are certain and simple with equal periodic payments. In this chapter, we study the annuities
that are subject to the following conditions :
(a) The periodic payments are made at equal time interval.
(b) The payment period coincides with the interest conversion period.
(c) The periodic payments are made at the end \of every payment period.
Remark : If the payment date (i.e. beginning or end of the payment period) is not
mentioned, it should be then assumed that payments are made at the end of the payment
periods and the annuity is ordinary annuity.
AMOUNT OF AN ORDINARY ANNUITY

The amount or future value of an annuity is the sum of all the payments made and the
interest earned on them at the end of the term ofthe annuity. In other words, future value of
an ordinary annuity is the sum of the compound amounts of all the payments accumulated
at the end of the term.
For example, consider an ordinary annuity of Rs. 1,000 payable at the end of every year
for 3 years at 8% effective rate of interest.
Three-year term
14 ~I
Payment periods
1 1
0 1 2 3
t
Rs. 1,000
t
Rs. 1,000
t
Rs. 1,000
Payments
The payment of Rs. 1,000 made at the end of 1at year will earn interest for 2 years and
this amount will be accumulated to 1,000 (1.08)2, i.e., Rs. 1,166.40.
The second payment ofRs. 1,000 made at the end of 2nd year will earn interest for 1 year,
since this amount remains in the account for one completed year. At the end of the term of3
years, this payment will be accumulated to Rs. 1,000 (1.08), i.e., Rs. 1,080.00.
The last payment, i.e., the third payment will earn no interest, because as soon as the
payment is made, the term ends. Therefore, the amount of this payment will remain same,
i.e., Rs. 1,000.
. . The amount of this annuity
A = 1,166.40 + 1,080 + 1,000 = Rs. 3,246.40
Payment periods
o 1 2 3
I I
Rs. 1000 Rs.1000 Rs.1000
Payments
-: Rs. 1,000.00
L -_ _ _ _ _ _ _. . Rs. 1,000 (1.08) =Rs. 1,080.00
, - - - - - - - - - - - -__ Rs. 1,000 (1.08)
2
=Rs. 1,166.40
Amount =Rs. 3,246.40
'MMEDIATE ANNUITY 149
Now we try to derive the formula for future value of an ordinary annuity in a general
problem.
Let Rs. R be the size of the periodic payment of an ordinary annuity.
Let r be the annual rate of interest and m be the number of conversion periods per year.
:. The rate of interest per conversion period is given by
i =rlm
Let 'n' be the total number of conversion periods.
The first payment Rs. R, made at the end of the first period, earns interest for (n - 1)
periods, hence its compound amount would be R (1 + i)n-l. Similarly, the second payment of
Rs. R earns interest for (n - 2) years, the third for (n - 3) years and so on. The last payment
of Rs. R made at the end of the term does not earn any interest and its value is simply Rs. R.
This is illustrated in the following figure:
o 1 2 3 ............... n- 2n- 1 n
I I I
R R R ............... R R R
L-
I I
:
R
R (1 + i)
I R (1 ! i)2
:+
R (1 i)n-3
R (1 + i)n-2
R (1 + i)n-l
Amount of 1It instalment, Al = R(1+i)n-l

Amount of 2 nd instalment, A2 = R(1+i)n-2
Amount of(n - 2}1ld instalment A n - 2 = R (1 + i)2

Amount of(n -1)Btjnstalment A n - 1 = R (1 + i)
Amount of nth instalment An =R
The Amount of this annuity is given by
,A =Al +A2 +Aa + ...... A n - 2 + A n - 1 + An
=:: A = R(l + iY' -1 + R (1 + iY' - 2 + ...... + R (1 + i)2 + R (1 + i)l + R
'"* A =R + R (1 + i) + R (1 + i)2 + ...... + R (1 + i)n-2 + R (1 + i)n-l
'"* A =R [1 + (1 + i) + (1 + i)~ + ...... + (1 + i)n-2 + (1 + i)n-l]
(1 + i)n-l } r"-1
.: 1+r+r2 ... r"-1=--1-
A =R { (1 + i)-1 r-
A =R [(1 + iT - 1 ]
Thus, amount of an ordinary annuity of Rs. R payable at the end of every period for 'n'
periods at a rate of i per period is given by
Remark: When the periodic payment is Re. 1, then amount of annuity is given by
(1 + i)n - 1
i . This quantity is denoted by Smi'
(1 + i)n-1
S = R. smi where smi = .,
smi is read as"s sub n at the rate i".
The values of smi for various n and i are given in table III.
CONTINUOUS COMPOUNDING
The amount A of an ordinary annuity in which Rs. R are paid each year for t (= n) years
at the rate of interest of r per annum compounded continuously is given by
I
n(=t)
A= Rertdt
~ I A =; (e
rt - 1) I
TOTALINTERESTEARNED
A is the amount at the end of the term and Rs. R is the periodic payment.
If there are n payments, then the total payments paid =nR.
We knovT,that the amount is the sum of total payments and the interest· accumulated on
every payment.
.. The total interest earned is given by
II=A-rilll
Example 1 : Find the amount of an ordinary annuity of Rs. 5,000 payable at the end of
each year for:3 years at 8% per annum compounded annually.
Solution : Amount A of an ordinary annuity of Rs. R per period for n periods at the rate
of i per period is given by
A =R ((1 + it -1 )
Here, periodic payment R = Rs. 5,000
rate of interest r =8% =0.08
Interest is compounded annually
i = r = 0.08 and n = t = 3 years
IM~DA TE ANNUITY 151
A =5,000 (1.~38 - 1)
A =5,000 (1.25~: - 1)
A =5,000 (0.2:'~1 ) =5,000 (3.2464)
A =16,232
.. The amount is Rs. 16,232
AlternativelY,
A =R siili
Here A =5,000 Smo.os
A = 5,000 (3.2464000) = 16,232
The amount is Rs. 16,232
Example 2 : Find the amount of an ordinary annuity if payment of Rs. 500 is made at
the end of every quarter ~or 10 years at the rate of 8% per annum compounded quarterly.
Solution : The amount A of a ordinary annuity of Rs. R per period for n periods at the
rate of i per period is given by
A =R [(1 + iT - 1 ]
Here Periodic payment R = Rs. 500
Rate of interest r = 8% = 0.08
Interest is compounded quarterly
. r 0.08
:. '=4'=4=0.02 and n=4x 10 =40
A"= 500 [(1.0;~ - 1]
Let x = (1.02)40
then log x =40 log 1.02
log x =40 x 0.0086 = 0.344
x = antilog (0.344) = 2.2080
.. A:: 500 [2.~01 - 1]
A =500 [1.~0 ] = 500 (60.~)

A =30,200
.. The amount is Rs. 30,200,
Example 3: A person decides to put aside Rs. 100 at the end of every month in a money
market fund that pay interest at the rate of 8% compounded monthly. After making 12
deposits, how much money does he have ?
Solution : Since the payments are made at the end of every month, it is an ordinary
annuity.
The amount of an ordinary annuity of Rs. R per period for n periods at a rate of i per
period is given by
A =R [(1 + iT - 1]
Here, R =Rs. 100
Interest is compounded monthly.
.. 0.08 =0.0066 7 an d
,. - 2"r =12 n =12
n = 12
A - 100 [(1.00667)12 - 1 ]
- 0.00667
-
I
A - 100 1.0830425 - 1 ]
0.00667
A = 100 [Oo~:5] = 100 (12.4501)
A =1245.01
The amount is Rs. 1,245.
Example 4: At 6 months interval, Mr. X deposited Rs. 100 in a savin.gs A I c which carries
interest at 10% p.a. compounded semi-annually. The first deposit was made when his son was
6 months old and last deposit was made when his son was 8 years old. The money remained
in the account and was presented to his son when he was 10 years old. What much did he
received?
Soluti!Jn. Rs. 100 was deposited at 6 months interval for 8 years at 10%
i.e. R = Rs. 100
i = ~ =0.05 and n = 8 x 2 = 16
The amount of an ordinary annuity is given by
A =R [(1 + it -1]
.. Amount at the end of 8 years is
A = 100 [(1.05)16 -1]

0.05
Let x = (1.06)16
log x = 16 log 1.05
= 16 x 0.0212 = 0.339
x = antilog (0.339) = 2.183
A = 100 [2.183 -1]

0.05
= 100 [10~:]
= 100 (23.66) = 2,366
This will remain in the account for 2 more years.
.. n = 2 x 2 =4 and i =0.05
In case of compound interest, the amount is given by
A = P (1 + iY'
.. Amount at the of 10th year is :
A = 2,366 (1.05)4
= 2,366 x 1.2155
= 2,875
.. The amount is Rs. 2,875.
Example 5: If a bank pays 6% interest compounded quarterly, what equal deposits have
to be made at the end of each quarter for 3 years to have Rs. 1,500 at the end of 3 years?
Solution: Given that Amount A =Rs .. 1,500.

Since the payment are made at the end of quarter, it is the case of ordinary annuity.
Rate of interest r = 6% =0.06
i = 0~6 =0.015 and n.= 3 x 4 =12

Let Rs. R be the equal payment.
A =R [(1 + iT - 1 ]
1 500 - R [(1.015)12 - 1]
, - 0.015
1500 - R (1.1956 -1 )
, - 0.015
1,500 = R x 13.04
R - 1,500 - 115
- 13.04-
.. The quarterly payment is Rs. 115.
Example 6: A company set aside a sum of Rs. 4,500 at the end of each year for 7 years to
payoff a debenture issue of Rs. 40,000. If the fund accumulates at 9% compounded annucilly,
find the surplus after full redemption of the debenture issue.
Solution: Here, periodic payment R =Rs. 4,500.

.. i = r = 9% = 0.09 and n = t = 7.
Since the sum R is set aside at the end of every year, it is an ordinary annuity.
A = R [(1 + it -
1]
A - 4500 [<1.09)7 -1]

-, 0.09
A - 4 500 [1.828039 - 1 ]
- , 0.09
=> A = 4,500 [0.8~39 ] =41,401.96
· . Amount Accumulated =Rs. 41,401.96

Value of debenture =Rs. 40,000
· . The surplus =Rs. (41,401.96 - 40,000) =Rs. 1,401.96
· . The surplus is Rs. 1,401.96
Example 7 : Mr. X deposits Rs. 5,000 at the end of every 6 months into his saving bank
account. The bank calculates interest at a rate of 11% per annum compounded semi-annually.
(a) What account will be accumulated at the end of 12 years?
(b) What is the amount he will earn as interest ?
Solution:
(a) Since the deposit is made at the end of every 6 months, it is an ordinary annuity.
Given that, R = Rs.500
Rate of interest, r = 11% =0.11
Interest compounded semi-annually.
. 0.11 d
.. z = '2r =2 =0.055 an n == 2 x 12 = 24
IMMEDIATE ANNUITY
;
155
Amount of an ordinary annuity. is given by
A = R [(1 + iT - 1 ]
- 5000 [(1.055)24 -1)

A - , 0.055
A = 5,000 [3.6~:5 - 1]
A = 5,000 [ 2.61459]
0.55 =5,000 [47.53B]
A = 2,37,690
.. The amount after 12 years is Rs. 2,37,690
(b) The total interest earned is given by
I = A-nR
I = Rs. (2,37,690 - 24 x 5,000)
I = (2,37,690:- 1,20,000) =Rs. 1,17,690
.. The interest earned is Rs. 1,17,690.
Example 8 : Find the number of years for which an annuity of Rs. 1,500, payable per
annum accumulates to Rs. 30,000 at the rate of9% effective.
Solution : Since the payment date is not mentioned, it is assumed to be an ordinary

annuity.
Periodic Payment, R = Rs. 1,500
Accumulate amount, A = Rs. 30,000
Rate of interest i = r = 9% effective =0.09
The problem is to find 'n'
A = R [(1 + iT - 1 )
30,000 = 1,500 [ (1·~9 - 1]
(l.09)n -1 = 30,~;.9 =1.B

,
(1.09)n = 2.B
n log 1.09 = log 2.B
_ log (2.0B) _ 0.4472 _ 11 957
n - log (1.09) - 0.374 - .
.. The number of years is approximately 12 years.
156 FINANCIAL MATHEllAncS
Example 9: A deposits annually Rs. 200 15th for 10 years, the first deposit being made
one year from now; and after 10 years the annual deposit is enhanced to Rs. 300 per annum.
Immediately after depositing the 15th payment he closes his account. What is the amount
payable to him, if the interest is allowed at 6% effective ?
Solution: Since the deposits are made at the end of every year, it is an ordinary
annually.
This problem contain two annuities : An annuity of Rs. 200 for 10 years and thereafter
an annuity of Rs. 300 for 5 years.
Period in years
oI 1
I
2
I
3
I
4
I
5
I
6
I
7
I I
B 9
I
10
I
11
I
12
I
13
I
14
I
15
I
o 200 200 200 200 200 200 200 200 200 200 300 300 300 300 300
Payments,(in Rupees)
Consider the annuity ofRs. 200 for 10 years:
Periodic Payment R = Rs. 200
Rate of interest r = 6%=0.06
.. i = r = 0.06 and n = t = 10
A = RSmi
A = 200 BiOIo,06
A = 200 (13.1807949) = 2,636.16
Since the annuity ends at the end of 15th year, this amount will remain in the account for
5 more years, earning compound interest.
.. The amount accumulate at the end of 15th year
= 2,636.16 (1.06)5 A = P (1 + iY'
= 2,636.16 (1.338226)
= Rs.3,527.78 ... (1)
Now consider the annuity ofRs. 300 for 5 years starting form 11th year:
R = Rs. 300 and n = 5
Amount at the end of 15th year is
= 300 s51o.06
= 300 (5.6370930)
= Rs. 1,691.13 ... (2)
The required amount after 15 year is
(1) + (2) = Rs. 3,527.78 + Rs. 1,691.13
= Rs. 5,218.91
., The total amount is Rs. 5,218.91
'MMEDIATE ANNUITY 157
Example 10 : An account fetches interest at 5% per annum compounded continuously. An

individual deposits Rs. 1,000 each year in the account. Find how much will ~e in the account
after 5 years.
Solution : Giv~n that R = Rs. 1,000

No. of years t =5
rt = 0.05 x 5 =0.25
Interest is compounded continuously.
The amount of annuity is given by
A = ~r [en -1]
A -- 1,000
0.05 e
[ 0.26 -1]
A = 20,000 [1.284 - 1]
A = 20,000 (0.284) =5,680
Example 11 : Find
(a) How much should be deposited in a bank each year in order to accumulate Rs. 50,000
in 6 years, if the interest is calculated at a rate of 6% per annum compounded
continuously ?
(b) How long it will take for an annuity of Rs. 5,000 to amount to Rs. 91,091 at a rate of
11% per annum compounded continuously?
Solution:
(a) Let Rs. R be deposited each year.
Accumulated amount A =Rs. 50,000
Number of years t =6 years
:. rt =0.06 x 6 =0.36
Amount of an a annuity is given by
A = Rr [ert·-l]
R
50,000 = 0.06 [e036 - 1]
~ 3,000 = R (eO.36 - 1)
Let x = eO.36
log x = 0.36 log e
log x = 0.36 x 0.4343 =0.156348

x = antilog (0.1563) = 1.4332
3,000 = Rs. (1.4332 - 1)
3,000 = R (0.4332) => R =6,925.21
:. The periodic deposit =Rs. 6,925.21
(b) Let 't" be the number of years
Given that R =Rs. 5,000 and A =Rs. 91,091
Rate of interest r =11% =0.,011
Amount of the annuity is given by
A = !!r [en - 1]
.. 91,091 = 5,000 [ OUt _ 1]

0.11 e
=> eO. 1lt - 1 = 2.004002
= eO. 111 = 3.004002
Taking long on both sides we get
O.l1t log e = log 3.004002
t = log 3.004002
0.11 log e
0.47769
t = 0.11 x 0.4343
t = 10
.. The r~quied number of years is 10 years.
L Find the amount of an ordinary annuity of Rs. 1,000 payable at the end of each year
for 3 years at a rate of 10% per annum compounded annually. [Ans. Rs. 3,310]
2. Find the amount of an ordinary annuity of Rs. 3,000 at the rate of 5% per annum
compounded annually for 8 years. [Ans. Rs. 28,628]
3. Find the amount of the following annuities:
(a) Rs. 200 per year for 5 years at 8% per year compounded annually.
(b) Rs. 500 payable at the end of each year for 14 years at 5% effective rate of
interest. [Ans. (a) Rs. 1,173; (b) Rs. 9,810
4. Find the amount of an annuity consisting of payments of Rs. 600 at the end of every
three months for 3 years at the rate of 8% compounded quarterly.
[Ans. Rs. 8,047.25]
5. Find the amount of an ordinary annuity, if payment ofRs. 200 is made at the end of
every month for 3 years at the rate 18% compounded monthly. [Ans. Rs. 9,023.10]
6. For the purpose of his daughter's marriage, a man deposits Rs. 3,000 at the end of
each 6 month period in a fund paying 8% per year compounded semi-annually. Find
the amount accumulated at the end of 18 years. [Ans. Rs. 2,32,795]
7. Find the amount of an ordinary annuity of 12 monthly payments of Rs. 1,000 that
earn interest at 12% per year compounded monthly. [Ans. Rs. 12,682.50]
8. A man deposited Rs. 500 at the end of each year for 5 years. He made his first
payment at the end of 1990 and the last payment at the end of 1994. How much
should have been there on 311t December 1994, if the rate of interest was 10%
compounded annually? [Ans. Rs. 30,525.50]
9. A man plans to deposit a sum of Rs. 750 in a savings· account at the end of this
month and the same amount at the end of each following months. To what sum will
the investment grow at the end of 5 years, if the rate of interest is 5% per annum
- compounded monthly? [Ans. Rs 51,004.56]
10. Find the amount of the following ordinary annuities:
(a) Rs. 1,000 a year for 5 years at 7% per year compounded annually.
(b) Rs. 500 per quarter for 10 years at 8% per year compounded quarterly.
(c) Rs. 4,000 each six months for 15 years at -5% per year compounded semi-
annually.
(d)Rs. 40 each month for five years at 6% per year compounded monthly.
[Ans. (a) Rs. 5,750.74; (b) Rs. 30,200.99; (c) Rs. 1,75,610.81; (d) Rs. 2,790.80]
1L A person wishes to deposit Rs. 2,500 per year in a savings account which earns
interest of 10% per year compounded annually. Assume the first deposit is made at
the end ofthis current year and addition deposits at the end of each following year.
(a) To what sum will the investment grow at t~e time of the 20th deposit?
(b) How much interest will be earned? [Ans. (a) Rs. 1,43,187.50; (b) Rs. 93,187.50]
12. A c~mpany sets aside a sum of Rs. 5,000 annually for 10 years to payoff a debenture
issue ofRs. 60,000. If the fund accumulates at 5% per annum compounded annually,
find the surplus after full redemption of the debenture issue. [Ans. Rs. 2,889.46]
13. A company set aside a sum of Rs. 4,000 at the end of each year for 7 years to payoff a
debenture issue· of Rs. 35,000. If the surplus after full redemption of the debenture
issue. [Ans. Rs. 2,948.68]
14. An annuity consists of equal payments at the end of each month for 2 years is to be
purchased for Rs. 2,000. If the interest rate is 6% per annum compounded monthly,
how much is each payment? [Ans. Rs. 78.64]
15. For the purpose of education of his child, Ram want to accumulate Rs. 50,000 by
making equal payments at the end of each quarter for next 5 years. What will be the
size or these investments, if money is worth 6% converted quarterly?
[Ans. Rs. 2,162.29]
16. Mr. Shyam deposits an amount of Rs. 2,000 at the end of every 3 months into his
savings bank account. The bank calculates interest at the rate of 7% per annum
compounded semi-annually.
160 FINANCIAL ..ATHEliA ncs
(a) What amount will be accumulated at the end of 10 years in his account?
(b) What is the total interest earned from these deposits?
[Ana. (a) Rs. 1,14,468.27; (b) Rs. 34,468.27]
17. How much money must be deposited at the end of each quarter if the objective is to
accumulate Ra. 5,00,000 after 5 years? Assume interest is earned at the rate of 10
per cent per year compounded quarterly. How much interest will be earned ?
[An,s. Rs. 19,573.56; Rs. 1,08,528.08]
18. A company must accumulate Rs. 12,000 at the end of 10 years to replace certain
component of its machine. What sum must the company invest at the end of ~ach
year, assuming interest is earned at the rate of 4% per year compounded annually?
[Ana. Rs. 1,002.08]
19. If a bank pays interest at the rate of 5% per annum compounded annually, what
equal deposits have to be made at the end of ever year to have Rs. 1,00,000 at the
end of 10 years. How much interest will be earned on these deposits ?
[Ana. Rs. 7,950.46; Rs. 20,495.40]
20. To save for his son's education, Mr. Singh deposited Ra. 1,000 at the end of each 6
months period into a savings account paying 4% interest compounded semi-annually.
The first deposit was made when his son was 6 months old and the last deposit was
made when his son was 21 years old. The money was kept in the account and was
presented to his son on his 25th birth day. How much did he receive?
[Ana. Ra. 75,996.43]
2.L An amount of Rs. 1,500 is deposited in a savings bank account at the end of every 3
months for a period of 8 years and no payment is made there after. But the accounts
will be closed at the end of loth year. Assuming that the bank calculates interest ala
rate of 6% per annum compounded quarterly, calculate the amount which will be
received at the time of closure of the account? [Ana. Rs. 68,752.58]
22. What amount should be set aside at the end of each year to accumulate Rs. 1,48,970
at the end of 8 years at 5% effective. [Given (1.05)8 =1.468] [Ana. Rs. 16,915.60]
23. A deposits annually Ra. 200 for 10 years, the first deposit being made one year from
now. After 10 years the annual deposit is enhanced to Rs. 300 per annum,. At the
end of 20th year, he closes his account. What is the amount payable to him at the end
of 20th year, if the interest is allowed at 9% effective? . [Ana. Rs. 8,659.19]
24. A sum of Rs. 500 is deposited in a bank at the end of every 6 months. What is the
amount to the credit of the depositor at the end of 10 years, if interest is credited to
the account at the rate of 6% for the first five years and 8% thereafter?
[Ana. 14,487.72]
25. A person deposits Rs. 2,187 at the end of ever 3 months in a fund created to fulfil his
obligation ofRs. 50,000 which is due after a certain number of years. If the money is
worth 6% per annum compounded quarterly, find the number of years.
[Ana. 5 years]
26. The amount of an annuity of Rs. 500 payable at the end of each year for 12 years is
Rs. 8,433. If the interest is compounded at 6% effective, find the number of years.
[Ana. 10 years]
27. Mr. X has decided to invest Rs. 500 at the end lof each year. He did so for 7 years.
Due to some unavoidable situations, he could not make the payments for the next 4
years. He again invested Rs. 500 per annum for the next 4 years beginning from the
end of the 12th year. Find the amount to his credit at the end of the 15th year
assuming
.
interest at effective rate of 9% per annum. .
[Ans. Rs. 11,452.75]
28. An annuity is payable for 15 years certain, the first payment falling due at the end of
first year. The annuity is payable at the rate ofRs. 5,000 per annum during the Brst
10 years and Rs. 3,000 per annum during the remaining 5 years. Calculate the
future value of the annuity on the basis of interest at 4% per annum.
[Ans. Rs. 8~i,25.9]
29. If Rs. 500 is deposited each year in a savings bank account paying 5.5% per annum
compounded continuously, how much will be in the account after 4 years?
[Ans. Rs. 2,237.27]
30. A bank pays interest at the rate of 8% per annum compounded continuously. Find
how much should be deposited in the bank each year in order to accumulate
Rs. 10,000 in 5 years. [Ans. 1,626.67]
31. An account fetches interest at 10% per annum compounded continuously. A man
deposits Rs. 600 at the end of each year in his account. If he wishes to accumulate a
sum ofRs. 4,932, how many consecutive deposits he has to make in his account?
[Ans.6]
32. Find the amount of an annuity of Rs. 1,200 at the end of every year for 3 years at a
rate of 5% per annum compounded continuously. [Ans. Rs. 3,883.35]
33. How much need to be saved each year in a savings account paying 6% per annum
compounded continuously in order to accumulate Rs. 6,000 in three years?
[Ans. Rs. 1,825.56]
PRESENT VALUE OF AN ORDINARY ANNUITY

We have so far studied annuity problems in which payments were made with the
objective of obtaining a certain lump sum at a future date. In this section, we shall study
problems in which a lump sum is invested at year zero at a certain rate of compound interest
so that a series of equal payments can be obtained over some future period of time. The lump
sum investment is generally known as the present value of the ordinary annuity. The
present value of an ordinary annuity is the sum of the present values of each instalment.
For example, suppose that a person purchases a personal loan from a bank at present at
6% per annum compounded annually and agrees to pay Rs. 2,000 at the end of every year for
3 years. This is shown in the following figure:
Loan No. of years
~
0 1 2 3
I I I
Rs.2,Ooo Rs.2,ooO Rs.2,OOO
Annual payments
The present value of the first instalment of Rs. 2,000 will be Rs. 2,000 (1.06)-1, i.e.,
Rs.l,886.79.
162 FINANCIAL AfATHEAfAricS
The present value of the second instalment of Rs. 2,000 will be Rs. 2,000 (1.06)2, i.e.,
Rs.1,779.99.
The' present value of the third (final) instalment of Rs. 2,000 will be Rs. 2,000 (1.06)-3,
i.e., Rs. 1,679.24.
:.' The Present Value of this annuities
P =Rs. 1,886.79 +Rs. 1,779.99 + Rs. 1,679.24 =Rs. 5,346.02
P =Rs. 5,346 (approximately)

o 123
I I I I
As. 2,000 Rs. 2,000 Rs. 2,000
2,000 (1.06)-' = 1,886.79 .---.J I I

2,000 (1.06)-2 =1,779.99 - - - - - - 1 :. .
2,000 (1.06)-3 =1,679.24 . - - - - - - - - - - '

Present Value =5,346.02
Thus, we say that a loan of Rs. 5,346 at a rate of 6% per annum compounded annually is
repaid by three annual instalments of Rs. 2,000.
The benefits are receivable in the form of either money such as Ipan, etc. or asset such as
house, etc. at the beginning of the annuity. And this is repaid through a certain number of
equal instalments. Therefore every intalment contains some certain amount of interest.
Therefore, the present value of an annuity will be always less than the sum of the all
periodic payments.
N:ow we derive the formula for the present value of an ordinary annuity.
Consider an annuity of n payments of Rs. R each, where the interest rate is 'i' per period.
The first payment of Rs. R is made at the end of first period. So the present value of this
Rs. R is calculated for one period. Its present value is R(l + i)-I.
The second payment of Rs. R is made after 2 payment periods and the present value of
this Rs. R is R (1 + i)-2 and so on. This is illustrated in the following figure:
1 2 3 ...... n-1 n-1 n
ORRR ...... RRR
R(1+i)_~
R(1 +i)-2 ~
R (1 + i)-3
R (1 + i)-(n- 2>_-----.....
R (1 + i)-(n- 1>_---------'
R (1 + i)-n
Thus,
The present value of 1st instalment, PI =R (1 + i)-I
The present value of 2nd instalment, P 2 =R (1 + i)-2
The present value of (n - l)st instalment, P n-l =R(1 + i)-<n-l)

The present value of nth instalment, Pn= R(1 + iY'
The present value of this ordinary annuity in given by
P=P1 +P2 +P3 + ... , .. P n - 1 +Pn
~ =
P R (1 + i)-1 + R (1 + i)-2 + ...... + R (1 + i)-(n -1) + R (1 + i}-fl-
~ P =R [(1 + i)-I + (1 + i)-2 + ...... + (1 + i)-<n -1) + (1 + i}-fl-]
~ P =R (1 + i)-I [1 + (1 + i)-I + ... + (1 + i)-<n - 2) + (1 + i)-<n - 1)]
P=R(1+i)-1 [1-(+~}fl] 1 + (1 + £)-1 .. 1+r+r2

• .•. •..
rn-1_1-rn
7 1..." r
P _ -.!L
- 1+i
[1 -(1 ++
1 - (1
i}-fl- ]
i)-I
wherer < 1
P=R[l-(1.+ i}-fl-]
(1 + £)-1
P =R [1 - (It i)-II ]
Thus, the present value P of an ordinary annuity of Rs. R per payment period for n
II
periods at the rate of i per period is given by
1 P =R [1-(1/ iT"
Remark: When the periodic payment is Re. 1, then the present value of an ordinary
. IS
annUIty . gIven
. b y 1 - (1 .+ i}-fl- . Th·IS quanti·ty IS
. denotedbYaiili
£
1 ~ (1 + i}-ll
P =Raiili whereaiili = .
£
The values of aiili for various n and i are given in the table IV.
The preseht value P of an ordinary annuity in which Rs. R are paid for each year for n (=
t) years at the rate of r per annum compountJ,ed continuously is given by
n (=t)
P= f R~dt
o
n (=t)
P =R f e-rl dt
°
P=R.-
. -r
e~l
P -R [e~
=-r R
- eO] =- [e-rl- 1]
-r )
Thus, the present value in this case is given by
I P ~= [1-e-rl] I
TOTAL INTEREST PAID
Let P be the present value of an ordinary annuity and Rs. R, the periodic payment.
If there are 'n' payments, then the total payments made =,:,-R.
We know that every periodic payment contains interest and the present value is the total
of the instalments paid minus the total interest
i.e. P =nR-I
I I=nR-P I
Example 12 : Find the present value of an annuity of Rs. 2,000 payable at the end of each
year for 10 years, if money is worth 4% effective.
Solution : Present value of an ordinary annuity is given by

P =R [ 1 - (Ii + i~ ]
Given that R =Rs. 2,000

i = r = 4% =0.04 ar.d n =10
_ 2 000 [1 - (1.04)-10 )
P-
.. , . 0.04
P _ 2 000 (1- 0.67556417)

-, . 0.04
P = 2,000 (0.32:'~!58 ) = 2,000 (8.110896)

JIIIIEDIATE ANNUITY 165
P = 16221.79
Example 13 : An equipment is purchased on an instalment basis such that Rs. 500 is to

be paid at the end of every month for five years. If the money is worth 6% per annum
compounded monthly, find the purchasing price of the equipment.
Solution : The purchasing price of the equipment is the present value of the annuity of
Rs.500.
Since the instalment is paid at the end of every month, it is an ordinary annuity.
Here R =Rs. 500
.. i =;2 = °io;' =0.005 and n =5 x 12 =60

Present value of an ordinary annuity is given by
P = R [ 1- (1/ i)-R 1
P - 500 [ 1 - (1.005)-60
- 0.005
1
P = 1,00,000 [1- (1.005)-60]
1 1
Let x = (1.005)-60 =(1.005)60 =Y(say)
log y = 60 log (1.005)
logy = 60 x 0.00212 =0.1272
y = antilog 0.1272 =1.3403
1
x = 1.303 =0.746102
P = 1,00,000 (1- 0.746102)
P = 1,~().O =
(0.253898) Rs. 25,389.80
.. The purchasing price is Rs. 25,389.80
Example 14: A pe,·son buys a house for which he agrees to pay Rs. 5,00,000 now and
Rs. 5,000 at the end of each month for 6 years. If the money is worth 12% compounded
monthly, what is the cash price of the house?
=
Solution : The cash price of the house Down payment + Present value of the annuity
of Rs. 5,000. . .. (1).
Cash down =Rs. 5,00,000
Since the instalments are paid at the end of every month, it is an ordinary annuity.
166 . RNANCMLMATHEMAnCS
The present value of an ordinary annuity is given by
P =R [1 -(~ + i~]
Here Instalment amount R =Rs. 5,000

Rate of interest r = 12%::;; 0.12
. r 0.12 d
•• £ = 12 = 12 = 0.01 an n = 6 x 12 = 72
.. P = 5,000 [1 - ~.:)-72]
P _ 5 000 [1 - 0.48849606] _ 5 000 [0.51150394]
- , 0.01 - , 0.01
P = 5,000 [51.150394] =Rs. 2,55,751.97
:. (1) =>The cash price ofthe house =5,00,000 + 2,55,751.97 =Rs. 7,55,751.97
:. Price of the house is Rs. 7,55,751.97
Example 15 : A person purchases a car on instalment basis such that instalments of Rs.
10,000 each payable .at the end of every year for 20 years and a final payment of Rs. 50,000
one year later. If the rate of interest is 9% per annum compounded annuqlly, find the cash
down price of the car.
Solution:
. Present value of the } {Present value of the
Cash pnce of the car = annuity' of Rs. 10,000 + final payment of Rs. 50,000
P = Rr1-:(.+i~]
. L Z
Here periodic payment, R =Rs. 10,000

. . i =r =0.09 and n =20.
.. P = 10,000 [ 1 - ~.:)-20 ]
P = 10,000 [1 - 0.~:385 ]
P = 10,000 [0.82~:915] =10,000 (9.128546)

P = Rs. 91,285.46 ... (1)
Final payment ofRs. 50,000 is paid at the end of 21 st year.
Present value of this final payment

= 50,000 (1.09)-21 P=A(1 + i)"-n
= 50,000 (0.163698) =Rs. 8,184.90 ••• (2)
Cash price of the car
(1) + (2) = Rs. 91,285.46 + Rs. 8,184.90
= Rs. 99,470.36
:. Price of the car is Rs. 99,470.36.
Example 16 : A loan of Rs. 30,000 is to be repaid with interest at 6% per annum

compounded half yearly in equal instalments payable at the end of every 6 months for 10
years. What is the size of each instalment? What amount will be paid as total interest for this
loan?
Solution-:
Let R be the size of each instalment.
Present Values or loan amount =Rs. 30,000
.. ~
.
= 2"r =20.06 =0.03 d
an n = 2 x 10 =20
P =R [1- t irn ]
(1
30 000 - R [1 - (1.03)-20 ]
" - 0.03
30 000 - R [ 1 - 0.55367575 ]
, - 0.03
R _' 30,000 x 0.03
- 0.44632425
R = 2,016.47
.. The size of each instalment is Rs. 2,016.47
The total interest paid is given by
1= nR-P
I = (20 x 2016.47) - 30,000
I = ';03~:>.4 - 30,0(1) = 10,329.40
The total interest paid is Rs. 10,329.40
Example 17 : What will be the present value of a continuous income stream of Rs. 3,500
per annum for four years if it is discounted continuously at the rate of 5% per year?
Solution : The present value of an ordinary annuity when interest is compounded

p = R-r [1 - e-"t]
Here periodic payment R =Rs. 3,500

No. of years t =:= 4. :. rt = 0.05 x 4 = 0.2
P = 3,500 [1 _ e-{)·2]
.. 0.05 .
P = 70,000 [1 - 0.81873]
P = 70,000 [0.18127] =12,688.90
Example 18. A person deposits his whole fortune of Rs. 20,000 in a bank and settles to
withdraw Rs. 1,800 per year for his personal expenses. He begins to withdraw from the end of
the first year and goes on spending at this rate. In how many years the entire amount will
be ruined, if the interest is reckoned at 5% per annum (a) compounded annually?
(b) compounded continuously ?
Solution : Since the amount is withdrawn at the end of every year, it is an ordinary
annuity.
Let n be the number of years
Here present value, P~
-
Rs. 2(1,000
Periodic payment R =Rs. 1,800
(a) In case of interest compounded annually:
i = r = 0.05
P= R[l-(1t iJ"fl]
20,000 = 1,800 [1 - b~O5)-I ]
1 - (1.05)n = 20,~;.5 =0.5556.
(1.05)-11 = 1- 0.5556 =0.4444
1
(1.05)n = 0.4444 = 2.2502

n log (1.05) = log 2.2502
log 2.2502
n =
log 1.05
0.35218
n = 0.02119 = 16.62
.. The required number of years is 16.62 years.
(b) In case of interest compounded continuously:

p = ~r [1-e-n]
20,000 = ~05 [1- e-O.056]

20,000 x 0.05
=* 1- e-O. 05t = 1,800 =0.5556
=* e-O·05t
= 1 - 0.5556 =0.4444
1
=* eO.05t
= 0.4444 =2.2502
0.05t log e = log 2.2502
t = log 2.2502
0.05 x log e
0.35218
t = 0.05 x 0.4343 =16.22
.. The required number of years is 16.22 years.
Example 19 : What should be the quarterly sales volume of a company if it desires to

earn an 8% annual return convertible quarterly on its investment of Rs. 1,50,000 ? Quarterly
costs are Rs. 2,000. The investment will have ten years .life with no scrap value.
Solution : Let Rs. x be the quarterly sales volume.

Quarterly cost =Rs. 2,000
:. Quarterly return, R =Rs. (x - 2,000)
The present value or capital value =Rs. 1,50,000
No. of years t =10
Interest is compounded quarterly,
.. i = ~ = 0~8 =0.02 and n =4 x 10 =40
P =R [1-(li+ iT"]
.. 1,50,000 = (x _ 2,000) [1 - ~:)-40 ]

~ 1,50,000 = (x _ 2,000) {1- 0'~2894 ]
~ 1,50,000 = (x - 2,000) (27.355479)

1,50,000
~ x-2,000 = 27.355479 = 5,483.36
.. x = 7,483.36
.. The sales volume is Rs. 7,483.36
Example 20 : A series of 8 annual sums of money is payable, the first payment taking
place at the end of one year from now. The first five payments are Rs. 300 each and the last
three payments are Rs. 200 each. Find the present value of these payments, ifmoney is worth
8% per annum compounded annually.
Solution : We express the payment as a series of uniform payments. For this purpose,
consider the first five payments ofRs. 300 each as made oftwo parts (Rs. 200 + Rs. 100)
(Period in years)
0 2 3 4 5 6 7 8
1 1 1 1 1 1 1 '1 1
200 200 200 200 200 200 200 200
+100 +100 +100 +100 +100
(Payments in Rupees)
Thus, we get two series of uniform payments : One Rs. 200 payable for 8 years and
another Rs. 100 payable for 5 years.
:. The required present value =Present value of RB. 200 payable for 8 years + Present
value ofRs. 100 payable for 5 years.
Since the payments are made at the end of every year, it is an ordinary annuity.
P = R aiili
Here rate of interest i = r = 8% = 0.08.
In case of Rs. 200 payable for 8 years.
R = Rs. 200 and n = 8 years
P 1 = 200 aBlo.o8
P l = 200 (5.74663894) = 1,149.33
P l = Rs. 1,149.33 ... (1)
In case of Rs. 100 payable for 5 years
R = Rs. 100 and n =5
P 2 = 100 a510.08
P 2 = 100 (3.99271004) = 399.27
P 2 = Rs. 399.27 ... (2)
The required present value is :

(1) + (2) = 1,149.33 + 399.27 = 1,548.60
:. The present value is Rs. 1,548.60
Example 21 : A person purchased a house paying Rs. 5,00,000 cash down and promising
to pay Rs. 15,000 every month for the next 5 years. The seller charges in~erst at 9% per
annum compounded quarterly.
(a) What was the cash price of the house ?
(b) If he missed the first 15 payments, what must he pay at the time of l(jth payment to
bring him up to date ?
i c) After making 22 payments, he wishes to discharge his remaining indebtedness by a
single payment at the time when 23rd regular payment is due. What single payment
must he pay ?
(d) If he missed the first 20 payments, what must he may when the 21 st is due to
discharge his entire indeptness ?
Solution:
Here R =Rs. 15,000, r =9% =0.09
. . i = ;2 = °i~9 =0.0075 and n = 12 x 5 =60

(a) Cash price =down payment + present value of the annuity ofRs. 15,000
=5,00,000 + 15,000 aOO\O.OO75 ... r =0.09
=5,00,000 + 15,000 (48.17337352) i = r/12 =0.0075

= 5,00,000 + 722600.60 n = 12 x 5 =60
= 12,22,600.60
. . Cash price of the house is Rs. 12,22,600.60
(b)
oI 1
I
2
I
15
I
16
I
17
I
58
I
59
I
60
I
R R R R R
If he missed the first 15 payment,

Amount payable at the 16th payment = Future value of the annuity of Rs. 15,000 for
16 periods
=15,000 Si6\O.OO75
=15,000 (16.93228183)
=2,53,984.23
. . The amount payable is Rs. 2,53,984.23
(c)
o. 1 2 22 23 24 58 59 60
I I I I I I I I I
R R R R R R R R R
14 I
R PV of 37 payment
After making 22 payment,
Amount payable at the time of 23rd payment
= 23 rd payment + Present value of remaining 37 (i.e. 60 - 23) payments.
= 15,000 + 15,000 a3710.0075
= 15,000 + 4,83,078.99
=4,98,078.99
.. The amount payable is Rs. 4,98,078.99
(d)
0 1 2 20 21 22 68 59 60
I I I I I I I I I
R R R R R R R· R R
I .-101 I
FV of 21 payment PV of 39 payment
If he missed the first 20 payments, to discharge his indebtness, amount payable at
the time of 21 st payment
=Future value of first 21 payment + Present value of remaining 39 payments
= 15,000 s2110.0075 + 15,000 a39\0.0075
= 15,000 [ S2110.0075 + a39\0.0075 ]
=15,000 [22.65240312 + 33.70529048]
= 15,000 [56.38769360]
=8,45,365.41
The amount payable is Rs. 8,45,365.41
Example 23 : Prove that i =_1___1_

aiili siili
Solution.:
1 1
RHS = -aiili
----
siili
1 1
= (1 + i)n-l
( 1 - (\ + i)-It )
t i
= 1- (1 + iJ-'! (1 + i)n-l
t
= -
1 (1 + iY'-1
1- (1 + i)n
i (1 + i)n i
= (1 + i)R - 1 - (1 + i)R - 1
= (1 + ii)R _ 1 (1 + i)R - 1)
= i= RHS.
Hence proved.
L Find the present value of each of the following ordinary annuities:

(a) Rs. 5,000 a year for 10 years at 7% per year compounded annually.
[Ans. Rs. 35,117.91]
(b) Rs. 1,000 per quarter for 5 years at 8% per year compounded quarterly.
[Ans. 16,351.43]
(c) Rs. 2,000 every six months for 12 years at 5% per year compounded semi-
annually. [Ans. Rs. 35,769.97]
2. An equipment is purchased on an instalment basis such that Rs. 1,200 is to paid at
the end of every month for eight years. If the money is worth 9% per annum
compounded monthly, find the purchasing price. [Ans. Rs. 81,910.13]
3. If money is worth 6% compounded once in two months, find the present value of an
annuity whose annual payment is Rs. 1,800 which is payable once in two months for
5 years. [Ans. Rs. 52,117.57]
4. Find the present value of an annuity of Rs. 3,000 at the end of each year for 15 years,
if money is worth 5% effective. [Ans. Rs. 31,138.97]
5. Find the present value of the following annuities:
(a) An. annuity of Rs. 1,500 payable at the end of each year for 9 years at 7%
effective. [ADs. Rs. 9,772.85]
(b) An annuity of Rs. 2,500 payable at the end of every 6 months for 5 years at 6%
per annum converted semi-annually. [Ans. Rs. 21,325.51]
6. Find the sum of money received by a pensoner at age 58, if he wants to commute his
annual pension of Rs. 1;200 for a present payment, when compound interest is
reckoned at 4% effective and the expectation of his life is assessed at 10 years only.
[Ans. Rs. 9,717]
7. Calculate the present value of an annuity of Rs. 5,000 per annum Jor 12 years, the
interest being charged at 4% per annum compounded annually. - rAns. Rs. 46,925.37]
8. A fixed royalty of Rs. 1,000 per year is granted to an author by the publisher of a
book for 20 years. The right of receiving the royalty is sold after 12 years elapsed.
Find the nearest rupee the price at which it is sold, assuming money is worth 12%
per annum compounded annually. [Ans. Rs. 4,967.64]
9. A Ilian buys car on instalment basis such that he pays Rs. 50,000 on signing of the
, contract and remaining in 4 equal instalments of Rs. 20,000; the first is being paid at,
174 FINANCIAL
, MATHEMATICS
the end of first year and so on for each year. If the rate of interest is 8% effective,
find the cash price of the car. [Ans. Rs. 1,16,242.54]
10. Mr. X wants to purchase a house which will cost him Rs. 6,00,000 at the time of his ~
retirement, which is due after 16 years. How much should he deposit at the end of
each year in a bank paying interest at rate of 15% per annum compounded annually
in order to accumulate the above said amount? [Ans. Rs. 10,768.12]
1L A man purchased a piece of land paying Rs. 50,000 in cash and the balance in 20
instalments of Rs. 8,000 each at the end of each year. If the interest was reckoned at
16%, how much he should have paid ifhe had purchased it cash down ?
[Ans. Rs. 97,430]
12. A machine is purchased for Rs. 30,000 down and payments of Rs. 2,500 at the end of
every 6 months for 6 years. If the interest is at 8% compounded semi-annually, find
the corresponding cash price of the machine. [Ans. Rs. 53,462.68]
13. XYZ Ltd. purchases a machine on instalment basis making 24 monthly payments of
Rs. 6,000 each and a final payment of Rs. 15,000 one month later. If the rate of
interest is 9% compounded monthly, find the cash price of the machine.
[Ans. Rs. 1,43,779.04]
14. A loan of Rs. 3,000 is to be repaid with interest at 6% per annum by means of an
immediate annuity for 10 years. Find the level payment. What is the amount paid as
total interest? [Ans. Rs. 407.60, Rs. 1,076]
15. A man buys a car for Rs. 80,000 paying a down payment of Rs. 20,000. He agrees to
pay the remaining amount in 10 equal instalments, the first is to be paid one year
after the date of purchase. Calculate the amount of each instalment, compound
interest being calculated at the rate of 5% per annum. [Ans. Rs. 7,770.27]
16. A person borrows Rs. 25,000 on the understanding that it is to be paid back in 8
equal instalments at intervals of 6 months, the first payment to be made six months
after the money was borrowed. Calculate the value of each instalment, if money is
worth 6% per' annum compounded semi-annually. [Ans. Rs. 3,561.41]
17. If the present value and amount of an ordinary annuity of Re. 1 per annum for n
years are Rs. 8.1109 and Rs. 12.0061 respectively, find the rate of interest and the
value of n without consulting the compound interest table.
[Ans. i = 4% and n =: 10 years]
18. Mr. X sells his old car for Rs. 1,00,000 to buy a new model costing Rs. 2,50,000. He
pays Rs. x cash down and remaining by payments of Rs. 7,000 at the end of each
month for 18 months. If the rate of interest is 7% compounded monthly, findx.
[Ans. Rs. 30,719.07]
19. Find the present value of an annuity of Rs. 100 per annum, assumed to be payable
for 10 years, at the rate of 4% per annum compounded continuously.
[Ans. Rs. 824.19]
20. A man buys a car worth Rs. 2,00,000 paying 40% cash and the balance to be paid in
20 equal annual instalments. Calculate the value of each instalment if the money is
worth 7.5% per annum compounded continuously. [Ans. Rs. 11,584]
21. According to an investment proposal, an initial investment of Rs. 40,000 is expected

to yield a uniform income of Rs. 5,000 per annum for a certain number of years.
What is the expected payback period, that is after what time, the initial investment
will be recovered, if the money is worth 6% per annum (a) compound annually and
(b) compounded continuously? [Ans. 11.23 years, (b) 10:22 years.]
22. A man has been accumulating a fund at 3% effective which will provide him with an
income of Rs. 20,000 per year for 15 years, the first payment on his 60th birthday. If
he now wishes to reduce the number of payment to 10, what should he receive
annually? [Ans. Rs. 27,989.80]
23. What amount should be set aside a.t end of every year to replace the loan of
Rs. 11,310 in two years at the rate of 6% per annum compounded continuously?
[Ans. Rs. 6,000]
24. Rakesh borrowed Rs. 80,000 from a bank to help finance the purchase of a house.
The bank charges interest at a rate of 9% per year on the unpaid balance, with
, interest computation made at the end of each month. He has agreed to repay the
loan in equal monthly instalments over 30 years. How much should each payment
be, if the loan is to be amortised at the end of the term? [Ans. Rs. 653.45]
25. A company borrows a loan of Rs. 4,00,950 on condition to repay it with compound
interest at 6% per annum by annual instalments of Rs. 1,50,000 each. In how many
~.? ~3
26. Find the capital value of uniform income stream of Rs. R per year for m years,
reckoning interest continuously at 100 r% per year, if income is forever.. [Ans. Rlr]
27. According to an investment proposal an initial investment ofRs. 50,000 is expected
to yield a uniform income stream of Rs. 5,000 per annum. If money is worth 5% per
annum compounded continuously, what is the expected pay-back period, i.e., after
what time, the initial investment will be recovered? [Ans. 13.87 years]
28. A person has a right to receive Rs. 350 per annum for 8 years and Rs. 250 per annum
for next 6 years. The first annual sum is due at the end of first year. What is the
present value of his right, assuming interest rate of 5% per annum.
[Ails. Rs. 3,120.98]
a6nli
29. Show that - - = 1 + V3n where V = (1 + i)-I
a6nli
30. X purchased a machine paying Rs. 50,000 down and promising to pay Rs. 2,000 every
3 months for 10 years. Seller charges interest at 8% compounded quarterly.
(a) What was the cash price of the machine?
(b) If X missed the first 10 payments, what must he pay at the time of 11th payment
to bring him up to date.
(c) After making 8 payment, X wishes to discharge his entire remaining
indebtedness by a single payment at the time when 9th regular payment-was due.
What must he pay in addition to the regular payment then due?
17ti FINANCIAL MA THEMA TICS
(d) If X missed the first 10 payments, what must he pay when the 11th payment is
due to discharge his entire indebtedness?
[~. (a) 1,04,711; (b) 24,337.40; (c) 45,875.40; (d) 68,026.20]
31. A purchased a television paying Rs. 5,000 down and promising to pay Rs. 200 every
three months for next 4 years. The seller charges interest at 8% per annum
compounded quarterly.
(a) What is the cash price of television ?
(b) If A missed the first eight payments, what must he pay at the time the fourth is
due to bring him upto date? [Ans. (a) Rs. 7,715.54; (b) Rs. 1,950.92]
32. Shares in a mining company are expected to produce dividends of Rs. 0, 30, 24, 16,
and 8 in the present and in the four following years and to be worth nothing
thereafter. If the interest is added once yearly at 5%, find the present or capital
value of the holdings. [Ans. Rs. 70.74]
33. A company purchased a machine paying Rs. 25,000 down payment and promising to
pay Rs. 3,000 every month for next 2 years. The seller charges interest @ 12% per
annum compounded quarterly. After making 10 payments, if the company wishes to
discharge the remaining in debtness by a single payment at the time when the 11th
payment is due, what must the company pay? [Ans. Rs. 49,853.37]
34. Establish the following relation: 8ii\i =(1 + i)'i ami.
Annuity Due
INTRODUCTION
In the preceding chapter, we have discussed ordinary annuity in which the p~riodc
payments are made at the end of the corresponding payment periods, the first being paid at
the end of the first period. But in practice, some annuities require the first payment to be
made at the beginning of the first payment period, i.e., at the comen~ of the annuity
and the subsequent payments at the beginning of the respective payment periods.
Consider an example of a limited payment endowment (life insurance) policy for which
annual premium are payable for 15 years. The policy will come into operation only on the
payment of first premium and the risk is covered then onwards. So the policy-holder is
advised to pay the first year premium at the beginning of the year to enforce the policy and
the remaining annual premium at the beginning of every consecutive years. Thus, it is an
annuity of 15 equal annual payments in which all payments are made at the beginning of
.the payment period, the first being made at the beginning of the first year. Such kind of
annuity are known as Annuity Due.
Thus, an annuity due is defined as fellows:
"An annuity due is an annuity in whkb the payment are made at the beginning of each •
payment period, the first payment being Que now."
The term of an annuity due begins from the beginning of the first payment period and
ends at the end of the last payment period, i.e., one period after the last payment is made.
AMOUNT OF AN ANNUITY DUE

The amount ')r future value of an annuity due is the sum of the compound amounts of all
payments accumulated at the end of the term of the annuity due.
. Consider an annuity due of Rs. 1,000 payable at the beginning of every year for 3 years
at 8% effective rate of interest. The payments are shown in the following figure:
Term of the annuity
~I
o 1 2 3
I I I I
As. 1,000 As. 1,000 As. 1,000
Periodic RSyments
The first payment of Rs. 1,000 made at the beginning of first year will earn interest for 3
years and this will amount at the end of the term to Rs. 1,000 (1.08)3, i.e. Rs. 1259.71.
Second instalment of Rs. 1,000 made at the beginning of second year will amount at the
end of the term to Rs. 1,000 (1.08)2, i.e. Rs. 1,166.40.
The third and last payment ofRs. 1,000 will remain in the account for one year, since the
payment is made at the beginning of the year and earns interest for one year. This
instalment will amount at the end of the term of the annuity (due) to Rs. 1,000 (1.08)1, i.e.
Rs.l,080.
Recall that in case of ordinary annuity, the last payment of Rs. 1,000 will earn no
interest, since the payment is made at the end of the period, i.e. at the end of term of the
annuity.
The amount of this annuity is
A = Rs. 1,259.71 + Rs. 1,166.40 + Rs. 1,080.00 = Rs. 3,506.11
This annuity due illustrated in the following figure:
Payment periods
o 1 2 3
I I I I
1,000 1,000 ,As. 1000
Payments (in As.)
I I
1 - ._ _ _ _ _ _ _ _ :.~
_
1
As. 1,000 (1.08) =As. 1,080.00
As. 1,000 (1.08)2 = As. 1,166.40
As. 1,000 (1.08)3 ';_!3~:?
Amount =As. 3,506.11
Thus, amount of an annuity due of Rs. 1,000 payable at the beginning of every year for 3
years at a rate of 8% effective is Rs. 3,506.11.
Remark : The amount of an ordinary annuity of Rs. 1,000 payable for 3 year at 8%
effective is 3,246.40. So it is understood that the amount of an annuity due is always greater
than the amount of an ordinary annuity for a given periodic payment (R), term (n periods)
and rate of interest (i).
" Now we derive the formula for the amount of an annuity due in a general problem.
Let R = The periodic payment
t = term of the annuity due (in years)
m = number of conversion periods per years
ANNUITY DUE 179
n = number of payment periods (n =mt)

r = rate of interest per annum
i = rate ofinterest per conversion period (i TrIm)
The first payment of Rs. R made at the beginning of the first period earns interest for n
periods and will amoJl,I1t .to R (1 + i)n at the end of the term.
The second payment of Rs. R earns' interest for n - 1 periods and will amount to
R (1 + i)n-l at the end o.fthe term.
Continuing in this manner, the last payment Rs. R made at the beginning of last
payment periods will earn interest for one period and amount to R (1 + i).
o 1 2 n-1 n-2 n-1 n
I I I I I I
R R R R R R
I R(1 +/)1
:
L..-_ _ _+-:_ R ~1 + 1)2
- R (1 + 1)3
R (1 + l)n-2
R(1 +/)n-1
R (1 + /)n
Adding these amounts, we get the amount of annuity due

A = R [1 + i)n + R (1 + i)n -1 + ...... + R (1 + i)2 T R (1 + i)
A =R [1 + i)n + (1 + i)n -I + ...... (1 + i)2 + (1 + i)]
A =R [(1 + i) + (1 + i)2 + ...... + (1 + i)n -1 + (1 + i)n]
A =R (1 + i) [1 + (1 + i) + ...... (1 + i)n - 2 + (1 + i)n -1]
.
rn-1
=R (1 + i) (~ ?~ ~
1 1
A : 1 + r + r2 + ... ; r n - I =--1-
r-
A =R (1 + i) ( (1 + iT - 1 1
A, =R ( (1 + i)n + ; + 1
- (1 i)
A =R (1 + i~ +1- 1 - 11
Thus, the amount of an annuity due of Rs. R payable at the.beginning of every period for.
n periods at a rate of i per period is given by
1 + i)n + 1 - 1
A=R ( ,.
Remark 1 : We know that

(1 + i)'l -1
Siili = £
.
Therefore the amount of an annuity due can be further given by
.A=R[Sn+w-l]
. or A=Rsiili
siili is the amount of an annuity due of Re. 1 payable for n periods at the rate of i per
period.
Remark 2 : The amount A contain the periodic payments and the interest accumulated.
TOO interest earned will be given by
I=A-nR
Example 1 : Find the amount of an annuity due of Rs. 850 payable at the beginning of
each year for 9 years, in,terest being calculated at a rate of 7% per year compounded annually.
Solution: Since the payment are made at the beginning of each year, it is an annuity
due:
Periodic payment R =Rs. 850
i =r = 7% = 0.07 and n =9
Amount of an iumuity due is given by
(1+i)'l+l_1 1]
A=R [ .
~
A =850 [(1.°6~ - 1 1]
A =850 [1.96715136 - 1 1]
0.07
A = 850 [13.816448 - 1]
A = 850 [12.816448] = 10893.98
The amount is Rs. 10,893.98
Example 2 : At the beginning of each month, Rs. 500 is deposited in an account opened
in a post office that pays interest at 12% per annum compounded monthly. Find the balance
in the account at the end of 6 years. Also calculate the total interest earned from these
investments.
Solution : Since the payment are made at the beginning of each month, it is annuity
due.
Periodic payment R Rs. 500 =
ANNUITY DUE 181
Interest is compounded monthly

. r 0.12
.. , = 12 = 12 = 0.01
and n = 6 x 12 = 72
Amount of an annuity due is given by
A = R [(1 + i~ +1 - 1 _ 1 ]
A=500[(1+0.01)72+1- 1 1]
0.01
A = 500 [(1.01)73 - 1 _ 1 ]
0.01
Now, Let x = (1.01)73
log x = 73 log 1.01
= 73 x .0043 = 0.3139
or x = antilog (0.3139) =2.06
A =500 [2.06
0.01
-1 -1] = 500 [1.06 -1]
0.01
A = 500 (106 - 1) =500 (105) =52,500
The amount is Rs. 52,500
Total interest earned is given by
I=A-nR
1= 52,500 - 72 x 500
I =52,500 - 36000 =1650
The interest earned is Rs. 16,500.
Example 3 : To save for a child's education, a family decides to invest Rs. 1,800 at the
beginning of each 3 month period in a fund, paying interest at 8% pet annum compounded
quarterly. Find the amount of the investment at the end of 15 years.
Solution : Sine the payments are made at the beginning of each 3 month period, it is an
annuity due.
Rate of interest 'r = 8% =0.08
,. =4"r =T
0.08 =0 .0 2 an' d n =15 x 4 =60
The amount of an annuity due is given by
A=R
, [(1 + iY' + 1
,, -1 ]
-1
182 FINANCIAL AfATHEIiAncS
A - 1800 [(1.02)61_ 1 -1]

. - , 0.02
A =1,~0 [3.46~0 - 1_ 1 ]
A = 1,800 [117.33257 -IJ

A =1.800 [116.33257) =2.09.398.63
. . The amount is Rs. 2,09,398.63
Alternative method:
The amount of an annUity due is given by
A=R[S,,+w-l]
A =1,800 [ S6Th>.o~ - 1]
A =1,800 [117.3325702 -1]
A =1,800 [116.3325702] =209398.63
. . The amount is Rs. 2.09,398.63.
Example 4 : Establish the relation between the amount of an ordinary annuity of Re. 1
payable for n periods at the rate of i per period and the amount of an annuity due of Re. 1
payable for n period at the rate .of i per period.
'-.
Solution : The amount of an ordinary annuity of Re. 1, payable for n periods at the rate
of i per period is given by --
sii!i =(1 + i)"-1
. ~
...(1)
The amount of an annuity due of Re. 1, payable for n periods at the rate of i per period is
given by
(1 + i)" + 1 - 1
siili = i
1 ... (2)
Now (2) => ,siili =(1 + i)" (1, + i) - 1

1
(1 + i)" (1 + i) - 1
=> smi = -i
~ i
(1 + i)" (1 + i) - 1 - i
=> 8mi = i
(1 + i)" (1 + i) - (1 + i)
=> smi =
.. . [(1 + i)" - 1 ]
=> Siili =(1 +~) i
=> 8mi =(1 + i) smi [using (1)]

Thus, the relation between smi and smi is given by
8mi =(1 + i) smi
ANNUITY DUE 183
Remark: Using the above relation, the amount of an annuity due of Rs. R, payable at
the beginning of every period for n periods at the rate of i per period can also be given as
follows:
rl-
-=-R-(1-+-i)-S-ii1-i--'\
A
Example 5 : An amount of Rs. 1,500 is deposited in a bank account at the beginning of

every year for a period of 12 years and no payment will be made thereafter. The account
holder plans to close the account at the end of 16 years. The bank calculates interest at the
rate 71/ 2 per annum compounded annually. What amount he will receive at the time of closure
of the account ?
Solution: Since the payments are made at the beginning of every year, it is an annuity
due.
Period payment R =Rs. 1,500.
number of payment periods n =12
=
rate ofinterest r =i 7~ % =0.075
We first calculate the amount at the end of 12 years, since the annuity is only for 12
year.
A =R [(1 + i~ +1 - 1_ 1]
A-I 500 [(1.075)13 -1

- , 0.075
_ 1 500 [2.560413 -1
A- , 0.075
A =1.,500 [20.805507 - 1]
A =1,500 (19.805507) =29,708.26
.. The amount at the end of12 years is Rs. 29,708.26.
This amount will be in the account for four more years earning co~pund interest.
:. Principal at the beginning of 13th year P =Rs. 29,708.26
Compound Amount is given by
,A =P(1 + i)'l
Here i =0.075 and n =4
A =29,708.26 (1.075)4
A =29,708.26 (1.335469) =39,674.46
.. , The amount at the 'end of 16 years is Rs. 39,674.46.
Example 6 : An annuity consisting of equal payments at the beginning of each quarter

for 3 years is to be accumulated to Rs. 7,000. [fthe interest rate is 8% compounded quarterly,
how much is each payment ?
Solution: Since the payment are made at the beginning of each quarter; it is an annuity
due.
Let Rs. R be the quarterly payment
Amount after 3 years A = Rs. 7,000
rate of interest r =8% =0.08
..
; =!..4-- 0.08
•
_ 0 02
4 - .
and n = 3 x 4 = 12
"(1 ~ i)n+ 1 - 1 1]
A=R [ . £
.
7000 - R [(1.02)13 -1 1]
, - 0.02
7 000 - R [1.2936066 - 1
, - 0.02 1]
7,000 =R [13.68033]
7,000
R = 13.68033 = 511.68
.. TPe quarterly payment is Rs. 511.68.
Example 7 : Find the amount of an annuity due of Rs. 1,850 payable at the beginning of
every year for 15 years, if the irtterest is compounded at a rate of 7% effective for 10 years and
7~ effective thereafter.
due
The annuity in the problem is shown in the following figure:
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
I I I I I I I I I I I I I I I I
R R R R R R R R R R R R R R R
1111
at 7% effective
_'III
7.5% effective
-,
Since the interest rate is changed after 10 years, the given annuity can be split into two :
one is an annuity due of Rs. 1,850 for 10 years at 7% effective and another one is an annuity
due ofRs. 1,850 for 5 years at 7.5% effective.
Consider the annuity due of Rs. 1,850 for 10 years at 7% effective:
Periodic payment R = Rs. 1,850
No. of payment periods n =10
Rate of interest i =r =7% =0.07
ANNUITY DUE 185
Amount of an annuity is given by

A =R [sn+ 1Ii -1]
A = 1,850 [ smO.07 -
1]
A =1,850 [15.7835993 - 1]
A = 1,850 (14.7835993) = 27,349.66
This is the amount at the end of 10 years. Since the annuity due ends at the end of 15
year, this amount will earn interest for 5 years at 7.5% effective.
:. Principal for 11th year, P =Rs. 27,349.66
No. of periods =5 'years
Amount is given by
A =P (1 + iY'
A = 27349.66 (1.075)5
A = 27349.66 (1.43562933) ... (1)
Amount at the end of 15 years =Rs. 39,263.97
Consider the annuity due of Rs. 1,850 for last 5 year at 7.5% effective:
Periodic payment R =Rs. 1,850 ,
Rate of interest i =r = 7.5% = 0.075
No. of periods n =5
Amount of this annuity is given by
A = 1,850 ( s610.075 - 1)
A =1,850 (7.2440203 - 1)
A =1,850 (6.2440203) =11,551.44 ... (2)
.. The amount of this annuity is Rs. 11,551.44
Thus the amount ofthe annuity due ofRs. 1,850 for 1,5 years is given by
(1) + (2) =39,263.97 + Rs. 11,551.44
:. The required amount is Rs. 50,815.41.
Example 8 : A person deposits Rs. 2,000 per annum for 6 years, the first deposit is made
at year zero. After 6 years the annual deposit is enhanced to Rs. 2,500. He closes his account
at the end of 1()th year. What is the amount payable to him, if the interest is calculated at 5%
effective?
due.
The given annuity consists of two annuities : one is Rs. 2,000 payable for 6 years and
another one is Rs. 2,500 payable thereafter for 4 years.
o 1 2 3 4 5 6 7 8 9 10
I I I I I I I I I I I
2,000 2,000 2,000 2,000 2,000 2,000 2,500 2,500 2,500 2,500
1«
Consider the annuity of Rs. 2,000 for 6 years at 5% effective

Amount at the end of 6 years = 2,000 ( 87)0.05 - 1)
=2,,000 (8.1420085 -1)
=2,000 (7.1420085) =14,284.02
.. Amount at the end of 6 years is Rs. 14,284.02
This amount will earn compound interest for 4 more years.
.. Amount of this annuity at the end of 10 years is
A = 14,284.02 (1.05)4 =17326.32
A :;: Rs. 17,326.32 ... (1)
Now Consider the annuity due ofRs. 2,500 for last four years.
Amount of this annuity due at the end of 10 years is
A =2,500 ( 8510.05 - i)
A =2,500 (5.5256313 - 1) =2,500 (4.52556313)
A =Rs. 11,314.08 ... (2)
.. The amount of the given ~uity due is
(1) + (2) =Rs. 17,362.32 + Rs. 11,314.08
= Rs. 28,676.40
:. The required amount is Rs. 28,676.40
Alternative method:
The given annuity can also be expressed as follows:
0 1 2 3 4 5 6 7 8 9 10
I I I I I I I I I I I
2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000
+500 +500 +500 +500
. . Amount oBhe given annuity due

=Amount of annuity due of Rs. 2,000 for 10 years
+ Amount of annuity due ofRs. 500 for 4 years.
=2;000 ( 8rno.05 - 1) + 500 ( 8510.05 - 1)
=2,000 (14.2067872 - 1) + 500 (5.5256313 - 1)
=2,000 (13.2067872) + 500 (4.5256313)
=26,413.57 + 2,262.82 =28,676.39
. . The required amount is Rs. 28,676.39
I §f!i 3jtS m1--1

L Find the amount at the end of 10 years of an annuity of Rs. 1,500 payable at the
beginning of each year until 10 payments have been made of money is worth 8%
effective. [ADs. Rs. 15,645.49]
ANNUITY DUE 187
I
2. Find the amount of an annuity due of Rs. 800 payable at the beginning of each year
, for 12 years, if money is 'Worth 6% effective. [Ans. Rs. 14,305.71]
3. A person deposits Rs. 2,000 in an account at the beginning of each quarter for 5
years. Ifthe money is worth 7% per annum compounded quarterly, what amount will
be accumulated at the end of fifth year? [Ans. Rs. 48,232.78]
4. An annuity consists of 48 monthly payments of Rs. 600, the first being made at the
beginning of first month and the subsequent payments at the interval of one month
each. If the interest is calculated at the rate of 12% per annum compounded monthly,
what is the amount ofthis annuity at the end offour years? [Ans. Rs. 37,100.90]
5. Find the amount of an annuity due to payment of Rs. 500 is made at the beginning of
each quarter for 10 years at the rate of 8% per annum compounded quarterly.
[Ans. Rs. 30,805.01]
6. Find the amount of annuity of Rs. 1,600 payable at the beginning of each month for 3
years at the rate of 15% compounded monthly. [Ans. Rs. 73,087.12]
7. Find the amount of the following annuities:
(a) Rs. 1,100 payable at beginning of every year for 9 years at the rate of 6.5%
effective. .
(b) Rs. 700 payable at the beginning of every 6 months for 10 years at the rate of 6%
per annum compounded semi-annually.
(c) Rs. 500 payable at the beginning of every 3 months for 6 years at the rate of 7%
per annum compounded quarterly.
(d) Rs. 300 payable at the beginning of every month for 6 years at the rate of 6% per
. annum compounded monthly. .
[Ans. (a) Rs. 13,743.86; (b) Rs. 19,373.54; (c) Rs. 15,013.73; (d) Rs. 26,052.27]
8. For the purpose of their daughter's marriage, a couple decided to deposit Rs. 2,500 in
a fund at the beginning of every three months, starting from the girl's fourth
birthday. Last payment was made on the 17th birthday. No payment was made
thereafter and accumulated amount was withdrawn on the 21 st birthday of the girl.
What would have been the amount withdrawn, if the interest was calculated at a
rate of 10% per annum compounded quarterly? [Ans. Rs. 4,01,022.88]
9. A person decides to put aside Rs. 150 at the beginning of,every month in a money
market fund that pays interest at the rate of 9% compounded monthly. How much
money does he have at the end of one year? [Ans. Rs. 1,890.21]
10. What amounL~hld be set aside at the beginning of every year to accumulate a sum
of Rs. 1,50,000 at the end of 14 years, if the interest is compounded at a rate of 6.5%
per annum compounded annuity? [Ans. Rs. 6,470.49]
11 For his son's higher education, X wants to save a certain amount at the beginning of
every three months from now. He estimates that the cost of education would be
Rs. 2.5 lakhs. What amount he has to save at the begin~ of every quarter to
accumulate this cost which is required at the end of 12 years from now? Money is
worth 7% compounded quarterly. [Ans. Rs. 3,308.52]
12. An annuity of equal payments at the beginning of every 6 months for 8 years is to be
calculated for Rs. 20,000. If the interest rate is 18% per annum compounded half-
yearly, how much is each payment? [ADs. Rs. 555.96]
13. An amount of Rs. 2,100 is deposited in a savings bank account at the beginning of
every 6 month period for a period of 10 years and no payment will be made
thereafter. The account holder plans to close the account at the end of 15 years. If the
bank calculates interest at the rate of 9% compounded half-yearly, what amount he
will receive, at the time of the closure of the account? [ADs. 1,06,913.54]
14. Mr. X wants to purchase a house when he retires after 16 years from now. The price
of the house is Rs. 3,00,000 now and it is expected that the price of the house after 16
yeas would be 25%' more than the current price. What amount X has to set aside at
the beginning of every quarter, the first payment due now, if money is worth 11%
compounded quarterly? [Ans. Rs. 2,146.42]
15. An amount of Rs. 3,600 is deposited at the beginning of every year for 16 years.
Interest is calculated at a rate of 5.5% per annum compounded annually. The
amount was kept in the account and withdrawn at the end of 20 years. What would
have been the amount at the end of 20 years. [Ans. Rs. 1,15,937.94]
16. Find the number of years for which an annuity 'of Rs. 544.25, payable at the
beginning of each 6 months accumUlates to Rs. 1,500, if the interest is calculated at
6% compounded semi-annually. [ADs. 10 years]
17. A bank pays interest at a rate of 8% compounded quarterly. At the beginning of each
quarter a sum of Rs. 2,000 is deposited into a savings account. After a certain
number of years, the amount is accumulated to Rs. 49,600. Find the number of years.
[ADs. 5 years]
18. A sum of Rs. 3,800 is deposited in an account at the begin~ of every quarter for 7
years. If the bank calculates interest at 6% per annum compounded quarterly for 5
years and at 7% per annum compounded quarterly thereafter, find the amount of
this annuity. [ADs. Rs. 1,35,360.82]
19. Mr. X has decided to invest Rs. 2,400 at the beginning of every 6-month period. He
did so for 5 years. Due to some financial problems, he could not make the payment
for next 3 years. He again invested Rs. 3,600 per six months, for the next four years
from the beginning of the 9th year. Find the amount to his credit at the at the end of
the 12th year assuming interest at the rate of 9% per annum compounded semi-
annually. [ADs. Rs. 92,362.38]
I
20. An annuity is payable for 14 years certain, the first payment falling due at the
beginning of first year. The annuity is payable at the rate of Rs. 1,800 per annum
during the first 8 years and Rs. 1,500 per annum during the remaining years.
Calculate the future value of this annuity of money is worth 5.5% effective.
[ADs. Rs. 36,355.53]
21. At the beginning of every year, Rs. 650 is deposited into a savings account that pays
interest at a ratio of 5% effective. After 7 years, the bank raises the interest rate
from 5% to 6%. If the account is to be closed at the end of 12 years, what amount
would be received? [ADs. Rs. 11,320.37]
ANNiIITY DUE -189
PRESENT VALUE OF AN ANNUITY DUE

The present value of an annuity due is the sum of the preset values of all the payments.
. Consider an annuity due of Rs. R payable for n consecutive payment periods, where the
interest rate is i per period and each payment is due at beginning of the corresponding
payment period.
The first payment of Rs. R is made at the beginning of the first period, i.e., at the
beginning of the term. Therefore, its present value is,Rs. R itself.
The second payment of Rs. R is made at the beginning of the second payment period,
i.e., immediately after the first payment periods. Therefore, the present value of this R is
-R (1 + i)-I and so on. '
0 1 2 n-2 n-1 n
I I I I I I
R R R ...... R R
R
R (1 + 1)-1
R (1 + 1)-2
R(1 +~-<n2)
: I
_ _ _ _ _ _ _ _ _ _ _ _...J
R (1 + 1)-<n-1) _----------------1
Thus, we have
Present value of 1st payment, PI =R
Present value of 2nd payment, P 2 =R (1 + i)-I .
Present value of3rd payment, P s =R (1 + i)-2
Present value of (n - 1)th payment, P n -1 =R (1 + i)-{n - 2)

Present value of nth payment, P n =R (1 + i)-<n -1)
Pr~sent value of this annuity due is given by
P =P1 + P 2 + Ps+ ...... +P,,-l + PIS
=
P R + R (1 + i)-I + R (1 + i)-2 + ...... + R (1 + i)-<" - 2) + R (1 + i)-<" - 1)
P =R [1 + (1 + i)-I + (1 + i)-2 + ...... + (1 + i)-<,,-2) + (1 + i)-<,,-I)]
1- (1 + i}-ll ] 2 _1_ i -r"

1+r+r + ...... +r" -1 - r
P =
R [ 1- (1 + i)-I
wherer < 1
(1 + i~
P -_ R (1'+ ~ .) [ 1(1- + ]
i)-1
(1 + i)-(1 + i)-n+l]
P=R [ .
~
P=R [
1- (1 + i)-(n-l)
.
+ i]
~ .
1 - (1 + i)-<n -1) ]
P =R [ . +1
~
Thus, the present value of an annuity due ofRs. R, payable for n periods at a rate ofi per.
period is given by
1 - (1 + i)- (n -1) ]
P=P [ . +1
~
Remark 1 : The above fonnula can also be written as follows:

P=R[a n-1Ji+ 1 ]
or
P = R aiili where aiili = an-I)i + 1
aiili is the present value of Re. 1 payable at the beginning of every period for n periods
at the rate of i per period.
Remark 2 : The total interest paid is given y

I=nR-P
Remark 3: We have seen that

aiili =a n-1)i +1
., 1 - (1 + i)- (n - 1)
aiili = ~
. +1
.. 1 - (1 + i~ +1 +i
aiili=
.. (1 + i) - (1 + i~ +1
aiili=
~
.. ,_
aiil, - (1
1
+ ~ .) [ - (1 .+ i~ ]
~
~ aiili = (1 + i) aiili
Thus, the present value of an annuity due of Rs. R payable for n periods at a rate of i per
period can also be given by
P = R (1 + i) aiili
ANNUITY DUE 191
Example 9 : Find the present value of an annuity of Rs. 5,000 payable at the beginning
of each year for 10 years, if money is worth 5% effective. .
Solution: Since the payment are made the beginning o~ each year, it is an annuity due.
Periodic payment R' = Rs. 5,000
No. of periods n =10
Present value of an annuity due is given by
. [ 1 - (1 + ir<" - 1)' ]
P =R . , +1
.. P =5,000 [ 1 - ~O5)-9 +1]
P =5,000 [ 1 - 0.::0892 + 1 ]
P =5,000 [7.1078216 + 1] =40,539.11

.. The present value is Rs. 40,539.11
Example 10 : Find the present value of an annuity due of Rs. 300 payable at the
beginning of each 3-month period for 12 years, if money is worth 6% compounded quarterly.
Solution : Since the payment are made at the beginning of every quarter, it is an
annuity due.
i= i =0:6 =0.015 and n =4 x 12 =48

1 - (1 + ir<n -1)
,
]
P=R [ . +1
P =300 [ 1- ~O5)-47 + 1]
1 1
Let x =(1.015)-47 =(1.015)47 =Y(say)
y =(1.015)47
logy =47 log 1.015
logy = 47 x 0.0064 = 0.3008
Y =antilog (0.3008) = 1.999
1 .
x = 1.999 = 0.50025
P =300 [1 - ~;1025 + 1]
P = 300 [33.31667 + 1] = 10,295

.. The present value is Rs. 10,295.
Example 11 : A person purchases a house paying Rs. 75,000 in cash and the balance in
30 installments of Rs. 6,000 each at the beginning of every six month period. If the interest is
reckoned at a rate of 7% per annum compounded semi-annually. What is the equivalent cash
price of the house ?
Solution : Price of the house = Cash down + Present value of the annually due of
Rs. 6,000 payable in 30 half-yearly instalments at 7%
per annum compounded half-yearly.
=75,000 + 6,000 [a 30 _ P. 0.035+ 1]
=75,000 + 6,000 [ a2910.035 + 1]
=75,000 + 6,000 [18.035767 + 1]
=75,000 + 1,14,214.60
=1,89,214.60
.. Price of the house is Rs. 1,89,214.60.
Example 12 : What equal payments made at the beginning of each year for 10 years will
pay for a personal loan of Rs. 80,000, if the money is worth 7% effective.
Solution : Let R be the periodic payment

Since the payments are made at the beginning of each year, it is annuity due.
Value loan amount P =Rs. 80,000
No. of payment n =10
Rate of interest i =r = 7% = 0.07
1- (1 + i)-<n-l) ]
P =R [ . +1
£
.. 80,000 =R [ 1 - ~O7)-9 + 1]
~ 80,000 =R [1- ~.:374 + 1]
~ 80,000 = R [6.515232 + 1]
~ 8,000 = R [7.515232]
ANNUITY DUE 193
80,000
R =7.515232 =10,645.05
. . The annual payment is Rs. 10,645.05
Example 13: The premium on an insurance policy is Rs. 700 per month, payable at the
beginning of every month. If the policy holder wishes to pay 1 year's premium in advance, how
much should be paid provided that the rate of interest is 6% compounded monthly ?
Solution: Since the payable at the beginning of each quarter, it is an annuity due.
Quarterly payment R =Rs. 700
. r 0.06
. . l = 12 = 12 = 0.005 and n = 1 x 12 = 12
Amount payable in advance is the present value the annuity due of Rs. 700 payable at
the beginning of every quarter.
1 - (1 + ir<n - 1) ]
P =R [ . +1
l
.. P =700 [1 - 6~O5)-1 + 1]
P =700 [1 - 0;,~:1487 + 1]
P =700 [10.677026 + 1] =8,173.92

" Amount payable in advance is Rs. 8,173.92
Example 14 : Under an education loan, a person received four annual amounts of Rs.
800 each for four years, the first being receivable at year zero. The loan is to be repaid by a
lump sum at the end of 10 years from now. What is the amount repayable at that time?
Assume interest rate 6% effective.
. Solution: Since the loan is receivedlVclt the beginning of every year, it iS,an annuity due.
We first calculate the amount of the loan.
The loan amount is the present value of the annuity due of Rs. 800 for four years.
Periodic payment R = Rs. 800
No. of periods n =4
Rate of interest i =r =6% = 0.06
The present value of an annuity due is give by
P = R [an-Iii + 1]
P =800 [a310.o6 + 1]
P =800 [2.67301195 + 1]
P =800 [3.67301195] =2,938.41
., The amount of the loan when received is Rs. 2,938.41
Amount payable at the end of 10 years is the compound amount of the loan.
Compound amount is given by
A =P (1 + i)'i
Here, principal at the beginning P =Rs. 2,938.41
i =0.06 and n =10
A = 2,938.41 (1.06)10
A = 2,938.41 (1.79084770)
A = 5,262.24
.. The required amount is Rs. 5,262:24
Alternative Method
We first calculate the amount of the loan at the e)ld offour years.
Amount of annuity due is given by
A =R [Sn + Iii - 1]
A =800 [S4+ 110.06 -1]
A =800 [ S5l0.06 - 1]
A =800 [5.637093 - 1]
A =800 [4.637093]
A = 3,709.67
.. The amount at the end of 4 years is Rs. 3709.67.
This amount has to be repaid at the end of 10 years, is after 6 years.
Principal at the beginning of 5th year, P =Rs. 3709.67
n = 6 and i = 0.06
.. Amount at the end of 10 years
=3,709.67 (1.06)6
= 3,709.67 (1.41851911)
. = 5,262.24
.. The required amount after 10 years is Rs 5,262.24.
Example 15 : A person borrowed a certain sum from a bank and agreed to repay the loan
in 20 equal annual instalments of Rs. 1,200 the first being made at the beginning of the first
year. If the bank cho rged interest at a rate of 6.5% effective, what was the amount of the
loan ? If he has made 12 payments so far, what single payment must he pay at the time the
13 th payment is due to discharge his remaining indebtedness ?
Solution: Since the payments are made at the· beginning of each year, it is annuity due.
ANNUITY DUE 195
Amount of the loan is the present value of the annuity due of Rs. 1,200 for 20 years.
Here, annual payment R =Rs. 1,200
No. of payments n = 20
Rate of interest r = i =6.5% =0.065
Preset value of an annuity due is given by
P =R [an -lli + 1]
P = 1,200 [aI910.065 + 1]
P = 1,200 [10.73471022 + 1]
P = 1,200 [11.73471022] = 14,081.65
" The loan amount is Rs. 14,081.65
Now, amount to be paid at the time of 13th payment to discharge the remaining
indebtedness is the present value of the remaining 8 payments at begimring of 13th year.
This is shown is the follo-wing figure:
0 1 2 11 12 13 18 19 20'
I I I I I I I I I
1,200 1,200 1,200 1,200 1,200 1,200 1,200 1,200
PVadf 8 payment
I" ~I
Preset value of remaining 8 payments

=1,200 [as-iii + 1]
=1,200 [a7l0.065 + 1]
=1,200 [5.48451977 + 1]
=1,200 [6.48451977] =7,781.42
" Amount required at the time of 13th payment is Rs. 7,781.42.
I #33it+J€14-i
L What is the present value of an annuity due of Rs. 1,900 payable annually for 10
years at 5.5% compounded annually? [ADs. Rs. 15,109.17]
2. Find the present value of an annuity of Rs. 2,100 payable at the beginning of each
month for 3 years at the rate of 12% per annum compounded monthly.
[ADs. Rs: 63,858.02]
3. Find the present value of an annuity due of Rs. 4,000 payable at the beginning of
every six-month period for 12 years, if money is worth 5% compounded semi-
annually. Also calculate the amount of this annuity at the end of 12 years.
. [ADs. Rs. 73,328.44; Rs. 1,32,631]
, 4. Find the present value of an annuity of Rs. 2,900 payable at the beginning of every
year for 15 years, if money is worth 6% effective. Also calculate the amount of this
annuity. [ADs. Rs. 29,855.45; Rs. 71,550.33]
/
5. Find the present value of the following annuities:

(a) Rs. 350 payable at the beginning of every month for 2 years at 15% compounded
monthly.
(b) Rs. 450 payable at the beginning of every quarter for 7 years at 9% compounded
quarterly.
(c) Rs. 500 payable at the beginning of every year for 18 years ~t 7.5% effective.
(d) Rs. 480 payable at the beginning of every 6 months period for 11 years at 8%
compounded half-yearly.
[Ans. (a) Ri;. 7,308.71, (b) Rs. 9,482.18, (c) Rs. 5,216.98, (d) Rs. 7,214]
\
6. Establish the relation between the present value of an annuity due of Re. 1 and the
preset value of an ordinary annuity of Re. 1, both for n periods at the rate of i per
period.
7. A company purchases a machine on instalment basis such that Rs. 2,300 is to be paid
at the beginning of every month, the first is to be paid immediately. If the money is
worth 9% per annum compounded monthly, what is the price of the machine?
Assume that the term of the loan is 5 years. [Ans. Rs. 1,11,629.75]
8. X purchased a house and areed to pay 20 equal annual payments of Rs. 30,000. If
the interest is reckoned at 4:!~ effective, what is the purchasing price of the house?
[Ans. Rs. 4,07,798.81]
9. X purchased a house paying Rs. 2,00,000 cash down and agreed to pay Rs. 6,000 at
the beginning of every quarter for 8 years. If interest is calculated at 6% compounded
quarterly, find the price of the house. [Ans. Rs. 3,53,876.87]
10. A person borrows a certain sum of money from a money lender at a rate of 7.2% per
annum compounded monthly. He agrees to pay the loan in 20 monthly installments
of Rs. 1,000 payable at the beginning of every month. Find the amount borrowed.
[ADs. Rs. 18,906.34]
lL A man buys a car on instalment basis such that Rs. 90,000 will be paid at the time of
purchase and the remaining amount in 8 equal annual payments of Rs. 25,000; the
first is to be paid at the beginning of first year. If the interest rate is 8% effective,
what is the price of the car? [Ans. Rs. 2,45,159.25]
12. Mr. X borrowed Rs. 50,000 from a bank and repaid the loan in 20 equal instalments
at the interval of 6 months. The first instalment was made immediately when the
money was borrowed. If money is worth 6% per annum compounded semi-annually,
calculate the size of each -instalment. What amount would have been paid as
interval? [ADs. Rs. 3,262.90; Rs. 15,258]
13. A loan of Rs. 35,000 is to be repaid in 30 equal payments payable at the interval of 3
months, the first being made at the beginning offll'st quarter. If the rate of interest
is 8% compounded quarterly, what is the amount of quarterly instalment?
[As. Rs. 1,532.11]
14. A debt of Rs. 5,000 with interest at the rate of 8% compounded quarterly is to be
discharged by 8 equal quarterly payments, the first being due today. Find the size of
each instalment. Also calculate the total interest paid. [ADs. Rs. 669.17; Rs. 353.36]
ANNUITY DUE 197
15. Determine the monthly payments over a 4-year period for an annuity due having a
present value ofRs. 45,000, if money is worth 5% compounded monthly.
[ADs. Rs. 1,032.01]
16. What equal payments made at the beginning of each year for 10 years will pay for a
piece of land of worth Rs. 4 lakhs, if money is worth 8% effective?
[ADs. Rs. 49,335.09]
17. The premium on an insurance policy is Rs. 1,500 per month payable at the beginning
of every month. If the policy holder wishes to pay 1 year's premium in advance, how
much should be paid, provided that the rate of interest is 6% compounded monthly?
[ADs. Rs' 17,515.54]
18. Under an education loan, a person receives five annual amounts ofRs. 2,500 each for
five years, receivable at the beginning of every year. This loan is-to be repaid by a
lump-sum at the end of 10 years from now. Assuming rate of interest at 7% effective,
calculate the amount r~payble at the end of 10 years. [ADs. Rs. 21,575.77]
19. In the previous example (18), if the loan is to be repaid in five equal annual
instalments at the beginning of every year starting from the beginning of 11 years,
find the annual instalment. ~ADs. Rs. 4,917.88]
20. Mr. A purchased a car paying Rs. 1,00,000 down and promising to pay Rs. 6,000
every month, for next 4 years payments are made at the beginning of every month.
The seller charges interest at the rate of 15% per annum compounded monthly. What
was the cash price of the car? After making payments for 3 years, the buyer wishes
to discharge his remaining indebtedness by a single payment at the time when next
payment is due. What is this single payment? [Ans. Rs. 3,18,283.75; Rs. 1,25,292.22]
21. What amount should be set aside at the end of every year to replace a loan of
Rs. 25,000 iii 5 years at the rate of 5% effective. [ADs. Rs. 5,499.40]
22. A series of 10 annual sums of money is payable, the first payment taking place at the
beginning of 1st year. The first 6 payments are Rs. 2,400 each and the last 4
payments are Rs. 1,800 each. Find the present value of the payments, if money is
worth 8% per annum compounded annually. [ADs. Rs. 16,040.03]
23. A person has a right to receive Rs. 1,200 per quarter for 5 years and Rs. 900 per
quarter for the next 3 years. The first payment is due at year zero. What is the
present value of his right, assuming interest at 8% per annum compounded
quarterly? [Ans. Rs. 26.547.47]
Deferred Annuity
INTRODUCTION
We have so far discussed about annuities in which periodic payments are made at the
end (or beginning) of every payment period, the first being paid at the end (or the beginning)
of the first period. But there are some obligations for which the fll'st payment may not be
paid at the end of the period. For example, consider an education loan. Such loans are
provided to students for the purpose of higher education. Suppose that a bank provides an
education loan of Rs. 1,00,000 to a student and the loan is to be repaid in 20 equal annual
instalments and the borrower is expected to repay the loan after the expiry of a certain
number of years (say 5 years). The 5rst instalment is paid at the end of 6 th year and the last
is paid at the end of 25 th year. Such kind of annuities are called deferred annuities.
Thus, the deferred annuity is defined as an ordinary annuity in which the first payment
is postponed until the expiry of certain time period which is equivalent to certain number of
payment intervals.
If the term of an ordinary annuity of 'n' periods begins after the lapse of'm' periods, then
the annuity is said to be an annuity of'n' periods, deferred 'm' periods.
In deferred annuity, the first payment is made at the end of (m + 1)th period. But the
term of deferred annuity begins at the beginning of the (m + 1)th payment period, i.e.,
immediately after the expiry of m periods.
The length of time between now and the beginning of the term of the deferred annuity is
called the interval of deferment.
It should be noted that the interval of deferment ends are period before the first payment
is due.
DEFERRED ANNUITY 188
.r----
This has been illustrated in the following figure:
1 2
Interval of deferment -----..
3 m-1 m m+1 m+2
I I I I
L I I
R
I
R ... R
Term of deferred annuity ~
Remark: Deferred annuity can be a due deferred annuity. If the deferment period of an
annuity due is equal to m periods, then the first payment is made at the beginning of
m + 1 periods.
AMOUNT OF A DEFERRED ANNUITY

The amount of a deferred annuity is the value of the annuity at the' end of the term.
Since the amount is the sum of future values of every periodic payment at the end of the
term, the amount of a deferred annuity does not depend on the deferment interval.
Therefore, this amount is obviously the amount of an ordinary annuity.
Thus, if a deferred annuity consists of n periodic payments of Rs. R each at the rate of i
per period and the annuity is deferred for m periods, then the amount A of this annujty is
the amount of an ordinary annuity consisting of n perioaic payments of R each at the rate i
per period.
The amount of an deferred annuity is thus given by
A =R [(1 + iT - 1 ]
or
A =R snit
Example 1 : An annuity consists of 12 semi-annual payments of Rs. 2,000 each the first
being payable at the end of 5 years. Find the amount of this annuity, if money is worth 6%
converted semi-annually.
Solution. : The first payment is made after 1~ year, i.e., after 3 payments.
:. It is a deferred annuity.
Amount of a deferred annuity is given, by
A =R [(1 + iT - 1]
Here periodic payment R =Rs. 2,000
. r 0.06 3
'="2=2"=0.0
Given that n =12
A - 2 000 [(1.03)12_ 1 ]
- , 0.03
A =2,000 [ 1.42,5~38 - 1]
"
A - 2 000 [0.42576088 ]
- , 0.03
A = 2,000 [14.192029] = 28,384.06
.. The amount is Rs. 28384.06
Example 2 : Find the amount of a sequence of semi-annual payments of Rs. 800 each, the
first being made at the end of 6 ~ years and the last at the end of 14th year. Find tm amount of
this annuity, if money is worth 8% converted semi-annually.
Solution : Since the perjodic; payment is payable after 6 years, it is a deferred annuity.
Deferment interval is 6 years.
:. Term ofth3 annuity is 8 years.
Since the payments are made semi-annually, n =2 x 8 =16
Interest is compounded semi-annually
i - !. - 0.08 - 0 04
.. --2- 2 - .
Amount of a deferred annuity is given by
A =R [(1 ii -1]
+
Here A =800 [ (1.0~: - 1]
A =800 [1.872~0:5 - 1]
A =800 [21.82453] =17,459.66

.. The amount is Rs. 17,459.66.
Example 3 : At 6 months interval Mr. A deposits Rs. 100 in a savings bank account
which credit interest at the rate of 8% per annum compounded semi-annually. The first
deposit was made when A's son was 6 years old and the last deposit was made when his son
was 21 years old. The money remained in the account and was presented to the son on his
25th birthday. How much did he receive?
Solution: Since first deposit is made at the end of6 years, it is a deferred annuity.

Payment are made on semi-annual basis.
1
Interval of deferment =52" years
1
m=52"x2=11
Last payment was made at the end of 21 years.

.. Term of this annuity =1~ years
. 1
n = 152" x 2 = 31
; - ~ - 0.08 _ 0 04
--2- 2 - .
Amount at the end of21Bt year is the amount of this deferred annuity ofRs. 100.
Amount of deferred annuity is given by :
A=R siiji
A = 100 S3i]O.04
A =100 (59.3283353) =5,932.83
.. Amount after 21 years is Rs. 5,932.83
This amount remained in account for 4 more years.
Now n =4 x 2 =8
Amount is given by
A =P (1 + i)"
Here P =Rj;. 5932.83 and i =0.04
A =5,932.83 (1.04)8
A = 5,932.83 (1.36856905) =8,119.49
.. Amount at the end of 25 years is Rs. 8,119.49.
PRESENT VALUE OF DEFERRED ANNUITY

The present value of a deferred annuity for 'n' periods, deferred 'm' periods, is the value
of the annuity at the beginning of the interyal of deferment. In other words, the present
value of a deferred annuity is the sum of present values of each instalment at the beginning
of the deferment interval. We have seen that the amount of an ordinary annuity and the
amount of a deferred annuity are the same. But present value of deferred annuity is not the
same as the value of an ordinary annuity.
For example, suppose that a person borrows a certain sum from a bank now at 6%
effective rate of interest and agrees to pay Rs. 2,000 at the end of every year; the first
instalment is to be paid at the end of 4th year.
. . - -Term of annuity-----+!
o 2 345 6
I I I I I I
i4--deferment interval---.l 2.000 2.000 2.000
Payments in Rupees
Present value of first instalment ofRs. 2,000

=Rs. 2,000 (1.06)-<3 + 1) =Rs. 2,000 (1.06)-4 =Rs. 1,584.19
Present value of second instalment of Rs. 2,000
=Rs. 2,000 (1.06)-<3 + 2) =Rs. 2,000 (1.06f"5 = Rs. 1,494.52
Present value of third instalment of Rs. 2,000
=Rs .. 2,000 (1.06)-<3 + 3) =Rs. 2,000 (1.06~ =Rs. 1,409.92
:, The present value of this annuity is
P =Rs. (1,584.19 + 1,494.52 + 1,409.92) =Rs. 4,488.63
Thus, we say that a loan of Rs. 4,488.63 at a rate of 6% per annum compounded annually
is repaid by three annual instalments of Rs. 2,000 (recall that in case of ordlnary annuity of
Rs. 2,000 at 6% effective for 3 years is Rs. 5,346.02).
Now we derive the formula for the present value of a deferred annuity.
Let R be the periodic payment, i the rate of interest per period, n the number of payment
and m the deferment interval.
Since the first payment of R is made at the end of (m + 1) periods, the present value of
this R is R (1 + i)-<m + 1).
The second.payment of R is made at the end of (m + 2) period. So the present value of
second payment is R (1 + i)-<m + 2) and so on.
Thus,
Present value of 1at payment, PI =R (1 + i)-<m + 1)
Present value of 2nd payment, P 2 =R (1 + i)-<m + 2)
Present value of 3rd payment, P 3 =R (1 + i)-<m + 3)
Present value of nth payment, Pn =R (1 + i)-<m + n)

Present value of this deferred annuity is given by
P =PI + P 2 + P3 + ...... :+ Pn
P =R (1 + i)-<m + 1) + R (1 + i)-<m + 2) + ...... + R (1 + i)-<m +n)
P =R (1 + i)-m (1 + i)-I + R (1 + i)-m (1 + i)-2 + ...... + R (1 + i)-m (1 + i)-"
P = R (1 + i)-m [(1 + i)-I + R (1 + i)-2 + ...... + (1 + iJ"fl]
P =R(l + ,')-nt(1 + LJ '\-1 [(1+iJ"fl-1]

(1 + i)-l- 1 a+ar+ar2+ ... arn-l=a.rn-1!
r-
. 1 [(1+i)""'l-1]
P =R (1 + ,)-m • (1 + i) (1 + i)-I- 1
P =R (1 +i)-m [(~ ~ ~i+ ~)1 ]
P =R (1 + i)-m [ (1 + ~ - 1]
=> P =R (1 + i)-m [1-(\ + i)""'l ]
=> P =!!-, [(1 + i)-m - (1 + i)....(m +11.)]
Thus, the present value of a deferred annuity is given by
I p = -¥ [(~ + i>-'" -{1 + iT'"~ I

Remark 1 : When the periodic payment is Re. 1, then the present value of a deferred
. .. (1 + irm - (1 + i)-<m + n) •• (m)
annuity IS glven by i . This IS denoted by aiili •
Therefore, we express the present value as follows: .

(m)
P =R aiili •
Remark 2 : We have derived that

(m) (1 + irm - (1 + i)-<m + n)
aiili = i
(m) 1 - (1 + i)-<m +11.) - (1- (1 + i)-m)
=> aiili = .
(m) 1- (1 + i)-<m +11.) 1-(1 + irm
=> a iili = i
(m)
=> ami = am+nl i .... ai7i1 i
.. The present value of a deferred annuity can also be expressed as
I P =R [aiii+'ii\ i- ai7i1 i] I
We have derived that
P =R [am+nli- ai7i1 i]
i.e. P=R am+nli-R ai7i1i
Thus, present value of a deferred annuity of Rs. R, payable at a rate of i per period for n
periods, deferred m periods can be expressed as the present value of an ordinary annuity of
Rs. R at a rate of i per period for (m + n) periods minus the present value of an ordinary
annuity of Rs. R at a rate of i per periods for m periods.
We know that the present value of R of an ordinary annuity for n (= t) years at the rate
of r per annum compounded continuously is given by
t (=n)
p =I Re-rt dt
o
" The preset value of a deferred annuity is give by
t(=m + n) t(=m)
p= I Re-rt dt - I Re-rt dt
o o
I I !
t= m+n m+n m m+n
p = I
t= m
Re-rt dt fix) dx = j{x)cix + j{x)cix
I I
m+n m m+n
P =- [e-rt]
-r
R m+n
m
j{x) dx - j{x)dx = I
m
j{x)cix
P =--R [e-{m + n}r _ e-mr]

r
~ P =-R [e-mr _ e -{m + n} r]

r
Thus, the present value of a deferred annuity of Rs. R to begin at the end of m periods
and to continue for n periods at a rate of i per period is given by
I P= ~ [e- mr - e-{m + n} r] I
Example 4 : Find thetresent value of 20 semi-anual payments of Rs. 500 each, the first
being made at the end of 62 years, if the money is worth 10% compounded semi-annually.
Solution : Since the first payment is made at the end of ~ years, it is a deferred annuity
Deferment period = 6 years
Payment are made semi-annually
:. m = 2 x 6 = 12
No. of payment periods, n = 20
Rate of interest, r = 10% = 0.10
Interest compounded semi-annually
. r 0.10
. . l =2' = 2 =0.05
The present value of a deferred annuity is given by

p =~ £ [(1 + i)-m - (1 + o-(m +nl]
p =g~ [(1.05)-12 - (1.05)-32]
P = 10,000 [0.55683742 - 0.20986617]
P = 10,000 [0.34697125) =3,469.71
The present value is "Rs. 3,469.71
Example 5 : Mr. X borrows a certain sum of money at 8% per annum compound interest
and agrees to pay both principal and interest in 10 equal yearly instalments of Rs. 1,200 each.
If the first instalment is to be paid at the end of 5 years from the date of borrowing and the
other yearly instalments are paid regularly at the end of the subsequent years, find the sum
borrowed by him.
Solution: Since the first instalment is paid at the end of 5th year, it is a deferred
annuity.
Payments are made annually
. . Deferment interval m =4 (years)
Present value of a deferred annuity is giv~n by .
P =~ £ [(1 + i)-m - (1 + i)-<m +nl]
.. P = ~O [(0.08)-4 _ (1.08)-14]
P =15,000 [0.73502985 -
0.34046104]
P = 15,000 [0.394556881] = Rs. 5,918.53
. . The amount borrowed is Rs. 5,918.53.
Alternative Method:
Present value of a deferred annuity is given by
P =R [am+iil r a;;;) j]
.. P = i,200 [aI41 0.08 - a41 0.08]

P =1,200 [8.24423698 - 3.31212684]
P = 1,200 (4.93211) = 5,918.53
. . The amount borrowed is 5,918.53.
Example 6 : Find the present value of an annuity consisting of 60 monthly payments of

Rs. 150 each, the first being made at the end of 3 years, if the money is worth 12% per annum
compounded monthly.
206 FINANCIAL MATHEMAncB
Solution: Since the first payment is made at the end of 3 years, it is a deferred annuity.
Monthly instalment R =Rs. 150
No. of instalments n =60
Deferment period =2 years and 11 months
.. m =2 x 12 + 11 =35
. r 0.12
:. ,= 12 =12 =0.01
The present value of deferred annuity is given by
p =!$, [(1 + iT'" - (1 + i)-<m +n)]
.. p =~ [(1.01)"-85 - (1.01)-95]
P =15,000 [(1.;1)35 - (1.;1)95 ]

Let x = (1.01)35 Let y = (1.01)95
log x = 35 x 0.0043 = 0.1505 log y =95 log 1.01
x =antilog (0.1505) = 95 x 0.0043 = 0.4085
x = 1.415 y = antilog (0.4085)
y =2.562
.. p = 15,000 [1.~5 - 2.~6 ]
P =15,000 [0.706714 - 0.39320]
P =15,000 (0.316394) =4745.91
.. The present value is Rs. 4,745.91.
Example 7 : X buys a machine for which he agrees to make quarterly payments of

Rs. 1,800, the first is being made at the end of 31/ 2 years and the last at the £00 of 8 years.
Find the purchasing price of the machine, if the money is worth 9% per annum compounded
quarterly.
Solution: Since the payments are make at the end of ~ years. It i.s a deferred annuity.
Quarterly payment R =Rs. 1,800
1
Period of deferment = 3,years
m = 3 x 4 + 1 = 13
Term of the annuity is 4~ years
.. n =4 x 4 + 3 =19
Rate of inte.rest r = 9% = 0.09

. r 0.09
:. z =4" = "4 = 0.0225
Purchasing price of the machine is the present value of the deferred annuity of Rs. 1,800.
Present value of deferred annuity is given by
p =!f.Z [(1 + irm - (1 + ir<m +nl]

p =0~5 [(1.0225)-13 - (1.0225)-32]
P =80,000 [0.74881905 - 0.49065233]
P =80,000 (0.25816672) =Rs. 20,653.34
.. Price of the machine is Rs. 20,653.34.
Example 8 : A man borrows Rs. 80,000 at compound interest of 5% per annum and
agrees to repay the money in 15 equal yearly instalments. What should be the annual
instalment if the first payment is paid at the end of 5 years ?
Solution: Since the first payment is made at the end of 5 years, it is a deferred annuity.
Deferment interval =4 years
.. m=4
Let R be the annual instalment.
Amount borrowed P =Rs. 80,000
No. of instalments n = 15
Rate of interest r =i = 0.05
P =R [am Hili-a;;;!i]
80,000 =R [a19l 0.05 - a41 0.05]
80,000 =R [12.08532086 - 3.54595050]
80,000 =R (8.53937036)
80,000
R = 8.53937036 = 9,368.37
. . The annual instalment is Rs. 9,368.37.
Example 9 : An annuity consists of 6 annual payment of Rs 2,400 each, the first being
made at the end of 5 years. If money is worth 6% per annum compounded continuously, what
is the present value of this annuity ?
Solution: Since first payment is made at the end of 5 years, it is a deferred annuity.
Deferment interval m =4
No ..ofpayments n =6
Periodic payment R = Rs. 2,400
Rate of intere.st r =6% =0.06

Present value of deferred annuity in case of continuous compounding is given by
m+n
P = f Re- dt
m
rt
i.e. P = -R [e-mr _ e-(m + n)r]

r
P =2,400
0.06 [e-()·24 - e~·60]
P =40,000 [0.78663 - 0.54881]
P =40,000 (0.23782) = 9,512.80
. . The present value is Rs. 9,512.80
Example 10. An annuity payable for 15 years certain, the first payment falling due at the
end of 1st year. The annuity is payable at the rate of Rs. 200 per annum during the first 10
years and the rate of Rs. 300 per annum during the remaining 5 years. Calculate the present
value of the annuity on the basis of interest at 7% per annum.
Solution : Periodic payment are shown in the following figure:
Periods (in years)

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
I I I I I I I I I I I I I I I I
0 200 200 200 200 200 200 200 200 200 200 300 300 300 300 300
Payments (in Rupees)
Ordinary annuity of Rs. 200 Deferred annuity of Rs. 300
Consider the first 10 payments ofRs. 200:

It is an ordinary annuity ofRs. 200 for 16 years.
Period payment R = Rs. 200
No. of periods n = 10
Rate of interest i = r == 7% = 0.07
P =Ra~i
P = 200 aWl 0.07
P =200 (7.02358154) =Rs. 1,404.72 ... (1)
Consider the last 5 payments of Rs. 300 :

It is a deferred annuity ofRs. 300, the first payment being due at the end of 11 years.
Determent interval m =10
Payment periods = n = 5
P =R [am+iil i-a -;;] i]
P = 300 [a15l 0.07 - alol 0.07]
P =300 (9.10791401-7.02358154)
P = 300 (2.08433247) =Rs. 625.30 ... (2)
.. Present value of the desired 15 payJp.ents is given by
\
(1) + (2) = Rs. 1,404.72 + Rs. 625.30
=Rs. 2,030.02
.. The required present value is approximately Rs. 2,030.
Alternative method:
The given annuity can be alternatively expressed in the following manner:
Periods (in years)
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
I I I I I I I I I I I I 1 I .1 I
0 200 200 200 200 200 200 200 200 200 200 200 200 200 200 200
+100 +100 +100 +100 +100
I"
Ordinary annuity Rs. 200 I.. ~I
Deferred annuity of Rs. 100
Present value of the given annuity can be expressed as the sum of the present value of
an ordinary annuity of Rs. 200 for 15 years and the present value of a deferred annuity of
Rs. 100 for 5 years, deferred 10 years.
Consider the ordinary annuity of Rs. 200 for 15 years:

No. of periods n = 15
Rate of interest r = i = 0.07
.. The present value of this annuity is given by
P =200 a15l 0.07
P =200 (9.10791401)
P =Rs. 1,821.58 ... (3)
Consider the deferred annuity ofRs. JOO:

Deferment interval m =10
No. of payment n = 5
Present value of this annuity is given by

P =100 [al5l 0.07 - aiOl 0.07]
P = 100 [9.10791401-7.02358154]
P = 100 [2.08433247]
P =Rs. 208.43 ... (4)
Present value of the desired 15 payment is given by
(3) + (4) = Rs. 1,821.58 + Rs. 208.43
= Rs. 2,030.01
:. The required present value is Rs. 2,030.01
Example 11 : A is entitled to the following benefits:

(a) Five annual payment at the rate of Rs. 200 per annum, the first being due at the end
of one year from now.
(b) Thereafter 6 annual payments at the rate of Rs. 300 per annum, the first. of these
being due at the end of 11 years from now.
(c) An additional lump sum of Rs. 2,000 at the end of 1 0 years.
Find the present value of his benefits at the rate of interest of 6% per annum.
Compounded annually.
Solution: The required present value is the sum of present values of the three different
benefits.
(a) In case of 5 annual payments of Rs. 200 :
Periods (in years)

0 1 2 3 4 5
I I I I I I
0 200 200 . 200 200 200
Since the payments are made at the end of every year for 5 years, it is an ordinary
annuity.
No. of payments n =5
Rate of interest i = r = 6% = 0.06
P=Ra-;;ji
P =200 a51 0.06
P = 200 (4.21236379)
P = Rs. 842.47 ... (1)
(b) In case of 6 annual payments of Rs. 300 :

Periods (in years)
0 1 2 10 11 12 13 14 15 16
I I I I I I I I I I
300 300 300 300 300 300
Since the first payment is due at the end of 11 years, it is a deferred annuity.
Deferment interval m = 10
Payment periods n = 6
P =R [aiii"'+1i! i-a ml i]
.. P = 300 [alsl 0.06 - alOl 0.06]
P =300 [10.10589527 - 7.36008705]
P =300 (2.74580822)
P = Rs. 823.74 ... (2)
(c) In case of lump sum of Rs. 2,000 at the end of 10 years.
Lump sum A =Rs. 2,000
No. of conversion periods n =10
Present value of a lump sum is given by
P =A (1 + i)-n
P =2,000 (1.06)-10
P =2,000 (0.05583948)
P =Rs. 1,116.79 ... (3)
The present value ofthe benefits is given by

(1) + (2) + (3) = Rs. 842.47 + Rs. 823.74 + Rs. 1,116.79
=Rs. 2,783.
:. The required present value is Rs. 2,783.
Example 13 : Establish the relation between the present value of an ordinary annuity of
Re. 1 for n periods at the rate of i per period and the preset value of a deferred annuity of
Re. 1 for n periods, deferred m periods at the same rate per period.
Solution: The present value of an ordinary annuity of Re. 1 for n period at the rate of i
per period is given by
aii)i = 1-(1 + irn ... (1)
The present value of a deferred annuity of Re. 1 for n periods, deferred m periods at the
rate of i per period is given by
(m) (1 + irm - (1 + i)-(m + n)
a-;;Ji = ... (2)
(m) (1 + i)-m - (1 + i)-m (1 + irn-
=> a-;;J, =
=> (m) _ (1
a,. ... [1 - (1 . + irn-]
- + L;'\-In
nil L
L Find the amount of an annuity consisting of 6 annual payments of Rs. 1,200 each,
the first being made at the end of 5 years, if the money is worth 6% effective.
[Ans. Rs. 8,730.38]
2. Find the amount of an annuity consisting of 20 semi-annual payment of Rs. 500
each, the first being made at the end of 4 ~ years, if the money is worth 5% per
annum compounded semi-anually. [Ans. Rs. 12,772.28]
3. Find the amount of a sequence of annual payments of Rs. 8,000 each, the first being
made at the end of 5 years and the last at the end of 10 years, if the money is 5%
effective. [Ans. Rs. 54,415.30]
4. An annuity consists of 12 semi-annual payments of Rs. 2,000 each, the first being
payable at the end of 2 years. Find the amount of this annuity, if money is worth 6%
compounded semi-anually. [Ans. Rs. 28,384.06]
5. Find the amount of a sequence of quarterly payments of Rs. 3,000 each, the first
being made at the end of 4 years and the last at the end of 7 years, if the interest is
calculated at 10% per annum compounded quarterly. [Ans. Rs. 45,421.32)
6. A sequence of payments of Rs. 200 are made on monthly basis, the first being made
at the end of 3 years and the last at the end of 5 years. Find the amount of this
annuity, if interest is calculated at 12% per annum compounded monthly.
[Ans. 5,648.64]
7. X deposited Rs. 500 at the end of every three months in a savings account which
credits interest at the rate of 7% per annum compounded quarterly. The first deposit
was made when X's son was 5 years old and the last deposit was made when his son
was 20 years old. The money remained in the account and was presented to the son
on his 25 th birthday. How much did he received? [Ans. Rs. 76,049.30]
8. Mr. A wishes to provide for his son's education by investing a certain sum of money
three months after his son's 12th birthday, and an equal sum quarterly thereafter. If
this investment yields interest at the rate of 6% compounded quarterly, find the
quarterly investment, if Rs. 40,000 is to be available for the son on his 17th birthday.
[Ans. Rs. 1,729.83]
9. Find the present value of a sequence of annual payments of Rs. 4,000 each, the first
being made at the end of 5 years and the last at the end of 10 years, if money is
worth 5% effective. Ans. Rs. 16,708.65]
10. Find the present value of a sequence of annual payments ofRs. 25,'000 each, the first
being made at the end of 7 years and the last at the end of 16 years, if money is
worth 7% effective. Also find the amount ofthis annuity.
[Ans. Rs. 1,24,917.08, Rs. 3,45,411.20]
lL Mr. X buys a piece of land for which he agrees to make 10 annual payments of
Rs. 1,50,000 each, first being made at the end of 3 years. find the equivalent cash
price of this property, if money is worth 5% effective. [Ans. Rs. 10,50,576.24]
12. A man borrows a certain sum of money at 10% per annum compound interest and
agrees to pay both the principal and interest in 20 equal semi-annual in&talments of
Rs. 8,000 each. If the first instalments is to be paid at the end of 5 years from the
date of borrowing and the other instalments are paid regularly at the end of
subsequent 6 months, find the sum borrowed by him. [Ans. Rs. 99,861.48]
13. Find the present value of an annuity consisting of 52 monthly payments of Rs. 250
each, the first being made at the end of 2 years if money is worth 5% compounded
monthly. [Ans. Rs. 10,602.33]
14. What is the present values of an annuity of Rs. 400 payable at the end of every
month, if the first payment is made at the end of 3~ years and last at the end of 7
years and money is worth 12% per annum compounded monthly. [Ans. Rs. 9,259.51]
15. A company buys a machine for Rs. 2,30,000 and agrees to make 10 annual payments,
the fist being made at the end of 3 years. find the annual payment, if the -money is
r
worth 6~ effective. [Ans. Rs. 36,288.48]
16. A man borrowed Rs. 50,000 at compound interest of 7% per annum and has to repay
the money in 20 equal yearly instalments. What should be the instalment of
repayment has to start 3 years hence? [Ans. Rs. 5,403.52]
17. A house is sold for Rs. 75,000 down and 15 semi-annual payments ofRs. 6,000 each,
the first due 4 years hence. If the money is worth 8% compounded semi-anually,
what is the cash price of the house? [Ans. Rs. 1,25,694.36]
18. A borrows Rs. 1,75,000 from a bank which computes interest at a rate of 6% per
annum compounded quarterly. He agrees to repay the loan in 30 equal quarterly
instalments, the first being made at the end of 31/ 2 years and the other instalments
at the end of subsequent quarter. Find the amount of monthly instalment.
[Ans. Rs. 8,842.98]
19. A person purchased a house on 1st Jan. 1983 for which he agreed pay Rs. 1,50,000
down and the remaining amount in monthly instalments of Rs. 2,750. The first
payment was made on 30th Sept. 1985 and last on 3pt Dec. 1990. If the interest was
calculated at 9% per annum compounded monthly, what was the cash price of the
house? [Ans.2,59,732.67]
20. If Rs. 8,000 is to be paid at the end of every year, the frrst payment is to be made' 5
years hence and the interest rate is 5% effective, how many payments will be
required to discharge a debt ofRs. 54,415? [Ans.l0]
21. A had decided to invest Rs. 500 at the end of each year. He did so far 7 years. Then
there was a gap of 4 years. He could again invest Rs. 500 per annum for the next 4
years beginning from the end of the 12th year. Find the amount to his credit at the
end of the 15 lh year assuming interest at effective rate of 9% per annum.
[Ans. Rs. 11,452.75]
22. A man took a loan which was to be repaid by monthly instalment of Rs. 2,000 for 5
years. He paid the instalments up to the end of two years. Then he left for USA on a
foreign assignment and returned back after one year. He did not pay any instalment
in the third year and wants to start the payment from the beginning of the fourth
year. Find how much he should pay each month so that his loan will be cleared by
the end of five years as agreed upon, the rate of interest being 12% compounded
monthly. [ADs. Rs. 3,050.42]
23. A person has a right to receive Rs. 350 per annum for 8 years and Rs. 250 per annum
for the next 6 years. The first annual sum is due at the end of 6 years from now.
What is the present value of his rights, assuming interest rate of 5% effective?
[Ans. Rs. 2,445.36]
24. Calculate the present value of a deferred anriuity payable for 10 years certain, the
first payment falling due at the end of 6 years from the present time. The annuity is
payable at the rate of Rs. 100 per annum for the first 5 years and 200 per annum
thereafter. Interest is calculated at a rate of 5% effective. [ADs. Rs. 870.82]
25. An annuity is payable for 15 years certain, the first payment falling due at the end of
first year. The annuity is payable at the rate of Rs. 500 per annum during the first
10 years and Rs. 300 per annum during the remaining 5 years. Calculate, the present
value of the annuity on the basis of interest at 4% effective. [Ans. Rs. 4,957.70]
26. A is entitled to Rs. 200 per annum for 4 years, the first being payable after one year
from now. For the next 5 years he is entitled to Rs. 150 per annum. Fi~d the present
value of these payments at 7% per annum. Find also the accumulated value of the
annuity at the end of 9 years. [Ans. Rs. 1,146.64, Rs. 2,108.06]
27. Establish the relation: a])i = a;;+;;J i - a-;;;J i'
28. An annuity consists of 15 equal annual payments of Rs. 7,500, the first being made
at the end of 6 years. Find the present value of this annuity, if interest is
compounded continuously at 6% per annum. [Ans. Rs. 54,953.75]
29. Mr. X borrowed Rs. 10,000 from a bank and agreed to repay the debt in 10 equal
annual instalment, th~ first being made after 5 year from the date of borrowing. If
the interest is calculated at a rate of7% per annum compounded continuously, what
would have been the size of the annual instalment? [Ans. Rs. 1,839.83]
30. Find the present value of a sequence of annual payments of 2,500 each, the first
being made at the end of 7 years and the last at the end of 16 years, if the money is
worth 5% per annum compounded continuously. Also find the amount of this
annuity. [Ans. Rs. 14,574.50, Rs. 32,435]
Perpetuity and General
Annuity
INTRODUCTION
In the previous chapters, the three major kinds of annuities viz. immediate 'annuity,
annuity due and deferred annuity have been elaborately discussed. In all the above
discussed annuities, there is a fixed term and the interest conversion period is as same as
the payments period. But some annuities have indefinite payments or payment periods. Also
in some annuities, interest conversion period may not be equal to the payment period. In this
chapter, we are going to study the annuities in which the payments are made for ever
(perpetuity) and the annuities in which the payment period is not equal to the interest
conversion periog.
PERPETUITY
An annuity of which the payments are to continue for ever is called a perpetuity. It is
annuity whose payments are made on a fixed date and continue forever. Perpetuities are of
three kinds :
(a) Immediate perpetuity
(b) Perpetuity Due
(e) Deferred perpetuity
If the first payment is made at the end of the first payment period, and the subsequent
payment at equal payment intervals forever, the annuity is called an immediately perpetuity.
If the first payment is made at the beginning of the first period and the subsequent
payments at equal intervals for ever, the annuity is called perpetuity due.
In deferred perpetuity, the first payment is made after the deferment of a certain number
of periods and the subsequent payments are made at equal intervals for, ever.
Remark: The 'amount' of a perpetuity is undefined, since it increases bey')nd all bounds
as time goes on. However, it has a definite present value.
PRESENT VALUE OF IMMEDIATE PERPETUITY

We consider a perpetuity of Rs. R payable at the end of every period, the first being
payable at the end of first period.
Let money be worth i per period.
The present value of this annuity is defined as the sum of money which, invested now at
the rate i per pel'iod, will yield Rs. R at the end of each period forever.
Present value of 1st payment =R (1 + i)-I
Present value of 2nd payment =R 1 + i)-2
Present value of 3ni payment =R (1 + i)-3 and so on.
.. The present value:.ofthis annuity.
.=;; P.., = R (1 + i)-I + R (1 + i)-2 + ...... 00
P.., =R [(1 + i)-I + (1 + i)-2 + ...... 00
poo =R [1 ~\ :r-il)-l ]
a
':a + ar + ... ooc: -1-' r21
-r
P.., =R [(1 + ~) _1]

R
P..,=-:-· ,
Thus, present value of an immediate perpetuity of Rs. R payable at the end of every
period for ever at· a rate of i per period is given by
I P.,=~ I
Remark 1 : Present value of an immediate perpetuity can also be obtained as follows:
P.., =Lim Pn
1-0
P..,=R [- i-]
R
P",=-:-
£
Remark 2 : Present value of an immediate perpetuity can also be expressed as follows:

1
P =R a;, i where a;] i ='7"
QO
£
PERPETUITY AND GENERAL ANNUITY 217
a;J i is the present value of an immediate perpetuity of Re. 1 payable at the end of every
period for ever at a rate of i per period.
Remark 3 : We know that present value of an ordinary annuity of Rs. R payable for't'
years at r per year compounded continuously is given by
R
P =-(l-rt)
r
The present value of immediate perpetuity in case of continuous compounding can be
obtained by taking t - 00
.. P", = Lim ~(1-rt)
n_",r
P", =-;:R [l-e-] =R-;: [1- 0]

R
P",=-
r
Thus the present value of an immediate perpetuity of Rs. R at r per annum compounded
I p",=~ I
PRESENT VALUE OF PERPETUITY DUE
We consider a perpetuity of Rs. R payable at the beginning of every period, the first
payment due now.
Let { be the rate of interest per period
Present value of 1st payment =R
Present value of 2nd payment =R (1 + i)-I
Present value of 3ni payment =R(l + i)-2 and so on.
To find the present value of this perpetuity due, we find the sum of present values of all
payments payable' for ever.
. . The present value of this perpetuity is given by
P", =R + R (1 + i)-I + R (1 + i)-2 + ...... 00
p", =R + R [(1 + i)-I + (1 + i)-2 + ......00)
R
P",=R+-:- ,
Thus, the present value of a perpetuity due of Rs. R payable at the beginning of every
period for ever at a rate of i per period is given by
'. P",=R+-Rr
I 1 .
I I
Alternatively, this result can be obtained from the present value of annuity due.
l-(1+i)-<n-l) ]
Pn=R [ . +1
L
P co = Lim [R 1- (1 +. i)-.{n-l) + 1]
n---oo "
Pco=R[~+l ]=R[y+1]
I Pco=~+R I
Remark: Present value of a perpetuity due can also be expressed as follows :
.. .. 1 1+i
P co =R a"OOJ i where a"OOJ i =-;- + 1 =-.-
a;] i is the present value of perpetuity due of Re payable at the end of every period for
ever at a rate of i per period.
PRESENT VALUE OF DEFERRED PERPETUITY

We consider a perpetuity of Rs. R payable at the end of every period deferred for m
period.
The first payment if payable as the end of (m + l)th period.
Let i be the rate of interest per period
Present value of 1st payment =R (1 + i)-<m + 1)
Present value of 2 nd payment =R (1 + i)-<m + 2)
Present value of 3rd payment =R (1 + i)-<m + 3) and so on,
.. Present value of deferred perpetuity is given by
P co =R (1 + i)-<m + 1) + R (1 + i)-<m + 2) + R (1 + i)-<m + 3) + ...... 00
P co =R (1 + i)-m [(1 + i)-I + (1 + 0-2 + (1 + i)-3 + ...... 00]
P co =R (1 + [1 ~
i}-ln (~ ~il)-1 ] =R (1 + i}-ln (y)
P'" =!;t (1 + i}-ln
Alternative Method:
. [(1+ i)-m-(1 +i)-<m+n)]
Poe = nLIm R .
Z.
i): -
_00
Pa; =R ((1 + 0)
=> P co =!$(1 + i)-m

L
Thus, the present value of a deferred perpetuity of Rs. R payable at the end of every
period, deferred for m periods, when money is worth i per period is given by
I P",=~(1 + i)-m I
Remark 1 : Present value of a deferred perpetuity is also expressed as follows:
(m) (m) (1 + i)-m
P = R a OOJ i where a OOJ i =-
00 .
£
(m)
a OOJ i can also be denoted by m/a OOJ i.
m/a;j i is the present value of a deferred perpetuity of Re. 1 payable at the end of every
period, deferred for m period at the rate of i per period.
Remark 2 : The present value of deferred perpetuity in case of continuous compounding

can be obtained from present value of deferred annuity by taking n - 00.
Present value of a deferred annuity in case of continuous compounding is given by
P =R- [e-mr _ e-(m + n)r]
r
. R
P", = Lim - [e-mr _ e-{m+ n,) r]
n-+oor
R
P", =- [e-mr _ 0] =- e-mr
R
r r
Thus, the present value of a deferred perpetuity of Rs. R, deferred for m years at a rate
of r per annum compounded continuously is given by
I P",=;e-mr I
Example 1 : Find the present value of a sequence of payments of Rs. 2,400 made at the
end of every 6 months continuing forever, if money is worth 6% converted half-yearly.
Solution : Since the payments are made at the end of every 6 months and continuing for
ever, it is an immediate perpetuity.
. r 0.06
:. £ =~ 2= 0.03
Present value of an immediate perpetuity is given by
R
P="7
L
2,400
Here P = 0.03 =80,000
:. Required present value is Rs. 80,000
Example 2: Under a settlement of property Mr. Shah is entitled to receive Rs. 1,800 Per
annum adinfinitum, the first being due at the end of first year. Find the present value of Mr.
Shah's right at (a) 6% compounded annually and (b) 6% compounded continuously.
Solution : Since adinfinitum is receivable at the end of every year for ever, it is an
immediate perpetuity
(a) !: ~l"se of interest compounded annually,
i =r =0.06
Present value of immediate perpetuity is given by
R
P=y
1,800
·. P = 0.06 =30,000
· . The present value of the right is Rs. 30,000
(b) In case of interest c~mpounde continuously,
Present value of immediate perpetuity is given by
R
P=y
1,800 ...
· . P .;: 0.06 =.. 0,000
· i..
The present value of the right is Rs. 30,000
Example 3 : A sum of Rs. 30,000 invested at r% compounded quarterly will provide

payments of Rs. 600 each at the end of every 3 months. Find r.
Solution : Since the payments are provided at the end of every quarter for ever, it is an
immediate perpetuity.
Present value P =Rs. 30,000
Let r be the rate of interest.

P_!!:
£
30,000 =6~0 £
. 600
£ ,== 30000
, =002
.
i =:i => r =4 x i =4 x 0.02 =0.08 =8%

Rate of interest r =8%
Example 4: What sum of money invested now would establish a scholarship ofRs. 5,000
to be awarded at the beginning of each year to a deserving student, if money is worth 5%
compounded annually ?
Solution : Since the payments are made at the beginning of every year for ever, it is a
perpetuity due.
Periodic payment R= Rs. 5,000
:. i =r =5% =0.05
Money to be invested now is the present value of this perpetuity due.
Present value of a perpetuity due is given by
P=R+!!- ,
P - 5 000 5,000
-, + 0.05
P =5,000 + 1,00,000 =1,05,000
· . Amount to be invested is Rs. 1,05,000.
Example 5 : A person creates an endowment fund of Rs. 80,000 to provide a prize at the
beginning of every year. This fund earns interest at 7% per annum compounded annually.
What is the price amount ?
Solution: Since the prize is to be distributed at the beginning of every year, it is a

perpetuity due.
Endowment fund created is the present value of this annuity
·. P =Rs. 80,000
Let R be the prize amount.
·. i =r =7% =0.07
Present value of a perpetuity due is given by
P =R + ~ , i.e., P = R [ 1 + f)
80,~ =R [1 + 0~7)
80,000 =R (15.2857)
80,000
R = 15.2857 = 5,233.65
. . The price amount is Rs. 5,233.65.
Example 6 : Find the present value of a sequence of payments of Rs. 4,000 payable at the
end of each year for ever, the first payment being made at the end of 6 years, if the rate of
interest is 5% per annum compounded continuously.
Solution: Since the payments are payable at the end of every year forever, deferred for
5 years, it is a deferred perpetuity.
Period of deferment m = 5
If interest is compounded continuously, the present value of deferred annuity is given by
R
P =-e-mr
r
_ 4,000 -0.25
P - 0.05 e mr = 5 x 0.05 =0.25
P = 80,000 x 0.77880 = 62,304
.. The required present value is Rs. 62,304.
Example 7 : The present value of a perpetual income of Rs. x at the end of every month,
the first being received at the end of 3 years is Rs. 3,00,000. Find the value of x, if money is
worth 15% per annum compounded monthly.
Solution : Since this is the perpetuity and the first being received at the end of 3 years,
it is a deferred perpetuity.
Present value P =Rs. 3,00,000
Periodic payment R =Rs. x
. r 0.15 0
:. £=12=12"= .0125
Since the first payment is receivable at the end of 3 years, the period of deferment m =
35
Present value of a deferred perpetuity is given by
P =!!-(1 + i)-m
L
30,000 = 0.~25 (1.0125)-35

~ 3,750 = R (0.64740177)
~ R = 5,792.38
:. The value of x is Rs. 5,792.38.
Example 8 : Find the present value of a deferred perpetuity of Rs. 1,800 per annum, the
first payment being paid at the end of 6 years from now at 9% effective.
Solution: Present value of a deferred perpetuity is given by

P =!;(1 + irm .
l

i =r = 9% = 0.09
Period of deferment m =5
1,800
.. P = 0.09 x (1.09)-5
P = 20,000 x 0.64993138 = 12,998.63
. . The required present value is Rs. 12,998.63.
L Find the present value of a sequence of payments of Rs. 800 made at the end of each
3 months continuing forever, if money is worth 9% compounded quarterly.
[Ans. Rs. 35,555.56]
2. Find the present value of a sequence of payments of Rs. 1,500 made at the end of
every month forever, if money is worth 12% per annum compounded monthly.
[Ans. Rs. 1,50,000]
3. A businessman is expected to earn Rs. 20,000 per annum in perpetuity. If it is
assumed that the rate of interest is 8% per annum compounded continuously, what
is the total present value? [Ans. Rs. 2,50,000]
4. What is the present value of a perpetual cash flow of Rs. 4,500, discounted at 4%
effective? [Ans. Rs. 1,12,500]
5. If the present value of a sequence of payments of Rs. 1,800 made at the end of each 3
months and continuing forever is Rs. 90,000, at what rate interest is calculated?
[Ans.8%]
6. How much money is needed to ensure a series of lectures costing Rs. 2,000 at the
beginning of each year indefinitely, if money is worth 5% compounded annually?
[Ans. Rs. 42,000]
7. At what rate converted semi-annually will the present value of a perpetuity of
Rs. 2,200 payable at the beginning of every 6 months forever be Rs. 42,200 ?
[Ans.ll%]
8. What sum of money ·invested now would establish a scholarship of Rs. 3,000 to be
awarded at the beginning of each year to a deserving student, if money is worth 6%
compounded annually? [Ans. Rs. 63,000]
9. A person creates an endowment fund of Rs. 62,500 to provide prize at the end of
every year. If the fund earns interest at 8% per annum compounded continuously,
what is the price amount? [Ans. Rs. 5,000]
10. A sum of Rs. 15,600 invested now would establish a scholarship of Rs. 600 to be
awarded at the beginning of each year forever to a deserving candidate, if money is
worth 100 r% compounded annually. Find r. [Ans. 4%]
1L Find out the capital value of a uniform income stream of Rs. R per year forever
. reckoning interest continuously at 100 r% per year. [Ans. i]

12. If the cash equivalent of a perpetuity of Rs. x payable at the end of every six months
is Rs. 20,000, if money is 5% per annum compounded half-yearly. Findx.
[Ans. Rs. 500]
13. Find the present value of a sequence of annual payments of Rs. 1,500 each, the first
being made at the end of 7 years, if the rate of interest is 7% per annum compounded
continuously. [Ans. Rs. 14,079.64]
14. Under a settlement of property Mr. Lalit is entitled to receive Rs. 1,800 per annum
adinfinitum, the first payment being due at the end of 6 years. Find the present
value of Mr. Lalit's right at 6% effective. [Ans. Rs. 22,417.80]
15. A person deposits a sum of Rs. 90,000 now to receive a perpetual income at the end of
every quarter starting from the end of 5 years. If money is worth 8% per annum
compounded quarterly, what is the quarterly income receivable? [Ans. Rs. 2,622.26]
each year, the first being made at thtl end of 8 years, if the rate of interest is 4% per
annum compounded continuously. [Ans. Rs. 1,70,051.30]
each 6 months and continuing forever if money is worth 8% converted semi-annually.
[Ans. Rs. 40,000]
GENERAL ANNUITY
We have so far studied annuities which involve simple cases in which the payment
interval coincides with the interest conversion period. A general annuity is an annuity in
which the payment interval does not necessarily coincide with the interest conversion period.
General annuity is also known as complex annuity. When we study a general annuity, we
come across two different situations. They are as follows:
(a) The interest conversion is more frequent than payment of annuity, and
(b) The payment of annuity is more frequent than the conversion of interest.
We don't require any new formulas to find the amount or present value of different
annuities. The easiest way to solve general annuity problem is to reduce into the simple
form.
Now, we discuss the method of reducing the general annuity into a simple annuity.
Here, we convert the interest rate per conversion period into the equivalent rate of
interest per payment period.
Let ip be the rate of interest per payment period,
i, the rate of interest per conversion period, and
m, the number of conversion periods within a payment interval.
The rate of interest per payment period ip is given by

I ip = (1 + iyn - 1 I
This implies that (ip + 1) = (1 + iyn
Number of conversion periods in a payment period can be obtained as follows:
Number of months in payment period
m = Number of months in interest period
Remark: The amount and present value of any kind of annuity by replacing "i' in the
corresponding formula by "ip'. For example, amount of an ordinary annuity is given by R siil ip '
Example 9 : Find the amount of an immediate annuity of Rs. 400 per annum payable
half-yearly for 15 years, on the basis of the nominal rate of 8% per annum convertible
quarterly.
Solution : Since the payment period does not coincide with the interest conversion
period, it is a general annuity.
Interest is converted quarterly.
. r 0.08
:. £=4=4=0.02
Payments are made half-yearly for 15 years
Number of months in payment period
m = Number of months in interest period
6
.. m =3"=2
Rate of interest per payment period is given by
ip = (1 + iyn - 1
ip = (1.02)2 - 1 :::;. (1 + ip) = (1.02)2
Amount of an immediate annuity is given by'
A =R [(1 + ir;n - 1 )
A - 400 [«1.02)2)30 - 1)
- (1.02)2-1
A = 400 [(1.82)60 - 1 ]
(1.02)2 - 1
A = 400 [3.2810&079-1]
1.0404-1
A =400 (56.461158) =22,584.46

. . The required amount is Rs. 22,584.46.
Example 10 : Find the present value of an annuity of Rs. 5,000 payable at the end of each
2 years for 10 years, if money is worth 4% effective.
Solution : Since the payment period does not coincide with the interest conversion
period, it is a general annuity. Since the payments are made at the end of the payment
period, it is an immediate annuity.
Since r =4% effective, i =r =0.04
.Term of this annuity t =10 years
Payments are made once per 2 years
10
:. n ="2= 5
_ Number of months in payment period
m - Number of months in interest period
24
.. m = 12 = 2
ip =(1 + iF -'- 1
. . ip =(1.04)2 - 1 ~ (1 + ip) =(1.04)2
P =R [ 1 - (Ii: ipJ-n ]
_ 5 000 [1- «1.04)2~]

P- , (1.04)2 - 1
1 - (1.04)-10 ]
P =5,000 [ (1.04)2 _ 1
P =5 000 [1- 0.67556417]

, 1.0816-1
P = 5,000 (3.975929) = 19,879.65
The present value is Rs. 19,879.65
Example 11 : A person buys a television paying Rs. 4,000 down and promising to pay Rs.
1,000 at the end of every quarter for 3 years. If money is worth 8% compounded annually find
the purchasing price of the television.
Solution: Purchasing price of the television = the down payment + the annuity of
Rs. 1,000 for 3 years.
Since the payments are made at the end of every quarter, it is an ordinary annuity and
since the payment period does not coincide with interest period, it is general annuity.
Down payment =Rs. 4,000
Payment are made quarterly for 3 years
:. No. of payment periods n =3 x 4 =12
Rate of interest r =8% effective
:. i =r = 8% =0.08
_ No. of months in payment period
m - No. of months in interest period
3 1
m----
- 12 - 4
ip =(1 + iyn - 1
.. ip =(1.08)114 - 1 ~ ip - 1 =(1.08)114
P =R [1 -C\: ip)-tI ]
P = 1 000 [1- (1.08)114)-12]

, (1.08)114 - 1
1 - (1.08)-3 ]
P = 1,000 [ (1.08)114 _ 1
Let x =(1.08)1/4
1 1
log x = 4'log 1.08 = 4' )( 0.0334 = 0.0084
x = antilog (0.0084) = 1.02
P = 1000 [1- 0.79383224]

, 1.02-1
P = 1,000 (0.2:'~76)= 10,308.39
Present value of this annuity is Rs. 10,308.39

Purchasing price of the television =Rs. 4,000 + Rs. 10,308.39 =Rs. 14,308.39
:. Price of the television is Rs. 14,308.39.
Example 12 : Find the present value of an annuity due of Rs. 600 payable twice a year
for 15 years on the basis of nominal rate 6% per annum convertible 6 times a year.
Solution: Here, Payment period is 6 months

Interest conversion period is 2 months
Since the payment period does not coincide with interest period, it is a general annuity
Periodic payment R =Rs. 600 .
Term of this annuity t = 15 years
Payments are made half-yearly.
:. n =2 x 15 =30
Interest is compounded 6 times a year.
. r 0.06
.. l =6" = -6- =0.01
No. of months in payment period

m = No. of months in interest period
6
.. m = 2"= 3.
ip =(1 + i)"l - 1
ip =(1.01)3 - 1 ~ 1 + ip =(1.01)3
1 - (1 + ip)-<n -1) ]
P=R [ . +1
lp
_ [1 _ (1.01)3>- (30 -1) ]

P - 600 (1.01)3 _ 1 +1
1 - (1.01)-87 ]
P =600 [ (1.01)3 _ 1 + 1
P =: 600 [1- 0.42076585 1]

1.030301-1 +
P = 600 [19.11600772 + 1] = 12,069.60
Required present value is Rs. 12,069.60
Example 13 : What equal payment made at the end of each month for 5 years will pay for
a house priced at Rs. 4,00,000, if money is worth 10% per annum compounded quarterly?
Solution : Since the payment are made at the end of every 'month, it is an ordinary
annuity.
Here,.payment period is 1 month
Interest period is 3 months
Since the payment period does not coincide with interest conversion period, it is a
general annuity.
1
m=3
Let R be the periodic payment

Price of the house is the present value of the annuity
.. Present value of P =Rs. 4,00,000
Term of this annuity t = 5 years
n =5 x 12 = 60
. r 0.10
:. £ =4 = 4 =0.025
ip =(1 + i)"' - 1
.. ip =(1.025)113 - 1 => (1 + ip) =(1.025)1/3
P =R [1 -(\: ip~ ]
1 - «1.025)1/3)-60]
4,00,000 =~ [ (1.025)113 _ 1
1 - (1.025)-20]
4,00,000 =R [ (1.025)113 _ 1
Let x = (1.025)1/3
log x = a1 log (1.025)

log x =3"1 x 0.0107 =0.0036
x =antilog (0.0036) =1.008
:. 4,00,000 = R [1 -~01:794 ]
4,00,000 =R (48.7161325) => R =8,210.83

:. Required monthly payment is Rs. 8,210.83.
Example 14: At the beginning of each month, Rs. 500 is deposited into a savings account
that pays 12% per annum compounded quarterly. Find the amount i the account at the end of
3 years.
Solution: Since payments are made at the beginning of each month. it. i!> :.tt.. hrmuity
Payment penod = 1 month

Interest conversion period = 3 months
It is a case of generai annuity.
PeriodIC' payment R = Rs 500
Rate ofInterest r =12% =0.12

. r 0.12
:. l = 12 = 12= 0.01
Term of the annuity t =3 years

No. of payment periods n =3)( 12 =36
_ No of months in payment period
m - No. of months in interest period
1
m=3"
ip =(1 + iyn - 1
.. ip =(1.01)113 - 1 '=> (1 + ip) =(1.01)113
A =R [(1 + ip~ +1- 1 1]
A - 500 [«1.01)113)36 + 1 - 1 1]
- (1.01)113 - 1
37
<1.0i)"3 -1 ]
=> A = .500 [ (1.01)113 _ 1 1
Let x =(1.01)3713 Let y = (1.01)113

37
log x = 3" log 1.01 logy =3"1 log 1.01
37 .
log-.x =3" )( 0.0043 log y =3"1 )( 0.0043
logx = 0.053 log y =0.0014
x =antilog (0.053) y =antilog (0.0014)
x = 1.13 y =1.003
A - [ 1.13 - 1 1]
- 1.003-1
0.13 ]
A - 5 O0 [ 0.003 - 1
A - 500 (4~.3) =21,666.67

.. Required amount is Rs. 21,666.67
Example 15 : Mr. X buys a car for which he agrees to make 20 annual payments of
Rs. 20,000 each, the first being made at the end of 6 years. What is the equivaient cash price
of the car, if money is worth 8% per annum compounded semi-annually ?
Solution : Since the first annul payment is paid at the end of 6 years, it is a deferred
annuity.
Annual payment R =Rs. 20,000
Period of deferment n =5
Since the payment period is not equal to the interest period, it is a general annuity.
Payment period =1 year
Interest period =6 months
No. of conversion periods with in a payment period (say mp) is given by
_ No. of months in a payment period
mp - No. of months in a interval period
12
.. mp=S=2

. 0.08
.. '=2=0.04.
ip =(1 + i)mp - 1
.. ip = (1.04)2 - 1 :::;> (1 + ip) = (1.04)2
Cash price of the car is the present value of this deferred annuity.
p =~ [(1 + ip'r'" - (1 + ip~m+n)]
'p .
.. p = 20,000 [
«1.04)2)-6 - «1.04)2)-(5 + 20)
(1.04)2 - 1
1
P _ 20 000 [(1.04)-10 - (1.04)-60]
-, (1.04)2 - 1
P -_ 20000
.'
[0.70891881- 0.14071262]
1.0816 - 1
P = 20,000 (0.5;~:19) = 1,39,266.22
.. The price of the car is Rs. 1,39,266.22
Example 16 : What sum of money invested at 6% converted semi-annually will provide a

perpetual income of Rs. 1,200 at the end of each month?
Solution : Since the payment period does not coincide with the interest period, it is a
general annually and since the payments are made at the end of every month, it is an
immediate perpetuity.
Monthly payment R =Rs. 1,200

- ~ - 0.06 _ 0 03
'-2-2-'
1
m =6
ip = (1 + i)m - 1
ip = (1.03)116 - 1
p=R
ip
1,200
P = (1.03)116 - 1 Let x =(1.03)116
1,200 1,200 log x =6"1 x 0.0128 =0.0021
P = 1.005 - 1 = 0.005
P = ~,40 x =antilog 0.0021 =1.005
.. The amount to be invested is Rs. 2,40,000.
L Find the amount and present value of an annuity of Rs. 5,000' payable at the end of
every 6 months for 5 years, if money is worth 8% compounded quarterly.
[Ans. Rs. 60,142, Rs. 40,473.85]
2. Find the present value of-an immediate annuity ofRs. 600 payable half yearly for 20
years on the basis of effective rate of 6% per annum. [Ans. Rs. 13,967.36]
3. A man deposits Rs_ 1,000 at the end of every year in a bank paying 8% compounded
quarterly_ Find the amount at the end of6 years. [Ans. Rs. 7,381]
4. Find the present value of an immediate annuity of Rs. 1,200 payable in equal
monthly instalments for 10 years certain at nominal rate of interest 8% per annum
convertible half-yearly. [Ans.93,190.80]
5. Mr. X wants to accumulate Rs. 60,000 at the end of 5 years, by making equal
payments at the end of each quarter. What will be the size of these investments, if
money is worth 7% converted semi-annually? [Ans. Rs. 2,535.25]
6. A purchase a piece of land at Rs. 6,00,000 for which he agrees to make equal
payments at the beginning of each year for 15 years. If money is worth 6% per
annum compounded semi-annually, what is the size ofthese annual payments?
[Ans. Rs. 58,574.28]
7. Find the present value of an annuity due of Rs. 400 payable in equal half-yearly
instalments for 17 years certain at nominal rate of interest 8% per annum converted
quarterly. [Ans. Rs. 7,621.41]
8. An annuity consists of equal payments of Rs. 1,600 at the beginning of each quarter
for 6 years. if the interest rate is 15% per annum compounded monthly, what will b~
amount at the end of6 years? Also find the present value of this annuity.
[Ans. Rs. 63,241.30, Rs. 25,855.83]
9. To save for a child's education, a family decides to invest Rs. 10,000 at the end of
each year in a fund paying 8% per annum compounded quarterly. What is the
amount of this investment at the end of 20 years? [Ans. Rs. 4,70,136.80]
10. At the beginning of each period consisting of 4 months, Rs. 2,500 is deposited into a
savings bank account that pays 6% per annum compounded half-yearly. Find the
balance in the account at the end of 7 years. [Ans. Rs. 65,000]
1L How much money must be deposited at the beginning of each 6-month period, if the
objective is to accumulate Rs. 30,000 at end of 8 years. Assume that the interest is
earned at 6% per annum compounded quarterly. What is the amount of interest
earned from these deposits? [Ans. Rs. 1,442]
12. Find the present value of a sequence of quarterly payments of Rs. 250 each, the first
being made at the end 3 years the last at the end of 8 years, if money is worth 12%
per annum compounded monthly. . [Ans. Rs. 2,767.07]
13. Find the amount and present value of an annuity consisting of 16 semi-annual
payments ofRs. 1,300 each the first being payable at the end of 3 ~ years, if money
is worth 7% effective. [Ans. Rs. 27,134.45]
14. A house is sold for Rs. 1,80,000 down and 60 monthly payments of Rs. 4,000 each,
the first being payable at the end of 25 th month from the date of sales. Find the cash
price of the house, if money is worth 8% per annum compounded quarterly.
[Ans. Rs. 3,39,494.75]
15. A man borrows Rs. 25,000 from a commercial bank and agrees to repay the loan in
equal half-yearly instalments, the first being made at the end of 5if2 years and the
last at the end of 15 years. If the interest is calculated at a rate of 6% per annum
compounded quarterly, what is the size of each instalment? [Ans. Rs. 2,267.96]
16. A bond promises to pay Rs. 180 dividend at the end of each 6 months for 8 years. If
money can be invested at 5.5% compounded annually, what is the present value of
these dividends? [Ans. Rs. 2,311.38]
17. How much money is needed to endure a series of lectures costing of 4,800 at the
beginning of each year indefinitely, if money is worth 8% per annum compounded
half-yearly? [Ans. Rs. 63,623.53]
18. FiJid the present value of sequence of payments ofRs. 2,100 made at the end of every
month forever, if money is worth 10% per annum compounded half-yearly.
[Ans. Rs. 2,62,500]
19. A school sets up a fund ofRs. 1,00,000 now to provide a scholarship to one deserving
student at the beginning of each year forever. If money is worth 6% per annum
compounded half-yearly, what is the scholarship amount? [Ans. Rs. 5,740.41]
20. A person deposits Rs. 60,000 now for the purpose of getting a certain sum of money
at the end of every month indefinitely. If the interest is calculated at a rate of 8% per
annum compounded quarterly, what amount will be received at the end of every
month? [An&. Rs. 420]
21. Under an agreement Mr. X is entitled to receive Rs. 6,000 per annum forever, the
first being due at the end of 8 years. Find the present value of this agreement at 6%
per annum compounded half-yearly. [ADs. Rs. 65,134.76]
22. The present value of a perpetual income of Rs. R at the end of every 6 months, the
first being made at the end of 31/ 2 years is Rs. 40,000. Find the value of R, if money is
worth 6% effective. [ADs. Rs. 1,408.40]
23. Find the present value of a perpetuity of Rs. 320 payable at the beginning of each
month, if money is worth 9% compounded quarterly. [ADs. Rs. 40,320]
24. A house worth Rs. 2,40,000 is offered for sale for Rs. 50,000 cash and 36 equal
quarterly payments. Find the quarterly payments, if interest is calculated 7%
compounded semi-annually. [ADs. Rs. 7,140.66]
25. What equal payments at the beginning of each quarter will amount to Rs. 1,000 at
the end of 5 years, if money is worth 4% effective? [ADs. Rs. 45.87]
c:=-_~
Amortisation of Loan
INTRODUCTION
One of the most important application of annuities is the repayment of interest bearing-
debts. Purchasing a house, car or other items by making a series of periodic payments is an
example of a loan that is amortized. Even though there are different methods of repaying a
loan, the method of periodic payments that cover interest on outstanding principal and a
part of the principal is widely accepted by the world of business. Many of the loans issued by
banks and financial institutions are of this kind. In this chapter, we elaborately discuss how
a loan is amortised.
METHODS OF REPAYING LOAN

There are basically 3 methods of repaying a interest bearing debt. They are:
(a) single payment at the end of the term
(b) payment of only interest periodically
(c) Uniform periodic payment.
Let us understand these methods by means of a suitable example. Suppose that a person
takes a loan of Rs. 1,000 at 8% effective and the term, of the loan is 3 years. He can repay
the loan by any of the following three most common ways.
(a) No payme~t of any kind is made by the borrower during the period of 3 years and
entire loan is repaid with interest at the end of 3 years by a single payment.
The amount payable =Rs. 1,000 (1.08)3 =Rs. 1,259.71
(b) He can pay only the interest regularly at the end of every year. The interest ofRs. 80
is regularly paid at the end of every year as it falls due; and at the end of 3 years, the
principal of Rs. 1,000 is repaid.
(c) the loan is repaid by a uniform payment made at the end of each year for 3 year. The
um'fiorm
. year1y payment IS . Rs. 1,000 =
Rs .
388
.03
a31 0.08
Every payment ofRs. 388.03 contains interest of the outstanding principal and a certain
portion of principal.
Remark: As compared to other methods, it is obvious that the amount of interest paid
for the loan is less, if the borrower adopt the third method.
We shall now discus, in greater detail, th~ third method, which is also known as
amortization of loan, by level or equated payments comprising both the principal and
interest.
AMORTISATION OF LOAN
A loan is said to be amortised, if it can be discharged by a sequence of equal payments
made over equal periods of time. Each payment can be considered as consisting of two parts :
(a) Interest on the outstanding principle, and
(b) Repayment of part of the loan.
Thus, a loan, generally with a fixed rate of interest, is said to be amortized, if both
principal and interest are paid by a sequence of equal payments made over equal periods of
time.
Suppose that a loan of Rs. P is amortized at a particular rate of interest i per payment
period over n periods. Let R be the periodic payment. We know that Rs. P is the present
value of the annuity ofRs. R at year zero, is at the beginning oft~e term ofloan.
Present value of an immediate annuity of Rs. R payable at the end of very period for n
periods at i per payment period is given by
P =R anli
. . The periodic payment R is given by
! P
R= aRli I
This can be further express as
P Pi
R= (I-Utir") or R=I-(I+if"
Thus, the periodic payment R can also be given by
R_ Pi
- 1- (1 + i~
I
\
If the rate of interest is compounded continuously, the present value of an immediate
annuity of Rs. R payable at the end of every year for t years at a rate of r per annum is given
by
AMORTISATION OF LOAN 237
R Pr
P =-;: (1- crt) => R =1-rt
Thus, in case of continuous compound interest, the periodic payment R is given by
PREPARATION OF AMORTISATION SCHEDULE

We have already discussed that a part of each payment is used to pay the interest on the
outstanding principal (loan) amount and the remaining part is used to reduce the principal.
This analysis of how every periodic payment in the loan is handled can be given in a table,
called an amortization schedule.
Consider the example of a loan of Rs. 1,000, repayable in equal annual instalment at the
end of every year for 3 years at a rate of 8% per annum compounded annually.
The annual payment R is given by
R =~ = 1,000 = 1,000 = 388.03
a-;;J i a31 0.08 2.57709699
.. The annual payment is Rs. 388.03
. . The total amount paid =Rs. 388.03 x 3 =Rs. 1,164.09
and total interest paid = (Rs. 1,164.09 - 1,000) = Rs. 164.09
Now, principal at the beginning of 1st year =Rs. 1,000
Interest for 1st year =Rs. 1,000 x 0.08 =Rs. 80
Periodic payment at the end of 1st year =Rs. 388.03
Every annual payment contains the interest on the principal outstanding and a certain
part of principal.
.. Principal repaid at the end of 1st year =Rs. (388.03 - 80.00)
=Rs. (308.03) ... (1)
.. Principal at the beginning of 2nd year = Rs. (1,000 - 308.03)

=Rs. 691.97
Interest for 2nd year =Rs. 691.97 x 0.08 =Rs. 55.36
Payment made at the end of 2nd year = Rs. 388.03
.. Principal repaid in 2nd year = Rs. (388.03 - 55.36)
=Ri. 332.67
.. Principal at the beginning of 3rd year =Rs. (691.97 - 332.67)
=Rs. 359.30
Interest for 3rd year =Rs. (359.3 x 0.08) =Rs. 28.74
Payment made at the end of 3rd year =Rs. 388.03.
The results are shown in the following table:

Repayment Principal Interest @ 8% Periodic payment Principal repaid
Internal outstanding at the paid at the end of at the end of at the end of
(year) beginning of ever every year every year every year
year
1 Rs. 1,000.00 Rs. 80.00 Rs. 388.03 Rs. 308.03
2 Rs. 691.97 Rs. 55.3.6 Rs. 388.03 Rs. 332.67
3 Rs. 359.30 Rs. 28.74 Rs. 388.03 Rs. 359.30
Total Rs. 164.10 Rs. 1,164.09 Rs. 1,000.00
Remark 1 : From the amortization schedule, it is observed that payment to be made at
the end of third year is Rs. 388.04 (= Rs. 359.30 + Rs. 28.74). The payment originally made is
Rs. 388.03. The difference of 0.01 for the third year is due to rounding off and can be ignored
for practical purposes.
Remark 2 : We observe that the payment of the principal goes on increasing in
successive years and the interest payment goes on decreasing.
GENERAL FORMULA FOR AMORTISATION

Now, we derive a general formula for amortisation of the instalment of a particular
payment period for the interest portion and the capital repayment portion.
Consider a loan of Rs. P to be repaid by n equal periodic payments of Rs. R.
Let i be the rate of interest per period
We know that
P=Ra-;;Ji
Equal periodic payment is given by
R=~
a-;;Ji
Now, principal at the beginning of 1st period =R a-;;J i
Interest for 18t period = R a-;;J i x i
-
_R [1 -(1 •+
l
i~] Xl
.
=R (1- (1 + i~)
Instalment paid at the end of 18t year =R
:. Principal contained in 1st payment =R - R (1- (1 + i~
=R (1. + i)-n
Principal at the end of 1 payment period, i.e., at the beginning of 2nd payment period
8t
= Principal at the beginning of 18t payment period

- Principal repaid in the 1at payment
AMORTISAnON OF LOAN 239
= R [1- (1t i)-" (1 + irn ] =R [1- (1 +i i)-(n~ I) ] =R an=T1i

Interest for second period =R an=T1i xi
1 - (1 + i)-<n -I) ]
. =R [ i x i =~ (1 - (1 + i)-<n -1»
Instalment paid at the end of 2nd year =R

:. Principal contained in the 2nd payment =R -R (1- (1 + i)-<n -1»
= R (1 + i)-<n-I)
rd
Principal at the beginning of 3 payment period
= R a n=T1 i - R (1 + i)-<n -1)
=R [1-(1 +/)-<n-l) _ (1 + i)-<n-l) ]
1- (1 + i)-<n-2)]
=R [ .
l
=Ra~. n-ilill
Continuing in this manner, we can observe the following three useful results :
(a) The successive payments of Rs. R for n periods at the rate of i per period contain
interest portions of
R (1- (1 + irn),R (1- (1 + i)-<n-l), ...... R (1-(1 + i)-2, R (1-(1 + i)-I)
(b) The successive principal repayments are
R (1 + irn, R (1 + i)-<n-1>, ...... R (1 + i)-2, R (1 + i)-I
(c) Principal outstanding at the beginning of every payment period are :
R a'iili , Ran_Iii' R a n _ 2 Ii' ...... , R a21i' R alii
Now we prepare the general amortization schedule for a loan of Rs. P (= Rs. R a'iil i)
. payable for ri periods at the rate of i per period.
Payment Principal Interest at i per Principal repaid Instalment

period outstanding at the period for every at the end of at the end of
beginning of every period every period every period
payment period
1 Ra'iili R (1 - (1 + irn) R (1 + irn R
2 R an_1k. R (1- (1 + i)-<n-I) R (1 + i)-<n-I) R
3 R a n _ 2k R (1- (1 + i)-<n-2» R (1 + i)-<n-2) R
n-l Ra21i R (1-(1 + i)-2 R (1 + i)-2 R

n R alii R (1 - (1 + i)-I) R (1 + i)-I R
Total - nR-P P =Ra'iili nR
AMORTISATION FORMULAS
Using the above discussion, we obtain the following results that describe the
amortization of a loan of Rs. P, payable by an equal payments of Rs. R at the end of every
period for n periods at the rate of i period.
(a) Periodic payment Rs. R of a loan of Rs. P is given by
R-~ Pi
- a-;ai - 1- (1 + i~
(b) Principal outstanding at the beginning of kth period
=Principal outstanding at the end of (k - l)th period
= Present value of remaining n - (k - 1) payment
1-(1 + i~-(kl)]
= RaIl _ (k _ 1~ i = R [ i
(c) Principal repaid till the beginning of kth period

=Loan Amount - Principal outstanding at the beginning of kth period
= P -R an-(k-!li
(d) Interest in the kth payment
=i x principal outstanding at the beginning of kth period
= i x Ran _ (k _ 1~ i
(e) Principal contained in the kth payment
=kth payment - interest in the kth payment
.=R-iRan_(k_di
Alterantively, principal contained in the kth payment
= Principal outstanding at the beginning of kth payment
- Principal outstanding at the beginning of (k + l)th payment
(fl Total interest paid = nR - P
Example 1 : Find the amortised monthly payment necessary to pay-off a personal loan of
R:;. 60,000 at 12% per annum compounded monthly in 5 years.
Solution: Loan amount P =Rs. 60,000

r 0.12
:. i = 12 =12 = 0.01 and n = 12 x 5 = 60
Let R be the monthly payment.

Periodic payment is given by
Pi
R = 1- (1 + i)--n
R _ 60,000 x 0.01
- 1 - (1.01)-60
600 . 600
R = 1 - 0.55044962 = 0.44955038
R = 1,334.67
.. The monthly payment is Rs. 1,334.67.
Example 2 : A loan of Rs. 15,000 is to be amortised by equal payments at the end of

every 6-month perio.d for 10 years. If money is worth B% per annum compounded semi-
annually, find
(a) Principal outstanding at the beginning of 7th year
(b) Principal repaid after 12 instalments have been paid.
Solution:
Loan amount P =Rs. 15,000
Rate of interest R = 8% = 0.08
Interest compounded semi-annually
0.08 0 d
.. z. = 2"
r
= -2- = .04 an n = 2 x 10 = 20
First we find the periodic instalment.
Let Rs. R be the semi-annually payment.
Periodic payment R is given by
Pi
R = 1-(1 + irn
R _ 15,000 x 0.04
- 1 - (1.04)-20
600 600
= 1 _ 0.45638695 = 0.54361305 = 1 103.73
Instalment amountR =Rs. 1,103.73
(a) Principal outstanding at beginning of kth period
= R an-(k-di
.. Principal outstanding at the beginning of 7th year
=Principal outstanding at the beginning of 13th period
= 1,103.73 a 20 -(13-1)10.04
=1,103.73 a81 0.04
=1,103.73 [1- b~4)-8 ]
= 1,103.73 [1- 0'~O:921 ]
= 1,103.73 (6.73274475) = 7,431.13

.. Principal outstanding at the beginning of 7th year is Rs. 7,431.13
(b) Principal repaid at the beginning of kth period

=Loan amount - Principal outstanding at the beginning of kth period
.. Principal repaid after 12 instalments have been paid
=Principal repaid at the beginning of 7th year
=Loan amount - Principal outstanding at the beginning of 7 th year
=Rs. 15,000 - Rs. 7,431.13 =Rs. 7,568.87
. . Required principal repaid is Rs. 7,568.87.
Example 3 : A loan of Rs. 3,000 is to be repaid with interest at 6% effective by means of

an immediate annuity for 10 years. What will be the interest and principal contained in the
5 th instalment ?
Solution:
Loan amount P =Rs. 3,000
.. i = r = 6% = 0.06 and n = t = 10.
First, we find the annual instalment Rs. R
R- Pi
-1-(1 + i}-fl
R'- 3,000 x 0.06
- 1 - (1.06)-10
180 180
R = 1 - 0,55839478 = 0.44160522
=407.60
R
Annual instalment is Rs. 407.60
To find the interest contained in 5th instalment, we first find the principal outstanding at
the beginning of 5th instalment, i.e., at the beginning of 5th year.
Principal outstanding at the begir..'"1ling of kth year
=R an-(k-di
., Principal outstanding at the beginning of 5th year
=407.60 a 10 _ (5 _ 1)1.0.06
=407.60 a61 0.06
=~07.6 [1- ~O6) ]
=407.60 [1- 0'~654 ]
=407.60 (4.91732433) =2,004.30

Principal outstanding at the beginning of 5th year is Rs. 2,004.30
AMORT/SA TlON OF LOAN 243
Interest contained in kth payment = i x principal outstanding at the beginning of kth

period.
" Interest contained in 5th instalment
= i x principal outstanding at the beginning o(5th instalment
=0.06 x 2,004.30 = 120.26
.. Interest contained in 5th instalment is Rs. 120.26.
Now, principal contained in kth payment
=kth payment - interest contained in kth payment
.. Principal contained in 5th instalment \
=5th instalment - interest contained in 5th instalment
=Rs. 407.60 - Rs. 120.26 =Rs. 287.34
.. Principal contained in 5th instalment is Rs. 287.34.
Example 4:A loan ofRs. 50.000 is to be repaid by equal annual instalments of principal
and interest over a period of 5 years. If the rate of interest is 8% 'effective. find
(a) The annual payment.
(b) Principal outstanding at the beginning of 3rd year.
(c) Principal repaid till the beginning of 3m year.
(d) Interest contained in the 3rd payment.
(e) Principal contained in the 3mpayment.
(f) Total interest paid.
Solution : Loan amount P =Ri;. 50,000

Rate of interest r =8% effective
:. i =r= 8% =0.08
No. of payments n =5
(a) Let Rs. R be the annual instalment.
Annual' instalment is given by
R-~ Pi
- a'ili - 1- (1 + i'Jfl
R _ 5,000 x 0.08
.. - 1 - (1.0s)-5
4,000
R = 1 _ 0.68058320 = 12,522.82
. . Annual instalment is Rs. 12,522.82
(b) Principal o,utstanding at the beginning of kth period
=R a n _ (k -1~ i
, .. Principal outstanding at the beginning of 3rd year
=12,522.82 a 5 _ (3 1)1 0,08
...!
= 12,522.82 a31 0.08

=12,522.82 (1 - (1.08)-3 )
0.08 .
= 12 522 82 (1 - 0.79383224 )
,. 0.08
=32,272.52
.. Principal outstanding at the beginning of 3rd year is Rs. 32,272.52
(c) Principal repaid at the beginning of kth period
=Loan Amount - Principal outstanding at the beginning of kth period
. . Principal repaid till the beginning of 3rd year
=Rs. 50,000 - Principal outstanding at the beginning of 3rd year
=Rs. 50,000 - Rs. 32,272.52
=Rs. 17,727.48.
. . Principal repaid till the beginning of 3rd year is Rs. 17,727.48.
(d) Interest contained in kth payment
=i x Principal outstanding at the beginning of the kth perio~
.. Interest contained in 3rd payment
=0.08 x Principal outstanding at the beginning of 3rd year
= 0.08 x 32,272.52 = 2,581.80
.. Interest contained in 3rd payment is Rs. 2,581.80
(e) Principal contained in kth payment.
== kth payment - Interest contained in kth payment
.. Principal contained in 3rd payment
=3rd payment - Interest contained in 3rd payment
=Rs. 12,522.82 - Rs. 2,581.80
=Rs. 9,941.02
.. Principal contained in 3rd payment is Rs. 9,941.02
({) Total interest paid = nR - P
= 5 x 12,252.82 - 50,000
= 62,614.10 - 50,000 = 12,614.10
.. Total interest paid is Rs. 12,614.10.
Example 5: A loan of Rs. 75,000 is to be repaid with interest at 8% per annum by means
of 25 level annual payments, the first one being made at the end of first year. Immediately
after the 15 th payment is made the lender desires to have the balance repaid in 5 level annual
payments including principal and interest. Find the revised level payment.
Solution: Loan amount P =Rs. 75,000

AMORnSAnONOFLOAN 245

Interest.is compounded annually.
:. i =r =0.08 and n= 25
Let Rs. R be the level annual payment.
R
P Pi
=-a-;;J i =---=:'-'---
1- (1 + i'Jfl
R _ 75,000 x 0.08
- 1 - (1.08)-25
6,000 6,000
R =1- 0.14601790 = 0.853982 =7,025.91
.. Level annual payment is Rs. 7,025.91
After making 15 payments, principal outstanding at the beginning of 16th year is to be
repaid in 5 level annual payments.
We first find the principal outstanding at the beginning of 16th year.
Principal outstanding at the beginning of kth period
=Ran _(k -1~ i
.. Principal outstanding at the beginning of 16th year
=R a 25 _ (16 _ 1)1 0.08 =R alol 0.08
=7,025.91 [1 - ~.g:)-10]
=7,205.91 [1- 0'~;81439]

=47,148.82
.. Principal outstanding at the beginning of 16th year is Rs. 47,148.82
This outstanding principal ofRs. 47,148.82 is to be repaid by 5 annual payment
Now P =Rs. 47,148.82
n = 5 and i;= 0.08
Now the revised annual payment
47,148.82 x 0.08
= 1- (1.08)-5
- 3,771.9096 = 11 808 74
- 0.3194168 ' .
.. The revised level annual payment is Rs. 11,808.74.
Example 6 : A couple wishes to purchase a house for Rs. 12,00,000 with a down payment
of Rs. 2,50,000. If they can amortize the balance at 9% for 20 years, what is their monthly
payment ? What is the total interest paid ? What is their equity after 10 years ? (Given
a 240\0.0075= 111.1449; a 12010.0075 = 78.9416.)
246 FINANCIAL iliA THEIIIA TICS
Solution: Price of the house =Rs. 12,00,000

Down payment =Rs. 2,50,000
Amount to be repaid in instalment
=Rs. 12,00,000 - Rs. 2,50,000 = Rs. 9,50,000
Principal amoup.t P =Rs. 9,50,000
Interest is compounded monthly
. r 0.09
: •. L =12 =12 = 0.7~ and n =20 x 12 = 240
Let Rs. R be the monthly instalment.
R=~
a-;;Ji
· al 9,50,000
MonthIy lOst ment =
a 24010.0075
9,50,000
= 111.1449 =8,547.40
Monthly instalment is Rs. 8,547.40.
Total interest paid =nR - P
=240 x 8,547.40 - 9,50,000
=11,01,376
Tot/ill interest paid is Rs. 11,01,376.
Now, equity after 10 year = down payment + principal repaid in 10 years ... (1)
Principal repaid i"> 10 year = principal amount - principal outstanding at the end of 10
years ... (2)
After 10 years, we iirP. at the beginning 121at month.
Principal outstanding at the beginning of kth period
=Ran _ {k - Ij i
.. Principal outstanding at the beginning of 121st month
=R a 240 _ (121- 1) 10.0075
=8,547.40 a 12010.0075
=8,547.40 x 78.9416 =6,74,745.43
.. From (2), principal repaid in 10 year
=9,50,000 - 6,74,745.43 =2,75,254.57
.. ~ncipal repaid in 10 years is Rs. 2,75,254.57
Now from (I), Equity after 10 years
=2,50,000 + 2,75,254.57 =5,25,254.57
. . Equity after 10 years is Rs. 5,25,254.47
AMORTISATION
, OF LOAN 247
Thus, monthly instalment is Rs. 8,547.47

Total interest paid is Rs. 11,01,376
Equity after 10 years is Rs. 5,25,254.47 .
•¥f.1SiM Wl-1
L What do you mean by amortisation schedule? Prepare an amortisation schedule for
a loan of Rs. 10,000 taken at the rate of interest of 8% per annum and payable in 5
equal annual payments, the first being made at the end of first year.
[Ana. Rs. 2,504.56)
2. Prepare an amortisation schedule for a loan of Rs. 5,000 which is to be repaid by
equal payments at the end of each month for 3 months, if money is worth 12% per
annum compounded monthly. [Ana. Rs.1,700.11]
3. Find the amortized quarterly payment necessary to pay-off a loan of Rs. 3,000 at 4%
per annum compounded quarterly, in 15 years. [Ana. Rs. 667.34]
4. Mr. X has purchased a house for Rs. 7,00,000 and has made a down payment of
Rs. 1,50,000. He proposes to repay the balance in 25 years by monthly instalments at
9%. (Given a 30010.0075 =119.1616).
(a) What is the monthly payment '(
(b) What is the total interest payment? [Ana. (a) Rs. 4,615.58; (b) Rs. 8,34,674]
5. A loan of Rs. 3,000 is to be repaid by annual instalments of principal and interest
over a period of 10 years, the rate of interest being 10% per annum. Find
(a) the anpual instalment.
(b) the principal outstanding after the 6 th payment.
(c) the principal repaid after 6 payments have been made.
[Ana. (a) Rs. 488.10; (b) Rs. 1,547.28; (c) Rs. 1,452.72]
6. A loan of Rs. 10,000 is to be amortized by equal payments at .the end of every 3-
month period for 5 years. If money is worth 16% per. annum compounded quarterly.
Find
(a) the quarterly instalment.
(b) the principal outstanding at the beginning of 4th year
(c) the principal repaid in 3 yeari.
tAns. (a) Rs. 735.82; (b) Rs. 4,954.09; (c) Rs. 5,045.91]
7. A loan of Rs. 2,500 is to be repaid with interest at 10% effective by means of
immediate annuity for 10 years. Find
(a) interest contained in the 6th payment
(b) principal contained in the 6th payment. [Ans. (a) Rs. 154.20; (b) Rs. 252.55]
8. A man gets a loan of Rs. 12,000 and agrees to repay in 10 equal payments, the first
being made at the end of 6 months. If money is worth 12% per annum compounded
semi-annually, find the interest and the principal contained in the 5th instalment. ,
[Ans. (a) Rs. 481.04; (b) Rs. 1,149.36]
9. A loan ofRs. 30,000, is to be amortised by equal payments at the end of each year for
5 years. If the interest is calculated at the rate of 6% per annum compounded
annually, find
(a) the annual payment
(b) the principal outstanding at the beginning of 4th year
(c) the principal repaid after 4 years' instalments have been made
(d) the interest contained in 4th payment
(e) the principal contained in 4th payment, and
(f) the total interest paid.
[Ans. (a) Rs. 7,121.89; (b) Rs. 13,057.22; (c) Rs. 16,942.78; (d) Rs. 783.43; (e) Rs. 6,338.46;
if) Rs. 5,609.45]
10. A borrows Rs. 18,000 from B and agrees to repay the amount by 20 equal semi-
annual payments, payable a.t the end of every 6 month period. If the rate of interest
is 6% per annum compounded semi-annually, find
(a) the semi-annual payment
(b) the principal repaid after 6-years' payment have been made.
(c) the interest contained in 8th instalment.
[Ans. (a) Rs. 1,209.89; (b) Rs. 9,506.95; (c) Rs. 386.01]
It A loan of Rs. 7,500 is to be repaid with interest at 8% per annum by means of 20
equal annual payments, the first one being made at the end of first year.
Immediately after the 10th payment is made, the lender desires to have the balance
repaid in 3 level annual payments including principal and interest; to which the
borr'1wer agreed provided a rate of 7% per annum will be used for this agrem~nt.
Find the revised annual payment. [Ans.1,953.18]
12. A loan of Rs. 20,000 is to be repaid, with interest at a rate of 7% per annum by 15
equal annual payments, the first being made at the end of first year. Immediately
after the 10th payment has been made the borrower request the lender for the
extension of the term of the loan by another five years. What is the revised annual
payment?' [Ans. Rs. 1,281.91]
13. A loan of Rs. 5,000 is to be repaid by equal annual payment at the end of every year "
for 18 years. Interest is reckoned at the rate of 6% effective. Immediately after
making the 10th payment, the borrower requests the money lender to extend the
term of the loan by another four years. What is the revised level annual payment to
be made during the next 12 years on the assumption that the lender now decided to
realise an interest of 7% per annum hence forward? [Ans. Rs. 361.04]
14. A borrowed Rs. 16,000 from B and agreed to repay the loan by equal quarterly
instalment for 10 years at the rate of 8% per annum compounded quarterly. After
making payments for 5 years, due to some financial crisis, he could not make any
payment for the next 2 years. At the end of 7th year they made an agreement under
which B agreed not to levy any penalty or late payment fee. But he was not willing to
extend the term of the loan. What quarterly payment A had to pay for the next 3
years at the same rate of interest? [Ans. Rs. 1,059.59]
15. A loan of Rs. 7,500 is made subject to repayment by 15 equal annual payments, the
first to be made at the end of 6 years. If the rate of interest is 10% effective, find the
level annual payment. Also find
(a) the principal contained in the first payment
(b) the principal contained in the 5th payment
[ADs. Rs. 1,588.05; (a) Rs. 380.17; (b) Rs. 556.60]
16. A couple wishes to purchase a house for Rs. 10,00,000 with a down payment of Rs.
2,00,000. If they can amortise the balance at 9% for 25 years, what is the monthly
payment ? What is the total interest paid ? What is their equity after 5 years ?
(Given a 30010.0075 = 119.1616 and a 24010.0075 = 111.1449). .
[ADs. Rs. 6,713.57; Rs. 12,41,071; Rs. 2,53,820.93]
17. A borrower is repaying one debt of Rs. 4,000 by 30 equal half-yearly instalments of
principal and interest calculated at 9% per annum convertible half-yearly of which
12th payment has just been paid and another debt of Rs. 1,500 by 20 equal half-
yearly instalments of principal and interest calculated at 8% per annum convertible
half-yearly of which 8 th payment has just been paid. If the remaining instalments of
the two debts are to be replaced by an annuity certain of 20 half-yearly payments
calculated at interest rate of 10% per ann:um convertible half-yearly, find the
instalment of the annuity. [ADs. Rs. 322.73]
Sinking Fund
INTRODUCTION
Sinking fund is one of the major applications of annuities. In the previous chapter, we
have seen how an obligation of a large amount due at present is repaid by equal periodic
paym~nts. The present value of these obligations such as price of house, car, etc. is know
well in advance. Similarly, in many cases the necessity of a large amount at some future
date can be foreseen and a fund can be formulated by periodic payment to meet this future
obligation such a fund is called sinking fund. We shall discuss in this chapter, how a sinking
fund is created to meet future financial obligation. .
SINKING FUND
Sinking fund is defined as follows:
"A sinking fund is a fund that is 'accumulated for the purpose of paying off a financial
obligation at some future designated date."
The use of sinking fund is more common in business where they are used to plan ahead
of anticipated expenses such as replacement or modernisation of a manufacturing plant,
expansion .of business and etc. Individual may even anticipate future expenses such as
higher education, marriage and etc. and create a fund by periodic payments. These kinds of
funds crated by periodic payments are called sinking funds. Sinking funds are generally
used to redeem bond issues, payoff debts, replace outdated equipments, or provide money for
purchasing new equipments.
In sinking funds, the periodic payments are generally equal in size and made at equal
time interval (monthly, quarterly, half-yearly, etc.). It is also supposed that the payments
are made at the end, of every payment period. It is therefore cJ)nsidered as an immediate
annuity.
SINKING FUND 251
Since the sinking fund is created to meet a future fInancial obligation, the amount
required at the future date will be the amount of the periodic payments accumulated on that
particular future date, i.e., the amount of an immediate annuity. Our aim is to.fInd what
periodic payment should be set aside to accumulate this amount.
Let Rs. R is the sum of money set aside periodically. It Rs. A is the amount to be
accumulated after n periods and i is the rate of interest per period, then the amount A is
given
A = RS-;J i or A = R [(1 + iT - 1 ]
Thus, periodic payment R is given by
A
R=-
s-;Ji
or
Ai
R = (1 + iY'-1
The amount A of an ordinary annuity of Rs. R payable at the end of each year for t years
at the rate of r per annum compounded continuously is given by
R
A =-(ert
r
-1)
Thus, periodic payment R is given by

Ar
R =-;;--1
e -
. Example 1 : A person has decided to setup a sinking fund for the purpose of purchasing a
computer in two years time. It is expected that the computer will cost Rs. 30,000 at the end of
2 years. Determine the size of equal quarterly instalment the person pay into the fund, if
money is worth 10% per annum compounded quarterly.
Solution:
. The amount A =Rs. 30,000
:. i =~ = °i O
=0.025 and n = 2 x4 =8
Let Rs. R be the quarterly instalment.
The periodic paymentR is given by
Ai
(1
R = + iY'-1
R _ 30,000 x 0.025
- (0.025)8 - 1
750
R = 0.21840290 = 3,434.02
" The quarterly instalment is Rs. 3,434.02
252 RNACMLTH~nS
Example 2 : A person have setup a sinking fund in order to have Rs. 50,000 in 10 years
for his son's higher education. What amount he has to set aside at the end of every month into
the fund paying 6% per annum compounded monthly?
Solution:
Amount of the fund A =Rs. 50,000
No. of years t = 10 years
. r 0.06
:. ,= 12 =12 =0.005 and n =10 x 12 =120
Let Rs. R be the monthly payment.
Peri~dc payment R is given by
Ai
R = (1 + i)'t - 1
R _ 50,000 x 0.005
- (1.005)120 - 1
250
R =(1.005)120 _ 1
Let x =(1.005)120
log x = 120 log 1.005
log x =120 x 0.0021 =0.252
x =antilog (0.252) =1.786
250
" R = 1.786 _ 1 318.07
., The monthly instalment is Rs. 318.07
Example 3 : A sinking fund is created for the redemption of debentures of Rs. 80,000 at
the end of 20 years. How much money should be set aside out of the profits each year for the
sinking fund, if the investment can earn interest 5.5% effective ?
Solution:
Value of debentures A =Rs. 80,000
Let Rs. R be set aside at the end of every year
No. of payment periods n =20
Rate of interest i =r =5.5% =0.055
Ai
R = (1 + i)'t - 1
R _ 80,000 x 0.055
- (1.055)20 - 1
SINKING FUND 253
4400
R =2.91775749 -1 =2,294.35
.. The annual instalment is Rs. 2,294.35
Example 4 : A company sets aside a sum of Rs. 12,000 annually for 15 years to pay-off a
debenture issue of Rs. 2,50,000. If the fund accumulates at 6% per annum, find the surplus
after the full redemption of the debenture issue.
Solution:
Annual Payment R =Rs. 12,000
No. of periods n =t =15
Rate of interest i =r =6% = 0.06
Amount accumulated into the sinking fund is the amount of the annuity of Rs. 12,000.
Amount of an immediate annuity is given by
A =R [(1 + iT - 1 ]
A - 12000 [<1.06)15 -1]
-, 0.06
A =12,000 [2.396~: -1] =2,79,311.64.

. . Amount at the end of 15 years is Rs. 2,79,311.64.
Amount required to redeem the debenture is Rs. 2,50,000.
.. The surplus =Rs. 2,79,311.64 - Rs. 2,50,000
= Rs. 29,311.64
. . The surplus amount is Rs. 29,311.64.
Example 5 : A company has a machine whose life is 10 years. If the rate of interest is
calculated at a rate of 10% effective, how much money must be set aside at the end of every
year into a sinking fund to replace the old machine by a new one that will cost Rs. 68,000 at
the end of 10th year ?
Solution:
Amount required after 10 years A =Rs. 68,000
Rate of interest i =r = 10% =0.10
No. of payment periods n =t = 10
Let Rs. R be the annual payment to be set aside.
Ai
R =(1 + i)n-1
254, FINANCIAL MATHEMA TICS
R _ 68,000 x 0.10
- (1.1)1°-1
6,800
R =2.59374246 -1 =4,266.69
. . The annual instalment is Rs. 4,266.69
Example 6 : A machine costs a company Rs. 6,00,000 and it effective life is estimated to
be 20 years. If the scrap value of the machine at the end of its life is expected to realise
Rs. 50,000 only. In order to provide money at tJ"at time for a new machine costing the same
amount, a sinkingfund is set up. The amount in the fund at that time is to be the difference
between the replacement cost and salvage value. If equal payment are made in the fund at the
end-of every 6 months period and the fund earns interest at 7% per annum compounded semi-
annually, what should each payment' be ?
Solution:
Cost of machine =Rs. 6,00,000
Life of the machine =20 years
Salvage value = Rs. 50,000
Amount needed after 20 years,
A =Rs. 6,00,000 - Rs. 50,000 =Rs. 5,50,000
:. i i
= = 0~7 = 0.035 and n =2 x 20 =40
Let Rs. R be the semi-annual payment.
Ai
R = (1 + i)n-1
R _ 5,50,000 x 0.035
(1.035)40 - 1
-
19,250
R =3.95925972 _ 1 =6,505.01
.. Semi-annual payment is Rs. 6,505.01.
Example 7 : A company purchases a machine for Rs. 90,000 and estimates that its value
will depreciate each year by 10% of its value at the beginning of the year. Tfte effective life of
the machine is estimated to be 12 years. After 12 years, the machine will be sold out at its
scrap value and replaced by a new machine which is expected to cost then 20% higher than
the price of the present one. The ('ompany sets aside at the end of each quarter a certain fixed
sum for 12 years in order to buy the new machine. The amount in the fund is the difference
between the replacement cot and scrap value. Find the fixed sum. Assume that the fund earns
interest at 8% per annum compounded quarterly.
SINKING FUND 255
Solution:
Cost of the present machine C= Rs. 90,000
Rate of depreciation r =10%'= 0.10
Life of the machine n =12 years
Scrap value of an asset is given by
S =C (l-r)n
. . Scrap of the machine at the end of 12 years
'8 =90,000 (1- 0.10)12
8 =90,000 (0.28242954) =25,418.66
. . Scrap value is Rs. 25,418.66
Cost of new machine = Rs. 90,000 + 20% ofRs. 90,000
=Rs. 90,000 + Rs: 18,000 = Rs. 1,08,000
Amount required to purchase new m~chine
=Cost of new machine - Scrap of old machine
= Rs. 1,08,000 - Rs. 25,418.66
=Rs. 82,581.34
Amount Required A =Rs. 82,581.34
. r 0.08
:. l = 4' = 4 = 0.02 and n = 12 x 4 = 48
Let Rs. R be the amount to be set aside at the end of ever quarter.
R- Ai
- (1 + i)n-l
R _ 82,581.34 x 0.02
- (1.02)48 - 1
1,651.6268
R = 2.58707039 _ 1 1,040.68
. . Required quarterly payment is Rs. 1,040.68.
Example 8 : An investor wants to know the amount he should pay for a goldmine
expected to yield an annual return of Rs. 2,00,000 for the next 10 years, after which it will be
worthless. Find the amount he should pay for the mine if he wants to yield 18% annual return
on his investment and also set up a sinking fund to replace the purchase price. Assume that
the sinking fund earns 10% annually.
Solution : Let Rs. x be the purchase price of the mine
Rate of return on investment = 18% =0.18
Return on investment ofRs. x per year = 0.18 x
Life of the mine n = 10 years
Net annual return =Rs. 2,00,000 per year
Sinking fund is created to replace the purchase price.

.. Amount to be placed into the sinking fund each year is Rs. 2,00,000 - 0.18 x
These payment must accumulate to Rs. x at the end of 10 years.
.. Amount A = Rs. x
Interest earned by sinking fund i = r = 10% = 0.10
Here n = 10 and R = 2,00,000 - 0.18 x
R- Ai
- (1 + i)n-1
0.1 x
2 ,00,000 - 0.18 x =(1.1)10 _ 1
0.10 ]
=> 2,00,000 =X [ (1.1)10 _ 1 + 0.18
=> 2,00,000 =x [1.59~;246 + 0.18 ]

=> 2,00,000 =x (0.24274539)
=> x =8,23,908.54
:. Purchase price ofthe Goldmine is Rs. 8,23,908.54
Example 9: A man borrows Rs: 3,000 and agrees to pay interest quarterly at an annual
rate of 8%. At the same time, he sets up a sinking fund in order to repay the loan at the end of
5 years.. If the sinking fund earn interest at the rate of 6% per annum, compounded quarterly,
find the quarterly cost of the debt.
Solution : Quarterly cost of the debt is the sum of the quarterly interest and the ,
quarterly contribution towards the sinking fund.
Amount borrowed =Rs. 3,000
Interest rate =8% = 0.08
Quarterly interest payment =3,000 x 0.02 =Rs. 60
A sinking fund is created to repay the loan after 5 years.
Amount to be accumulated A =Rs. 3,000
. = 4"
-£
0.06 = 0.01 5 an d n = 4 x 5 = 20
r =4
Let Rs. R be the amount to be set aside at the end of every quarter into the sinking fund.
R- Ai
- (1 + i)n-1
R _ 3,000 x 0.015
- (1.015)20 - 1
SINKING FUND 257
45
R = 1.34685501 _ 1 = 129.73
.. Quarterly payment towards the sinking fund is Rs. 129.73
Quarterly cost of the debt =Rs. 60 + Rs. 129.73
= Rs. 189.73
:. Quarterly cost ofthe debt is Rs. 189.73
Example 10: A machine costs Rs. 65,000 and its effective life is estimated to be 10 years.
[fthe scrap value of the machine is Rs. 15,000 only, what should be retained ou~ of profits at
the end of each year to accumulate at 11 % per annum compounded continuously so that a new
machine can be purchased at the same price after 10 years ?
Solution:
Cost of old machine =Rs. 65,000
Scrap value =Rs. 15,000
Cost of new machine after 10 years is the same as that of old machine.
:. Cost of new machine =Rs. 65,000
Amount required after 10 years
A =Rs. 65,000 - Rs. 15,000
A = Rs. 50,000
No. of years t = 10 years :. rt = 0.11 x 10 = 1.1
Let R be the amount to be set aside annually towards the sinking fund.
R-~ - ert -1
R _ 50,000 x 0.11
- el.l-1
5,500
R = 3.0041638 -1 = 2,744.29
" Annual payment towards sinking fund is Rs. 2,744.29
Example 11 : A sinking fund is created for the redemption of debenture of Rs. 40,000 at
the end of 16 years. How much money should be provided out of profits each year for the
sinking fund, if the investment can earn interest at 7% per annum compounded
continuously ?
Solution: Amount Required A =Rs. 40,000

Interest is c~espond continuously.
No. of years t = 16 :. rt = 0.07 x 16 = 1.12
Let Rs. R be the amount to be kept in the sinking fund at the end of every year.
Ar
R=~l e -
R _ 40,000 x 0.07
- e1.12 _1
2,800
R =3.46571893 _ 1 =1,135.57
.. The annual payment is Rs. 1,1:i5.57.
Example 12 : A company establishes a sinking fund to provide for the payment of

Rs. 20,000 debt maturing in 8 years and cor,tributes a certain sum of money towards the
sinking fund at the end of each quarter. Find the quarterly deposit of the rate of interest is 8%
compounded semi-annually.
Solution:
Amount required A =Rs. 20,000
No. of years t =8 years
Since'the payment interval differ from the interest interval, it is a general annuity.
Payment period = 3 months
Interest period = 6 months
No of months in payment period
m = 3/6 = 112
. r 0.08
.. J=2"=T=0.04
Rate of interest per payment period is given by·
ip = (1 + i)'n - 1
.. ip = (1.04)112 - 1 ~ (1 + ip) = (1.04)112
and n = 8 x 4 = 32
Let lliI. R be the quarterly payment towards the sinking fund
R
Ai
r
=(1 + lp. n_ 1
R _ 20,000 «1.04)112 - 1) ,
- [(1.04)112]32 - 1
R _ 20,000 [(1.04)112 - 1]
- (1.04)16 - 1
R =453.71
SINKING FUND 259
.. Required quarterly payment is Rs. 453.71.
L A person has decided to set up a sinking fund to purchase a house after 10 years. It
is expected that the house will cost Rs. 8,00,000 at that time. What monthly
instalment he has to pay into the sinking fund, if money is worth 12% per annum
compounded monthly? (Given (1.01)120 =3.30038678) [ADs. Rs. 3,477.67]
2. A company establishes a sinking fund to provide for the payment of Rs. 75,000 debt
maturing in 6 years. Contributions to the fund are to be made at the end of every
year. Find the amount of each annual deposit, if interest is 10% effective.
[Ans. Rs. 9,720.55]
3. A municipality issues Rs. 25,00,000 worth of Revenue bonds that are due in 30 years.
To payoff the debt a sinking fund earning 4% per year compounded semi-an~uly
will be established. What semi-annual deposit should be made into the fund? .
[Ans. Rs. 21,919.92]
4. A sinking fund is created for the redemption of debentures of Rs. 1,50,000 at the end
of 20 years. How much money should be provided out of profits at the end of each
year for the sinking fund, if the investment can earn interest at 4% effective?
[ADs. Rs. 5,037.26]
5. Mr. X plans to send his son for higher studies abroad after 10 years. He expects the
cost of these studies to be Rs. 2,00,000. How much must he set aside at the end of
each 6-month period for 1'0 years to accumulate this amount, if interest rate is 9%
per annum compounded s~mi-anuly ? [Ans. Rs. 6,375.23]
6. A sinking fund is crated for the redemption of debentures ofRs. 1,80,000 at the end
of 25 years. How much money should be provided out the profit at the end of each
year for the sinking fund, if the investment can earn interest at 5% effective?
[ADs. Rs. 3,771.44]
7. A company set aside a sum of Rs. 5,000 at the end of each year for 10 years to payoff
a debenture issue of Rs. 60,000. If the money earns interest at 5% effective, find the
surplus after the full redemption of the debenture issue. [Ans. Rs. 2,889.46]
8. How much money must be set a side each year to replace a machine that will cost
Rs. 15,000 after 8 year ? The rate of interest is 12% per annum compounded
annually? [Ans. Rs. 1,219.51]
9. A firm anticipates a capital expenditure of Rs. 1,20,000 for a new equipment in 10
years. How much should be deposited quarterly in a sinking fund earning 8% per
annum compounded quarterly to provide for the purchase? [Ans. Rs. 1,986.69]
10. A company has machine whose life is 15 years. If the rate of interest is calculated at
a rate of 9% effective, how much money must be set aside at the end of each year into
a sinking fund to replace the old machine by a new one that will cost Rs. 32,000 at
the end of 15 years? [ADs. Rs. 1,089.88]
1L A machine costs a company Rs. 4,80,000 and its effective life is e3timated to be 10
years. If the scrap value of the machine at the end of its life is expected to realise
Rs. 60,000 only. In order to provide money at that time for a new machine costing
the same amount, a sinking fund is set up. The amount in the sinking fund at that
time is to be the difference between the placement cost and salvage value. If equal
payments are made into the fund at the end of every month and the fund earns
interest at 6% per annum compounded monthly, what should each payment be?
[ADs. Rs. 2,562.86]
12. Suppose a machine costing Rs. 70,000 is to be replaced at the end of 8 years, at
which time it will have a salvage value of Rs. 7,000. In order to provide money at
that time for new machine costing Rs. 80,000, a sinking fund is setup. The amount in
the fund at that time is the difference between the cost of new machine and salvage
value of the old machine. If equal payments are placed in the fund at the end of each
quarter and the fund earns 8% compounded quarterly, what should be the size of
each quarterly payment? [ADs. Rs. 1,650.57]
13. A sinking fund is formed by investing Rs. x at the end of each year for n years. Show
that the fund will amount finally to Rs. a at the rate of 100 r% per year, if
x--- ar- -
- (1 + r)n-l
Further show that approximately Rs. 101.04 must be set aside each year, if the
sinking fund (interest at 6%) is to replace a machine costing Rs. 1,000 after 8 years.
14. A machine costs Rs. 66,000 and its effective life is estimated to be 16 years. At that
time, it will have a salvage value of Rs. 6,000. A sinking fund is created to replace
the machine at the end of 16 years' by setting aside a sum of money at the end of each
year. What is the value of each payment, if the fund earns interest at 6.5% effective?
[Ans. Rs. 2,242.65]
15. A machine costs a company Rs. 2,75,000 and its effective life is estimated to be 18
years. A sinking fund is created for replacing the machine by a new model at the end
of its life, when its scrap realises a sum of Rs. 45,000 only. The price of the new
model is estimated to be 30% higher than the price of the present one. Find what
amount should be set aside at the end of each 3-month period out of the profits for
the sinking fund, if the fund earns interest at the 10% per annum compounded
quarterly. [ADs. Rs. 1,588.80]
16. A machine, being used by a company is estimated to have the life of 10 years. The
machine depreciates at the rate of 8% per annum for first 6 years and 9% per annum
for the rest of its life, depreciation being calculated on the diminishing value method.
The cost of the machine was initially Rs. 60,000. The company wishes has to replace
this machine by a new model at the end of its life. The price of the new machine is
estimated to be 20% higher than the price of the present one. Assuming that the
proceeds from the sale of scrap would be used for meeting the cost of new machine,
find what amount the company should set aside at the end of every year towards a
sinldng fund created for the purpose of purchasing the new machine, if every
payment earns interest at 10% effective. [Ans. Rs. 2,318.35]
SINKING FUND 261
17. An investor wishes to know the amount he should pay for an oilwell expected to yield
an annual return ofRs. 30,000 for the next 30 years, after which the well will be try.
Find the amount he should pay so that his investment will yield a 10% annual
return, if a sinking fund ears 6% annually. [Ans. Rs. 2,66,314.16]
18. A rental firm estimates that, if purchased, a machine will yield an annual net return
of Rs. 10,000 for 6 years, after which the machine would be worthless. How much
should the firm pay for the machine, if it wants to earn 7% on its investment and
also set up a sinking fund to replace the purchasing price? For the fund, assume
annual payments and a rate of 5% compounded annually. [Ans. Rs. 46,079.18]
19. A debt of Rs. 8,00,000 bearing interest at 7% compounded semi-annually is to
discharged by the sinking fund method. If 10 equal semi-annual deposits, the first
due in 6 months, are made into a fund which pays 6% compounded semi-anually,
find
(a) the semi-annual cost of the debt.
(b) the amount in the fund just after 7th deposit.
(c) how much ofthe fund's increase at the time ofthe 5th deposit is due to interest.
[Ans. (a) Rs. 97,784.41; (b) Rs. 5,34,720.23; (c) Rs. 8,758.51]
20. A machine costs Rs. 55,000 and its effective life is estimated to be 10 years. If the
scrap is Rs. 5,000 only, what should be retained out of profits at the end of each year
to accumulate at 11% per annum compounded continuously so that the new machine
can be purchased at the same price after 10 years? [Ans. Rs. 2,744.28]
21. Mr. X borrows Rs. 50,000 for 10 years. He agrees to pay the interest at 5% at the end
of each year and to establish a sinking fund to repay the principal.
(a) Find the annual cost of the debt, if the fund pays 3 1/2%
(b) How much will be in the fund just after 6th deposit?
(c)How much of the increase in the fund at the time of 5th deposit will be due to the
interest?
22. A machine costing Rs. 40,000 now will have a salvage value of Rs. 6,000 at the end of
its life after 5 years. A new machine at that time is expected to cost Rs. 50,000. In
order to provide funds for the difference between the replacement cost and salvage
value, a sinking fund is set up into which equal payments are placed at the end of
every month. If the fund earns interest at the rate of 8% per annum compounded
quarterly, how much should each quarterly payment be ? [Ans. Rs. 633.81]
23. A sinking fund is created for the redemption of debentures of Rs. 72,000 at the end of
25 years. How much money should be set aside out of profits at the end of each year
for the sinking fund, if the investment can earn interest at the rate of 6% per annum
compounded semi-anually? [Ans. Rs. 1,295.78]
24. A machine purchased for Rs. 36,000 is depreciated at 10% per annum on diminishing
values. In order to make up the loss due to depreciation during the period of 10
years, a sinking fund is created by setting aside a sum of money at the end of each
year. What is the value of each payment if the accumulated amount in the fund is
just equal to the total depreciation and if the fund earns interest at 5.5%
compounded annually? [Ans. Rs. 1,821.12]
25. A man buys a car for Rs. 2,25,000. He estimates that its value will de~r'ciat each
year by 15 % of its value at the beginning of the year. Find the depreciated value of
the car at the end of 5 years. He wants to sell the car after 5 years at the depreciated
value and to buy a new car. Cost of the new car is expected to be 20% higher than the
existing one. In order to buy a new car, he crates a sinking fund and sets aside at the
end of every month for. 5 years a certain fixed amount into the sinking fund. If the
fund earns interest at 12% per annum compounded monthly, what should be
monthly payment be ? [Ans. Rs. 99,833.70; Rs. 2,083.59]
leasing, Capital Expenditure
and Bond
INTRODUCTION
In business, companies come across different investment alternatives. They have to
decide whether to purchase a machine or lease it and if they decide to invest on machine,
they have to decide on which machine should be purchased. In such situations, they have to
select a preferable as well as profitable alternative. The concept of annuity, particularly
present value concept play an important role in these kind of leasing and capital
expenditure. In this chapter, we will study the application of compound interest and
annuities to leases, capital expenditure analysis and corporate bond pricing.
LEASING
A lease is a contractual agreement whereby the lessor grants the lessee the right to use
an asset in return for periodical lease rental payments.
Suppose a person needs a car for a period of two months. He can buy one car' and sell it
after two months. It will definitely require a lot of effort, time and cost. So the simple
alternative is that he can get a car for two months on lease. Similarly, if a company needs a
machine for a short period of time, it can lease the machine instead of purchasing. However,
if the machine is required for a long period, it is advisable to purchase it. So it is very
important to decide on the profitable alternatives whether to buy an equipment or to lease it.
Consider the problem of a company on deciding whether to purchase a machine for Rs. P
or to obtain the machine by leasing it for n years at a periodic (Generally annual) rent of
Rs.R.
Assume that money is worth r per annum. The company has to decide on which
alternative is preferable. In such situations, the present value of all rents, i.e., the present
value of an ordinary annuity of Rs. R for n years at the rate of r per annum is found out and
compared with the purchase price of the machine and then decision is made accordingly.
P -_ R a-;;Ji -- R [1 -(1 + i~
i
]
Let PI and P 2 be the present values of investment on the purchase of the machine and
the present value of the series of rent paid. If PI < P2" then we conclude that PI is preferable.
Remark 1 : If the machinery or equipment has any resales or salvage value, then this
value must be included in evaluating an investment. If Rs. P is the purchasing price of the
machine at present and Rs. S is the salvage value of the machine after n years, then the
present value of the investment on machine (PI) is given by
PI =(P - S (1 + l)-n)
This present value is compared with the present value of series of periodic rent and
decision is taken accordingly.
Remark 2 : If the periodic payments of rentals are made at the beginning of the year,
not at the end of year, then the present value of the series of payments of rent is the present
value of an annuity Due.
P =Rii-,.
nl,
=R (a~1 n-lI'. + 1)
1- (1 + i)-<n-I) ]
or P 2 =R [ . +1
~
Example 1 : A company may obtain a particular machine either by leasing it for 5 years
(the useful life) at an annual rent of Rs. 2,000 or buy purchasing the machine for Rs., 8,100. If
the company can borrow money at 10% per annum, which alternative is preferable ?
Solution: Purchase price of machine PI = Rs. 8,100

Periodic rent R = Rs. 2,000
No. of periods (years) n = 5
It is an ordinary annuity
Present value of an ordinary annuity ofRs. R is given by
P=R[l-(ti~]
.. Present value (Pi) of rentals ofRs. 2,000 paid for 5 years is
P _ 2 000 [1- (1.1)-5 ]

2 - , 0.1
LEASING ,CAPITAL EXPENDITURE AND BOND 265
P 2 = 2,000 [ 1 - 0.6;~9213 ]
P 2 =2,000 x 3.79078677 =7,581.57

Present value of rents (P 2) is Rs. 7,581.57 which is less than the purchases price (PI) of
the machine (Rs. 8,100)
lease is preferred
Example 2 : A company may obtain on a particular machine either by leasing it for 5

years (the useful life) at a quarterly rent of Rs. 1,000, payable at the end of every quarter or by
purchasing the machine for Rs. 15,000.
(a) Which alternative is preferable, f the company can investment money at 10% per
annum compounded quarterly ?
(b) What if it can invest at 12% per annum compounded quarterly ?
Solution:
Purchase price of the machine PI =Rs. 15,000
Quarterly rent R =Rs. 1,000
Rental period is 5 years
(a) Rate of interest r =10% =0.10
.. ~-4
; - ~ - 0.10
4 -_ 0025
.
and n = 5 x 4 = 20
Present value of an ordinary annuity of Rs. R is given by
P =R [1- (It i)"-'l]

.. Present value (P 2 ) of quarterly rent ofRs. 1,,000 for 5 years is given by
P _ 1 000 [1- (1.025)-20]
2- , 0.025
P 2 -_ 1,000 [1 - 0.61027094
0.025
]
P 2 = 1,000 [15.5891624] = 15,589.16

Present value of quarterly rents (P2) is Rs. 15,589.16, which is more than the
purchase price (PI) ofRs. 15,000
:. Purchase is preferable.
(b) Rate of interest r =12% =0.12

2
.. i =~ =01 = 0.03 and n = 5 x 4 =20
266 FINANCIAL MA THEMA ncs
Present value of quarterly rent ofRs. 1,000 for 5 years is given by

P = 1 000 [ 1 - (1.03)-20 ]
2, 0.03
P =1 000 [1 - 0.55367575 ]
2, 0.03
P2 = 1,000 (14.877475) =14,877.48
Present value (P 2 ) of quarterly rents is Rs. 14tB77.48, which is less than the purchase
price (PI) ofRs. 15,000
:., lease is preferable.
Example 3 : Annual return (after taxation) from a new machine is expected to be

Rs. 2,500. The machine costs Rs. 2,00,000 at present and has no scrap value at the end of its
life. Life of the machine is expected to be 10 years. A loan can be arranged for this amount
payable in 10 equal annual instalments at 5% per annum compounded annually. Should the
machine be purchased ?
Solution:
Annual Return RI =Rs. 25,000
Purchase price of machine P =Rs. 2,00,000
Loan is repaid 10 equal annual instalment at 5% effective.
:. n = 10 and i = 5% = 0.05
Let Rs. R2 be the equal annual payment which will amortize the loan ofRs. 2,00,000.
P =R [1-(1/ i)-n]
2,00,000 = R2 [1 - ~.:)-IO ]
2 00 000 - R [1 - 0.61391325 ]
" - 2 0.05
2,00,000 =R2 [7.721735]
R2 = 25,900.91
. . Annual instalment (R 2 ) against the loan is Rs. 25,900.91, which is more than the
annual return (R I ) ofRs. 25,000.
Since the expected annual returns are not sufficient to pay the annual instalment, new
machine should not be purchased.
Example 4 : A machine costs a company Rs. 66,000 and its expected life is 15 years. It is
estimated that the machine can be sold for Rs. 20,000 at the end of its life. Alternatively the
machine can be obtained by leasing it at an annual rent of Rs. 7,000. If the rate of interest is
7% per annum, find which alternative is preferable to the company.
Solution:
Purchasing price of the machine, P = Rs. 66,000
Resale value of the machine S =Rs. 20,000
Life of the machine = 15 years
Annual rent R = Rs. 7,000
. present value of the investment (P 1) on the machine
The . (P 1) is given by
P 1 = P - S (1 + i~
P 1 =66,000 - 20,000 (1.07)-15
P 1 = 66,000 - 20,000 (0.362446.02)
P 1 = 66,000 -72,48.92 = 58,751.08
.. Present value (P 1) of investment on machine is Rs. 58,751.08
Present value P 2 of annual rent is the present value of the ordinary annuity of Rs. 7,000
payable at the end of every year for 15 years.
.. Present value of annual rent, P 2 =7,000 a'i51 0,07
P _ 7 000 [1 - (1.07)-15 ]
2 - , 0.07
P _ 7 000 [1 - 0.36244602 ]
2 - , 0.07
P2 =7,000 (9.107914) =63,755.40
.. Present value of annual rents (P2 ) is Rs. 63,755.40
Since PI < P 2 , purchase of machine is preferable.
Example 5 : The lease of a certain business premises is due to expire shortly. The owner
has offered the occupier on extended lease for 10 years only at a considerably increased rent.
The new rent asked is Rs. 15,000 per quarter payable in advance. Alternative premises are
therefore being considered. The lease of these premises, which provides comparable facilities,
can be purchased for Rs. 4,00,000. Would you recommend that the lease of the alternative
premises be brought, if the rate of interest is 8% per annum compounded quarterly ?
Solution:
Purchase price of alternative premises, P l =Rs. 4,00,000
Quarterly rent R =Rs. 15,000
Term of the lease = 10 years
No. of rental payment n = 10 x 4 =40.

.. i =~ 0~8 = 0.02
Since the rent is payable in advance at the beginning of every quarter, it is an annuity
due.
Present value of an annuity is due is given by
.
P=Ra-;;J.=R
n I
[1- (1 + i)-<n-ll
.
,
+1
]
· . Present value (P0 of the quarterly rent is given by
P 2=15,000 [1 - ~.g:)-'39 + 1]
P 2 = 15,000 [1 - 0.~:482 + 1]
P 2 = 15,000 (27.902589) = 4,18,538.84

· . Present value of annuity of rent is Rs. 4,18,538.84
Given that purchase price of lease of alternative premise is Rs. 4,00,000.
· . Since the present value of the annuity of quarterly rent of Rs. 15,000 is more
expensive than lease of alternative premises, the lease of alternative premises should be
preferred.
Example 6 ; A company wishes to acquire a machine for the next 8 years and considers
the following methods oj'paying for it.
(a) outright purchase for Rs. 2,00,000 with a maintenance contract of Rs. 15,000 payable
annually in advance. The machine would have a second hand resale value after 8
years of Rs. 30,000.
(b) Rent the machine for 8 years at Rs. 50,000 per annum, payable annually in advance,
inclusive of all maintenance.
Assuming that the cost of capital to be 8% effective, find which method is more
economical.
Solution:
In case of a purchasing the machine :
Purchase price =Rs. 2,00,000
Annual maintenance contract R =Rs. 15,000
Since it is payable annually in advance, it is an annuity due
No. of years n =8
Rate of interest i =r= 8% = 0.08
Resale value of the machine =Rs. 30,000
Present value PI of investment on purchasing the machine
l.EASING ,CAPrrAl. EXPENDITURE AND BOND 269
=Purchasing price of the machine

+ present value of annuity of maintenance cost ofRs. 15,000
- Present value of resale value
. . Present value of investment on machine
PI = 2,00,000 + 15,000 (all. -IIi + 1) - 30,000 (1 + iT"
PI =2,00,000 + 15,000 (a71o.os + 1) - 30,000 (1.08)-8
PI =2,00,000 + 15,000 (5.20637006 + 1) - 30,000 (0.54026888)
PI =2,00,000 + 93,095.55 - 16,208.07
PI = 2,76,887.48
.. Present value of investment on machine (PI) is Rs. 2,76,887.48
Incase of leasing the machine:
Annual rent R =Rs. 50,000
No. of years n =8
Since the rent is payable annually in advance, it is an annuity due.
Let P 2 be the present value of annual rent.
Present value (P~ of the annual rent ofRs. 50,000 for 8 year at 8% effective is given by
P2 =R (as-IIO.08 + 1)
P 2 =50,000 (a71 o.os + 1)
P2=50,000 (5.20637006 + 1) = 3,60,318.50
.. Present value of rental of machine (P 2 ) is R:s. 3,60,318.50
Since PI < P2, purchasing the machine is preferable.
CAPITAL EXPENDITURE
Companies, while deciding to purchase a machine, may be faced with a choice between
two or more machine which are designed to improve operations by saving on labour cost,
knowing the time value of money, we can find the net annual savings of each machine.
Net annual saving (S) is given by
Net annual saving (S) = Labour saving (L) - Annual cost (C)
Machine which has higher net annual saving is preferred to be purchased.
If P is the cost of machine (purchase price), n is the number of years and time value of
money is i per year, the annual cost is given by
P
Annual cost, C = - -
a~i
Alternatively, net saving is given by

Net saving =Present value of annual savings - Cost of the machine
Example 7 : Machine A costs Rs. 8,000 and has a useful life of 7 years. Machine B costs
Rs. 6,000 and has a useful life of 5 years. Suppose Machine A generates an annual labour
savings of Rs. 2,000 while machine B generates an annual labour savings of Rs. 1,800.
Assuming that the time value of money of the corporation is 10% per annum, which machine
is preferable? (Assume that the savings is realised at the end of each year).
Solution:
For machine A :
Let C 1 be the annual cost of machine A
Cost ofthe machine A, PI =Rs. 8,000
Life of the machine A, n = 7 years
Equivalent annual cost is given by
C - PI
1 - ao .
nl,
.. Annual cost, C1 of machine A is

Cl = 8,000
a71 0.10
8,000
C1 = 4.86841882 =1,643.24
Annual cost of machine A is Rs. 1,643.24
Net annual saving is given by
Net annual saving =Annual labour saving - Annual cost
Given that annual labour saving for machine Ll =Rs. 2,000
.. Net annual savings from machine A
8 1 =Rs. 2,000 - Rs. 1,643.24
8 1 = Rs. 356.76 .
.. Net annual savings from machine A, 8 1 =Rs. 356.76
For machine B :
Let C 2 be the annual cost of machine B.
Cost of the machine B, P 2 =Rs. 6,000
Life of the machine B, n = 5 years
Annual cost of machine B is given by
C 2--~
a51 0.1
6,000
C2 = 3.790787 = 1,582.78
Annual cost (C 2) of machine B is Rs. 1,582.78
Given that annual labour savings from machine B, L2 = Rs. 1,800
:. Net annual savings from machine B
LEASING ,CAPrrAL EXPENDrrURE AND BOND 271
82 =Rs. 1,800 - Rs. 1,582.78

8 2 =Rs. 217.22
.. Net annual savings from machine B, 8 2 is Rs. 217.22
Since 8 1 > 8 2, machine A is preferable
Alternative method:
For machine A:
Present value of annual savings ofRs. 2,000 for 7 years at 10% per annum
Rl = 2,000 a71 0.1
=2,000 (4.86841882) =9,736.84
Net saving is given by
Net saving =Present value of anIiual saving - Cost of the machine
Cost of machine A is Rs. 8,000.
.. Net savings from machine A
=Rs. 9,736.84 - Rs. 8,000
=Rs. 1,736.84
.. Net savings from machine A is Rs. 1,736.84
For machine B :
Present value of annual labour savings ofRs. 1,800 for 5 years at 10% per annum
=1,800 a51 0.10
=1,800 (3.790787) =6,823.42
Net savings from machine B
=Rs. 6,823.42 - Rs. 6,000
= Rs. 823.43
Net savings from machine B is Rs. 823.43
Since net savings from machine A is higher, machine A is preferable.
BONDS
A bond is a written contract between a borrower and a lender (bond holder). Through
this contract, the borrower promises to pay a specified sum at a specified future date, and to
pay interest payments, at a specific rate, at equal intervals of time until the bond is
redeemed.
The face value of a bond is the amount mentioned in the bond. It is the amount paid to
the bondholder at the maturity of the bond. Face value is also known as par value or
denomination of the bond.
The rate at which a bond yields interest is called the nominal interest rate or dividend
rate or coupon rate. This is normally quoted as an annual percentage of face value of the
bond. Interest payments are conventionally made periodically.
The redemption price of a bond is the amount the bond pays at maturity. The redemption
price is generally the face value. If the redemption price is equal to the face value, then the
bond is said to be redeemed at par. It redemption price is higher than the face value, then
the bond is said to be redeemed above par.
The redemption price is stated on the bond. If it is stated that a bond is to be redeemed
at 105, this means that the redemption price of the bond is 105% of its face value.
Bonds are bought in open bond market. Purchase price of a bond is the amount paid by
the bondholder to the borrower at the time of bond's original issuance or the price at which
the bond is traded between investors in bond markets after issuance. Bond price is usually
different from the redemption price or par value. wpen the bond price is higher than the face
amount, the excess is referred to as a bond premium. If the price is lower than the face
amount, the difference is called bond discount.
The yield rate or effective rate is the rate at which the purchaser of the bond expects to
realise an income from his investment. These rates are determined in the bond market
influenced by such factors as the supply and demand of money, open-market activities of the
Reserve Bank, credit standing and etc. Yield rate may be either higher or lower than the
nominal rate. Nominal rates are fixed for the entire life of the bond; but the effective interest
rates vary from time to time.
The owner of a bond is entitled to the following benefits from the bond:
(a) All future dividends as they occur.
(b) The redemption price of the bond at maturity.
The purchase price of a bond therefore is the combination of the present value of the
annuity of periodic interest payment and the present value of the redemption price of the
bond. Now we derive the formula for the determination of purchase price of a bond.
Let F be the face value and C be the redemption price. Let n be the number of periods
before redemption and id be the rate of interest per period.
The periodic dividend payment, R (periodic interest) is given by
R =F x id
Let i be the yield rate per period
Present value of annuity of periodic dividend payments of R for n periods is given by
PI = Ra...,.
nil
The present value of redemption price of the bond is given by

P2 = C (1 + fr-n
Let Vbe the purchase price of the bond.,
Purchase of a bond is given by
V=P I +P2
I V = R a In! + C (1 + iy-n I
Remark: If the bond is redeemed at par, then C =F and purchase price will be given by
I V = R a-;;l i + F (1 + i)-n I
Example 8 : A bond with a face value of Rs. 1,000 matures in 10 years. The nominal rate
of interest on bond is 12% per annum paid annually. What should be the price of the bond so
as to yield effective rate of return equal to 10% ?
Solution:
Face value of the bond F =Rs. 1,000
Nominal rate of interest = 12% = 0.12
.. id =0.12
Annual dividend R is given by
R =Fx id
R =1,000 x 0.12 =120
.. Annual dividend is Rs. 120
No. of periods before redemption n =10
Effective rate i ;:: 10% = 0.10
Present value of all future dividends is given by
PI =Ra-;;Ji
P = 120 [1- (1.10)-10]
1 0.1
PI = 120 [1 - 0.3~5429 ]
PI = 120 [6.144567] = 737.35

· . Present value of dividends is Rs. 737.35
Present value of Face value is given by
P 2 = F(1 + i}-ll
P 2 = 1,000 (1.1)-10
P 2 =1,000 (0.38554329) =385.54
· . Present value of face value of the bond is Rs. 385.54
Since purchase price of a bond is the sum of the present value of all future dividends and
the present value of face value, the purchase price of the bond is
V=P 1 +P2
V = Rs. 737.35 + Rs. 385.54 = Rs. 1,122.89
· . The required purchase price is Rs. 1,122.89
Example 9 : Find the purchase price of a Rs. 800, 6% bond, dividends payable semi-
annually, redeemable at par in 5 years, if the yield rate is to be 8% compounded semi-
annually.
Solution:
Face value of the bond F =Rs. 800
Nominal rate of interest = 6% =0.06
Dividends are payable semi-annually.
. 0.06
.. 'd=-2-=0.03
Semi-annual dividend is given by

R =F x id
R =800 x 0.03 =24
. . Semi-annual dividend R is Rs. 24
Yield rate is 8% = 0.08, compounded semi-annually
. - 0.08 _ 0 04
~ - 2 - .
N·.). of years = 5 years
No. of dividend periods n =5 x 2 =10
Purchase price of a bond is given by
V =R a-' . + F (1 + irn
nil
V R [1 - (1t irn ] + F (1 + irn

=
V =24 [1 - ~.:)-10 ] + 800 (1.04)-10
V =24 [ 1 - 0.~;:6417 ] + 800 (0.67556417)
V = 194.66 + 540.45 = 735.11

.. Purchase price of the bond is Rs. 735.11
Example 10 : A Rs. 2,000, 6% bond is redeemable at the end of 10 years at 105. Find the
purchase price to yield 7% effective.
Solution: Face value of the bondF =Rs. 2,000

Since the bond is Redeemable at 105, the redemption price of the bond is 105% of its face
value
Redemption price C = 1.05 x 2,000 = Rs. 2,100
Nominal rate id = 6% = 0.06
AnImal dividend R is given by
R =F x id
R = 2,000 x 0.06 =Rs. 120
No. of periods before redemption n = 10
Annual yield rate i = 7% = 0.07
Purchase price of a bond is given by
V = R a-'
nil
. + C (1 + ir-n
V = 120 alol 0.07 + 2,100 (1.07)-10
V = 120 (7.02358154) + 2,100 (0.50834929)
V = 842.83 + 1,067.53 = 1,910.36
.. The present value of the bond is Rs. 1910.36
L A company may obtain a particular machine either by leasing it for 10 years (the
useful life) at an annual rent of Rs. 10,000 or by purchasing the machine for
Rs. 70,000. If the company can borrow money at 10% per annum, which alternative
is preferable? [Ans. Lease is preferable]
2. A company may obtain a particular machine either by leasing it for 5 years (the
useful life) at an annual rent of Rs. 4,000 or by purchasing the machine for Rs.
15,000. If the company can borrow money at 9% per annum, which alternative is
preferable? [Ans. Purchase is preferable]
3. A machine costs a company Rs. 50,000 and its expected life is 8 years after ~hic the
machine has no resale value. Alternatively the machine can be obtained by leasing it
at quarterly rent of Rs. 3,000, payable at the end of every quarter. If the rate of
interest is 12% per annum, find which alternative is preferable to the company.
[Ans. Pur~hase is preferable]
4. Which alternative is preferable, when a company may obtain a particular machine
either by leasing or purchasing on the basis of the given information.
(a) Purchase price ofRs. 4,000 interest rate of 14% per annum, or leasing for 4 years
at an annual rent ofRs. 1,250.
(b) Purchase price of Rs. 18,000, interest rate of 12% per annum compounded semi-
annually, or leasing for 5 years at a semi-annual rent ofRs. 2,800.
[Ans. (a) Lease is preferable, (b) Purchase is preferable]
5. A company gets a contract and realises 7% net annual return from the contract. The
company expects to realise Rs. 70,000 at the end of every year for 5 years. However
accepting the contract requires capital expense of Rs. 2,50,000 at present, should the
company accept the contract? [Ans. Accept the contract]
useful life) at an annual rent of Rs. 21,000 payable at the beginning of every year or
by purchasing the machine for Rs. 2,00,000.
(a) Which alternative is preferable, if the company can borrow money at 6% effective
rate?
(b) What if the cost of borrowing is 8% effective?
[Ans. (a) Purchase is preferable, (b) Lease is preferable]
useful life) at a semi-annual rent of Rs. 2,400 payable at the end of every 6-months
period or by purchasing the machine for Rs. 21,000.
(a) Which alternative is preferable, if the company can invest money at 8% per
annum compounded semi-annually?
(b) What if the company can invest money at 12% per annum compounded semi-
annually? [Ans. (a) Purchase is preferable, (b.) Lease is preferable]
8. A company plans to install a new machine from which it expects an annual earning
ofRs. 45,000. The machine costs the company Rs. 2,00,000. The life of the machine is
estimated to be 5 years. After that there will be no scrap or resale value. The
company can get a loan for this amount and repay is 5 equal annual instalments at
6% per annum on unpaid balance of the loan. Should the company buy the machine?
[Ans. Should not purchase]
9. A man needs a car for his personal use only for two years. He has two alternatives.
(a) Purchasing the car for Rs. 2,50,000 and reselling it for Rs. 1,50,000 after 2 years.
(b) Getting the car by leasitlg by paying monthly rent of Rs. 6,000 payable at the end
of every month.
Assuming the interest rate to be 12% per annum compounded monthly, find which
alternative he can choose. [Ans. Leasing is preferable]
10. A company can either construct a factory building for Rs. 12,50,000 or rent an
equivalent one with a 25-year lease for an annual rent of Rs. 1,00,000 payable at the
beginning of each year and an option to purchase the building or Rs. 1,30,000 at the
expiration of the contract. If the company expects t:> earn 8% per annum after taxes
from other investment opportunities, should the company construct or rent an
equivalent factory building? [Ans. Rental is preferable]
11 Annual return after taxation from a new machine is expected to be Rs. 25,000. The
machine costs Rs. 2,00,000 at present and has a life of 10 years. The scrap value of
the machine is estimated to be Rs. 40,000. It is assumed that the company would
earn 6% return if Rs. 2,00,000 spent on the machine were invested elsewhere. Should
the company buy the machine? [Ans. Buy the machine]
12. A machine costs a company Rs. 1,60,000 with a maintenance contract of Rs. 15,000
payable at the end of every year. The resale value of the machine is Rs. 25,000 at the
end of its life of 12 years. Alternatively the company can lease a machine including
all maintenance for 12 years at Rs. 3,500 per annum. If the rate of interest is 7% per
annum, which alternative is preferable to the company?
[Ans. Purchase is preferable]
13. The lease of certain business premises is due to expire shortly. The owner has offered
the occupier, Mr. X, an extended lease for 15 years only at a considerable i~creas of
rent. The new rent asked is Rs. 90,000 per quarter payable in advance. Alternative
premises are therefore being considered. The lease of these premises, which provides
comparable facilities, can be purchased for Rs. 30,00,000. Mr. X can borrow this sum
at 4% per half-year with the loan and interest payable by thirty equal amounts at 6-
month interval. The first repayment would be due six months after the date of the
sale agreement.
(a) What would be the amount of each half-yearly payment?
(b) Would you recommend that the lease of the alternative premises be bought?
[Ans. (a) Rs. 1,73,490.63, (b) Yes.]
14. A company wishes to acquire a machine for the next five years and considers the
following methods of paying for it.
(a) Outright purchase for Rs. 4,00,000 with a maintenance contract of Rs. 20,000
payable annually in advance. The machine would have a send-hand resale value
after 5 years of Rs. 50,000.
LEASING ,CAPrrAL EXPENDITURE AND BOND 277
(b) Rent the machine for 5 years at Rs. 1,10,000 per annum, payable annually in
advance, inclusive of all maintenance.
(c) Hire purchase of a down payment of Rs. 2,00,000. followed by four annual
payments of Rs. 95,000, inclusive of all maintenance, after which time the
company owns the machine. The machine would have a second hand resale value
after 5 years of Rs. 50,000.
Assuming the cost of capital to be 12% effective, find which method is most
economical. Comment briefly on your answer. [Ans. Rental is preferable]
15. Machine A costs Rs. 25,000 and has useful life of 8 years. Machine B costs Rs. 28,000
and has useful life of 6 years. Suppose that machine A generates an annual savings
of Rs. 5,000 while machine B generates an annual savings of Rs. 4,500. Assuming the
time value of money is 7% effective, which machine is preferable?
[Ans. Machine A is preferable]
16. A machine with useful life of 7 years costs Rs. 10,000, while another machine with
useful life of 5 years costs Rs. 8,000. The first machine saves labour expenses of
Rs. 1,900 annually and the second one saves labour expenses by Rs. 2,200 annually.
Assuming that the time, value of money is 10% per annum, which machine is
preferable? [Ans. Second machine]
17. Machine A costs Rs. 9,750 and will generate an annual labour savings ofRs. 2,400.
Machine B costs Rs. 7,750 and will save Rs. 2,300 annually. Machine A has a useful
life of 8 years, while machine B has a useful life of 6 year only. If time value of money
is 10% per annum, which machine is preferable? (Assume annual compounding and
that the savings is realised at the end of each year). [Ans. Machine A is preferable]
18. A Rs. 1,000 bond paying annual dividends at 8.5% will be redeemed at par at the end
of 10 years. Find the purchase price of this bond, if the investor wishes a yield rate of
8%. [ADs. Rs. 1,033.54]
19. A bond with a face value of Rs. 5,000 matures in 12 years. The nominal rate of
interest on this bond is 12% per annum. What should be the price of the bond so as to
yield an effective rate ofreturn equal to 10 %? [Ans. Rs. 5,683.40]
20. An investor intends purchasing a 3-year Rs. 1,000 par value bond having nominal
rate of 10%. At what price the bond may be purchased now, if it mature~.: at par and
the investor requires a yield rate of 14%. [ADs. Rs. 907.13]
21. Find the purchase price of a Rs. 1,000, 6% bond, dividends payable semi-anually,
redeemable at par in 10 years, if the yield rate is to be 5% compounded semi-
annually. [Ans. Rs. 1,077.94]
22. Find the purchase price of a Rs. 500, 4% bond, dividends payable semi-annually,
redeemable at 104 in 5 years, if the· yield rate is to be 6% compounded semi-
annually. [Ans. Rs. 472.18]
23. A Rs. 1,000, 6% bond is redeemable at Rs. 1,050. Find the purchase price of this
bond, if the yield is expected to be 9% compounded semi-annually. [Ans. Rs. 732.57]
24. Find the purchase price of a Rs.· 1,000 bond, redeemable at the end of 10 years at
110, and paying anu~ dividends at 4%, if the yield rate is to be 5% effective.
[Ans. Rs. 984.16]
Theory of Probability -~ --
INTRODUCTION
We live in a world in which we are unable to forecast the future with complete certainty.
Many unpredictable phenomenon where the results can not be predicted with certainty are
frequently observed in business, economics, and even in our day- to-day life. For example, a
company can not accurately predict the future demand of his product. One can not ascertain
that tomorrow it will be raining or not. In all these cases, there is involved an element of
uncertainty. Our need to cope ~th uncertainty leads us to the study and use of probability
theory. For example, an insu1'ance company requires precise knowledge about the future
contingencies in order to. calculate premium. Probability is the numerical measure of
uncertainty. In this chapter, we dt'cuss basic concepts and application of probability and
various probability distributions .
. SET THEORY
We first study the important topic of sets, a simple idea that recurs throughout the study
of probability. A set is a well-defined collection of objects. A set is usually denoted by a
capital letter, such as A, B, or C. Each object in a set is called an element of the set. An
element of a set is usually denoted by a small letter, such as x, Y. or z. A set is generally
described by listing all of its elements enclosed in braces. For example, (a) if Set A consists of
the numbers 2, 4, 6, and 8, we may say: A ={2, 4, 6, 8}. (b) If A is the set of vowels, then A
could be described as A ::: {a, e, i, 0, u}.
Two sets are equal if they have exactly the same elements in them. For example, if
Set A = {I, 2, 3} and Set B = {3, 2, 1}, then the two sets A and B are equal as they have the
same elements. It is to be no~d that the order in which the elements are listed does not
matter.
THEORY OF PROBABILITY 279
A set that contains no elements is called a null set or an empty set. For example the set
of natural numbers in between 5 and 8 which are divisible by 4 is a null set, because there
are no natural numbers divisible by 4 in between the natural numbers 5 and 8. The set of
men with three arms contains no elements. It is the null set (or empty set), since all men
have two arms at most. The null set is denoted by 0 or {}.
If every element in Set A is also in Set B, then Set A is a subset of Set B. For example,
let Set A ={I, 2, 6} and Set B =n, 2,4, 5, 6}. Set A is a subset of Set B if every element from
Set A is also in Set B. But if Set A = n, 2, 3}, then Set A is not a subset of Set B, since the
number 3 is in Set A, but not in Set B.
There are two basic operations of sets. The union of two sets is the set of elements that
belong to one or both of the two sets. In other words, the union of two sets set A and set B is
the set of all elements which belong to either set A or set B. Symbolically, the union of A and
B is denoted by A U B. For example, if set A ={l, 2, 3, 4} and set B ={3, 4, 5, 6}, then A U B
= {I, 2, 3, 4, 5, 6}.
The intersection of two sets is the set of elements that are common to both sets.
Symbolically, the intersection of A and B is denoted by A n B. For example, (a) if set A ={l,
2,3, 4} and setB ={3, 4, 5, 6}, then A n B ={3, 4}, (b) if setA ={l, 2, 3, 4} and setB ={5, 6, 7,
8}, then A n B =0. Two sets A atidB are said to be disjoint, if A n B =0.
The difference of two sets A and B, in this order, is the set of elements which belong to
A but not to B. Symbolically, the difference of A and B is denoted by A - B and red as "A
difference B". For example, if set A =n, 2, 3, 4} and set B ={3, 4, 5, 6}, then A - B ={I, 2},
and B -A = {5,6}.
Let U be the universal set which contains all elements and A is a sub set of U. Then the
complement of A with respect to U is the set of all elements of U which are not the elements
of A. Symbolically, the complement of A is denoted by AI. For example, (a) if U = {I, 2, 3, 4,
5, 6}, and A = {l, 2, 3, 4}, then AI = {5, 6}; (b) ifU = {a, e, i, 0, u) and A = {e, i, 0), then AI
= {a, u}.
BASIC TERMINOLOGY IN PROBABILITY
Before we study the definitions and laws of probability, it is necessary to understand
some basic terms which are used in probability.
Experiment: An Experiment is an operation that results in two or more outcomes. For
example, tossing a fair coin, rolling an unbiased die, and etc. All statistical experiments have
three things in common:
• The experiment can have more than one possible outcome.
• Each possible outcome can be specified in advance.
• The outcome of the experiment depends on chance.
A coin toss has all the attributes of a statistical experiment. There is more than one
possible outcome. We can specify each possible outcome (i.e., heads or tails) in advance. And
there is an element of chance, since the outcome is uncertain.
Sample Space : A sample space is a set of elements that represents all possible
outcomes of a statistical expri~nt. A sample point is an element of a sample space. For
example, in a toss of two coins, the sample space S = {HH, HT, TH, TT} and all the four
elements are sample points.
Event: An event is a phenomenon which satisfies a specific description. For example, in
a toss of two coins, "getting exactly one head" is an event. An event may be simple or
compound. If an event corresponds to a single possible outcome, it is called simple event and
otherwise, it is compound or composite event. Thus, an event is a subset of a sample space -
one or more sample points.
Mutually Exclusive Events : Events are said to be mutually exclusive, if the
happening of anyone of them excl:udes the happening of all others in the same experiments.
For example, in a toss of two coins, the events "getting only heads" and "getting only tails"
are mutually exclusive, because if two heads comes, two tails don't. Similarly in a throw of a
dice, "getting even numbers" and "getting odd numbers" are mutually exclusive events but
the events "getting even numbers" and "getting a multiple of 3" are not mutually exclusive,
since 6 is the common outcome in both events. Thus, we can also state that two events are
mutually exclusive if they have no sample points in common.
Collectively Exhaustive Events : When a list of the possible events that can result
from an experiment includes .every possible outcome, the list is said to be collectively
exhaustive. For example, in a toss of a coin, the list "head" and "tail" is exhaustive; while
throwing a dice, the possible outcomes are 1, 2, 3, 4, 5, and 6 and hence the exhaustive
number of cases is 6. Similarly, in a throw of a dice, "getting even numbers" and "getting odd
numbers" are collectively exhaustive events.
Equally likely Events : Events are said to be equally likely when one does nQt occur
more often than the others. For example, if an unbiased dice is rolled each numb~r is
expected to appear approximately the same number of times in a long run. Similarly when a
large number of trials of throwing a coin is made, it may be expected that the number of
times head appears if' approximately equal to the number of times tail appears.
Independent Events: Two events are independent when the occurrence of one does not
affect the probability of the occurrence of the other. For example, if a coin is tossed twice, the
result of the second throw would in no way be affected by the result of the first throw. But
out of 52 cards, if one is drawn and without replacing it another card is drawn, then the
probability of second card is affected. In this case the events are dependent. The question of
dependency or independency is relevant when experiments are consecutive and not
simultaneous.
Complementary Events: Two events are said to be complementary to each other, if
they are mutually exclusive and exhaustive. For example, in a throw of a dice, "getting even
numbers" and "getting odd numbers" are complementary events, since both are mutually
exclusive and the totality represents the sample space.
PROBABILITY DEFINED
The probability of an event is a measure of the likelihood or chance that the event will
occur. Probability is determined as the ratio of the number of successful or favourable
outcomes to the total number of equally likely outcomes. Probability of occurrence of the
event A is denoted by p (A) or Pr (A).
;
Let A be an event. The probability of the event A is given by

(A) _ Number of successful outcomes
p - Total number of outcomes
Symbolically, if an event A can happen in en' ways out of a total of eN equally likely and
mutually exclusive ways, then the probability of occurrence of the event is:
n
peA) =Pr(A) =N
The probability of any event can range from 0 to 1. If p =0, it denotes impossibility of the
occurrence of the event. For example, in case of throwing a dice, the probability of getting 7
is zero, since it is an impossible event. If p = 1, it denotes the certainty of the event. For
example, in case of throwing a dice, the probability of getting a natural number less than 7 is
1, since this event represents the sample space. In most cases, the probability lies in between
these two extremes 0 and 1. If the event A is very unlikely to.()ccur, thenp(A) will be close to
O. And if event A is very likely to occur, then p(A) would be close to 1.
Example 1 : Suppose we draw a card from a deck of playing cards. What is the
probability of drawing a spade?
Solution: The sample space of this experiment consists of 52 cards. Since there are 13
spades in the deck, the probability of drawing a spade is
13
P (Spade) =52 = 1/~
Remark: Probability of occurrence of an event can also be expressed in terms of
percentage. For example, that the probability of draw a spade out of 52 cards is ~ is means
that there is 25 % of chance of drawing a spade. The only difference is that the probability
can not go beyond 100%
Example 2 : Suppose a coin is flipped 3 times. What is the probability ofgetting two tails
and one head?
Solution: For this experiment, the sample space consists of 8 sample points.
S ={TTT, TTH, THT, THH, HTT, HTH, HHT, HHH}
Each sample point is equally likely to occur. The event "getting t~o tails and one head"
consists of the following subset of the sample space.
A ={TTH, THT, HTT} and n (A) = 3
The probability of Event A is given by
n
p(A) =N
Therefore,
3
p(A) =8" = 0.375
. . The required probability is 0.375
Example 8: From a bag containing 10 red balls and 15 black balls, a ball is drawn at
random. What is the probability that it is a red ball?
Solution: Let A be the event of drawing a red ball.

Number of red balls, n =10
Total number of balls, N = 10 + 15 = 25
Probability of an event A is given by
(A) =Number of favourable outcomes
p Total number of outcomes
10
Therefore, p(A) = 25 = 0.4
This means that there is 40% chance of drawing a red ball from the bag.
THEORAMS OF PROBABILITY
Often, we want to compute the probability of an event from the known probabilities of
other events. There are some important rules that simplify those computations. They are
• Rule of Addition (or)
• Rule of Multiplication (and)
• Rule of Subtraction (not)
Rule of Addition
The probability that Event A or Event B occur is equal to the probability that Event A
occurs plus the probability that Event B occurs minus the probability that both Events A and
B occur. The probability of the union of Events A and B is denoted by p(A U B) ..
p(A U B) =p(A) + p(B) '- p(A n B)
If the two events are mutually exclusive, then the two events can not occur
simultaneously and p(A n B) = O. Therefore, the probability of occurrence' of either the event
A or the event B is the sum of the individual probabilities of A and B.
p(A U B) =p(A) + p(B)
In a similar way this rule can be extended to three or more events.
Example 4 : A card is drawn randomly from a deck of ordinary playing cards. You win if
the card is a spade or an ace. What is the probability that you will win the game?
Solution: Let A =the event that the card is a spade; and let B =the event that the card
is an ace.
We know that there are 52 cards in the deck.
13
There are 13 spades, so p(A) =52'
4
There are 4 aces, so p(B) = 52 .
There is 1 ace that is also a spade, so P(A n B) =:2 .

The rule of addition is
p(A U B) =p(A) + p(B) - p(A n B)
13 4 1 16 4
p(A U B) =52 + 52 - 52 = 52 =13
. . The required probability is :3 .

Example 5 : A student goes to the library. The probability that she checks out (a) a work
of fiction is 0.40, (b) a work of non-fiction is 0.30" and (c) both fiction and non-fiction is 0.20.
What is the probability that the student checks out a work offiction, non-fiction, or both?
Solution: Let A = the event that the student checks out fiction; and let B = the event
that the student checks out non-fiction.
Given that p(A) =0.40; P(B) =0.30; and p(A n B) =0.20
Based on the rule of addition:
p(A U B) = p(A) + p(B) - p(A n B)
p(A U B) = 0.40 + 0.30 - 0.20 =0.50
. . The required probability is 0.50.
Example 6 : A card is drawn randomly from a deck of ordinary playing cards. What is
the probability that the card is either a king or a queen?
Solution: Let A =the event that the card is a king; and let B =the event that the card is
a queen.
We know that there are 52 cards in the deck.
There are 4 kings, so p(A) = :2 =;3
4 1
There are 4 queens, so p(B) =52 =13
The events A and B are mutually exclusive and so P(A n B) =O.

In case of mutually exclusive events, the probability of either A or B is given by
p(A U B) =p(A) + p(B)
112
p(A U B) =13 + 13 =13

Example 7 : A bag contains 40 balls numbered from 1 to 40. One card is drawn at
random. Find the probability that the number of the ball drawn will be a multiple of (a) 5 or
7, and (b) 5 or 9.
Solution: Total number of balls =40

(a) Let A be the event of drawing a ball numbered with a multiple of 5 and B be the
event of drawing a ball numbered with a mUltiple of7.
A = {5, 10, 15, 20, 25, 30, 35, 40}, and n(A) =8
B = {7, 14, 21, 28, 35}, and n(B) =5
Since 35 is a mUltiple of both 5 and 7, the events A and B are mutually excusive
and therefore n(A n B) = 1.
8 5 1
- Here,p(A) =40 ;p(B) =40; andp(A nB) =40
p(A U B) =p(A) + p~B) - P(A n B)
p(A U B) = (:0 + :0) - (:0 )

p(A U B) =12 / 40 =0.30
(b) Let A be the event of drawing a ball numbered with a multiple of 5 and B be the
event of drawing a ball numbered with a multiple of 9.
A = {5, 10, 15, 20, 25, 30, 35, 40}, and n(A) = 8
B = {9, 18,27, 36}, and n(B) =4
Since the events A and B are mutually excusive n(A n B) =0 and so p(A n B) =0
8 4'
Here,p(A) = 40 ;p(B) = 40

p(A U B) =p(A) + p(B)
~(A U = (:0) + (:0)
B)
12
p(A U B) = 40 = 0.30
.. The required probability is 0.3.
Rule of Multiplication
The rule of multiplication applies to the situation when we want to know the probability
that two events (Event A and Event B) both occur. The probability of the intersection of
Events A and B is denoted by P(AIB). If two events A and B are independent, then the
probability that both will occur is equal to the product of their individual probabilities:
Symbolically,
p(A n B) = p(A) x p(B)
In a similar way this rule can be extended to three or more events.
Conditional Probability: Multiplication theorem can be modified due to conditional
probabilities. If two events A and B are dependent in such a way that the event B occurs only
lHEORYFPBA~n , 285
after the event A has occurred, then the probability that Event B occurs, given that Event A
has occurred, is called a conditional probability. The conditional probability of Event B,
given Event A, is denoted by the symbol P(B IA). The general rule of multiplication in its
modified form in terms of conditional probabilities is given as follows: .
p(A n B) = p(A) x p(BI A)
Example 8 : A bag contains 5 red balls and 3 black balls. Another bag contains 4 red
balls and 5 black balls. If one ball is draiDn (rom each bag, find the probability that both are
red balls.
Solution: Let A be the event of drawing a red ball from first bag, and B be the event of
drawing a red ball from the second bag.
Number of red balls in first bag =5
Total number of balls in first bag =5 + 3 =8
Probability of an event A is given by
(A) _ Number of favourable outcomes
p - Total number of outcomes
5
.. p (A) =8
Number of red balls in second bag =4'

Total number of balls in second bag = 4 + 5 =9
4
.. p(B) =9
The events A and B ate independent. Probability of occurrence of both A and B is given
by
p(A n B) = p(A) x P(B)
The probability that both balls are red is
p(A n B) = (i) x (~) = :8

Example 9 : An urn contains 6 red marbles and 4 black marbles. Two marbles are·
drawn without replacement from the urn. What is the probability that both of the marbles are
black?
Solution: Let A be the event that the first marble is black; and let B be the event that
the second marble is black.
In the beginning, there are 10 marbles in the urn, 4 of which are black.
4
.. p(A) =10'
After the first selection, we do not replace the selected marble; so there are 9 marbles in
the urn, 3 of which are black.
3
:. p(BIA) =9
Based on the rule of mUltiplication:
p(A n B) =p(A) x p(B IA)
p(A n B) = (:0) x (~ ) =!~

. . The required probability is ~.
Remark: If the first marble is replaced, before we draw the second marble, then p(B IA)
=:0 and consequently p(A n B) = (:0) x (:0) =:00=0.16

6
Rule of Subtraction
The rule of subtraction applies to the situation when we want to know the probability
that an Event A will not occur. The probability that event A will not occur is equal to 1
minus the probability that event A will occur and vice versa. The probability of an event A
will not happen is as follows:
p(A') = 1 - p(A)
The events A and A' are complementary to each other.
Example 10 : Suppose the probability that X will graduate from college is 0.80. What is
the prob~ilty that X will not graduate from college?
Solution: Let A be the event that X will graduate.

Given that p(A) = 0.80
The probability of an event A will not happen is as follows:
p(A') =1 - p(A)
. . The probability that Bill will not graduate is
p(A') = 1.00 -0.80 = 0.20.
BAYES' THEOREM
Bayes' theorem (also known as Bayes' rule) is a useful tool for calculating conditional
probabilities. Bayes' theorem can be stated as follows:
Let AI, A2, ... , An be a set of mutually exclusive events that together form the sample
space S. Let B be any event from the same sample space which actually happens, then
p(A I B) = p(Ak n B)
k
p(A 1 n B) + p(A2 n B) + ... + p(An n B)
Invoking the fact that p(Ak n B) =p (Ak) x p(B I A k), Baye's theorem can also be
expressed as
(A I B) _ P(Ak) p(B I A k) .
p k - p(AI ) p(B I AI) + p(A2 ) p(B I A 2 ) + ... + p(An) P(B I An)
Applying Bayes' theorem in,:olves recognizing the types of problems that warrant its use.
Bayes' theorem is used, when the following conditions exist:
• The sample space is partitioned into a set of mutually exclusive events {AI> A 2 , ••• ,A,J.
• Within the sample space, there exists an event B, which actually occurs.
• The analytical goal is to compute a conditional probability of the form: p(Ak I B).
• At least one of the two sets of probabilities are known: (i) P(Ak n B) for each A k, and
(ii) peAk) and pCB I A k) for each Ak
Example 11 : In recent years, it has rained only 5 days each year. The weatherman has
predicted rain for tomorrow. When it actually rains, the weatherman correctly forecasts rain
90% of the time. When it doesn't rain, he incorrectly forecasts rain 10% of the time. What is
the probability that it will rain tomorrow?
Solution: The sample space is defined by two mutually-exclusive events - it rains or it

does not rain. Additionally, a third event occurs' when the weatherman predicts rain.
Event AI: It rains tomorrow.
EventA2: It does not rain tomorrow.
Event B: The weatherman predicts rain.
In terms of probabilities, we calculate the following:
p(Al) = 5/365 =0.0136985 [It rains 5 days out of the year.]
p(A2) = 360/365 =0.9863014 [It doe~not rain 360 days out of the year.]
p(B I AI) = 0.9 [When it rains, the weatherman predicts rain 90% of the time.]
p(B I A 2 ) = 0.1 [When it does not rain, the weatherman predicts rain 10% ofthe time.]
The problem is to find p(AI I B). The answer can be determined from Bayes' theorem, as
shown below.
p(A I ) p(B I AI)
peAl I B) =p(A I ) p(B I AI) + p(A2) p(B I A 2 )
(0.014)(0.9)
p(A 1 I B) =(0.014)(0.9) + (0.986)(0.1) =0.111
.. The required probability is 0.111
RANDOM VARIABLE AND PROBABILITY DISTRIBUTION
Random Variable
When the numerical value of a variable is determined by a chance event, that variable is
called a random variable. A variable is random, if it takes on different values as a result of
the outcomes of a random experiment. A random variable is also known as a chance variable
or a stochastic variable. Random variables can be discrete or continuous.
If a random variable takes only a limited number of values. which can be listed in such a
manner as O. 1. 2 •....• it is a discrete random variable. Discrete random variables take on
only integer values. Suppose. for example. that we.flip three coins ,and count the number of
heads. The number of heads results from this random process is O. 1. 2. or 3. Therefore. the
number of heads is a discrete random variable. Similarly. number of defective items in a
sample. number of printing mistakes in each page. and number of phone calls received by a
customer care centre are some examples of discrete random variable.
If a random variable takes any value with in a certain range. it is a continuous random
variable, For example, the average heig~t of a randomly selected group of boys is a
continuous random variable, because it could be a non-integer. Any variable involving
measurement of height, weight, time, volume. or etc is essentially a continuous random
variable.
Probability Distribution
A probability distribution is a table or a listing that links each possible value that a
random variable can assume with its probability of occurrence. A probability distribution can
be either discrete probability distribution or continuous probability distribution.
Generally, we use a capital letter to represent a random variable and a lower-case letter,
to represent one ofits values. For example.
• X represents the random variable X.
• p(X) represents the probability ofX.
• p(X = r) refers to the probability that the random variable X is equal to a particular
value, denoted by r. As an example. P(X = 1) refers to the probability that the
random variable X is equal to'''1: "
The probability distribution of a discrete random variable is known as discrete
probability distribution. It can always be represented by a table. For example, suppose you
flip a coin two times. This simple exercise can have four possible outcomes: HH. HT, TH, and
TT. Now, let the variable X represent the number of heads that result from the coin flips. '
The variable X can take on the values 0, 1, or 2; and X is a discrete random variable. The
table below shows the probabilities associated with each possible value of the X. The
probability of getting 0 heads is 0.25; 1 head, 0.50; and 2 heads. 0.25. Thus. the table below,
which associates each outcome with its probability, is an example of a probability
distribution for a discrete random variable.
Number of heads, X Probability, p(X)
0 0.25
1 0.50
2 0.25
The following are discrete probability distributions:
• Binomial distribution
THEORYFPBA~n 289
•
• Hypergeometric diStribution
• Multinomial distribution
• Poisson distribution
The probability distribution of a continuous random variable is knoWn as continuous
probability distribution. It is represented by an .equation, called the probability density
function. With a continuous diStribution, there are an infinite number of values between any
two data points. All probability density functions satisfy the following conditions:
• The random variable Y is a function of X; that is, y =fix).
• The value of y is greater than or equal to zero for all values of x.
• The total area under the curve of the function is equal to one.
Since the continuous random variable is defined over a continuous range of values; the/~
graph of the density functio~ will also be continuous over that range. The area bounded by
the curve of the density function and the x-axis is equal to 1. The probabUity that a random
variable assumes a value between a and b is equal
to the area under the density function bounded by a
andb.
For example, consider the probability density
function shown in the graph below. Suppose we
want to know the probability that the random
variable X is less than or equal to a. The probability
that X is less than or equal to a is equal to the area
under the curve bounded by a and minus infinity - a
as indicated by the shaded area. Figure 1
The following are discrete probability distributions:
• Normal distribution
• Student's t distribution
• Chi-square distribution
• F distribution ,
In this chapter, we discuss the commonly used probability distributions, namely,
Binomial distribution, Poisson distribution, and Normal distribution.
Expected V~ue
. The mean of the discrete random variable X is also called the expected value of X.
Notationally, the expected value of X is denoted by E(X). We use the following formula to
compute the expected value of a discrete random variable.
E(X) =px =I [Xi xp(Xi )]
where Xi is the value of the random variable for outcome i, px is the mean of random
variable X, and p(Xi) is the probability that the random variable will be outcome i.
Remark: Suppose you h':lve two variables. If X and 'Y are random variables, then
E(X + Y) =E(X) + E(Y) and E ()( - Y) =E(X) - E(Y)
where E(X) is the expected value (mean) of X, E(Y) is the expected value ofY, E(){ + Y) is the
expected value of the sum of X and Y, and E(X - Y) is the expected value of the difference
between X and Y.
Example 12 : In a recent little league softball game, each player went to bat 4 times. The
number of hits made by each player is described by the following probability distribution.
Number of hits, X 0 1 2 3 4
Probability, p(X) 0.10 0.20 0.30 0.25 0.15
What is the expected value of the probability distribution?
Solution: The given distribution is a discrete probability distribution. The expected

value of a discrete random variable is computed as follows.
E(X) = fIX = }: [Xi x p(Xi) ]
E(X) = 0 x 0.10 + 1 x 0.20 + 2 x 0.30 + 3 x 0.25 + 4 x 0.15 = 2.15
. . The expected value is 2.15.
Example 13 : The table on the right shows the joint probability distribution between two
random variables - X and Y. (In a joint probability distribution table, numbers in the cells of
the table represent the probability that particular values ofX and Yoccur together.)
x 0 1 2
Y
3 0.1 0.2 0.2
4 0.1 0.2 0.2
What is the expected value of the sum ofX and Y?
Solution: The given distributions are discrete probability distributions. First we find the
expected value of the discrete random variable X
E(X) = fIX = }: [Xi x p(Xi ) J
E(X) = 0 x (0.1 + 0.1) + 1 x (0.2 + 0.2) + 2 x (0.2 + 0.2) = 0 + 0.4 + 0.8 = 1.2
Next, we find the expected value ofthe discrete random variable Y
E(Y) = pY = }: [Yi x p(Yi )]
E(Y) = 3 x (0.1 + 0.2 + 0.2) + 4 x (0.1 + 0.2 + 0.2)
E(Y) =(3 x 0.5) + (4 x 0.5) = 1.5 + 2 =3.5
And finally the mean of the sum of X and Y is equal to the sum of the means.
I
E(X + Y) =E(X) + E(Y) =1.2 + 3.5 =4.7

Remark: A similar approach is used to find differences between means. The difference
between X and Y is E(X - Y) =E(X) - E(Y) = 1.2 - 3.5 =-2.3; and the difference between Y
and X is E(Y - X) = E(y) - E(X) = 3.5 - 1.2 = 2.3
BINOMIAL DISTRIBUTION
A binomial experiment (also known as a Bernoulli trial) is a statistical experiment that
has the following properties:
• The experiment consists of n repeated trials.

• Each trial can result in just two possible outcomes. We call one of these outcomes a
success and the other, a failure.
• The probability of success, denoted by p, is the same on every trial.
• The trials are independent; that is, t~e outcome on one trial does not affect the
outcome on other trials.
We consider the following st,atistical experiment of tossing a coin 2 times and count the
number of times the coin lands on heads. This is a binomial experiment because:
• The experiment consists of repeated trials. We flip a coin 2 times.
• Each trial can result in just two possible outcomes - heads or tails. \
• The probability of success is constant - 0.5 on every trial.
• The trials are independent; that is, getting heads on one trial does not affect whether
we get heads on other trials. /
The following are some helpful notations in binomial probability distribution:
r: The number of successes that result from the binomial experiment.
n: The number of trials in the binomial experiment.
p: The probability of success on an individual trial.
q: The probability of failure on an individual trial. (This is equal to 1 - p.)
A binomial random variable is the number of successes r in n repeated trials of a

binomial experiment. The probability distribution of a binomial random variable is called a
binomial distribution (also known as a Bernoulli distribution).
The binomial probability refers to the probability that a binomial experiment results in'
exactly r successes. Suppose a binomial experiment consists of n trials and results in x
successes. If the probability of success on an individual trial is p, then the binomial
probability is:
p(X = r) =nCr xpr xpn-r
The binomial distribution has the following properties:
• The mean of the distribution (p,x) = np.
• The variance. (ox 2 ) of the distribution = npq.
• The standard deviation (ox) of the distribution =Vnpq.
A cumulative binomial probability refers to the probability that the binomial random
variable falls within a specified range (e.g., is greater than or equal to a stated lower limit
and less than or equal to a stated upper limit). In this case, we calculate the all the
individual probabilities of successes and add them.
292 RNANCMLMA7HEMAnCS
"'
E~ple 13 : Suppose a die is tossed 5 times. What is the probability of getting exactly 2
fours?
\
Solution: This is a binomial experiment in which the number of trials (n) is equal to 5.
'Let X be the event of success of getting 4 a~d p be the probability of getting exactly 4.
The probability of success on a single trial is
1
p ="6 = 0.167.
q =·1-p = 1- 0.167 = 0.833
The number of successes, r =2
The binomial probability of success is given by :
p(X =r) =nCr xpr xpn-r
p(X =2) =5C2 X (0.167)2 X (0.833)3
p(X =2) =0.161
Example 14 : The probability that a student is accepted to a prestigious college is 0.3. If 5

students from the same school apply. What is the probability that at most 2 are accepted?
Solution: Let X be the event that a student is accepted to a prestigious college.

Given that p =0.3 and therefore q =1- p =1 - 0.3 =0.7
Number of students (trials), n = 5
The binomial probability of success is given by:
p(X =r) =nCr xpr xpn-r .
The probability that at most 2 students are accepted = p(X s r)
To find the probability that at most 2 students are accepted, we compute 3 individual
probabilities p(X = 0), p(X = 1), and p(X = 2) and using the binomial formula, we find the sum
of all these probabilities.
p(X S r) = p(X = 0). + p(X = 1) + p(X = 2)
p(X s 2) =5CO X (0.167)0 x (0.833)5
+ 5C1 x (0.167)1 x (0.833)4
+ 5C2 x (0.167)2 x (0.833)2
p(K.s 2) =0.1681 + 0.3601 + 0.3087 =0.8369
Example 15 : If the probability of producing a defective item is 0.10, find the mean·and
standard deviation for the distribution of defective items in a total of 400 items produced?
Solution: Let p be the probability of producing a defective item.

Given thatp = 0.10 ~ q =1-p =0.90
Number of items n = 400
THEORYFPBA~n 293
The mean of the distrbuon~) =np. ..

p,,, =400 x 0.10 =40
The standard de.viation of the distribution 0" =Vnpq
0" =V400 x 0.1 x 0.9 =6
POISSON DISTRIBUTION
Poisson distribution is a discrete probability distribution which was developed by a
French mathematician, Simeon Denis Poisson in 1837. Poisson distribution may be expected
in cases where the probability of success of an event is very small. For example, aircraft
accident, serious flood, and etc are some rare events and the probability of occurrence of such
events is considerably small.
The probability distribution of a Poisson random variable is called a Poisson distribution.
A Poisson random variable is the number of successes that result from a Poisson experiment.
A Poisson experiment is a statistical experiment in which the experiment results in
outcomes that can be classified as successes or failures and the probability that a success
will occur in an extremely small.
The following are some helpful notation in the Poisson distribution.
• e: A constant equal to approximately 2.71828. (Actually, e is the base of the natural
logarithm system.)
• p, : The mean number of successes that occur in a specified region.
• r : The actual number of successes that occur in a specified region.
Formula: Suppose we conduct a Poisson experiment, in which the average number of
successes Within a given region is p,. Then, the Poisson probability is:
e-JS p,r
p(X=r)=-,-
r.
where r is the actual number of successes that result from the experiment.
The Poisson distribution has the following properties:
• The mean of the distribution i~ equal to p,.
• The variance is also equal to p,.
Example 16 : The average number of homes sold by the Acme Realty company is 2 homes
per day. What is the probability that exactly 3 homes will be said tomorrow?
Solution: This is a Poisson experiment in which p, =2; since 2 homes are sold per day,
on average and r = 3; since we want to pnd the likelihood that 3 homes will be sold
tomorrow.
We know that e =2.71828
The Poisson probability is given by:
e-JSpl
p(X= r) =
r.,
- 3) _ 2.71828- 2 x 23 _ 0.13534 x 8 - 0 8
p (X - - 3! - 6 -.1
.. The probability of selling 3 homes tomorrow is 0.180.
Example 17 : Suppose the average number of defective items produced by a machine in a

day is 5. What is the probability that the number of defective items will be fewer than 3 on
the next day? .
Solution: This is a Poisson experiment in which f.L = 5; since 5 items are produced per
day, on average.
Here r = 0, 1, or 2; since we want to find the likelihood that the number of defective'
items will be fewer than 3.
To solve this problem, we need to find the probability p(X < 3).
p(X < 3) = p(X = 0) + p'{X ='1) + P(X = 2)
The Poisson probability is given by:
p(X= r) =e-1Jr.pt
I
e-5 x 50 e-5 x 51 e-5 x 52

p(X < 3) = O! + I! 2!
3) 0.006738 x 1 0.006738 x 5 0.006738 x 25
(X
p< = 1 + 1 + 2
p(X < 3) =0.006738 + 0.03369 + 0.084225 = 0.124653
.. The probability of getting f~wer than 3 defective items is 0.2650 .
. NORMAL DISTRIBUTION
The previous considered the probability distribution of variables with only two kinds of
possible outcomes: successes or failures. The random number of successes of n made up a
binomial distribution. The variable was an enumeration of the number of successes, and was
thus discrete. We now turn to another kind of variable whose individuals are measured for a
. characteristic such as height or age. The variable flows without a break and is thus
continuous, with no limit to the number of individuals with different measurements. Such
measurements are distrbu~ in any of a number of
ways. We will consider the normal distribution as
an example of a continuous distribution because of
its utility and wide use in applied statistical
methods. •
Whereas discrete probability distributions (such
as binomial distributions) are displayed with
histograms, continuous probability distributions
(such as normal distributions) are displayed with Figure 2
curves:
TH~ORY 1
OF PROBABILITY 295
The normal distribution is a continuous probability distribution. This has several

implications for probability. Probability curves demonstrate (he following important
properties:
• The total area under the normal curve is equal to 1.

• The probability that a normal random variable X equals any particular value is O.
• The probability that X is greater than Xl equals the area under the normal curve
bounded by Xl and plus infinity (as indicated by the shaded area in the figure 3).
• The probability that X is less than Xl equals the area under the normal curve
bounded by Xl and minus infinity (as indicated by the shaded area in the figure 4).
Figure 3 Figure 4
• The probability that X is greater than Xl equals but less than X2 is the area under the
curve between any two points Xl and X2 is (as indicated by the shaded area in the
figure 5).
Figure 5
Normal Equation: The normal distribution is defined by the following equation The
value of the random variable Y is:
1
Y = x e~ -p)202
(l xYin
where X is a normal random variable, Jt is the mean, Jt is the standard deviation, n is
approximately 3.14159, and e is approximately 2.71828.
. . ' , ' . . . ' .
CharacteriBticB of Normal DiBtribu,tiolJB : The graph of the normal distribution

.de]>ends on two factors - the mean and the standard deviation. The mean of the distribution
determines ·the location of the center of the .graph,and the standat-d deviation determines
the height and width of the graph. When the standard deviation is large, the curve·is short
and wide; when .the 'standard deyiation is .small, .the curve is tall and ·narrow. All normal
distributions look like a symmetric, bell-shaped curve, as shown below.
Figure 6 r .Figure 7
The curve on the left (Figlire 6) is shorter and wider ·than the curve on the right
.(Fi~e 7), because the curve on the left has a bigger standard deviation.
The mean~) determines the distrb~on' location; The fiiurebelow shows two. normal
distributions with different means:
'l!r""'l..
..
FigureS
Area under Normal Curve: For all normal distributions:

• 68,27 % of the data lies within :1:1 standard deviation (a) ofmean p,; 34.135 % area
wilille on either side of the mean . .
.• 95.45 % of the data lies within :t:2 standard deviation (a) of mean p,; 47.725 % area
wiIllie on either side of the mean.
• 99.73 %of the data lies within :1:3 standard deviation (a) of mean p,; 49.865 % area
will lie on either side of the mean.
THEORYFPBA~n 297,
As an illustration, consider a normal random variable with a mean of 100 and standard
deviation of 15. Sixty-eight percent (68%) of the areas under the curve for this distribution
, will lie in the range 100 ± 15 (between 85 and 115). In contrast, 95% of values lie in the ,
range 100 ± 30 (between 70 and 130). Virtually all observations fall in the range 100 ± 45 ,
(between 55 and 145).
Standard Normal Distribution: The standard normal distribution is a special case of
the normal distribution. It is the distribution that occurs when a normal random variable
has a mean ·of zero and a standard deviation of one. The standard normal distribution is also
called the Z distribution.
.
The normal random variable of a standard normal distribution is called a standard score
or a z-score. Every normal random variable X can be transformed into a z score via the
following equation:
z =(X-p.)
<" (J
where X is a normal random variable, p. is the mean of X, and (J is the standard deviation of
X.
The normal distribution is helpful in solving many real-world problems. Here is a
method that seems to work for most students in aolviIig normal probability problems: .
1. Draw a diagram of a normal .curve.
2. Mark the location of the mean on the curve.
3. Standardize the value you are considering.
4. Place the standardized value on the curve in relation to the mean
5. Shade the appropriate area under the curve that corresponds to the problem and
. then determine the area under the curve with your Z table.
298 FINANCIAL MATHEMA'nCS
Example 18 : Suppose you have a normally distributed random variable with p = 100
and s = 15. Find what percentage of values fall below 115.
Solution: Given that p = 100 and 0 = 15

Here X= 115
We calculate the z ' score via the
following equation:
z =(X -y)
o
115-100 1 "
z = 15 =+ "
Since the mean p divides the curve in to . . =100 .... =115
two equal parts with probability of 0.5 for Figure 10
each side, we get
p(X < 115) = p(z < +1) = 0.5 + p(O <z < +1) = 0.5 + 0.3413 = 0.8413
The probability of getting the values less than 115 is 0.8413.
:. Percentage of getting the values less than 115 is 84.13 %.
Example 19 : Suppose scores on an exam are approximately normally distributed with a

mean of 80 and standard deviation of 1O. What is the probability that scores are less than 65?
Solution: Given that p = 80 and 0 = 10

Here X = 65 and we have to find p(X < 65)
".We calculate the z score via the
following equation:
(X-p)
z=
o
65-80 Z=-1 z=o
z= 15 =-1 I •
X=65 .... =80 X-scale

Here, p(X < 65)
Figure 11
=p(z <-1) = 0.5 -p(-1 <z < 0)
=0.5-p(0<z<+I)
= 0.5 - 0.3413 = 0.1587
.. The probability of getting the values less than 65 is 0.1587.
Example 20 : The score obtained on a national achievement test are normally

distributed. The mean test score is 750 with a standard deviation of 120. What is the
probability that scores lie in between 630 and 870?
Solution: We have p = 750 and 0 = 120

The problem is to find p(630 <X < 870)
We calculate the z score via

following equation:
(X - ].t)
Z=
(J
When X ='630, - 630- 750 - 1

z...,. 120 --
870-750 1
When X = 870, . z = 120 =+
Here, p(630 <X < 870) Z=-1 I!=O Z=1 Z-scale
I I I
= p(-l < z < +1) X =S30X = 750 X = 870 X-scale
= p(-l < z < 0) + p(O < z < +1) Figure 12
= 2xp(O<z<+1)
= 2 x 0.3413 =0.6826
. . The required probability is 0.6826 .
•#3#1jti3mi-1
1 Write a short note on :
(a) Mutually Exclusive Events
(b) Independent Events
(c) Conditional Probability
2. State and prove Baye's Theorem.
3. What do you mean by a probability distribution ? What are the different kinds of
probability distribution ?
4. Define normal distribution. What are the basic characteristics of a normal
distribution?
5 •. If X = {a, b, c, d} and y = {f, b, d, g} find
(a) X - Y (b) Y -X (c) X n Y. [Ans. (a) {a, c}, (b) {f, g}, (c) {b, d}]
6. Let U = {I, 2, 3, 4, 5, 6,7,8, 9}, A = {l. 2,3, 4}, B = {2, 4,6, 8} and C = {3, 4, 5, 6}, find
(a)A', (b) B', (c)(A n C)" (d) (A UB)', (e) (A')', (f> (B- C)'
[Ans. (a) {5, 6, 7, 8, 9}, (b) {I, 3, 5, 7, 9}, (c) {I, 3, 5, 6, 7, 8, 9}, (d) {5, 7, 9}]
7. If A = {3, 5, 7,9, 11}, ~ = {7, 9,11, 13}, C ={11, 13, 15} and D ={l5, 17} fmd
(a) AUB , ' (b)BnC, (c)(AUB)UC, (d)CnD, (e)A-(BnC), (j)AnD
[Ans. (a) {3, 5, 7, 9,11, 13}, (b) {11, 13}, (c) {3, 5, 7, 9, 11, 13, 15}, (d) {l5},
(e) {3, 5, 7, 9}, (f> 4>]
8. A die is thrown once. Find the probability of getting
(a) an even umber (b) a prime number
(c) a number greater than 4, (d) a multiple of 3
1 1 1 1]
[ Ans. (a) 2' (b) 2' (c) 3' (d) 3
300 FINANCIAL AiAtHEMAT7CS
,
9. Two unbiased coms are tossed once. What is the'probability of getting no head?
[, 41]
10. In a single throw of two dice, find the probability of get&g , , ,ADs.
(a) a total of7 (b) doublets
(c) six as a product. [Ana. (a)~, (b)~, (C)~]
U Three unbiased coins are tossed. What is the probability of getting
(a) exactly two heads? (b) at lest two heads?
(c) at most two heads? [ . 3 1 7]
ADs. (a) B' (b) 2' (c)B
12. A card is drawn from a well suftled deck of 52 cardil. Find the probability that the
catd is aspade or Ii king. [
ADs. 13
.!.]
13. An urn contains 9 red, 7 white and 4 black balls. A ball is drawn at random. Find the
probability that t~e ball drawn is . [: . 9 7 4 ]
(a) red, (b) white, (c) red or white ADs. (a) 20' (b) 20' (c) 20
101 A, B, C are three mutually exclusive and exhaustive events associated with a random
3 1
experiment. Find p(A), given P(B) -= -2 p(A)and p(C) = -2 p(B). ' [ 4 ].
'ADs. 13
15. E and F are two events associated with a random experiment for which p(E) 0.60, =
= =
p(E or F) 0.85 and p(E and F) 0.42 find p(F). [ADs. 0.67]
, 16. A bag contains 30 balls numbered froin 1 to 30. One ball is drawn at random. Find
1
the probability that the number of the ball drawn will be a multiple of (a) 5 or 7 and
(b) 3 or 7. ,, [ADs. (a)~, (b) !~
11. A company has 40 male employees and 60 female employees, If two people are
selected at random, find the probably that
(a) both are male , (b) both are female
, (c) one is male and one is female ' [ADs.
(a) 0.358, (b) 0.158, (c) 0.485]
18. A speaks truth in 60% and B speaks in 40%. In what percentage of cases are they
likely to contradict each other in stating the same fact? [ADs. 72%]
19. One bag contains 4 white and 2 black balls. Another bag contains 3 white and 5
black balls. If one ball is drawn from each bag, find the probability that
(a) both are white (b) both are black
(c) one is white and one is black. , [ 1 5 13]
ADs.. (a) 4' (b) 24' (c) 24
20. A box contains 4 red and 6 white balls. One ball is drawn at random and in its place,
a ball of the other colour is put in ~he box. Now one ball is drawn at random from the
box. Find the probability that it is red,. [ADs. 0.42]
1 1 ', 1
2\1. A and B are two events such that p(A) ';"4' p(B) = 3" and p(A U B) '" 2' find the
p(B/~)]. ' [~. ~]
THEORY OF PROBABILITY
, 301
22. A and B appear in an interview for two vacancies in an oftic~. The probability of A's
selection is ~ and that of B iS~. What is the probability that
(a) both of them will be selected? (b) only orie of them will be selected?
(c) none of them will be selected? [1 2 24]
ADs. (a) 35' (b) 7' (c) 35
23. Suppose that one of the three men, a politician, a businessman, and an educator will
be appointed as the vice-chancellor of a university. The respective probabilities of
their appointments are 0.50, 0.30 and 0.20. The probabilities that research activities
will be promoted by these people, if they are appointed are 0.30, 070 and 0.80
respectively'. What is the probability that'research activities will be promoted by the
new vi<4e-chancellors ? [ADs. 0.52]
24. Of all the smokers in a particular city, 40% prefer brand A and 60% prefer brand B.
Of those smokers who prefer brand A, 30% are female and of those who prefer brand
B, 40% are female. What is the probability that a randomly selected smoker prefers
brand A, given that the person selected is a female? . [ Ans. ~ ]
25. In a factory which manufactures bolts, machines A, Band C manufactur,

respectively, 25%, 35% and 40% of the bolts. Of their outputs, 5%, 4% and 2% are
respectively defective bolts. A bolt is drawn at random from the product and is. found
to be defective. What is the probability that it is manufactured by the machine B ?
[ADs. :~]
26. Two groups are competing for the positions on the Board of Directors of a company.
The probability that the first and second groups win win are 0.6 and 0.4 respectively.
Further, if the first group wins, the probability of introducing a new product is 0.7
and the corresponding probability is 0.3, if the second group Wins. Find the
probability that the new product introduced was by the second group.
27. A manufacturer has three machine operators A, Band C: The first operator A
produces 1% defective items, where as the other two operators B and C produced 5%
and 7% defective items, respectively. A is on job for 50% of the time, B is on the job
for 30% of the time and C on the job for 20% of the time. A defective item is produced.
what is the probability that it was produced by A ? [ ~1
ADs. 34
28. A die is thrown 6 times. If "getting an even number" is a success, what is the
probability of
(a) exactly 5 successes? (b) at lest 5 successes? "
(c) at most 5 successes? , 3' 7 63]
[ ADs. (a) 32' (b) 64' (c) 64
'29. Suppose 10% of items produced by a machine are defective. Suppose 4 items are
chosen at random. Find the probability that .
(a) 2 are defective l (b) none is defective.
[ADs. (a) 0.0486, (b) ,0.65611
30. The probability that a patient recover from a rare blood disease is 0.4. If 10 people
have caught this disease, what is the probability that
(a) exactly 3 recover? (b) at least 7 recover?
[ADs. (a» 0.215, (b). 0548]
31. The probability that Hari hits a target is 1/4. He fires 64 times. Find the expected
number (P) of times, he will hit the target and also the variance 0 2•
32. Suppose 8% of people are left-handed. What is the probability that 2 or more of
random sample of 25 are left handed? [Ans. 0.595]
33. Suppose the probability that an item produced by a particular machine is defective is
0.2. If 10 items produced by this machine are selected at random, what is the
probability that not more than one defective item is found? [Ans.0.405]
34. In a town 10 accidents take place in a span of 50 days. Assuming that the number of
accidents follows the poison distribution, find the probability that these will be 3 or
more accidents in a day? . [ADs. 0.0012]
35. Ritika earned a score of 940 on a national achievement test. The mean test score was
850 with a standard deviation of 100. What proportion of students had a higher score
than Ritika? (Assume that the test scores are normally distributed). [ADs. 0.1841]
36. In a sample of 120 workers in a factory the mean and standard deviation of wages
were Rs. 11.35 and Rs. 3.03 respectively. Find the percentage of workers getting
wages between Rs. 9 and 17 in the whole factory assuming that the wage are
normally distributed. [ADs. 75.09%]
37. The monthly earning of 5,000 female workers in a factory are normally distributed
with mean earning of Rs. 1,500 and standard deviation of Rs. 121. Estimate the
number of female workers whose monthly earning are
(a) more than Rs. 1,690; (b) less than Rs. 1,350;
(c) between Rs. 1,500 and Rs. 1,680; (d) between Rs. 1,260 and Rs. 1,770.
[ADs. (a) 292, (b) 537, (c) 22, (d) 46]
38. An applitude test for selecting officers in a bank was conducted on 1,000 candidates.
The average score is 42 and the standard deviation of scores is 24. Assuming normal
distribution for the scores, find
(a) the number of candidates whose scores exceed 58
(b) the number of candidates whose scores lie between 30 and 66.
[ADs. (a) 252, (b) 533]
39. A training programme is designed to upgrade the supervisory skills of managers.
Past records shows that the mean length of time spe,nd by a manager on the
programme is 500 hours and 11. Standard deviation of 100 hours. Managers require
different number of hour& to complete the program. Find the probability that to
complete the program, a participant selected at random will take.
(a) more thiln 500 hours (b) between 500 and 650 hours
(c) more than 700 hours (d) between 350 and 450 hours
(e) less than 580 hours ({) between 420 and 570 hours.
[Ans. (a) 0.5, (b) 0.4332, (c) 0.0228, (d) 0.2417, (e) 0.7881, (j) 0.5461]
Construction of Mortality Table
INTRODUCTION
In life insurance, certain assumptions nave to be made by the insurer about the interest
rates, mortality rates and the expenses which will be incurved in the year to come for the
purpose of fixing the premium rates or assessing the liabilities under the insurance
contracts. It is important to have a correct estimate of these factors as otherwise the results
deducted from the assumptions made may not be reasonably close to the actual experience of
the insurer. He depends upon the mortality experience of the insured lives observed in the
recent past as a basis for estimating the probabilities of survival and death. Mortality tables
play major role in determining premi~ for any life insurance policy. In this chapter, we
shall study how a mortality table is constructed from the observations of deaths.
MORTALITY RATE
Mortality rate, simply known as death rate, is defined as the ration between the number
of person died during a particular year and the number of persons survived at the beginning
of that year. Mortality rate is generally calculated for a year, i.e., for a particular attained
age.
No. of deaths during the year
Death rate=N fl·· t h begInmng
. . 0 fth e year
o. 0 lVlng ate
If it is observed that out of 1,000 lives all aged 35, 20 die within one year i.e., before
attaining the get 36, the observed mortality rate at age 35 is worked out as 1~0 = 0.002 and
is denoted by q35. The mortality rates at various ages are determined in the same manner.
. MORTALITY TABLE
In all discussions of death rates or survival rates, we can find the phrase 'Mortality
Table'. A mortality table represents a record of mortality observed in the past and is
arranged so as to show the probabilities of death and survival at each separate age. A large
number of persons are selected at a particular age and number of deaths and observed each
and every year. Each years number of living is the previous year's number of living minus
previous year's number of dying. As the persons go on dying year after year the number of
living goes on shrinking. When the last person dies it is reduced to zero and the mortality
table ends there. Thus a mortality table has been described as the picture of a generation of
individuals passing through time.
Mortality tables as such data are called, are records of past mortality put into such form
as can be used in estimating the course of future deaths. Thus, mortality table is used to
predict future mortality. It is a mathematical tool which is used to calculate the monetary
values of benefits dep~nt on life contingencies.
The following are some examples of mortality tables:
(a) Lie (1970-73) ultimate Table
(b) HM Table (Makehan Graduation)
(c) American Experience Table
CONSTRUCTION OF MORTALITY TABLE

The main objective for having a mortality table for an insurer is to work out the
probabilities of deaths and survivals to enable him to make a reasonably accurate estimate
of his liabilities under. the insurance contracts and also to calculate premium to be charged.
The past experience from which the table is constructed will never be exactly reproduced in
future. There will be fluctuations in different directions at different ages but on the whole
the estimates in respect of mortality rates may be close to the actual experience. So the
mortality table should be constructed to represent the past experience as accurately as
possible. The following are the two methods of construction of mortality table:
(a) Table on generation basis
(b) Table on yearly basis
MORALITY TABLE ON GENERATION BASIS

The best way of construction of mortality table is based on generation. In this method we
selc~ a large number of persons at an attained age. Attained age means the age nearer to
birth date. For example, persons of 19 years 6 months to 20 years 6 months will be treated
as the age of 20 years. The attained age will be selected at which the insurance policy is to
begin.
The selected persons of the attained age will be observed throughout the year and the
number of deaths during the year will be recorded. The number of deaths in a year is
deducted from the number of living at the beginning of the year to obtain the number of
living at the beginning of the next year. This process is carried out till all the selected
persons are dead. After the death of all people only, the mortality table will come to the end.
This type of mortality table will be the actual mortality table.
CONSTRUCTION OF MORTALITY TABLE 305
The death rate is calculated as follows:

D th t ( ) No. of deaths during the year (dx )
ea ra e qx No. oflivings at the beginning ofthe year (lx)
The survival rate is calculated as follows: "
Survival rate (px) =1 - death rate (qx)
Following is a portion of a mortality table constructed on generation basis.
Age Number of Number of Mortality Rate Survival Rate
x Living(lJ Deaths (dJ (qJ (pJ
25 987095 1~63 0.00128 0.99872
26 985832 1252 0.00127 0.99873
27 984580 1250 0.00127 0.99873
28" 983330 1268 0.00129 0.99871'
29 982062 1286 0.00131 0.99869
and so on
Following are some basic considerations which are taken into account whil~ constructing
a mortality table on generation basis:
• In preparation of mortality table, persons of a generation; i.e.{ persons of a single
age, are selected and they are observed upto death. No new entries or withdrawals
are assumed at any stage of the study.
• The mortality table starts from a point, i.e., from a certain age, which depends upon
the requirements of the insurer, and will continue up to the point all of them have
been dead.
• The mortality table records the yearly death and survival rate. Each and every year
is considered for ~alcuting the rates. Every year the number of deaths are observed
and at the end of the year, this is subtracted from the number of living at the
beginning of the year to obtain the number of livings for the next year. Therefore, as
persons go on dying year after year the number of living goes on shrinking till it is
reduced to zero and mortality table ends there.
Since a large number of people are selected and observed upto the death of all of them,
we can expect a great extend of accuracy of the results. However, insurers face a lot of
problems in preparing such mortality tables based on an observed generation. Following are
some of the major difficulties:
Preparation of such table is difficult because a large number of persons of an
(i)
attained age is impracticable to get.
(ii) Even if the insurer gets a large number of people, constant watch on them is not
possible, since people cannot be expected to reside in the same place for a long time.
(iii) Since the insurer has to wait till the last person dies, it will require a long-period of
time to construct the table, say, 100 years.
(iv) A permanent officer cannot be expected to complete the table because he will not be
surviving for such a long time.
A lot of money will be wasted to record number of deaths every time.

(v)
(vi) Even if it is possible to construct such a lengthy table, that mortality table will be
quite obsolete because it had been constructed at least in 100 years during which a
lot of changes might have occurred.
MORTALITY TABLE ON YEARLY BASIS

To avoid the above difficulties, det\th rate is calculated on yearly basis. The death rate is
calculated for every age. Separate samples, i.e., certain number of people at different age
groups are selected and observed for the whole year. The number of deaths during the
different ages are recorded. By dividing the number of deaths by the number of livings in
each age, one death rate for the age is calculated.
An example is taken for construction of mortality table on yearly basis. For example,
5000 persons are taken at the attained age of 25, 4000 persons at age 26, 6000 persons at
age 27, 9,000 persons at age 28 and 3000 persons at age 29. The number of deaths observed
at these ages are 10, 16, 18, 54 and 15 respectively. The following table summarizes the
mortality rates at the above ages.
Age Number of Number of Mortality Rate Survival Rate
Living (lJ Death (dJ (qJ (pJ
25 . 5,000 10 0.002 0.998
26 4,000 16 0.004 0.996
27 6,000 18 0.003 0.997
28 9,000 54 0.006 0.994
29 3,000 15 0.005 0.995
By this method we construct the mortality table within the duration of one year. A year
is selected because a year constitute various types of weather, and, therefore, low, high and
normal mortalities are averaged in the year. Secondly, rates of premium in insurance are
quoted on an yearly basis and so the cost depending on mortality should also be base~ on
yearly basis.
GRADUATION OF MORTALITY RATES

It should be noted that the rates by graphical method or mathematical formula have to
satisfy certain statistical tests before they are accepted as the true underlying smooth
progression of rates. The statistical tests reveal the extent of departure from the data. A
certain acceptable precision range (interval) is set. If the graduated rate is beyond the
acceptable limits the graduation is discarded and another attempt is made to fin"d suitable
set of graduated rates. The process of trial and error is continued till a final set of rates are
derived which satisfy all the desired statistical tests for a graduation.
The theoretical justification of having smooth progression of rates also meets our
practical need to have smooth rats to ensure that premium rates calculated there from do
not show irregularity.
If the crude rates do not pertain to integral ages, it is not necessary to carry out the
CONSTRUCTION' OF MORTALITY TABLE
, 307
process of interpolation to get rates at integral as before taking up the process of graduation.
Both can be done simultaneously. The crude rates for fractional ages are used for
graduation but the final graduated rates are obtained for integral ages.
The irregularities introduced in the crude mortality rates obtained from the sample data
are ascribed to statistical fluctuations. We can remove the sampling errors by smoothing· out
the crude rates. This process of smoothing out is known as graduation. Mortality rates which
are obtained by smoothing the fluctuations of crude rates are called Graduated Mortality
Rates.
There are several methods of graduation. One is the graphical method in whidt the
observed rates are plotted on a graph paper and a smooth curve is drawn as close to alt'the
points as possible. The rates represented by the smooth curve are known as graduated rates.
Another method is by fitting a mathematical formula by interpolation method. The
graduated rates are then derived from this formula.
The crude death rate is graduated by graphical method as follows:
0.006 +...11.---1------1---+----+----+--------+
25 26 27 28 29
Age (Years)
Only the graduated mortality rate is used for the construction of mortality Table.
Following is the mortality table with graduated deat:~ rate which is considered as death rate
at different age.
Age Number of Number of Crude death Graduated Survival Rate

(x) living (lJ death (dJ • Rate Death Rate (qJ (pJ
20 5,000 10 0.002 0.002 0.998
21 4,000 16 0.004 0.003 0.997
22 6,000 18 0.003 0.004 0.996
23 9,000 54 0.006 0.005 0.995
24 3,000 15 0.005 0.006 0.994
It should be noted that th~ rates by graphical method or mathematical formula have to
satisfy certain statistical tests before they are accepted as the true underlying smooth
progression of rates. The statistical tests reveal the extent of departure from the data. A
certain acceptable precision range (interval) is set. If the graduated rate is beyond the
acceptable limits the graduation is discarded and another attempt is made to find suitable
set of graduated rates. The process of trial and error is continued till a final set of rates are
derived which satisty all the desired statistical tests for a graduation.
The theoretical justification of having smooth progression of rates also meets our
practical need to have smooth rats to ensure that premium rates calculated there from do
~ot show irregularity.
If the crude rates do not pertain to integral ages, it is not necessary to carry out the
process of interpolation to get rates at integral as before taking up the process of graduation.
Both can be done simultaneously. The crude rates for fractional ages are used for
graduation but the final graduated rates are obtained for integral ages.
SOURCES OF MORTALITY INFORMATION

For construction of mortality table, number of living at the beginning of each age and the
number of deaths during the age are required. The figures of mortality construction should
be as accurate as possible and based on a large number of persons. The sources of mortality
construction can be obtained either from:
(a) Population statistics, or
(b) Records oflife insurers.
(a) Population Statistics: the insurer gets number of living at each from census
records and the number of deaths from municipal and other death records. The population
statistics will reveal how many persons have died at what age. So, with the radix of total
number of persons at the beginning, it can be calculated how many died in a particular age.
The calculation of mortality table is not very easy and correct. The population statistics is
not very much useful to insurers because of the following reasons :
(i) The accuracy of population statistics is doubtful in the absence of age-proof.
Sometimes, members of a certain section of society are unaware of ages.
(ii) It has been also noticed that some deaths are unrecorded. It is very difficult to know
how many deaths are unrecorded and similarly, it is also difficult to know exactly
how many deaths occurred at a particular age.
(iii) Census figures are available only after 10 years and therefore, it would not be very
recent figure.
(iv) The population statistics will give statistics of all types of persons without any
separation while the insurers require mortality of only insurable lives.
(v) Interpolation and extrapolation are involved and correct figures are generally not
known.
(b) Records of Insurers. The records of insurer give a correct figure because the death
rates can be correctly recorded. No deaths will go unrecorded, correct number of persons
living and death for each age can be known. Collection of figures is done from the records of
as many insurers as possible in large numbers but is not more than 10 years covering
favourable and unfavourable years.
Separate mortality tables may be prepared for standard and sub-standard lives and male
and female lives. Sub-classification according to sex, marital status, occupation, geographical
area, social class may be made and tables are constructed separately.
The country of persons is done very cautiously, withdrawals and lapsaUons are excluded.
Persons included for calculation is called exposed to risk.
Yearwise aggregation of number of deaths and number of living persons is done from the
information of all insurers. Mortality rate at every age will be counted by dividing the
number of expired lives by number of exposed lives.
(c) Other Sources: Apart form popUlation statistics and insurers' records, life
insurance companies, for construction of mortality tables, may use the sources such as
patients' register maintained by hospitals, statistics relating to health and deaths, and etc.
Mortality tables constructed on the basis of these sources shall also be more reliable.
STAGES INVOLVED 'IN CONSTRUCTION OF MORTALITY TABLES

The, main object for having a mortality table for an insurer is to work out the
probabilities of deaths and survivors to enable him to make a reasonably accurate estimate
of his liabilities under the insurance contracts and also to calculate premiums to be charged.
He knows that the past experience from which the table has been constructed would never
be exactly reproduced in future. There will be fluctuations in different directions at different
ages but on the whole and in the long run the estimates in respect of mortality rates may be
close to the actual experience. While constructing Mortality Tables insurers have to follow a
certain procedure:
The various stages involved in the process of constructing a mortality table are
summarized below:-
(a) Deciding upon the data to be used
(b) Choosing the period of investigation
(c) Deciding the unit of investigation
(d) Deciding the method of investigation to be followed
(e) Determination of Exposed to risk and enumeration of deaths
(j) Obtaining observed rates of mortality
310 RNANCIAL IfATHEMAncS
(g) Graduation of observed death rates.

(h) Constructing the mortality table from the -graduated rates.
(a) The Data to be used:

The data to be used for investigation depends upon the object of investigation. If the
purpose is to determine the mortality rates for calculating premiums and valuing the
liabilities, the data to be used should be that of appropriate policy holders and not relating to
the general population, nor relating to policyholders of other country. In other words, we
ensure that the date is drawn from a group which is similar in all essential characteristics
with the group of policyholders for which the resulting mortality table would be applied.
The mortality rates vary according to many factors, the principal amongst them being
age and sex. Other factors are occupation, climate, temporary initial selection, and etc. As
far as possible the data should be sub-divided into homogeneous sub-groups, as otherwise
the heavier or lighter mortality experienced by some sub-groups may vitiate the results for
the group as a whole.
It is observed statistically that greater the number of lives under observation the more
reliable the results derived from the data. Therefore while sub-dividing the data into
homogeneous sub-groups care should be taken to ensure that there is sufficient number of
observations in each sub-group so that the results derived by using such data are reliable.
Thus, as far as possible, the 'data are sub-divided into homogenous groups for the
purpose of mortality investigations. .
(b) Period of Investigation:

It is observed that the mortality rates have decreased with the passage of time, which is
the result of advances in medical science, improved hygiene, general betterment of living
conditions and other factors. Thus, if the period of investigation is long the results derived
would not be applicable even for similar group of lives. Therefore, the period of investigation
should be as short as possible.
On the other hand, very short period of investigation would not yield the sufficient
volume of data to make the reslJlts derived therefore reliable. The balance of these
conflicting demands is achieved by keeping the period of investigation as 4 to 5 years.
, Secondly, the period of investigation should be so selected as to exclude temporary
. influences caused by factors like war, epidemics, etc.
(c) Unit of Investigation:

The various units that can be considered for investigation are lives, policies or sum
assured. Life is the natural unit for mortality investigation. If this is taken as a unit, each
life assured should be included in the investigation for only one policy even though he has
taken more than one policy simultaneously or at different times. Clearly this method gives a
true rate of mortality according to our definition.
If the unit selected is policy, then each policy contributes one unit to the exposed to risk
Ex, for each full year that is in force and one unit to ax in the year of death during the period
of investigation. A life who is assured under more than one policy is therefore included more
than once in the exposed to risk Ex, and similarly in Ox at the age of death. By this method
we get a rate of discontinuance of policies by death, instead of a 'rate of mortality. In actual
practice, it is difficult to eliminate duplicate policies on the same life taken either
simultaneously or at different times. So normally, the unit selected for investigation is
policy. When the data are large, the mortality rates based on policies would not be
significantly different from mortality rates based on lives.
When unit-selected is sum assured, each policy contributes to the exposed to risk and to
the deaths a number of units equal to the sum assured. This gives us a rate of claim or rate
of payment of unit sum assured by death. However, so far no mortality table has been
prepared based on sum assured.
(d) The Method of Investigation:

The essence of any method of investigation is to follow the lives included in the
experience, through one year of age called the rate year. There are three ways viz., (i) Life
year method, (ii) Calendar year method, and (iii) Policy year method. The census method can
also be used to fmd mortality rates.
Life year method: In this method, the lives are observed from one birth day to the next
birthday. Since the lives are observed from one birthday to the next birthday no
approximation is introduced while defining the age. As a result of this, the ratio Ox/Ex
obtained by this method represents the observed rate of mortality for precise age x.
However, this method has several disadvantages. The data available may not be suitable to
use this method as normally records of a life office contain either calendar year of birth or
age nearer birth day at entry, in which case calendar year method or policy year method will
be more convenient. Secondly, life-year method will not be convenient for select mortality
rates. In case of select rates, we desire rates according to exact duration, however in this
method on the date of attaining a particular age, the duration since entry date will not be
exact number of years in most of the cases.
Calendar year method: In this method, the lives are observed from 1st January to
3pt December (or any convenient period of one year, say 1st April to 31 st March). The lives
are classified according to, say, age nearer birthday (x) or age next birthday or age last
birthday as on 1St January. Whenever grouping of lives is done according to some other age
definition that exact age, the age x is shown in bracket (x). The lives E~) having same age
nearer birthday (x) on 1st January during the period of investigation are grouped for
observation purposes. They are observed for one year from 1st January till 31st December.
Deaths O(x) amongst them are noted down and the rate of mortality, Ox/Ex is estimated.
The advantage of the calendar year method is that the data necessary for the method are
usually available in the life office records in the form in which it can be conveniently used.
However, approximation in age is introduced. Like life-year method, this method is also not
suitable for select rates, as in most of the cases exact duration will not end on 31st December
(or 31 st March if the year starts from 1 st April) ..
Policy year method: In this method, the lives are observed from one policy anniversary
to the next policy anniversary. The lives are classified according tQ, say, age (x) nearer
312 RNAC~LMTHEncs
birthday as on policy anniversary and are observed from one policy anniversary to the next.
Normally the age nearer birthday on the date of entry is recorded and age on any policy
anniversary can be obtained by adding to age at entry the period elapsed from the entry
date. The E Vc ) policies having the same age (x) nearer birthday on any policy anniversary
during the period of investigation are grouped together and observed till next policy'
anniversary, provided they also fall in the period of investigation as we are counting only full
years' exposure. The deaths O(x) amongst them are noted down and the observed mortality
rates are obtained by the relation O(xfE(x)'
Census Method: The census method is an alternative method of finding rates of
mortality without observing them through one year of age as is done in the three methods
described above. Let pVc) denote at any moment the number of lives between ages x and x + 1.
If p(x) is approximately linear over a period of one year, then the two censuses taken at the
beginning and end of one year period enable us to find mortality rates.
o -
Let p(x)
1
denote the number of lives between ages x and x .+ 1 at the beginning of a year
and let pVc) denote the number of lives at the end of one year. Since p(x) is linear over the.
period of one year, the average number of lives between age x and x + 1 during one year
i( P
period is pVc) + (x», This can be taken as Lx as it represents the number of persons in a
population between age x and x + 2. If we also record the number of deaths Ox taking p~ace
during one year period with age x last birth day at death, then OJLx gives the desired centra!
mortality rates for exact age x. Since the rates are obtained by taking censuses of population,
this method is known as census method.
It may be noted that the lives counted in the 1st census between ages x and x +1 and the
lives counted in the 2nd census between ages x and x + 1 are two entirely different sets of
individuals. The rates derived by ce~su method holds good only if the assumption that
number of lives at any moment between ages (x) and x + 1 is linear is true. Compared to
eaTlier methods, census method is simple.
The census method is usually used for deriving mortality rates in respect of general
population. The periodical censuses and the corresponding data regarding deaths are used
for this purpose. The census data is collected from the whole population and in spite of best
efforts to educate the people and get accurate reports, the following errors are usually
noticed:-
(i)Deliberate mis-statements of age.
(ii) Mis-statement due to ignorance or other reasons e.g. tendency to round off the age to
nearest multiple of 5 or even number.
(iii) Some omissions and few overlapping occur during census enumerations.
(iv) At young ages, upto age 5, the rates of mortality vary rapidly and census returns are
also very unteliable at these ages. Usually more refined methods are used to arrive
at the mortality at young; ages
(e) Determination of Exposed to Risk and Deaths:

We have seen earlier that the rate of'mortality at any age x is OJEx, where Ex is the
number of lives who, during the period of investigation, are observed from age x to x + 1; and
ax is the number of deaths out of these lives under observation. It was decided to include
only those lives who remained under observation for the full year, from age x to x + 1 or until
death, if earlier. It is therefore customary to speak Ex as number of years exposed to the risk
(of death). Each life under observation at age x contributes one year to Ex.
Suppose that we apply policy year method of investigation. We include every policy
which is in force at any time during the period of investigation. Information on Policy
number, Name (for identification) of the policyholder, Date of entry into insurance, Age
nearer birthday at entry, Date and cause of exit from insurance contract are prepared for
every policy to be included. .
We hav~ seen that each policy that enters into observation can do so in two ways viz. as
beginners or new entrants. Therefore, all the policies included in the investigation are sorted
into two groups, beginners and new entrants. Each of these sub-groups is sub-divided
according to age at entry in case of new entrants and age on policy anniversary in case of
beginners. The various terms are defined below:
x denotes the age nearer birth day on the policy anniversary.
bx denotes the number of policies inforce on the policy anniversary.
nx denote the number of new policies introduced.
Similarly we have also seen that each policy under observation goes out of observation in
anyone of these ways viz. death, withdrawal or enders. Each group is sub-divided by age
nearer birthday on policy anniversary on the basis of death or withdrawal or enders in the
year. The various terms are defined below:
ax denotes the number of policies which go out of observation by death.
Wx denotes the number of policies which go out of observation by withdrawal.
ex denotes the number of policies which go out of observation by enders.
The values of bx , n x , ax, w x , and ex will contribute to the number of years exposed to the
risk, Ex. In general the exposed to risk can be obtained by using the following relation:
Ex = Ex_1-6x_l-wx-ex+bx+nx
The observed mortality rates are obtained by the relation a/Ex.
The formulae to determine exposed to risk at successive ages in case of calendar year
method and life year method can be developed as is done for policy year method. However,
these two methods are employed for aggregate rates and are not suitable when select rates
are also required.
(f) Obtabdng observed Mortality Rates:

After obtaining Ex, the exposed to risk, the quotient aiEx is evaluated which gives us qx,
the observed mortality rates or crude rates. We have to determine as to which age qx
pertains. The age approximation is introduced when instead of actual age some other age
grouping is followed. We had seen that when grouping is according to age nearer birthday
the qx pertains to age x; if it is according to age last birthday qx ~ertains to ages x + ~ and
when it is according to age next birthday qx pertains to ages x - 2 . From this crude rates,
the mortality rates for integral ages can be obtained by graduation.
314 RNAC~LMTHEncs
(g) Graduation:
We had seen earlier that crude mortality rates do not give us the probability of dying
within one year. We have to find the limiting values of the crude rates. This is done by a
process known as graduation.
The observed rates are arrived at on the basis of data of the recent past which can be
taken as a sample data for lives to be insured in future. A look at the series of rates
obtained will reveal that there is no smooth progression from one value to the next. Such
irregularity is not desirable as it introduces jumps and inconsistencies. These irregularities
are ascribed to statistical fluctuations. By experience We know that if the number of
.ihdividuals in the group is increased. the rates based on the data show a much more regular
progression from age to age. If the number be indefinitely large. the set of rates might have
exhibited the kind of smooth progression that a mathematical formula would have produced.
We can remove the sampling errors by smoothing out the observed values. This process of
smoothing out is known as graduation. This can be done by either graphical method or
interpolation method.
(h) Construction of Mortality Tables:

After obtaining the graduated mortality rates. the mortality table can be constructed as
explained earlier in this chapter. A complete mortality table has the functions like. x.lx. d x•
qx. Px. Lx. Tx. ex. These functions are elaborately discussed in the next chapter.
L Define mortality rate. Explain the role of probability in estimating mortality rate.
Give example.
2. Explain the method of constructing mortality table on generation basis with a
suitable example. What are the major difficulties of constructing mortality table on
generation basis?
3. How: will you construct a mortality table on generation basis? What are the
disadvantages of such tables?
4. Define graduation of mortality rates. Why there is need of graduation? What are the
methods of graduation?
5. What do you mean by graduated mortality rate? How does it differ from crude
mortality rate?
6. Explain the various steps involved in the construction of a mortality table.
7. Describe the importance of homogeneity of data to be used in construction of
. mortality table. '
8. Explain the census method of constructing population life tables. What are the errors
that usually creep in the census data?
9. Describe the relative advantages and disadvantages of the policy year method as
against life year method and calendar year method?
10. Write short notes on:
(a) Exposed to risk (b) Period of investigation (c) Period of selection
A Complete Mortality Table
INTRODUCTION
In the previous chapter, we have discussed how insurers construct mortality table and
how the crude rates are smoothed to obtain the graduated mortality rates. The graduates
values of qx are used for constructing a complete mortality table which contains mortality
functions, viz., lx, d x, qx, Px, Lx, Tx and ;x for successive ages x. In fact, given anyone
functions for all ages, the other functions can be derived therefrom. The following two .
mortality tables are used in this chapter.
(a) LIC (1970-73) Ultimate Table
(b) Hm (Makeham Graduation) Table
All the functions or components of a complete mortality table are discussed in detail in
this chapter.
COLUMN (x)
This column denotes the age of a prospect. The mortality table can start from any age
(like 0, 5, 12, etc.) and continue to 100 or 120 years as required by the insurer. The LIC
tables starts from age 15 and ends at age 103. Hm table starts from age 0 and ends at age
102.
COLUMN (Ix)
This column indicates the number of living persons at the beginning of each year. In
other words Ix denotes the number of persons those who attain age x. If the table starts from
age 0, the number in the lx column against this age that is to say lo is any convenient
number like 99,999 or even any arbitrary number like 1,51,039 and represents the number
of persons of age 0, i.e., the number of persons just born. Having fixed the starting number
1o• any other number lx in the column appearing against age x gives the number of persons
living out of the 10 persons born, who reach age x. Thus lao is the number of persons who
reach age 30 out of 10 person born 30 years ago.
All mortality tables may ~ot start with age O. It may start with any convenient age as
required by the insurer. The Lie (1970-73) Ultimate Mortality table starts from 15 and 115 is
9,99,999.
The number of survival (lx + 1) for age x + 1 can be calculated as the difference between
the number of person reached age x, (I,,) and the number of person died during age x (d,,), i.e.,
before attaining age x + 1
Thus from the Hm table,

The number ofpersons who survive to age 20 is given by
120 =119 - d 19
120 =96569 - 508
120 =96061
Similarly number of persons who survive to age 21 is given by
121 =120 -
d 20
121 = 96061 - 548
121 = 95513
Continuing in this manner, we will arrive at an age (x =w) where I" = O. It means that
all persons reaching age (x =w - 1) will die before reaching the age (x =w). This age w, on
and after which there are no survivors, is called the limiting age or extreme age of mortality
table. In Hm table, since 1 102 =0, 102 is the extreme age.
COLUMN (dx )
This column represents the number of people who died during age x before attaining age
x + 1, i.e., the number of person dying between ages x and x + 1. The number of survivors at
age x + is given by .
1,,+ 1 =l" -d"
From this relation, we get
Id" =l,,-lu1 t
For example, the number of death at the age of 30 is given by·
d ao =lao -la1
From Hm table
d ao =89685 - 88994
d ao = 691
Similarly we can calculate the number of deaths between any two particular years.
A COMPLETE MORTAUTY TABLE 317
The number of death between ages 40 and 45 is calculated as follows:

44
%
L
=40
d% =d 40 + d 41 + d 42 + d 43 + d 44
=(l4O -l41) + (l41 -142) + (l42 -l43) + (1 43 -1,w + (l44 -l45)
=l40 -l45
This is the number of deaths after reaching age 40 and before' reaching age 45.
In general, we write
%=b-l
%
L =a
d% = 1a -lb
From the Lie (1970-73) table, the number of deat}ls between age 40 and 45 is
44
%
L
=40
d% =l40 -l45 =963206 - 946656 = 16550
44
Alternatively, L d% =d 40 + d 41 + d 42 + d 43 + d 44
% =40
=2697 + 2968 + 3275 + 3617 + 3993 =16550.
The number of deaths from age x onwards till the extreme age w (where all people have
died) is given by
%=w-l
% =a
% =a
where w is the extreme age.

In other words, allla number of people will die, after attaining the age 'a'.
COLUMN (qx)
This column indicates the probability of death for age XJ i.e., the probability that a person
aged x dies within one year before reaching age x + 1.
No. of deaths during age x, i.e., between x at x + 1
:. q% = Total number oflivings at age x
i.e.
~ L:.:D
q % is also called the rate of mortality at age x. It will be seen that except at the very
young ages, the rate of mortality q% increases as age x increases.
We have already seen that
d% =1% -l% + 1
318 RNANCIAL MATHEMA TICS
Thus qx is also given by

Ix -Ix + 1
qx = 1
x
For example, the LIC Ultimate table, the rate of mortality at age 30 is given by
d ao 1314
qao = lao = 980776 = 0.00134
It is this function which gives the table the name "mortality table", because other
functions of a mortality table are derived from this function.
It should be noted that except very young Ilges, the mortality rate qx increases as age x
increases and at last it becomes one since all die at that age.
COLUMN (Px)
This column indicates survival rates. It gives, for successive ages, the probability that a
life aged x survives to age x + 1
No. of survivors to age x + 1
Px =Total number of livings at age x
~
i.e.
X+1
Px =-1-
x
For example, from Hm table,

la1 88994
Pao =lao = 89685 = 0.99229
Every person will definitely die at So. certain point of time. Therefore, the number of
persons who will die after attaining age x is the number of persons who reach age x, i.e., Ix.
In other words, every Ix persons who reach age x will die thereafter.
Clearly the probability that a person aged x will die within one year and the probability
that he will survive for one year are complementary probabilities.
This can be algebraically verified as under:

We know that
dx
qx=T
x
lx-Ix + 1
=:> qx ;;
Ix
Ix Ix + 1
=:> qx =r";"-l-
x x
=:> q;c = I-px

=:> qx + Px = 1.
A COMPLETE MORTALITY TABLE 319
For example, from Hm table

q30 + P30 = 0.00771 + 0.99229
~ q30 + P30= 1
It will be seen that except at very young ages, the value ofP% decreases as age x increase.
At last P%will be zero, since no one will survive.
Example 1 : Fill up the blanks in the following portion of a life table:

X 1% d% q% P%
10 1000000 '" 0.00409 ...
11 ... ... 0.00370 .. .
12 ... ... .. . 0.99653
13 ... ... ... 0.99658
14 ... ... 0.00342 .. .
Solution: We know that
d%
q%=l ~ d%=q%xl%
%
P% = I-d%
1% + 1 =1% - d%
For age 10:
d10 = q10 x l10 = 0.00409 x 1000000 = 4090
PI0 = 1 - Ql0 = 1 - 0.00409 = 0.99591
For age 11:
111 = 110 - d10 = 1000000 - 4090 = 995910
d u = Qu x l4 = 0.00370 x 995910 = 3685
Pu = 1 - Qu = 1 - 0.00370 = 0.99630
For age 12:
112 = lu - d u = 995910 ...:r8685 = 992225
Q12 = 1- P12 = 1- 0.99653 = 0.00347
d 12 = Q12 x l12 = 0.00347 x 992225 = 3443 .
Similarly
113 = 988782; q13 =0.00342; d 13 = 3382
l14 = 985400; d 14 = 3370; P14 = 0.99658
The complete table is :
X 1% d% Q% P%
10 1000000 4090 0.00409 0.99591
11 995910 3685 0.00370 I 0.99630
12 992225 3443 0.0034'1 0.99653
13 988782 3382 0.00342 0.99658
14 985400 3370 0.00342 0.99658
COLUMN (Ux )
Ux represents the force of mortality at age x. The force of mortality at age x is defined as
the limiting value of the nominal yearly rate of mortality at age x over a small interval '6/. In
practice the small interval we consider is one day, i.e., 6t = 3~5 of the year.
Consider a population which experiences the rates of mortality for each year of age. The
number of deaths d x during the age x do not definitely occur on a certain day or in a certain
month of the year. It is presumed that these deaths are uniformly spread over the year and
there is neither emigration nor immigration. Such a population is called stationary
population.
d
The number of deaths per day, after attaining age x and during age x is 3;5 and the
number of deaths at any given age will be the same from time to time and thus the
population is stationary. The number o~ deaths between age x and age x +3~5 is denoted by
d 1.
x + 365
On the other hand, the number of survivals between the age x and the age x + 3~5 is
1 1.
x + 365
Therefore the deaths between the age x and x + 3~5 is given by
d 1 == Lx -1 1
x + 365 x + 365
The rate of mortality at age x per day, i.e., the rate of mortality in between the age x and
1 . . b
x + 365 IS given y
d 1
x + 365
q x +1--
-
lx
365
i.e.
The corresponding yearly rate of mortality is given by

365 [Ix -1 _1]
x+ 365
Lx
It should be noted that this column is not shown in the table, because every year is
divided into 365 parts and consequently the length of table will be considerably too much.
COLUMN (Lx)
It represents the number of persons in the population between age x and x + 1. It is
assumed that the number of survivals are uniformly distributed through out a year.
Therefore this can be represented as the number of survivals at middle of ages x and x + 1.
It is also denoted by 'Ix + 112' i.e., Lx = Ix + 1/20
The number of survivals at the middle of ages x and x + 1 is given by
1
Lx ='2 (lx + 1%+ 1)
We. know that Ix + 1 = Ix -dx
Therefore from the above relation,
Lx ='21[Ix + lx-dx]
,
1
Lx ='2 [21x -dx]
I =.-~d·1
L.
For example, in Hm tables, at age x =50, Ix =72795, d x =1144.
1
L50 =150 -'2 d 50
1
L50 = 72795 -'2 (1144)
L50 = 72795 - 572
L50 =72223.
COLUMN (Tx)
This column denotes the total number of persons living at any time, who are aged x or
more. The total number of survivals at any age is equal to the summation of number of
persons living in between age x and x + 1; number of persons living in between age x + 1 and
x + 2 and so on. This summation will continue upto the age observed at the end of the
mortality table. .
. . Tx =No. of persons living between ages x and x + 1
+ No. of persons living petween ages x + 1 and x + 2
+ No. of persons living between ages x + 2 and x + 3
+ .......... ..
+ No. of persons living between w - 1 and w
where w is the age at the end of the table.
,I:. Tx; =Lx; + Lx; +1 + Lx; + 2 + ...... Lw -1 I
1 1 1 1
=> Tx; ='2 (1x; + 1%+ 1) + '2 (lx+ 1 + lx+ 2) + '2 (lx+ 2 + lx+ 3) + ...... + '2 (lw -1 + lw)
1 1
=> Tx; ='21x; + (lx+ 1 + 1:x;+ 2 + ...... 1w -1) + '21w
1 ,
=> Tx; =-2 1x + N,x+ 1 + 0 since lw =0
1 I
T% =21% + l\ + 1
where N: +1 =1% + 1 + l% + 2 + ...... lw-1
I For example, fom the Hm table, at age 89.
N~9 +1 =189 + l{= 90) + 191 + 192 ... 1101
= 1273 + 871 + 575 + 366 + ~2 + 129 + 71 + 37 + 19 + 9 + 4 + 1
=3577
1
T89 =2 189 + N90
1
= 2 (1800) + 3577
= 900 + 3577
=4477.
o
COLUMN (ex)
This column represents the complete expectation of life. In order to calculate the
complete expectation of life at age, first we compute the expectation of life at age x.
The expectation of life at age x is defined as the average number of complete years that
each person aged x will live after reaching age x. It is denoted bye%.
Out of 1% persons at age x, 1% + 1 reach age x + 1. This means that each of 1% + 1 lives
complete one year after reaching age x. Similarly, each of 1% + 2 lives complete two years after
reaching age x and so on.
Thus, the total number of completed years lived by l% person is
1% + 1 + 1% + 2 + ...... 1w - 1
The average number of complete years that each person aged x will live is the ratio
between the total number of completed years lived by 1% persons and 1%, the number of
persons reached age x.
1% + 1 + 1% + 2 + 1% + 3 + .. .lw - 1
:. e% = I
%
This expectation of life (e%) is called the curtate expectation of life, since it takes into
account only the complete years of life lived and ignores fraction of the year lived in the year
of death .
..The fraction of the year lived means the duration in which a person lived in the year of
his death. If the fractions are taken into account, we get the complete expectation of life. It is
denoted by ~%'
Now we'take into account the fraction oflife lived by 1% persons after reaching age x, but
not counted in ex.
In the first year d" persons die before reaching age x + 1. It means that d" people did not
complete one complete year. This period lived by d" people is not counted in ex. It is assumed
that the population is stationary and d" deaths are uniformly distributed over the year of age
x to x + 1. After reaching age x, one may have died in the first month and another one in
the last month. So on an average it can be taken that each of d" lives has lived for half year.
Therefore, the number of years lived by d" people after reaching age x is i d".
Similarly, in the second year, out of IH 1 persons, d u 1 persons die before reaching age
x + 2. The years of life lived by d" + 1 persons who died between ages x + 1 and x + 2 were not
counted in e". The number of years lived by d" + 1 persons is worked out asi d" + 1 and so on. "
Therefore, the additional number of years of life to be included in respect of the

fractional years lived by I" persons but not included in computation of e" is
1 1 1 1
'2 d" +'2dH l +'2dH2 + ...... '2 dW - l
1
='2 1"
To estimate;,,: the above fractional years lived ,by I" people is added to the total number
of completed years lived by I" persons
I 1
o N" + 1 + "2 1"
e" =
Again
In particular ;25 denotes the average number of years that a person aged 25 will live.
For example, from Hm Table
o T20
e20 =-1-
20
4044238
= 96061
=42.101
Example 2: Given e72 = 7.102, e73 = 6.680 and l73 = 30585, calculate l72.
Solution:
Given e72 =7.102
e73 =6.680
and l73 =30585
e% is given by
... (1)
=> e73 )( l73 =l74 + l75 + l76 + ... ; ••. (2)

Using (1) and (2) we get
e72 x 172 = 173 + (e73 x l73)
e72 x l72 =l73 (1 + e73)
172 (1 + e73)
172 =-~
e72
- 30585 (1 + 6.680) _ 33074 .-
172 - 7.102 -
172 =33074
CENTRAL DEATH RATE (mx )
as
Another future of mortality table is the central death rate. It is defined the death rate
in between the age x and x + 1 on the basis of the assumption that the number of deaths d%
are uniformly distributed over age x to x + 1. We know that L% is the number of persons
between ages x and x + 1. Therefore, the central death rate (m%) is defined as follows:
d%
m% =£ %
But
Dividing the numerator and denominator by 1%, we get

q%
~
q%
m% =-2--
-q%
The above relation is used to obtain Ins. if value of q% is given.
2q%
Again m% = - 2
-q%
=> m% (2 - q%) = 2q%
=> 2m%-m%. q% = 2q%
=> . 2q% + m% . q% = 2ms
=> (2 + m%) q% = 21ns
'This relation can be used to obtain q%. if value of m% is given.
ExaDiple 3 : Find the central death rates, if the mortality rates are :
(a) q40 = 0.00280 (b) q6S= 0.01672
Solutio" :
The central death rate is given by
2q%
m% =-2--
-q%
(a) Given that q4C) =0.00280
2q40
m40 =2-q40
2 x 0.00280
m4C) =2 - 0.00280
0.0056
m40 = 1.9972
m4C) =0.002804
.. Central death rate at age 40 is 0.002804
(b) Given that q58 =0.01672

2q58
m68 =2-cl58
2 x 0.01672
m68 = 2 - 0.01672
0.03344
m68 =1.98328
m68 =()'01686
.. Central death rate at age 58 is 0.01686.
Example 4 : Find the death rates, if the central death rates are:
(aJ ma9= 0.00974, (bJ m65 =0.04423
Solution : For a given central death rate, the mortality rate is given by
2m%
q% = 2 +m%
(a) Given that ma9 = 0.00974
2ma9
qa9 =2 + ma9
2 x 0.00974
qa9 = 2 + 0.00974
0.01948
qa9 = 2.00974
qa9 =0.00969
. . Mortality rate at age 39 is 0.00969.
(b) Given that m65 =0.04423 .
2m65
q65.= 2 + m65
2 x 0.04423
q65 =2 + 0.041.23
0.08846
q65 = 2.04423
q65 =0.04327
.. Mortality rate at age 39 is 0.4327
KINDS OF MORTALITY TABLES

There is an important classification of mortality tables of three kinds depending upon
the data used in their calculation. They are known as :
(a) Select Table
(b) mtimate Table and
(c) Aggregate Table
(a) Select Table: In general mortality table, the rates of mortality depend upon the
attained age only. In life insurance we take into account another factor besides age viz.,
period which has elapsed since entry into the contract. Mortality Tables giving rates
depending upon both age and duration elapsed since entry into insurance contract are called
select mortality table.
Insurance companies accept insurance proposals, only if some certain standards are met.
This standard may be determined by medical examination or by scrutinizing the proposal
form or by preliminary enquiries by agents or by all these measures combined. This process
of accepting the lives who meet the desired standards is called 'selection'. These lives are
A COMPLETE MORTALITY TABLE 327
called insurable lives. Clearly lives so selected experience lighter mortality than lives of
same age in general population.
It has been observed that two groups of persons so selected at different times will not
experience the same mortality even though they are of the same age. The group which has
been selected just now is found to experience lighter mortality than another of the same age
at present, but selected sometimes ago. For example, a group of persons aged 30 selected just
now is subject to a lower mortality rate than another which is now aged 30 but was selected
one year ago at aged 29.
Thus, persons taking policies at different ages are kept separate from each other for the
purpose of calculation of premium even though they all may be ofthe same age now.
The rate of mortality of a person who has just now entered at age 30 is denoted by q(30)'
The rate of mortality of a person now aged 30 but entered into the insurance contract
one year ago at age 29 is denoted by q(29) + l' The figure '29' inside the brackets represents
the age of entry and '1' represents the duration since entry.
The rate of mortality of a person now aged 30, but entered two years ago at age 28 is
denoted by q (28) + 2 and so on'.
Clearly q(30) < q(29) + 1 < q(28) + 2, although all represent the rates of mortality of persons
now aged 30.
Therefore, in constructing select mortality table each group of lives entering at a
particular age, say (x) should be considered separately and a separate mortality table should
be prepared by giving
q(:IC), q(:IC) + h q<x) + 2, ..•.••
Consider the separate mortality tables prepared for each of the entry ages, say from 30
and onwards.
Age at No. of years since entry
entry . 0 1 2 3 4 5
(x) q<x) q<x) + 1 q<x)+ 2 q(:IC) + 3 q<x)+ 4. q<X)+5'"
30 q(30) q(30) + 1 q(30) + 2 q(30) + 3

~ q(30) + 5···
•
31 q(31) q(31) + 1 q(31) +2
~ q(31) + 4. q(31) + 5........
32 q(32) q(32) + 1
~ q(32)+ 3 q(32) + 4. q(32) + 5 '"
33 q(33)
~ q(33) + 2 q(33) + 3 q(33)+4. q(33)+ 5 '"
34
~ q(34.) + 1 q(34.) + 2 q(34.) + 3 q(34.) + 4. q(34) + 5 '"
and so on
Each horizontal line forms a mortality table for lives entering at a particular age. It will
be noted that rates for the same age attained at different durations since entry appear along
a diagonal, going upward to the right~ Thus mortality rates for age 34 are q(34.)1 q(33) + h q(32) + 2,
q(23) + 3, q(30) + 4. and these relate to durations 0, 1, 2, 3 and 4 respectively at corresponding
entry ages 34, 33, 32, 31 and 30. Other functions like 1<x) can also be tabulated like this.
However, if the period of selection is limited to a certain definite number of years, the
select rates are calculated only for that duration and thereafter they are simply represented
by qx, ignoring the duration.
We suppose that the period of selection is three years. q(31) will be less than Q(30) + 1. But
there will be no difference between q(31) + 3 and q(30) + 4. Because the duration over and above
three years is of no consequence and only attained age matters. Both of these rates are
simply represented by q34'. Similarly for lives of attained age 35, q(32) + 3, q(31) + 4 and q(30) + 5
are equal and can be replaced by q35'
The following table shows the mortality rates for each of the entry ages say from age 30
and on words for a period of selection of 3 years.
Age at Duration since entry
entry 0 1 2 3 4 5
(x) q(x) q(%)+1 q(%)+ 2 qx+3 qx +4 qx+5 ...
30 q(30) q(30) + 1 q(30) + 2 q33 q34 q35 ...
.
31
32
q(31)
,
q(31) + 1 q(31)+2 q34
. q35 q36 ...
q(32) q(32) + 1 q(32)+2 q35 • q36 q37 ...
33 q(33) q(33) + 1 q(33)+2 q36 q37 q38 ...
34 q(34) q(34) + 1 q(34) + 2 q37 q38 q39 ...
and so on
If the period of selection is 3 years, it is unnecessary to write down the ~orta1iy rates
for the duration over three (i.e., qx + 3) for each age. These can be replaced by a single column,
"duration three and above". So the select mortality table with the observed rates for duration
3 and over can be constructed in the f\)llowing m~er :
I Age at(x)entry 0 1 2 x+ 3 and Attained age

q(xl q(x) + 1 q(x)+2 above x+3
30 0.00174 0.00200 0.00217 0.00228 33
31 0.00178 0.00206 0.00224 0.00236 34
32 0.00183 0.00212 0.00232 0.00246 35
33 0.00188 0.00220 0.00242 0.00258 36
34 0.00195 0.00230 0.00253 0.00271 37
and so on
From the above tables, for example, the mortality rate for age 32 selected at age 32 (i.e.
q(32) is 0.00le3, the mortality rate for age 32 select age 31 (i.e. q(31) + 1) is 0.00206 and the
mortality rate for age 32 selected at age 30 (i.e. Q(30) + 2) is 0.00217. The reveal that as the
selection pei;.od passes, the mortality rate increases although they are of the same age at
present.
We know that the mortality rates are derived from the number of deaths and number of
survivals ~t a particular age. So it is obvious that to construct a select mortality table, the
number of survivals at the beginning of every age during the select period and the number of
deaths during every age should be observed and can be tabulated.
Thus other functions like 1v&) and dU&) can also be tabulated. In the select table for lu&), the
observations 1u&) + h 1% + 1 are not related to each another as they represent different ages of
selection.
i.e., 1% + 1 .. 1v&) + 1
The following relations are used to find the death and survival rates
d(;&) =1(;&) -1U&) + 1
d(;&) 1(x) -1(;&) _ 1
qu&) =-1-= 1
(;&) (;&)
and Pu&) =1 - q(;&)
d(%) + 1 1u&) + I -1(;&) + 2

similarly qu&) + 1 =-1--
U&)+ 1
=
1u&) + 1
and Pu&)+ 1 =1- qv&)+ h and so on.
This should be noted that the above relations are applicable to the certain period of
selection.
(b) Ultimate table: A mortality table in which the rates in the select period are omitted
and only the ultimate rates are tabulated is called an ultimate mortality table. In
otherwords, figures for policies that still have the effects of selection are not included.
The ultimate table is used for valuation purposes. Where insurer wants to have a
reasonable safety margin, the ultimate table is used. It gives the maximum possible rate of
death. Clearly ultimate rates are higher than select rates for some attained age.
In the above example, the mortality rates for the duration of first three years, i.e., 0, 1,
and 2, will not be included for preparing the ultimate mortality table. Following is an
ultimate table for a duration of 3 years and more while the rates for duration 0, 1, and 2 are
called select rates.
Age at entry (x) Duration since entry (x + 3 and above) Attained Age x + 3
30 0.00228 33
31 0.00236 34
32 0.00246 35
33 0.00258 36
34 . 0.00271 37
and so on
--
Generally both select and ultimate mortality tables are shown together.
(c) Aggregate table : A table constructed without distinguishing the select and
ultimate lives is called an aggregate mortality table. The lives from which the mortality
rates of the aggregate lives are derived being a mixture of the select lives and ultimate lives.
The aggregate rates lie between the select and ultimate rates for the same age attained.
That is to say that they are lighter than the ultimate rates, but heavier than the select rates . ...
This is also called mix or general mortality table. In this table, persons of same age
irrespective of the consideration whether they were insured at age x or some years before the
agex.
The Hm table is the example of aggregate table. This table is used where no selection is
required. This table is also used in group insurance.
L Write a short note on (a) Death Rate and (b) Survival Rate.
2. Derive the relation: Px + qx = 1
3. What are the elements of a complete mortality table? Explain thelI1 briefly.
4. What you mean by force of mortality? Explain how it is estimated.
5. Define stationary population. Why the population observed is assumed as
stationary ?
6. Write a short note on Column Tx.
7. Define expectation of life. How does it differ from complete expectation of life ?
8. What do you mean by central death rate ? How does it differ from mortality rate ?
Derive the relation between death rate and central death rate.
9. Find the central death rates, if the mortality rates are :
(a) q45 = 0.01224, b) q62 = 0.03451
[ADs. (a) 0.01232, (b) 0.03512]
10. Find the mortality rates, if the central death rates are :
(a) mao = 0.15547 (b) m30 = 0.00774
[ADs. (a) 0.14426, (b) 0.00771]
11 Fill up the blanks in the following portion of a life table:
x lx dx qx Px
20 1000000 - 0.0050 -
21 - - 0.0045 -
22 - - - 0.9960
23 - - - 0.9965
24 - - - 0.9970
25 - - 0.0025 -
[ADs.
d 20 = 5000 d 22 = 3962 d 24 = 2949
P20 = 0.9950 q22 = 0.0040 q24 = 0.0030
P21 = 995000 l23 = 986560 125 = 980158
d 21 =4478 d 23 = 3453 d 25 = 2450
P21 = 0.9955 q23 = 0.0035 P25 = 0.9975
122 = 990522 l24 = 983107
12. From the following data, find the number of livings at age 43.
X 1% d% P"
40 - 400 0.006
41 - - 0.007
42 - - 0.008
25 - - -
[ADs. l43 =65277]
o 0
13. Given e55 = 16.926, e36 = 16.282 and l56 =65152, calculate l55' [Ans.l S5 =66566]
14. Given e33 = 32.021, e34 = 31.287 and l34 = 86886 calculate l33' [ADs. 133 =87585]
15. In a certain select mortality table, the period during which selection is assumed to
have effect on the mortality experienced is four years. Given the following table and
that l(20) =494985, find the values of l(20) + 2, l24' l(21) and l(24)
Age at d(;c) d(;c)+ 1 d(;c)+2 d(;C)+3 d,,+4 Age a
entry (x) attained
x+4
20 641 778 864 707 727 24
21 640 781 866 91 933 25
22 640 782 871 919 942 26
23 639 785 876 928 950 27
24 639 789 884 936 963 28
[ADs. l(20) + 2 =493566
l24 = 491795
l(21) =494995
1(24) =491291]
16. The following data are available in respect of a mortality table:

Age x L" m"
70 36760 0.06622
71 34309 0.07193
72 31830 0.07822
73 29337 0.08507
On the assumption of uniform distribution of deaths over the year of age, calculate
the values of I", d" and q" for ages 70 to 73.
[ADs. x 1" d" q"
70 37977 2434 0.06409
71 35543 2468 0.06944
72 33075 2490 0.07528
73 30585 2496 0.08161
17. What are the different kinds of mortality tables?
18. What do you understand by 'period of selection' ? What is the importance of selection
period in constructing mortality table?
Probabilities on
Survival and Death
INTRODUCTION
In the previous chapter, we have discu~ all the elements of a complete mortality
table. Among all elements, q", the death rate, is the important function which gives the table
the" name mortality table. The basic elements, I", d", q" and p" of a mortality table can be
used for calculating the various probabilities of survival and death. These probabilities are
discussed in this chapter.
PROBABILITY mPx
This is the probability that a person aged x survives n years. When m is one then this is
the probability that a person aged x will survive one year, i.e., p".
This probability of survival mPx is given by
_ No. of persons living at age x + m
mP" - No. of persons living at age x
I wJ'.=~ I
This can be written as
4+1 4+2 4+2 4+m
mPx =-1- x -I- x -I- x ...... x I
" ,,+1 x+2 x+m-l
PROBABILmES ON SURVIVAL AND DEATH 333
Thus the probability that a person aged x survives for m years is the product of the
probabilities that a person aged x will survive one year, a person aged x + 1 will survive one
year, ...... and the person aged x + m - 1 will survive one year.
For examRle, using Lie (1970-73) Ultimate table, the probability that a person aged 28
will survive for 3 years is
131 979462
aP28 =128 =983330 =0.99607
This can be alternatively given by
aP28 =P20 x P29 x P30
i.e. . aP28 =0.99871 x 0.99869 x 0.99866 =0.99607.
Remark : Every person aged x who survives m years will definitely· die after m years.
Therefore this is also the probability that a person aged x will die after m years.
PROBABILITY: mq"
This denotes the probability that a person aged x will die between the ages x ands x + m.
In other words, this is the probability that a person ag~d x will die within the next 'm' years.
It is denoted by mq:t. .
From definition,
Number of persons dying between ages x and x + m
mq:t = Number of persons living at age x
. l:t-l:t +m
.. mq:t = l:t
A person aged x who is expected to die within next m years may die between the ages (x
and x + 1) or (x + 1 and x + 2) or (x + 2 and x + 3) or ...... or (x + m - 1) and x + m).
Therefore, by addition theorem of probabilities, the probability that a person aged x will
die within the next m years is the sum of the probabilities that a person aged x will die
between ages (x and x + 1) or (x + 1 and x + 2) or (x + 2 and x + 3) or ...... or (x + m -1 and
x+ m).
Thus mq:t is given by
d:t d x +1 d x +2 d:t+m-l
mq:t =-1 + -1-+ -Z-+ ...... + I
:t :t X x
d:t+dx+l +d:t+2+ ...... d x +m - 1
i.e. mqx = I
:t
i.e.
i.e.
For exampl~ the probability that a person aged 28 will die with in next 3 years is given
by
_ 128 -131_ 983330 - 979462 _ 0 00393
3q 28 - 128 - 983330 -.
y
Further, we have
Ix -Ix +m
mqx = I
x
i.e.
Remark 1: The probability that a person aged x will die within next m years and the
probability that a person aged x will die after m years are complementary to each other.
Thus the probability that a person aged x will die ~r m years is 1 - mqx (or mPx).
Remark 2 : The probability (mqx) that a person aged x dies within the next m years is
also denoted by Imqx'
PROBABILITY: m,q"
This denotes the probability that a person aged x will die after m years but within one
year. In other words, this is the probability that a person aged x will die between the age
x + m and x + m + 1.
No. of deaths between ages x + m and x + m + 1
mfl.x = No. of persons living at age x
Ix + m - Ix + m + 1
mfl.x = Ix
Again, we know that

Ix + m -Ix + m + 1 =d x + m
dx + m
mllx =-1-
x
lx+m d x +m
i.e. mIlx =-1- x-- -
x Zx+m
i.e.
Thus the probability that a person aged x will die in year following m years from now is
the product of (i) the probability that he will survive m years (i.e. attain age x + m) and
(ii) the probability that a person aged'x + m will die within one year '
Further, we have
Ix + m -Ix + m + 1
~.e
mllx = Ix
Ix + m Ix +m+ 1
=> mfl.x =- Ix- - I
x
=> mfl.x = mPx = m+lPx I

This shows that a require probability is the difference between (i) the probability that a
person aged x will survive for m years and (ii) the probability that a person aged x will
survive for m + 1 years.
PROBABILITIES ON SURVIVAL AND DEATH 335
For example, using LIC (1970-73) ultimate table, the probability that a person aged 28
will die between the ages 31 and 32 is given by
_ 131 -132 _ 979462 - 978101 _ 3
a!i28 - 1 - 983330 - - 0.001 8
28
This probability can also be alterantively given by
131 ) 979462
a!i28 = ( 128 x q31 =983330 x 0.00139 =0.00138
PROBABILITY: mlnqx
This represents the probability that a person aged x will die within n years, following m
years from now. In other words, this is the probability that a person aged x will die between
the ages x + m and x + m + n. This probability is given by
No. of deaths between ages x + m and x + m + n
ml",qx - No. of persons living at age x
Ix + m - Ix + m + '"
m I n qx = 1
x
For example,.using LIC (1970-73) ultimate table, the probability that a person used 35
will die in between the ages 45 and 50 is given by
145- 150
1015q35 = 1
35
946656 - 919712
1015q35 = 973550 =0.02768.
This relation can be further written as
Ix + m Ix + m -Ix + m + n
m/n,qx =-1- x 1
x x+m
This shows that the required probability is the product of the probability that a person
aged x survives for m years and the probably that a person aged x + m dies within next n
years.
Further, we have
Ix + m -Ix + m + '"
m/n,qx = 1
x
mIlx = mPx - m +nP", I

This shows that the required probability is the difference between (i) the probability that
a person aged x survives for m years and (ii) the probability that a person aged x survives for
m + n years.
PROBABILITIES USING SELECT TABLE

The probabilities of survival or death discussed above, can also be estimated using a
select table.
We have the following relations to calculate the probabilities for a particular age.
d~) =lex) -lex) + 1
d(%)
qex) =-1- and
(%)
lex) + 1
Pex) =-1-
%
lex) + 1 .. lex + 1)' since lex) + 1 is the number of survivals at age x + 1, but selected one year
before at age x and lex + 1) is the number of survivals at age x + 1, but selected now at age
x+L .
Following are the probabilities of death and survival :
l(x) +m
(a) mPex) =-1-
. ex)
l(x) -l(x) + m
(b) mqex) = 1(x)
l(x)+m-l(x)+m+l d
(c) m/q(%) = I an
(x)
lex)+m -lex)+m-n
(d) m / n q(x) = I (x)
When we use a select table to calculate the probabilities of death or survival, it should be
noted that after the period of selection (say, m years) there will be no difference between the
probabilities qexJ + rn and qex -1) + (m + 1).
Example 1 : Find the following probabilities that:

(a) A life aged 40 survives 5 years.
(b) A life aged 40 dies within next 5 years.
(c) A life aged 40 dies after 5 years.
(Use Hm Mortality Table)
Solution:
(a) The probability that a person aged x survives m years is given by
•
lx+m
mP% =-1-
x
Here x = 40 years, and m = 5 years
140+5 145
5P40 =---z.;;; =140
77918
5P40 = 82277 = 0.947
.. The probability that a person aged 40 will survive 5 years is 0.947.
PROBABlunES ON SURVIVAl. AND DEATH 337
(b) The probability that a person aged x dies within next m. years is given by
l% -1% +m
mq% ,= 1
%
Here x = 40 years, and m= 5 years.

l4O- l 4O+5 l4O- l 45
5q40 = l40 = 140
82277 - 77918
5Q40 = 82277 .. = 0.053
.. The probability that a person aged 40 will die within 5 years is 0.053.
(c) The probability that a person aged 'x' will die after m years is equal to a probability
that a person aged x survive m years.
. . The required probability is given by
l%+m
mP% =·-l- %
Here, x =40 years, and n =5 years

l40+ 5 145
5P 40 =--z;;;- =140
77918
5P40 = 82277 = 0.947
.. The probability that a person aged 40 dies after 5 years is 0.947.
Example 2 : Using Hm mortality table, find the probability that

(a) A life aged 60 die between the ages 66 and 67.
(b) A life aged 60 will not dies between the ages 66 and 67.
'Solution:
(a) A probability that a life aged x will die between the aged x + m and x + m + 1, is
, given by
Ix + m -l% + m + 1
mAx = 1%
Here, X =60, and x + m =66
m '=66-60=6
160+6- 160+6+1 166- 167
6fCl60 = 1so = 1so
_ 47176 - 44972 _ 0 038
sfClso - 58842 -.
: ..The probability that a life aged 60 Wi~ die between and ages 66 and 67 is 0.038
(b) The probability that a life aged 60 will not die between the ages 66 and 67
=1- The probability that a life aged 60 will die between the ages 66 and 67.
= 1- mIl%
=1- 6R60
=1 - 0.038 =0.962
. . The probability that a life aged 60 will not die between the ages 66 and 67 is
0.962. -
Example 3 : Using lie (1970-73) mortality table, fiiul, the- probability that:
(a) A life aged 28 will die before attaining age 35.
(b) A life aged 28 will not die before attaining age 35.
(c) A life aged 20 will die in the 7th year from now.
(d) A life aged 20 will not die in the 7th year from now.
Solution:
(a) The probability that a life aged x will die before attaining age m is given by
l% -l% +m
mq% = l%
Here X =28, and x + m =35
m =35-28=7
., The probability that a person aged 28 will die before attaining the age 35 is
0.009.
(b) The probability that a life aged 28 will not died before attaining age 35
=1 - {The probability that a person aged 28 will die before attaining age 35}
= 1- mq% = 1- 7<128
=1-0.009
=0.991
.. The probability that a life aged 28 will not die before attaining age 35 is 0.991.
(c) The probability that a life age x will died in a particular year from now i.e., in
between x + m and x + m + 1 is given by
1% + m - 1% + m + 1
mIl% = 1%
Here x = 20, x + m + 1 = 27 and m = 6
Now
PROBABILlnES ON SURVIVAL AND DEATH 339
985832 - 984580
sIl20 = 993477
=0.001
. . The probability that a life age 20 will die in the 7th year from
\
now is 0.001.
(d) The probability that a life aged 20 will not die in the 7th year from now
=1 - {The probability that a life age 20 will die in the 7th year from now}.
= 1 - mil" =1 - 61120
= 1-0.001
=0.999
.. The probability that a life aged 20 will not die in the 7th year from now is 0.999.
Example 4 : Using Hm Mortality Table, find the probability that

(a) Life aged 40 will die between the ages 50 and 55.
(b) Life aged 40 will not die between the ages 50 and 55.
Solution: Let x be the attained age.

The probability that a life aged 'x' will die between the aged x + m and x + m + n is given
by
1" + m -1" + m + n
mlnq" = 1x
Here x =40, x+m=50 and x+m+n=55
m =10 and 1J. =5
(a) A life aged 40 will die between the aged 50 and 55 is probability that
, 140 + 10 -140 + 10 + S
100Sq 40 = 140
Here 140 = 82277]

Iso = 72795
[ Iss = 66566
72795 - 66566
100SQ 40= 82277
I01SQ40 =0.0757 .
.. The p~obailty that a life aged 40 will die between ages 50 and 55 is 0.0757.
(b) The probability that a life aged 40 will not die between the aged 50 and 55.
=1 - Probability that a life aged 40 will die between the aged 50 and 55.
=1- 10/sQ40
=1- 0.0757
=0.9243
340 FINANCIAL IfATHEIfATlCS
. . The probability that a life aged 40 will not die between the ages 50 and 55 is
0.0243. '
E:xampre 5: Using the UC (1970-73) Ultimate table, find the following probabilities that
(a) A life aged 35. 'dies within 12 years.
(b) A life aged 40 dies not earlier than 12 years and not later than 15 years.
(c) A life aged 52 survives 12 years.
(d) ~ life aged 52 will not dies between 65 and 70.
Solution:
(a) The probability that a life aged % dies within m years is given by
1" -1" +m
mq" = 1
"
Here % =35 years, and m =12 years
From LIe (1970-73) ultimate table,
1% = 135 = 973550
l:~ +m =135 .... 12 =147 =937401
135 -135 + 12 135 -147
12Q35 = 1
35
:::: 1
35
973550 - 937401
12Q 35 = 973550
1~35 =0.0371
The probability that a life aged 35 diei within 12 years is 0.0371.
(b) The 'probability that a life aged % dies not earlier than m years and not later than
m + n years is given by
1% + m -1% + m + n
mlnq" = 1
"
Here % = 40 years
m =12 years
..
n +m =15 years
n =3 years.
So, the probability IS given by
140 + 12 -140 + 12 + 3
1213q 40 = 140
152 -i55
= 140
PROBAIIIUfJES ON SURVIVAL AND DlATH 341
Here 152 =904837; 155 =876889; and 140 =963206

904837 - 876889
1213q 40 = 963206
1tl3q 40 =0.029.
The probability that a life aged 40 dies not earlier than 12 years and not later than
15 years is 0.029.
(c) The probability that a life aged x survives m years is given by

. Is+".
mPs =T
Here x = 52 years
m = 12 years
Here,
.
Is = 11S2 = 904837
Is +". =l52 + 12 =l64 =738825.
.. The required proba~lity is given by
11S2 + 12
1?P1S2 =-l-
1S2
738825
12P52 = 904837
1?P52 ::: 0.8165
.. The probability that a life ~ 52 survives 12 years is 0.8165.
(d) The, probability that a life aged x will not die between ages x + m andx + in + n
~ 1- [Probability that a life aged x will die betweenx + m and x + m + n]
::: 1- mlnqs =1 - t" + m -Is

Is
+ ". + n
Here, x = 52; x + m ::: 65; and x + m + n ::: 70

m =13 and n=5
Here Is =152 =904837
lu". =152 + 18 =l81S =717436
ls+ ". +fa ::: 11S2 + 18 + 5 :; 170 = 591285
.. The probability that a life aged 52 will not die between the ages 65 and 70
::: 1- 181l5qIS2
::: 1 _ [i52 + 18 ~:2 + 13 + 5 ]
_ [1651-1
-1-
70 ]
52
_ 1- [717436 - 591285]
- 904837
_ 1- 126151
- 904837
= 1 - 0.1394 =0.8606
.. The probability that a life aged 52 will not dies between age 65 and age 70 is
0.8606. -' .
Example 6 : Find the probability that of 2 persons A and B aged 30 and 35 respectively:
(a) both die before attaining age 55.
(b) both die after attaining age 60.
(c) A dies before 65 while B dies after 60.
(d) At least one of them survives to age 70.
Solution:
(a) The probability that 2 persons A and B die before attaining age 55
=P (A dies) x p (B dies)
=25Q30 x 20Q35
=(1 30 -1 30 +'25) x (135-135+20)
130 . 135
= (130- Z55) x(Z3S- 155)

130 las
_ (980776 - 876889 ) (973550 - 876889 )
- 980776 x 973550
103887 96661
=980776 x 973550
=0.1059 x 0.0993
=0.0105
.. The probability that of 2 persons A and B aged 30 and 35 both die before attaining
age 55 is 0.0105.
(b) The probability that both the persons died after attaining age 60 years
=p (A died after 60) x p (B died after 60)
=(1- aoQao) x (1- 25qa5)
= (1_1ao-160) x(1_1a5-160)
130 las
_ (1 _ 980776 - 811640) (1 _ 973550 - 811640 )
- 980776 x 973550
=(1- 0.17245) x (1- 0.16631)

=0.8276 x 0.8337
=0.68897
.. The probability that both the persons die after attaining age 60 years is 0.68897.
(c) The probability that A dies before 65 while B dies after 60 is given by
p (A dies after 65 years and B dies after 60 years)
=p (A dies before 65 years) x p (B dies after 60 years) ... (i)
Now p (A dies after 65 years) = 35q30
mQ" ='" -l"

l +m
"
130- 130 + 35 130 -165
35Q30 = 1
30
= 130
980776 -717436
35Q30 = 980776
... 35Q30= 0.2685
p (B dies after 60) =0.8337 (from part b)
Required probability =0.2685 x 0.8337 =0.2238
:. The probability that A dies before attaining age 65 while B dies after 60 years is
0.2238.
(d) The probability that atleast one of them survives to age 70 is given by
p (at least one of them survive to 70)
= 1- p (both dies 'before 70)
=1- [p (A dies before 70) x p (B dies before 70)]
p (A dies before 70) =4OQ30
130 -170
= 130
980776 - 591285
= 980776
389491
=980776 =0.3971
.' Probability that a A dies before 70 is 0.3971
p (B dies before 70) =35Q35
l35 -170
= 135
973550 - 591285
= 973550
382265
= 973550 =0.3927
344 FINANCIAL IfATHElfAncS
.. The probability that B dies before 70 is 0.3927

., Required probability is given by
= 1 - (0.3971 x 0.3927)
= 1-0.1559
=0.8441
.. The probability that atleast one of them survive upto 70 is 0.8441.
Example 7 : A select mortality table (period of selection 2 years) is given below:

Age at entry (x) l(s) l(s) + 1 ls+2 .Age attained (x + 2)
30 486024 485094 484096 32
31 485028 484080 483059 33
32 . 484012 483042 481994 34
Find (a) 21'(30) + 1
(b) 1211(31) + 1
(c) lIq(32)
Solution: .-<...,
(a) mPt¥) is giv.en by
It¥)~m·
mPt¥) = z;;-
+1+2
•. ·71'(30) + 1 =l(30)
1
(30) + 1
l(30) +3
=l(30) + 1
131 + 2 l33
- ----- 1(30)+3 =l31+2
-;- l(30) + 1 - 1(30) + 1
483059
= 485094 = 0.99580
. . The required probability is 0.99580
(b) Imqt¥) is given by

It¥) -It¥) + m
Imqt¥) = It¥)
•• ~(31)+ =1(31) + 11(31)

-1(31) + 1 + 2
+1
l(Sl) + 1 -184
=
l(Sl) + 1
_ 484080 - 481994 _ 0 00431

- 484080 -.
:. The required probability is 0.00431

(c) mA(x) is given by
l(;c)+m -l(;c)+m+l
mA(;c) = 1
(;c)
1(32) +1 -1(32) + 1 + 1
III (32) = •
1(32)
1(32) + 1 -134
= 1(32)
483042 - 481994
= 484012
1048
= 484012 =0.00217
Example 8 : Establish the relationship

mP:r =P:r K m-lP:r+ 1
SolutiOn:
RHS =(P:r) x (m - tP:r+ 1)
l:r + 1 l(;c + 1) + (m - 1)
-- -x
- lx 1x + 1
-1:r+l1:r+m
--x--
- 1:r 1:r + 1
l:r+m
=-1-
:r
=mP:r =RHS
Thus, mP:r:: (P:r) x m - tP:r + 1
Example 9: Given that the probability that two persons aged 2() and 45 respectiv.ely will
both live 25 years is 0.285 and that by the same mprtality table out of 95500 persons alive at
age 20, 81500 attain age 35, what is the probability that a person aged 35 will survive till age
wr .
Solution:
Given that 251'20 x 251'45 =0.285 ... (1)
120 =95500
and 135 =81500
It is to find the probability that a person aged 35 will survive till age 70, i.e., to find 351'35
l70
351'35 =l35. ... (2)
145 170
Now (1) => -l x-I = 0.285
20 45
l70 =0.285
l20
l70 =l20 x 0.285

l70 =95500 x 0.285
170 =27217
27217
.. (2) => 351'35 =81500 =0.334
L Find the following probabilities (using LIC) Mortality Table) that

(a) A life aged 30 survives 10 years.
(b) A life aged 30 dies within next 10 years.
(c) A life aged 30 dies after 10 years. [Ana. (a) 0.9821, (b) 0.0179, (c) 0.9821]
2. Find the following probabilities that
(a) A life aged 35 survives to age 45.
(b) A life. aged 40 dies before attaining age 50.
(c) A life aged 40 dies after attaining age 55.
(use LIC (1970-73) ultimate table). [Ana. (a) 0.972, (b) 0.017, (c) 0.910]
3. Given that 168 =43133, l75 =26237 and l78 =18961 find the probability that
(a) A life aged 68 dies in 7 years.
(b) A life aged 68 dies not earlier than 7 years and not later than 10 years.
[Ana. (a) 0.392, (b) 0.169]
4. Using LIe (1970-73) ultimate table, find the probability that
(a) A life aged 45 will die in between the aged 54 and 55.·
(b) A life aged 45 will not die in between the aged 54 and 55.
[Ana. (a) 0.011, (b). 0.989]
5. Using LIe (1970-73) ultimate table, find the probabilities that:
(a) a li~ aged 35 will die between the ages 45 and 50.
(b) a life aged 35 will not die between the ages 45 and 50.
(c) a life aged 35 will die in the 10th year from now.
(d) a life aged 35 will not die in the 10th year from now.
[Ans. (a) 0.0277, (b) 0.9723, (c) 0.0041, (d) 0.9959]
PROBABILITIES ON SURVIVAL AND DEA TH 347
6. Given that 150 = 10~, 160 =85000 and 165 =60000, find the probability that
(a) a life aged 50 will die between the ages 60 and 65.
(b) a life aged 50 will not between the aged 60 and 65.
(c) a person aged 60 survives 5 years.
(d) a person aged 60 dies before attaining age 65.
[~. (a) 0.25, (b). 0.75, (c). 0.706,(d). 0.294]
7. Given that 125 =89032,1 35 =81822 and 140 =78100, find the probability that
(a) a life aged 35 survives to age 40.
(b) a life aged 25 dies before attaining ages 40.
(c) a life aged 25 will not die before attaining age 35.
(d) a life aged 25 dies after 15 years.
(e) a life aged 25 dies between the ages 35 and 40.
(f) a life aged 25 will not die between the ages 35 and 40.
[Ans. (a). 0.954, (b). 0.123, (c). 0.919, (d) 0.877, (e) 0.042, (f) 0.958]
8. Of two persons A aged 35 and B aged 42, find the probability that
(a) A and B both survive 10 years.
(b) A and B both die within 10 years.
(c) One of the two lives survives 10 years while the other dies within that period.
(d) Atleast one survives 10 years.
[Use LIC (1970-73) ultimate table] [Ans. 0.9189, (b) 0.0015, (c), 0.0796, (d) 0.9985]
9. Of three persons A, B and C, aged 40,45 and 50 respectively, using LIC (1970-73)
ultimate table, find the probability that atleast one of them will not die between the
ages 65 and 70. [Ans.0.9976]
10. Establish Algebraically the following relation:
(m-'lP:x; + 1) - (mP:x;) =(q:x;) x (m-'lP:x; + 1)
lL Given that the probability that two persons aged 30 and 40 respectively will both live
10 years is 0.480 and that, by the same mortality table, out of 85800 persons live at
age 30, and 80200 attain age 35. What is the probability that a person aged 35 will
survive till a~e 50? - [Ans. 0.514]
12. A mortality table is represented by the function l:x; =100 V100 - x.
(a) Calculate the probability that
(i) a life surviving from birth to age 19
(ii) a life aged 36 dying before age 51
(iii) a life aged 19 dying between ages 51 and 64
(b) Calculate the limiting age of the table.
[Ans. (a) (i) 0.9, (i) 0.125, (iii) 0.111; (b) 100 years]
13. From the table given below, evaluate

(a) 3P(21) + 1 (b) 1I2Q(20)
•
(c) 2Q (22) + 1 (d) 111 (21) + 1
Age at entry 1(%) 1(%) + 1 1%+2 Attained age
(x) x+2
-
20 495393 494534 493633 22
21 494480 493620 492716 23
22 493566 492702 491795 24
23 492647 491781 490868 25
[Ans. (a) 0.9944, (b) 0.0037, (c) 0.0037, (d) 0.0019]
14. Given the following rates of mortality, what is the probability that a person aged 65
will die between ages 69 and 70 ?
Age Rate of mortality
65 0.035
66 0.040
67 0.045
68 0.050
69 0.055
[Ans. 0.04623]
Well-known Mortality Tables
INTRODUcnON
We have so far studied the principles involved in various prQcesses of construction of
mortality tables and the basic elements of a mortality table. While constructing a mortality
table, the past experience of mortality plays a major role. The mortality tables can be
classified into 3 categories viz., (a) those prepared from population data, (b) those prepared
from life assurance data and (c) those prepared from life annuitants' data. Different
countries follow different mortality tables constructed based on the mortality experience of
the respective countries. A brief account of well-known British as well as Indian mortality
tables is discussed in this chapter. However, for a fuller exposition of any ofthe tables, the
relevant paper or report sho~d be referred.
BRITISH TABLES FROM POPULATION DATA

1. Northampton Table:
Even though attempts were made to construct mortality tables in the 17th century, the
first mortality table to be used extensively for life assurance purposes was the Northampton
Table, published in 1783. It is based on deaths between 1735 and 1780 at various ages that
occurred in the parish of All Saints in the town in Northampton. In all 4689 deaths were
recorded. The deaths were taken as d% column of the mortality table from which 1% column
was constructed using the formula 1% = dn1 + .... + d w • The figures of the table were adjusted
for a radix of 10 =10,000.
The above method is incorrect, unless the population was stationary during the entire
period covering the dates of birth of all the deaths included in the investigation. However,
during the period covered by the data of this table the birth rate was increasing as a r~Bult-of
which the mortality rates derived were overstated, especially at the younger ages. The
350 RNANCMLMATHEMAnCS
premium rates based on this table were high and consequently insurance offices made large
profits on their life assurance business. The British Government used this table for life
annuities and therefore collected purchase prices much less than necessary and incurred
consider-able losses.
2. Carlisle Table
The population of two parishes in the town of Carlisle in 1780 and the deaths during the
years 1779 and 1787 in these two parishes formed the data of the Carlisle table, which was
constructed in 1815; by using census plethod. The total volume of data was rather scanty
but, in spite of this, extensive tables t~laing to single lives and joint lives and monetary
functions relating to them were constructed on the basis of the data. Evidently much
reliability cannot be placed on the tables prepared from such limited data. Male and female
lives were combined together and from life offices' point of view this was undesirable as in
their experience the proportion of female lives was very small. Further the rates were not
well graduated. However in spite of these defects, the tables were used by several offices as
basis for life assurance rates, mainly because of the readymade monetary functions
available.
3. English Life Tables (ELT)

The English Life Tables are constructed using the data collected at various censuses and
registered deaths. Table 1 gives the data used for the various ELT tables.
Table 1
ELTNo. Population Census used Deaths for the period
1 1841 1841
2 1841 1838-1844
3 1841&1851 1838-1854
4 1871&1881 1871-1880
5 1881&1891 1881-1890
6 1891&1901 1891-1900
7 1901&1911 1901-1910
8 1911 1910-1912
9 1921 1920-1922
10 1931 1930-1932
11 1951 1950-1952
12 1961 1960-1962
13 1971 1970-1972
From the above it will be observed that the difference between ELT 1 and ELT 2 is only
the difference in the number of deaths taken in account, while constructing the tables. In
ELT No.1 only one year's deaths were taken; whereas in ELT No.2 seven years' deaths
were taken. The results of first three tables were more or less similar which indicated that
the mortality rates during the period 1838 to 1854 were almost stationary.
WELL"KNOWN MORTALITY TABLES 351
For Tables ELT No.4 to ELT No.7 two censuses and deaths over a ten-year period were
taken. It was found however that in view of the consistent improvement in mortality, it is
preferable to use one census and deaths over a short period, say 3· years, and this was
adopted for the tables ELT No.8 and onwards. This change in procedure was also partly due
to the attempts to avoid the period ofthe 1st World War (1914-1918).
The tables give rates for male and female lives separately. AB time went on, more and
more details were collected at the time of census. Prior to 1911, the population was recorded
in quinquennial age groups; but from 1911 onwards data for individual ages are available.
However, to eliminate the effect of misstatement of ages, the data were grouped in suitable
quinquennial age groups for graduation purpose. Rates for individual ages were obtained by
interpolating. From ELT no.8 and onwards rates of female lives were given according to
marital status (spinsters, married women and widows). When we come to ELT No.9, further
sub-divisions life (i) rates according to geographical areas of the country (ii) rural and urban
areas were also made. For ELT No.11 and ELT No.12 the graduation was done by fitting a
mathematical curve to crude death rates separately for males and females. For ELT No.11,
mortality rates for males were also given according to marital status (single, married and
widowed) For ELT No.12 classification according to rural and urban areas were not worked
out, as necessary data was not available in the desired form. For ELT No.13 in addition to
rural and urban classification, the rates were also not available according to geographical
areas ofthe country.
AB the English Life tables are based on the general population data, the rates of
mortality brought out by them will be higher than contemporary rates for assured lives, who
from a select class out of the general population. Therefore the ELT's cannot be used for
premium calculation or valuation of life offices. They are used for general demographic
work. They are also used for industrial assurance business after suitable adjustments as. the
insured lives coming under this category more or less experience the rates applicable to the
general population.
BRITISH .TABLES BASED ON ASSURED LIVES

In the absence of systematic data relating to lives assured, the life offices initially used
tables based on population like the Northampton table and Carlisle table. However,
subsequentiy the tables based on assured lives' data were constructed from time to time.
These tables are discussed below.
1. De Morgan's Equitable Table (Published in 1834).
The first table to be constructed in England from the life insurance records was the
equitable table based on the experience of the Equitable Life ABsurance Society. The
calendar year method was used and only aggregate tables were prepared as the data were
perhaps inadequate for select rates, though the author (De Morgan) realized the effect of
duration on mortality.
2. The Seventeen Offices Table (Published in 1843)
This table was based on the data collected from seventeen life offices in 1835.The policy
was the unit of observation and the observation was through calendar years. The data were
352 FINANCIAL MATHEAfAncS
much more extensive than those of the earlier tables but still as the data from extreme ages
at either end of the table were small, the rates for the extreme ages could not be considered
reliable. The mortality rates for female live were found to be heavier than male lives upto
age 50 but lighter for ages 50-70.
3~ The Institute of Actuaries Tables HM, HF, H(M) , lP'(5) (Published in 1869)
A Systematic effort was made by the Institute of Actuaries, London to prepare table
based on the date finished by 20 life offices, which included all data up to the end of 1863.
The most important table prepared at the outset was the HM data (healthy males) table
making use of the data in respect of all male lives accepted as first class. Data cards were
prepared for the lives included. The calendar year method ad again adopted.
Along with HM, other tables relating to (i) HF for healthy feinales, (ii) healthy males and
females combined ,and (iii) impaired lives were also prepared but these tables have not been
widely used. .
Subsequent to the construction of HM table the 1flMl table being a select table with a five-
year select period and the HM(6) table being the ultimate portion of the above select table
were also prepared.
4. British Office Tables - OM, 0 00, O[NM) and OM(5): (published in 1903.)
These tables were based on an investigation covering 30years from 1863 to 1893. The
investigation was made on a systematic basis. The policy year method was adopted with age
nearer birthday on policy anniversary for gro\@ing according to age. It was found that the
calendar year method used in earlier tables did not give a true picture of the effect of
selection. The policy was taken as the unit of investigation but simultaneous duplicates (Le.
several policies issued on the same life at the same time) were eliminated and taken into
account as only one policy for the purpose. Select tables were prepared with a select period of
10 years for the participating male lives and 5 years for non-participating male lives. The
following table was prea~ from the data:
(i) An aggregate table for participating male lives viz. OM table.
(ii) A select table for participating male lives viz., O[M] table with a select period of 10
years.
(iii) A select table for non-participating male lives viz., O[NM] table with select period of 5
years.
(iv) A table was prepared after excluding the experience of first 5 years out of
participating male lives experience. This is the truncated aggregate table ()M(6).'
It may be noted that all the above tables were based on data of whole life assurances as,
in those days, endowment assurance was comparatively less popular. However, special
investigations were made of the lives taking (i) Endowment assurances, (U) Joint life
assurances and (iii) of female lives.
The British Office tables were widely used for calculation of premiums and for valuation
and they held the ground from the data of publication towards the beginning of the 20th
century till about 1935 when the mortality tables of Assured lives viz., A24-29 tables were
produced.
WELL-KNOWN MORTALITY TABLES 353
5. The A (1924·29) Table (Published in 1933)

Though the British office tables were used widely for a long time it was realized that
mortality was progressively improving over the years. It Iwas therefore felt that in the
further investigation to be taken up (i) the period of investigation should not be very long as
had been the case in the earlier investigation and (ii) the results of the investigation should
be made available in a much shorter time than earlier (The Offices tables took 10 years to be
finalized and (iii) investigation should be taken up on a continuance basis so as to study
progression of mortality rates from time to time. To achieve these objects a Continuous
Mortality Investigation (CM!) machinery was set up and data for the five years 1924-29 was
collected from the contributory offices. Female lives and lives accepted otherwise than at
ordinary rates were excluded. Age grouping was left to the conven:ience of the office and
adjustments were made at the time of investigation. Data of individual policies wa~ not
called for from each census method was adopted so that the results may be published
quickly. The select period of 10 years adopted in the pervious investigation was considered
unnecessarily long and it was decided to have select rates for 5 years at the most and the
data were collected accordingly. Later, after examining the rates it was decided that a three-
year period of selection was quite adequate.
Investigations were made to see how rates for whole life and endowment plans, medical
and non-medical business compare with each other but the results were not conclusive.
After preparing one table including the whole data, tables were also prepared for
specially light and specially he~vy offices who contributed to the experience, as an aid to
each office to see how different it is from the features of pooled data.
6. A (1949-52) Table (Published in 1955)

The A (1949-52) table was the second mortality table prepared under the scheme of
continuous mortality investigation. The census method was again used and a select period
of 2 years was adopted. These rates confirmed that mortality has been consistently and
appreciably improving, the rates at the younger ages being half the rates of the A (1924-29)
Table.
7. A (1967·70) Table
Once again Census method was used to derive mortality rates. There was improvement.
in mortality rates since 1949-52. The effect of selection was studied for a period of five years
and two tables were prepared; one with a select period of 2 years and the other with a select
period of 5' years. However, the difference between '2 and over' and '5 and over' graduated
rates was small.
BRITISH TABLE BASED ON ANNUITANT LIVES

It has been observed that the rates of mortality for assured lives have been improving
with passage of time. When we use rates based on past experience without any modification
for future contracts, we are assuming that the past rates will be experienced in the future.
The 'error' introduced by this assumption will be on safer said in respect of insurance
contracts as there would be less claims than expected if the rates improve. However, in case
of annuity contracts, the 'error' introduced by this assumption would be against office
int\l!rest; as it will have to pay annuity for a longer period than expected if mortality rates
improve. Mainly for this reason separate tables are used for annuitants. Secondly
. annuitants as a class were observed to experierice lighter mortality than the assured lived
due to a process of self selection. Only those lived who expect to live for a longer period will
take annuities. Thirdly, while mixed table or table for male lives alone can be used for life
assurance purposes, separate tables for male annuitants and female annuitants are
necessary due to comparatively lighter mortality being experienced by female annuitants.
1. British Offices Annuitants' Mortality Rates O(lIm), 0(11" Tables:
British Officer Annuitants' mortality tables were prepared side by side with the OM etc.
tables based on the experience of the years 1863-93. Separate tables for male and female
lives were prepared. Select tables were constructed with a select period of 5 years.
Aggregate table were also prepared.
2. Government Annuitants' Experience (1875·1903):

The experience included lives who purchased Government life annuities during the
period 1875-1903. The policy year method with a select period of 5 years was used.
Projection: We have seen that in case of annuitants, if improvement in mortality that is
likely to take place in future is not taken into account, it will affect offices adversely. In the
annuitants' table described below improvement in mortality has been allowed for by
following method of projection where in qx is regarded as function of not only x, but also ofN,
where N is calendar year in which the age x is reached.
3. Office Annuitants' Experience 1900-1920:a(m) and a(f) tables:
The data of contributory officers for the period 1900 to 1920 were collected and tables of
rates prepared separately for male and female lives. Selection was traced for five years. The
data were divided into three periods with a view to study improvement in mortality, if any,
from one period to another.
For Projection purpose, the results of the previous investigation i.e. 1863-93 experience
alongwith that of the present investigation were taken to derive a forecast formula which
would give the estimates of mortality rates for the desired ages at any future date. The rates
applicable in 1925, the year of publication of results, were calculated using this forecast
formula and were used to arrive at values of annuity factors ax, etc.
4. Government Annuitants' Experience 1900·1920 a(m) and a(f) Tables:
All lives who took government life annuities including annuities purchased through
savings Bank and National Debt Office during the period 1900-20 contributed to this
experience. The method of investigation was similar to that of the office annuitants'
experience and selection was traced for a period of five years after purchase.
In this case the experience of the 1875-1903 investigation was made use of alongwith the
present experience for projection purpose. Projected mortality rates were used to calculate
annuity values for an entrant in 1928. There values were compared with annuity values
calculated by using mortality rates experienced for"the period 1900-20. It was found that
suitable allowance for future improvement could be made for an entrant in the year 1928 by
adding 3% for male and 4% for females to the annuity value based on 1900-20 experience
rates.
5. The a(55) Table for Annuitants.

We have seen that since 1925 a Continuous Mortality Investigation has been undertaken
in U.K. Based on the data for the period 1946-48 for female lives and 1947-48 for male lives,
the a(55) tables were constructed with a selected period of one year. As the observed
mortality of male annuitants based on the data for the period 1946-48 was inconsistent for
certain age-groups, the data for the period 1947-48 only was used as a base-line for
projection with appropriate adjustments so as to relate the same t'O the year 1947.
6. Table for Life Officer Annuitants a(90)

The data for the period 1967-70 of immediate annuitants were examined. As the class of
persons effecting annuities after the Finance Act 1956(UK.) had considerably changed, the
data of post-1956 were used for preparing the tables. The select period was taken as 1 year
for both males and female. The graduated rates at zero duration and 1 and over durations
were used for preparing select and ultim~e tables respectively.
INDIAN ASSURED LIVES

Insurance in India was first propagated by the British (and later one or two American)
Companies operating in India. These companies had no data of Indian Assured Lives, which
could be used for arriving at premium rates for Indian lives or for making valuations. It was
well known that Indian lives experienced higher mortality than British lives and so a British
Table e.g. I[<M) or aM) was applied to the Indian lives with a rating up of age by 5 or 7 years.
This was, however, only on an empirical basis.
Towards the end of the nineteenth century several Indian assurance companies were
started and one of them, the Oriental Government Security Life Assurance society grew to
be the biggest in size and popularity. It was this company that started investigation into t; \ ~
mortality of assured lives.
1. Oriental 1905-1925 Experience

The assured lives of the 'Oriental' during the period 1905-1925 were included in the
investigation. This period included the years 1918-20during which there were large-scale
epidemics. Sectional investigations were made to ascertain the comparative rates for
different communities. Only for Hindus, where the date was quite extensive, and analysis
. was also ma'de according to class of assurance i.e. (a) Whole Life, with and without profits,
(b) whole Life by limited payments, with and without profits and (c) Endowment Assurances
with and without profits. Duplicate policies were eliminated by treating the earlier policy as
a withdrawal as on the date when subsequent policy came into observation. Selection period
was taken as one year. As Hindus formed the bulk of the lives assured, it was decided to
graduate only the Hindu experience with all classes of assurances combined and to adopt it
as a standard table for deriving premium rates and for valuation purposes.
It was observed that the lightest mortality was experienced by the Endowment and
heaviest by the Whole Life, the Whole Life Limited Payment class being in between these
two classes. Further, the mortality experienced by other communities was lighter than that
by Hindus. Table 2 gives the ratio of actual deaths to expected deaths. The expected deaths
lare calculated using the Oriental (1905-25) Ultimate Rates, that is .mortality rates based on
Hindu experience. \
Table 2
Community Ratio of actual deaths
to expected deaths
Hindus 1.000
Mohammedans 0.921
Christians 0.789
Europeans 0.750
Parsees 0.662
2. Oriental 1925-35 Experience (Published in 1939):

This investigation was made by Shir L.S. Vaidyanathan, M.A. F .I.A. Actuary of the
Oriental Government Security Life Assurance Company. Its salient features are given
below:
(i) Date used: All the 'Oriental' assured lives during the period 1925-35 were included
in this experience. Two different types of classifications were adopted, viz.,
classification by areas and classification according to community. Two types of errors
were noticed in the data. At younger ages the errors appeared to be mainly due to
understatement of ages; and at older ages there were errors due to non - reporting of
deaths. The bulk of unreported deaths could relate to the paid - up policies.
(ii) Period of Investigation: The period of investigation 1925-1935 was free from
abnormal features affecting mortality, like epidemic.
(iii) Unit of Investigation: the unit of investigation was policy as it was not found
possible to remove duplicate polices. The investigation was confined to policies
accepted at ordinary rates.
(iv) Graduation of Crude Rates: Examining the data according to the full aggregate
rates and rates of mortality excluding the first few years (separately for first, first
two, first three and first four years) it was observed that the effect of medical
selection did not persist for more than one year. Accordingly the period of selection
was taken as one year. The standard table was based on the experience of l:Iindus
combined for all regions and of two main classes of polices, viz., Whole live and
Endowment Assurances. The ultimate portion was graduated first. It was decided
to take the select rate of mortality at each age as 78% of the ultimate rate at the
same~.
(v) Findings of The Iuvestigation :

(a) The rates obtained were much lighter in comparison to the Oriental 1905-25
experience. This was partly due to the fact that the period 1925-35 was free from
u •
epidemics. Part of this improvement can also be attributed to the progressive

improvement in mortality over time.
(b) Table 3 gives the ratio of actual deaths to expected deaths for different
communities. The expected deaths are calculated using the Oriental (1925-35)
Ultimate rates, that is, mortality rates based on Hindu experience (Standard
table).
TableS
Community Ratio of Aetual Deaths to Expected
Deaths
Hindus 1.000
Mohammedans 0.958
Christians 0.816
Europeans 0.615
Parsees 0.613
(c) The effect of selection was oflow intensity and for a short duration. This feature
made out a strong case for introduction of non-medical business in India.
(d) Table 4 gives the relative ratio of actual deaths to expected deaths for different
regions in India. The expected deaths are calculated on the basis of the
standard table and the data relate to both select and ultimate experience.
Table 4
Region Relative Ratio of Actual Deaths to
Expected DeathS
Sind· ·123.4
Burma 112.3
Bombay 106.4
Madras 99.0
United Provinces 96.9 I
Rajputana 96.0
Central Provinces 94.2
Bengal 87.4
Punjab 81.2
(vi) Use: The Oriental (1925-35) table gradually replaced the use of the British Tables by
the Indian insurers and by 1950 it was practically the only table of Indian assured
lives generally used in this country.
In 1954 almost all Indian insurers revised their premium rates. The reason among other
things was that mortality rates were known to be improving steadily with the passage of
time and the companies felt it necessary to modify the rates of the Oriental (1925-35) table
so as to give effect to the improvement in mortality. The Oriental Life Assurance Company
introduced the modification by reducing mortality rates of the 0(1925-35) table by 30% at
each age up to 50 and thereafter narrowing the difference so that at age 70 and upwards, the
0(1925-35) rates were again applicable. This was called the Modified 0(1925-35) table.
In 1956 the life assurance business in this country was nationalized and the Life
Insurance Corporation of India was formed. The Corporation adopted premium rates of the
Oriental Unit (with reduction of 5%subject to maximum ofRe. 1/-) which were based on the
Modified 0 (25-35) tables.
The Corporation felt the need for a standard mortality table, which will reflect the
current level of mortality experienced by the assured lives. Detailed instructions as to how
the schedules for the investigations should be compiled were issued to all its Divisional
Offices and Integrated Head Offices (IHOs)
The result of the mortality investigation for the year 1961 in respect of nine leading
IHOs was was published in the Transactions of the Actuarial Society of India (TAS 1963).
The results of this investigation showed very light mortality. However, it should be kept in
mind that the result is based on data in respesct of only 9 out of the 243 units.
3. First Continuous Mortality Investigation (1961-64):
It was decided by the Life Insurance Corporation of India to commence the Continuous
Mortality Investigation for assured lives from the policy anniversaries in the year 1961.
Important aspects of this investigation are discussed below.
(i) Data used:
The data was obtained from the Divisional Offices of the Corporation and Integrated
Head Office Units of leading Indian insurers. The data was obtained only for policies
issued under the Whole Life plan and Endowment Assurance plan accepted at
ordinary rates. The'data was obtained separately for durations 0, 1, 2, and 3 and
over. At young<>r ages bulk of the data pertained to policies issued by the
Corporation, wher~as at ages 50 and above bulk of the data pertained to LH.O.
Units. The policies were sum assured.
(a) Policies o~ medically examined male lives inforce for the full sum assured.
(b) Paid-up p~lices on medically examined lives.
(c) Female lives considered to be on par with male lives.
Cd) Policies under Non-Medical Special Scheme
(ii) Period of Observation:
On preliminary investigation it was found that the period 1961-64 was suitable.
There were no abnormal occurrences during this period. Therefore the period 1961-
64 was selected for observation.
(iii) Unit of Investigation:
The investigation was conducted on the basis of policies and not on lives.
(iv) Method of Investigation:
Policy year method was used for male lives medically examined; whereas from the
point of view of practical convenience the census method was used for the evaluation
of mortality rates of both non-medical business and female lives assured.
(v) Exposed to Risk and Actual Deaths:

For the purpose of construction of the standard table, the experience of medically
examined lives was used. (It may be recalled that the data used for Oriental's (1925-
35) table contained errors due to wrong statements of age. Such errors were
inherent in the data of assured lives in India)
In majority of cases of exposed to risk at durations 0,1,2, age had not been proved at
the time of proposal. A certain degree of caution is, therefore, necessary in
comparing the rates at duration 0,1 and 2 with those at duration 3 and over.
The exposed to risk at durations 3 and over included policies issued several years ago
and the result of the alterations in the age since effected was to reduce the
proportion of cases where age was understated. Under these conditions the
mortality rates at durations 3 and over would appear to be relatively low. It is
assumed that the deaths were shown against their correct age because the
satisfactory proof of age was insisted upon before settlement of claims.
(vi) Duration of Selection:
The percentages of actual deaths (A) at durations 0,1 and 2 to the expected deaths
(E) at each age according to the contemporaneous mortality at durations 3 and over
were calculated. Table 5 gives summary of the results.
Table 5
Age Duration 0 Duration 1 Duration 2
Group A E lOOAIE A E lOOAIE A E lOOAIE
20-39 935 1056 88.5 1069 1061 100.8 1200 1206 99.5
40-59 957 1118 85.6 1325 1041 116.1 1457 1314 110.9
, All Ages 1892 2174 87.0 2394 2202 108.7 2657 2520 105.4
--
Allowing for the effect of understatement of age on the rates at various durations,
Table 5 brings out clearly the fact that effect of medical selection wears out quite
early.
It was decided that, for practical purposes, it would be sufficient to take the selection
to last only one year and to take the ungraduated rates for durations 1 and over as
~eing suitable for constructing the ultimate table.
(vii) Graduation: ffitimate Rates:
It was decided to fit a suitable mathematical formula, incorporating some of the
features of the ungraduated rates. The final formula evolved is given below:
qx =A f{x) + BCX 0(x)
Where A = 0.000812
B = 0.0000380658
C = 1.103164
{(X) = (1.028)(20-x)(1.O.18(20-x»
0(X) = X-7 1t)

.3 sin ( 30' 2'
The table constructed using graduated rates is known as the LIC (1961-64) table.
(viii) Graduation of Select Rates:
Generally, the select portion of the table is constructed by reference to the ultimate
rates. Since the volume of data relating to the first policy year was subt~ial, it
was decided to graduate the select experience also by fitting a mathematical curve.
After various experiments the following curve was found to be suitable over the
entire age range 20-60.
q{x) = Af(x) +BC" where
C = 1.103164, A =0.72 x 0.000812, B =0.0000402793
fix) = (1.028) (20·x) (l·O.18{20-x»
(ix) Non-Medical Business:

It was observed that on the whole the experience of the non-medical special was
lighter than that of the non-medical general scheme. The actual deaths in the
combined non-medical experience were 91.4% of those expected by the standard
ultimate table, indicating that the non-medical busmess on the whole proved to be
satisfactory.
(x) Mortality Experience of Female Assured Lives:
The quantity of the data relating to female assured lives was small. This was
expected as at that time only a few families in the higher social strata paid attention
to the education of females and there were very few females who had an earned
income of their own to feel the need for insurance.
(xi) Special Note:
In interpreting the results of the First C.M.1. the following factors, among other
things, should be noted:
(a) Prior to nationalization of life insurance business in India, the years 1953 and
1954 witnessed a large scale reduction in the premium rates as a result of which
many existing policies were made paid up or discontinued.
(b) After the nationalization of life insurance the Corporation, in its first valuation
as' at 31.12.1957, adopted a differential bonus system in respect of policies taken
over by it. This also resulted in a large number of policies being m/ide paid up,
particularly in respect of policies of many I.H.O. of erstwhile insurers taken over
at the time of nationalization, to which lower rates of bonuses were allotted than
in respect of the Corporation's own policies.
(c) In the 1961-64 investigation which included paid up policies it is likely that
many deaths under paid-up policies were not reported or were reported very late
after the investigation period. Therefore, the levels of mortality revealed by this
investigation cannot be said to represent the mortality level in respect of the
assured lives during 1961-64.
4. Second Continuous Mortality Investigation (1970· 73)
Another large scale investigation into the mortality of the assured lives was commenced
i
by the Corporation in the year 1970. Important aspects of this investigation are discussed
belbw.
(i) Date Used:
The data was obtained from Divisional Offices in the form of various schedules and
other statements. The policies included in the investigation were those issued at
ordinary rates under the Whole Life, Whole Life Limited Payment, Endowment _
Assurance and Endowment Assurance by Limited Payment Plans and which were in
force for full sum assured. The data for each policy year for each office was analyzed
separately. Some of the Offices were not able to submit data due to various
administrative reasons. After scrutiny, data from a few Offices were discarded due
to inaccuracies. Ultimately data from only 14 Divisional Officers were used.,
Few the purpose of investigation, policies were grouped in the following manner:-
(a) Policies on medically examined male lives.
(b) Paid-up policies on medically examined male live~.
(c) Policies on female lives.
(d) Policies under Non-medical (General) Scheme.
(e) Polices under Non-medical (Special) Scheme.
In case of paid-up policies, a sample investigation showed that the number of
unreported deaths could be significant and this might vitiate any conclusion that
might be drawn from the analysis of paid-up policies. It was therefore decided to
exclude paid-up policies. Similarly policies on female lives were also dropped on
account of their number being very small.
(ii) Period of Observation:
The period of observation for this investigation was for three years from 1970 to
1973.
The investigation was conducted on the basis of policies and not lives. In other
words, duplicates were not excluded from the investigation.
Policy year method was again adopted for this investigation. The policies were
observed from the policy anniversary in the financial year 1969-70 to policy
anniversary in the financial year 1972-93.
Lapse action in Valuation and Mortality cards was taken six months after the date of
first unpaid premium. However, in the calculation of exposed to risk, the policies
were assumed to have been exposed only upto the date of first unpaid premium.
To ensure that deaths were not understated, the offices were advised to punch
missing cards in respect of the death claims. They were also asked to give list of
death claims not included in C.M.1. so that the total deaths covered by C.M.I. and
those not covered could be tallied with death claims as given in the relevant
statistical statement (D-returns) submitted by the offices.
The 1970-73 investigation clearly showed that the effect of selection exceeded one
year. Considering the practical convenience, the select period was taken as one year
only. The ultimate table prepared for durations one year and over.
(vii) Graduation of Ultimate Rates:
The mortality table was based on the investigation of the date in respect of medically
examined male lives accepted at ordinary rates i.e. Group (a) mentioned above.
Attempt was made to graduate the data by Perk's and Barnett's formula. However, a
satisfactory fit could not be obtained even after a large number of trials. Ultimately,
it was decided to graduate the mortality table by reference to the LIC (1961-64)
table. The graduated values of qx were obtained by the following formula for ages
upto 91.
qx= q'x (-0.00418x + 1.38)
Where qx stands for (1970-73) mortality rates and
qx' stands for (1961-64) mortality rates.
For ages above 91 the values of qx taken were the same as those under the (1961-64)
table.
The investigation revealed that the assured lives mortality in India had shown
marked improvement over the decades. The improvement in mortality was more
pronounced at younger ages than at older ages. The modifications made in the year
1954 to the Oriental (1925-35) table appears to be justified in the light of subsequent
experience. A trend of similar nature is noticed in the British experience also
thought the actual mortality levels were different and the course of mortality
followed a different pattern compared to India. The LIC (1970-73) rates between ages
50-65 were still higher than the A (1924-29) experience which related to a period of
45 years earlier. In spite of the improvement in mortality in India wide differences
continued to exist between the Indian experience and U.K. experience though at very
advanced ages the levels of mortality during the years 1970-73 appeared to be
similar.
(viii) GradJlation of Select Rates:
The data at duration 0 for individual ages was very small and there was no
noticeable trend in the crude death rates. Graduation of the crude select rates was
therefore not attempted. The expected deaths at duration 0 on the basis of the Lie
(1970-73) Ultimate rates were calculated. Table 6 gives the age-group wise
percntag~s of actual deaths (A) to expected death (E).
Data for age group 15-19 was very small and was therefore ignored. It was decided
to take select rates as varying percentages of the ultimate rates. At age 15 the select
rates was taken as 61% of the ultimate rate. The percentages for successive ages
were stepped up by 1% for each ages, till it became 80% for age 34; and then it was
stepped down by 1 % for each age till it reached 70% at age 43. For subsequent ages
the select rate was taken as 70% of the ultimate rate at those ages.
Table 6
Age Group (A / E) x 100
15-19 36
20-24 61
25-29 76
30-34 83
35-39 70
40-44 68
45-49 67
50 andover 68
(ix) Non-medical Business:
It was observed that mortality experienced by lives covered _under Non-medical

(Special) Scheme was lighter as compared to medically examined male lives; whereas
lives covered under Non-medical (General) experienced heavier mortality than both
the medically examined male lives and those coved under Non-medical (Special)
Scheme.
5. Third Continuous mortality Investigation (1975 - 79):

The Corporation has set up a permanent system of obtaining the data for mortality
investigation from its Divisional offices. As such it was possible to commence the third
investigation from the year 1975. The investigation of 1975-79 is discussed below.
(i) Date Used:
The data was obtained in the form of inforce Schedules (Le. policies inforce) as on
31.3.1975 and movement Schedules for all the years of investigation including the
first year.
The occupational extras upto Rs. 4-%0 which were charged for hazardous occupation
earlier were removed in the year 1971. Also, the decentralizations of underwriting
work to the branch offices brought in the dilution of underwriting standard. These
factors resulted in obliterating lines dividing lives acceptable at ordinary rates and
those with extra prem~u. It was therefore decided to include all the policies,
whether accepted at ordinary rates or with extra or lien, for investigation purpose.
It- was also decided to include all the risk covering plans in the purview of
investigation.
The offices were advised to punch missing valuation cards in respect of death claims
before preparing Schedules pertaining to death claims. They were also asked to give
list of death claims not covered by the C.M.1. so that the total deaths covered by
C.M.I. and those not covered could be tallied with deaths as given by them in the 'D'
returns.
364 RN4C~LMATHEnS
The data for each policy year and for each Divisional Office was analyzed separately.
Some of the Offices were not able to submit data due to various administrative
reasons. The data was received from 34 out of 43 Divisional Offices. Inforce and
movement schedules received from the offices were scrutinized and various checks
applied for consistency and accuracy. The figures given in the schedules were
reconciled with the relevant figures given by the respective Divisional officers in
their D-returns. Discrepancies noticed were removed by obtaining clarifications from
the offices. The Offices in respect of which discrepancies could not be resolved were
excluded. In all the data of 22 Divisional Offices were included in the investigation.
The data were grouped according to the following classes:
(a) Class of Lives I Medically examined male lives and lives under
Children Deferred Assurance Policies, Irrespective
of sex.
(b) Class of Lives ill : The covered the policies issued to males under Non-
medical (General) Scheme.
(c) Class of Lives IV This covered the policies issued to males under Non-
medical (Special) Scheme.
(d) Class of Lives V The covered all policies on female lives which were
inforce for full sum assured irrespective of the terms of
acceptance (Excluding Children Deferred Assurance
Policies)
It was observed in the 1970-73 sample investigation that in case of paid-up policies
the number of unreported deaths was significant and thus could vitiate the
conclusions, if paid-up policies were included. It was therefore decided not to include
paid-up polices (which formed class of lives II) in the 1975-79 investigation.
When it was decided to include in the data all the risk covering plans, the question
arose regarding treatment for inclusion of CDA policies. Few divisional Offices had
not punched sex code on cards in respect of CDA policies. Since the number of CDA
policies issued on female lives was very small it was decided to include CDA policies
irrespective of sex in the group of policies on medically examined male lives. As a
corollary, class v group did not include policies on female lives under the CDA plan.
(ii) Period of Investigation:
Policies were observed from the policy anniversary in the financial year 1974-75 to
policy anniversary in the financial year 1978-79.
Since it was not possible to eliminate duplicate policies issued on the same lives, the
investigation "'as conducted on the basis of policies as was done in the earlier two
investigations. .
. Policy-year method of investigation was followed.
WELL·KNOWN MORTALITY TABLES 365
•
The volume of data for this investigation was roughly three times than that for the
previous investigation.
The corporation takes lapse action six months after the date of fll'st unpaid premium.
However, in the calculation of exposed to risk, the policies were assumed to have
been exposed only upto the. date of first unpaid premium.
As was done in the 1970·73 investigation the deaths that occurred during the claim
concession period were included, both in deaths as well as exposed to risk; however,
where the policy had not resulted into death claim, the ·period of six months (Claim
concession period) was not included in the calculation of exposed to risk.
In Report V on C.M.1. published by the Institute and Faculty of Actuaries the data
from U.K. assured lives is available for the periods 1971·74 and 1975-78. This can be
compared with Indian Assured lives data for the period 1970-73 and 1975-79. Tables
7 and 8 give the percentage ratios of actual deaths (A) to expected deaths (E) in·
respect of medical, non-medical and combined data of medical and non-medical. For
U.K. assured lives the expected deaths are calculated on the basis of A (1967-70)
mortality; whereas for the Indian assured lives they are based on the LIC (1970-73)
Ultimate mortality.
Table 7
United KingdoJJl Assured Lives Experience
Percentage of Actual to Expected Deaths by the A (1976-70) Table
Duration Medical Non-Medical Combined
1975-78 1971-74 1975-78 1971-74 1975-78 1971-74
0 87 78 100 102 98 97
1 83 88 96 101 93 98
2& Over 84 89 91 98 88 94
Table 8
L.I.C. Assured Lives Experience
Percentage of Actual to Expected Deaths by the LIC (1970·73) Ultimate Table
Duration Medical Non-Medical Non-Medical Combined
(Gen) (Spl.)
1975- 1970- 1975- 1970- 1975- 1970- 1975- 1970-
79 73 79 73 79 73 79 73
0 73 68 74 60 61 60 __~1O 64
1 77 81 76 90 71 77 75 80
2& Over 90 101 81 113 72 84 85 98
It will be observed from above that for both the British and India experience at
duration '0', the more recent table showed slightly adverse experience for medical
lives; and for non-medical lives British experience was slightly better. But the Indian
experience showed somewhat deteriorated experience. For duration '1' and '2 &
over', both British -and Indian experiences showed improvement for recent tables.
From the table 8 given in (v) it will be seen that for the 1975-79 investigation the
effect of selection was persisting for at least first two years in respect of class of lives
I, (Le. medically examined male lives).
\
(vii) Graduation of Ultimate Riltes:

As was done in the previous investigation an attempt was made to graduate crude
rates at duration one and over in respect of Class I lives. However, no satisfactory fit
was obtained. So attempts were made to graduate crude rates at duration '2 and
over'. The following formula which was used for graduating the 1967-70 experience
of U.K Assured lives was tried.
q% =A +H(x-k +B~-k)
P%
It was found that for ages 17-39, the above formula (curve I) gave a good fit for the
Following values:
A =4·732928 x 10-5 ,
H = -0 '000128,
B = 1'10836126 x 10-3 ,
C = 1-07·895 and
K= 20'61245
Similarly by trial and error, it was found that the following curve (curve II) gave
good fit for ages 40 to 66.
q% =H (x -k) + B~-k)
P%
Where
H =-0.0001615,
B = 0.0010875,
C= L0847 and
K= 20.61245
If curve (I) is taken for ages 17 to 39 and curve (II) for ages 40 to 66, the two curves
together represent mortality curve quite satisfactorily. For passing from the first
curve to the second curve, ~lendig had to be attempted. The two curves were made
to overlap each other by extending them.
Table 9 gives the "values of qx over common range under the two curves and those of
qx obtained by blending for ages 36-43.
TABLE 9
AGE qx Curve I qx Curve II q x On blending two curves
36 0.001644 0.001313 0.001644
37 0.001797 0.001473 0.001784
38 0.001972 0.001660 0.001921
39 0.002171 0.001876 0.002063
40 0.002396 0.002125 0.002224
41 0.002649 0.002407 0.002446
42 0.002931 0.002727 0.002735
43 0.003246 0.003088 0.003088
It will be observed that curve I is showing higher mortality rates and lies above
curve II over common age-ranges. This may be due to following reasons:
(a) Under Non-Medical (General) Scheme lives are accepted without medical report
upto age 40 and under Non-medical (Special) upto age 45. Thus the composition
of lives under Class I category upto age 40 comprised of lives not accepted under
Non-medical schemes and thus the mortality rate would be heavier than that of
all classes combined.
(b) In respect of lives above age 40, usually Non-Medical (Special) limit is exhausted
and Non-medical (General) limit ceases and as such almost all proposals are
subjected to medical examination. Further, special reports are called for in
respect of large sums assured and thus stringent selection in made as compared
to medically examined lives under age 40, For these reasons mortality rates
under Curve II would show relatively lighter mortality upto age 45 as ('!ompared
to Curve 1.
(viii) Graduation of Select Rates:
. On examining the data of Class I at duration '0' it was found that the bias for stating
even ag:e and quinquennial age still persisted. Further the data at durations '0' and
'1' were small. It was therefore decided not to fit mathematical formula for
graduation at these durations but, instead, to follow the procedure similar to that
followed in constructing select mortality table of the 1970-73 investigation. Select
rates for duration '0' were worked out for LIC (1975-79) Ultimate rates by taking
select rates at age 15 as 80% thereof. The percentage was stepped up by 1% for each
successive age till it became 95% at age 30 and then it was stepped down by 1% for
each thereafter till it became 80% at age 45. For subsequent ages, select rates were
taken as 80% of the Ultimate rates.
Similarly for duration '1', mortaiity rate at age 15 was taken as 84.5% of the LIC
(1975-79) Ultimate table. The percentage was stepped up by 1% for each successive
age till it reached 95.5% at age 26. It was stepped down by II
% for each age from
age 39 till it became 85% at age 46. Then it stepped down bYl % for each successive
age till it became 81% at age 54. For subsequent ages, rates at duration '1' were
taken as 81% of the Ultimate rates.
(ix) Non-medical Business:

The percentage ratios of actual deaths (A) to expected deaths (E) were worked out by
reference to the 1975-79 Ultimate table for Class I (Male medical and CDA), Class
III (Non-medical (General)) and Class IV (Non-medical (Special)). It was observed
therefrom that AlE ratio for Non-medical (Special) is 84%, for non-medical (General),
it is 96% and for Non-medical and medical (Males) taken together, it is 95%. In the
1970-73 investigation ~so, Males Non-Medical (Special) mortality experience was
lighter than the Male M~dical Experience.
\
\
(x) Mortality Experience of Female Lives:
It was observed that female lives experience much lighter rates as compared to other
classes of lives. However, as the data base was small for female lives no firm
conclusions could be drawn for this class of lives.
(xi) Comparison with earlier tables:
One comparing rates with earlier. tables it was observed that the mortality rates
have improved over the period consistently upto age 60 (if the 1961-64 experience is
not taken into account for reasons mentioned earlier).
While comparing rates with U.K Tables, it can be said that there is greater scope for
improvement of mortality rates for Indian assured lives experiencing heavier
mortality. It also bears out the welcome feature that the gap between Indian and
lighter experience of British Assured lives is narrowing down, especially at younger
ages.
(xii) Findings:
Whereas the 1970-73 investigation revealed that the lives covered under Non-
medical (Special) forms a class which experience mortality lighter than the lives
covered under Non-medical (General) and lives covered after medical examination,
the 1975-79 investigation confirmed the said inference.
Secondly, the special feature revealed in regard to mortality rates for U.K assured
lives, viz., mortality rates decrease with increase in age at younger ages on account
of accidental deaths was observed for the first time in India in the 1970-73
investigation and was repeated in the 1975-79 investigation.
L On what basis are mortality tables classified?

2. Briefly explain various British tables constructed on the basis of lives assured.
3. What are the salient features of Oriental 1925-35 Experience table?
4. What are the main features of First Continuous Mortality Investigation conducted
by Life Insurance Corporation of India?
5. What are the data used in Second Continuous Mortality Investigation by LIC?
6. Explain the method of graduation of mortality rates, which is used, while

constructing LIC (1970 -73) Ultimate Table?
7. What are the major finding from the Third Continuous -mortality Investigation
conducted by LIC?
8. Describe the method of construction of LIC (1970 - 73) Table.
9. Why the rates of LIC (1961 - 64) Table are not reliable? What care was taken in the
subsequent investigations?
10. Give a brief account of the following tables:
(a) The A (1924-29) Table
(b) The A (1967-70) Table
(c) The a(55) Table
Rate-Making in Insurance -------
INTRODUCTION
An insurance rate is the price per unit of insurance. Rate making refers to the pricing of
insurance. Like pricing of any other product or service, insurance rating assesses the cost of
the insurance product. However, in insurance, unlike other products, the cost of production
is nit known in advance when the contract is sold. It will not be known until some time in
future, when the policy has expired or when ever the claim arises. The pricing of insurance
products is based on prediction. So rate making is a complicated and challenging task for
every insurer. In this chapter, we discuss the basic concepts of underwriting and rate
making in insurance.
OBJECTIVES OF RATE-MAKING
Insurance rate making has several basic objectives. Because insurance rates are
generally regulated by a government regulatory body, certain statutory or regulatory
requirements must be satisfied. Also the overall goal of all insurance companies is
profitability. So some business objectives must be stressed in ratemaking. Thus, rating
objectives can be classified in to two basic categories - Regulatory objectives and business
objectives.
Regulatory Objectives: The goal of any insurance regulatory body is to protect the
interest of general public. There are lots of rating laws that require insurance rates to meet
certain standards. In general, rates charged by insurers must be adequate, not excessive and
not unfairly discriminatory.
• The first requirement is that the rate must be adequate. This means that the rates
charged by the insurer should be high enough to pay all losses and expenses. If the
rates are inadequate, t he insurer will fail and become insolvent. As a result policy
RATE-MAKING IN INSURANCE 371
owners, beneficiaries, and other claimants will be harmed, if their claims are not
paid. Therefore the premium paid must be sufficient to pay all claims and expenses
during the policy period.
• The second regulatory requirement is that the rates must not be excessive. This
means that the rates should not be so high that the policy holders are paying more
than the actual value of their protection. High prices are not in the public interest.
• The third regulatory requirement is that the rates must not be unfairly
discriminatory. This means that people with similar risk exposures should not be
charged sUbstantially different rates. For example, if two healthy men of same age
group, say age 28, buy same type and amount of life insurance from the same
insurer, they should not be charged two different premiums.
Business Objectives: insurers are also guided by certain business objectives in
designing a rating system. The rating should also meet the following objectives:
• Simplicity: The rating system should be easy to understand so that the premium can
be set with a minimum amount of time and expenses. It is very important, because
the commercial insurance purchasers should understand how their. premiums are
determined so that they can easily take active steps to reduce their insurance costs.
• Stability: Rates should be stable for at least a certain period of time so that customer
satisfaction can be maintained. If rates change rapidly, insurance customers may
become irritated and dissatisfied.
• Responsiveness: The rates should also be responsive over time to changing loss
exposures and changing economic conditions. To meet the objective of rate adequacy,
the rate should increase when loss exposures increase. For example, as a city grows,
auto insurance rates should increase because of greater traffic and increased number
of accidents. Likewise, the rates should reflect changing economic conditions. For
example, if inflation causes liability awards to increase, liability insurance rates
should be increased to reflect this trend.
• Encouragement of Loss Control: The rating system should also encourage loss-control
activities that reduce both loss frequency and severity. This objective is very
important because loss control tends to keep insurance affordable and profits are
also stabilized.
METHODS OF RATE-MAKING
There are basically 3 methods for determining rates in generally property and liability
insurance. They are
(a) Judgment rating
(b) Class rating
(c) Merit rating
Depending upon the type of rating, the cost of insurance differs from one policy to
another policy.
(a) 'Judgment rating: This method of rating is used when the factors that determine
potential losses are varied and cannot easily be quantified. Because of the complexity of
these factors, there are no statistics that can be used reliably to assess the probability and
quantity of future losses. Hence, an underwriter must evaluate each exposure individually,
and use intuition based on past experience. The rate is determined largely by the
underwriter's judgement. This rating method is predominant in determining rates for ocean
marine insurance, for instance.
(b) Class rating: This method is used when the factors causing losses can either be
eaiily quantified or there are reliable statistics that can predict future losses. These rates
are published in a manual, and so the class ra,ing method is sometimes called a manual
rating. Class rates are the most common rate in insurance business. Class ratings are often
used in pricing insurance products sold to the consumer because there are copious statistics
and a large enough population of similar situations that make class ratings effective. It also
allows agents to give an insurance quote quickly.
There are 2 methods to determine a class rated premium or to adjust it.
(i) Pure premium method
(ii) Loss ratio method
(i) Pure premium method: In the pure premium method, the pure premium is first
calculated by summing the losses and loss-adjusted expenses over a given period, and
dividing that by the number of exposure units. Then the loading charge is added to the pure
premium to determine the gross premium that is charged to the customer .
•
Pure Premium Formula is as follows:
. Actual Losses + Loss-Adjusted Expenses
P ure P remlum = .
Number of Exposure UnIts
Gross Premium is calculated as follows:
Gross Premium =Pure Premium + Load
(ii) loss ratio method : The loss ratio method is used more to adjust the premium
based on the actual loss experience rather than setting the premium. The loss ratio is the
sum of losses and loss-adjusted expenses over the premiums charged.
If the actual loss ratio differs from the expected loss ratio, then the premium is
adjusted according to the following formula:
~ Actual Loss Ratio - Expected Loss Ratio
Ra te Change = E xpected Loss Rat·10
(c) Merit Rating: Merit rating is based on a class rating, but the premium is adjusted
according to the individual customer, depending on the actual losses ofthat customer. Merit
rating often determines the premiums for commercial insurance, and, in most of these cases,
the customer has some control over losses-hence, the name. Merit rating is usually used
when ~ class rating can give a good aproxi~tn, but the factors are diverse enough to
yield a greater spread of losses than if the comp&sition of the class were more uniform. Thus,
merit rating is used to vary the premium from what the class rating would yield based on
individual factors or actual losses experienced by the customer. There are 3 methods to
determine merit rating.
Merit rating can be further classified in to three methods known as

(i) Schedule rating
(ii) . Experience rating
(iii) Retrospective rating
(i) Schedule rating: This method uses a class rating as an average base, and then the
premium is adjusted according to specific details of the loss exposure. Some factors may
increase the premium and some may decrease it-the final premium is determined by
adding these credits and debits to the average premium for the class. The various additions
to and subtractions from the basic rate are based upon the judgement of the person who
develop the overall scheduled rating system.
For example, schedule rating is used to determine premiums for commercial property
insurance, where such factors as the size and location of the building, the number of people
in the building and how it is used, and how well is it maintained are considered.
(ii) Experience rating : Experience rating uses the actual loss amounts in previous
policy periods, typically the prior two or three years, as, compared to the class average to
determine the premium for the next policy period. If losses were less than the class average,
then the premium is lowered, and iflosses were higher, then the premium is raised.
The adjustment to the premium is determined by the loss ratio method, but is multiplied
by a credibility factor to determine the actual adjustment. The credibility factor is the
reliability that the actual loss experience is predictive of future losses. In statistics, the
larger the sample, the more reliable the statistics based on that sample. Hence, the
credibility factor is largely determined by the size of the business-the larger the business,
the greater the credibility factor, and the larger the adjustment of the premium up or down.
Because the credibility factot for small businesses is small, they are not generally eligible for
experience rated adjustments to their premiums.
Experience rating is typically used for general liability insurance, workers compensation
and group insurance. It is also extensively used for auto insurance, including personal
auto insurance, because losses obviously depend on how well and how safely the individual
drives.
(iii) Retrospective rating: Contrary to experience rating, this method of rate-making
uses the actual current loss experience for the period to determine the premium for that
period, limited by a minimum and a maximum amount that can be charged. Pal"t of the
premium is paid at the beginning, and the other part is paid at the end of the period, the
amount of which is determined by the actual losses for that period.
Retrospective rating is often used when schedule rating cannot accurately determine the
premium and where past losses are not necessarily indicative of future losses, such as for
burglary insurance.
While determining the price for an insurance product, particularly a life insurance
product, insurers have to select the loss exposures and underwrite the insurance contract in
accordance with the degree of risk.
UNDERWRITING IN INSURANCE
Underwriting is the process of selecting and classifying risk exposures and deciding
whether to issue requested insurance policy and, if decided to issue it, on what terms and
conditions and at what price. It is directly related to rate-making or the pricing function of
an insurer, because computed rates contemplate some composition of loss-producing
characteristics to which they will be applied. The fundamental objective of underwriting is to
select certain type of proposals and to reject others so as to obtain a profitable portfolio of
insurable risk.
Underwriter is the person who decides to accept or reject a proposal for insurance. He is
wholly responsible for assessing loss potential of each proposal for insurance, using
information gathered for the purpose of underwriting.
Underwriting principles: As noted earlier, the goal of underwriting is to produce a
profitable volume of business. To achieve this goal, certain underwriting principles are
followed. There are important principles:
• The first principle is that the underwriter must select prospective proposals
according to the company's standards. This means that the underwriter should select
only those proposals whose actual loss experience will not exceed the loss experience
assumed in the loss experience.
• The second principle is to have a proper balance within each rate classification. This
means that a below - average insured, while underwriting, should be off set by an
above average insured, so that on balance, the rate for the group as a whole will be
adequate for paying all claims and expenses.
• The third underwriting principle is the equity among the policyholders. This means
that equitable rates should be charged. Each group of insureds should pay its own
way in terms OflOS:-:8S and expenses.
Life insurance underwriting is mainly concerned with mortality. Mortality risk for an
insurer is that the insured will die prior to the stipulated life. An impairment in any respect
of a proposed insured's personal health, medical history, health habits, family history,
occupation, or other activities that could increase that person's expected mortality risk. Next
we study the major which affect a person's expected mortality risk.
SELECTION OF RISK
Selection is the process whereby an insurer evaluates individual applications for
insurance to determine the degree of risk represented by the proposed insured. The main
purpose of selection is to determine whether the proposal for insurance should be accepted or
not and if accepted, whether the risk is to be accepted at normal rate or at extra premium.
The function of selection is to determine the rate of premium to be charged. Since the
degree of risk is not same to all persons, uniform premium can not be charged for all
proposals and different'premiums should be therefore charged to different groups of risk
exposures. Proposals with higher loss potentials should be charged more than the normal
premium rate. Therefore, each and every proposal should be evaluated to det.ermine the
amount of risk. This eVR1''.ation of risk is known as selection.
Underwriters have to take more care while selecting a risk to avoid adverse selection.
Adverse selection or anti-selection means selection of proposed insureds who are not
insurable or charging lesser premium for those who are to be charged higher premium. A
proposed insured knows more about his or her habits, health and other items which affect
his or her loss potential than does the insurance company. Some people do not reveal
information that would affect their underwriting classification with the intention of
obtaining insurance cover at lower rate. If an uninsurable person is allowed to purchase an
insurance policy, it would be unjustified and an honest person will have to pay more.
Underwriting is thus necessary to deter and detect adverse selection.
CLASSIFICATION OF LIFE RISKS

Classification is the process of assigning a proposed insured to a group of insureds of
approximately the same expected loss probabilities as the proposed. The various life risks
can not be treated individually, so they are put under a few broad categories based on the
degree of each risk. There are two main classes of risk:
(a) Uninsurable risks
(b) Insurable risks
(a) Uninsurable Risks: A risk exposure is uninsurable, if the loss potential is

considerably very high. For example, a person lying on the death bed is an uninsurable risk,
because, if he is insured, the cost of insurance would be much higher which will be against
the underwriting principles. Consequently, a healthy normal policyholder will have to pay
more for insurance. Therefore a life insurance company should give due consideration to all
factors affecting a risk and determine the premium charge. The second reason is that
unknown risk cannot be insured to avoid the existing policyholders. So in order to ensur~
that the premium is reasonable, the insurance company must accept those risks against
which it can assess adequate and fair premium.
(b) Insurable Risks: Pure risks are generally insurable. The insurable risks are those
which an underwriter selects for insurance after the selection process is carried out. All the
selected insurable risks can not be of same kind. In a group of individuals of same age, some
are in good health, some may have impaired health, and even some may be near death. So
an underwriter has to further classify the insurable risks into different groups by knowing
and understanding various factors which influence mortality and morbidity rates. While
underwriting life insurance policies, there can be different terms and conditions for different
policyholders. Following are the major classifications of insurable risks.
(i) Super-Standard Risk: The super-standard rjsk is present where the loss potential
is lesser than the standard risk. This risk is related to a above-normal life. Super-standard
risk is also called a preferred risk. An insurer does not prefer to issue preferred risk policies
because it increases the premium on other standard risk which may cause reduction in loss
of business.
(ii)Standard Risk: The standard ,risk is related with the normal life where the loss
potential is neither more nor less. Lives under this category experience average mortality
rates. This group does not contain only those persons who are free from all impairments or
376 ' FINANCIAL MA THEMATICS
those persons who are under serious illness. Majority of lives are included in this category:,
There are c'ertain criteria on which the risks are judged as normal life.
(iii) Sub-Standard Risk: Sub-standard risks are those risks who are E'luject to higher
than average mortality and morbidity rates. If a life proposed crosses the maximum limit of
sub-standard risk that will be treated as uninsurable. A substandard risk can be insured
after payment of additional premium. The three broad classifications of sub standard risks
are:
• Increasing Extra Risk: This category reflects the extra mortality'risks caused due
to impairments with the increase in age. Persons with extra weight are likely to have
blood pressure or heart problems, as they grow older.
• Constant Extra Riske This group reflects the lives with hazard that remain
constant through life. These hazards do not create variations in mortality as such
e.g., permanent total disablement-lost oflimbs.
• Decreasing Extra Risk: These lives represent cases where the extra risk decreases
with passage of risk since the consideration of proposal. A person who has just been
operated for a problem becomes normal over a time period. At the time of proposal
the risk waS substandard, but with p~sage of time, it has become a simple risk.
TREATMENT OF SUB-STANDARD LIFE INSURANCE RISKS

The popular methods of treating sub standard risk are:
• Increase in Premium: Increase in normal premium (multiple.tables extra) is the
. most common method 'adopted by the insurance companies for treatment of sub-
standard risks.
Under its method premiums can lx': treated as follows:
(i) the proposer's age is increased by a few year~ (e.g. 3-5 years) which results in
, increase in premium or
(ii) a special mortality table is developed for each sub-standard classification that
reflects the experience of each and a set of gross premium is computed for the
classification.
• Flat Extra Premium: In situation where the extra risk is expected be constant; a
flat extra premium may be changed. The policy remains a standard one for all
purposes including dividends and non-forfeiture values.
• Other Methods: The other methods of treating sub-standard risks are:
(i) Limited death benefit equal to refund ot' premium if death occurs in the earlier
years.
(ii) A lien (contingent debt) may be created such that upon death of the life
assured in the lien period, the lien amount shall be deducted from sum
payable under the policy.
(iii) A proposal may be declined by the insurer if there is increasing extra risk.
(iv) Restrictive clauses may be imposed as exclusions under the policy.
(v) The insurance cover may be reduced by amount and/or time or the plan may
be changed.
(vi) Another option from insurance company is to defer the cover till the extra risk
is over.
FACTOR AFFECTING INSURABILITY

Insurers have to decide whether to issue the insurance policy (selection), ami if decided
so, under which category (classification) and at what rate of premium. While underwriting a
life insurance policy, insurers have to consider a lot of factors which may affect the risk.
They are also called factors affecting longevity of a person. Here we discuss the major factors
an insurer takes into account, while underwriting a life insurance policy.
(a) Age, because the older a person, the greater the likelihood of death.
(b) Sex (death rate among female sex is, generally, higher than that of male sex)
(c) Physical condition (refers to physique of the proposed life and includes height,
weight, the distribution of weight and chest expansion)
(d) Personal history (health record, past habits, previous occupation, history of violation
of rules and regulations, and even Insurance history determine insurability of a
person),
(e) The purpose of the insurance (such as for estate planning, or business or for family
protection)
({) Family history
(g) Occupation (The nature of work may be hazardous because he may suffer an
accident at any time while as work.)
(h) Income and economic status (Insurance cOlllpanies should investigate weather the
income of the applicant bears a reasonable relationship to the amount of insurance
which he or she proposes to carry.),
(i) Present habits (Excessive smoking or tobacco or alcohol use causes increase in
mortality)
(j) Resident (The geo-graphical Jocation, atmosphere, political stability, climate
construction of house, etc. are important factor which may affect the risk)
(k) Certain hobbies (e.g., race car driving, mount climbing, hang-gliding, piloting non-
commercial aircraft, skydiving, and etc.)
(l) Aviation (aviation hazards involves commercial, private, or military flying).
(m) Defense services (in defense services, flying or gliding, etc., is still considered
hazardous one)
METHOD OF RISK CLASSIFICATION IN LIFE INSURANCE

After obtaining all underwriting information about a life proposed, the insurer should
evaluate the information collected and decide on whether to accept the proposal at the
preferred or standard rate classes or to treat as a substandard risk or to reject entirely. The
two methods commonly employed in such classification of risks. They are:
(a) Judgement Method
(b) Numerical Rating Method
(a) Judgement Method: The underwriter studies all the features of the life to be
insured and on the basis of analysis of various factors takes a decision. Under this method
the company depends upon the combined judgement of those in the medical, actuarial, and
other areas who are qualified for this work to make underwriting decisions. The judgement
method of rating functions effectively when there is only one unfavorable factor to consider
whether the decisions to be made is simply whether to accept the proposed insured at
standard rates or to reject him or her entirely. However, situations where multiple factors
are involved or a proper substandard classification is needed, then this method can not be
efficiently applied.
(b) Numerical Rating Method : In this method, a large number of factors, which
influence mortality, are taken in account. Each insurer must decide which combination of
risk factors to include in determining cost. After applicants are classified according to the
basic criteria of age, sex, physical condition, habits and etc., insurers must classify those
applicants whose expected mortality exceeds their established range. The impact of each of
these factors on the longevity of the risk can be determined by a statistical study of lives
possessing that factor.
Under this method, it is assumed that 100 % represents a standard risk. For various
factors, debits (additions) or credits (subtractions) are made to the scores. Values are
assigned to individual factors. Favorable factors are assigned negative values called credits
while unfavorable factors are assigned positive values called debits. For example, if the
degree of overweight for a person is found to be 35 per cent higher than that of a standard
risk, a debit (+) of 35 will be assigned to physical condition. Similarly for a favourable family
history, a credit (-) of 10 per cent can be allowed, if the applicant come from long-lived
parents and grandparents. The algebraic summation of the debits and credits added to the
par value of 100 represents the numerical value of risk.
Consider a married man having two children of the age 30 who is working in a mine. It is
found that he is 1.5 times overweighed than a standard risk. This condition assigns a dept
(+) of 50 percent to the applicant. His medical examination reveals that his blood pressure is
considerably high. Therefore, a debit (+) of 10 will be assigned to medical history. But
because the applicant comes from long-lived parents and grandparents, family history is
worth a credit (-) of 15 percent. Since he is occupied in a hazardous environment, an
additional debit (+) of 10 percent is added against occupation. He already owns a 20-year
endowment life insurance policy. This insurance history will earn a credit (-) of 15 percent.
Adding the debits to and subtracting the credits from the par value of] 00, we get the overall
rating as 150 percent. This is shown in the following table.
Factor Debit (+) Credit(-)

1. Age: Favourable
2. Build: Overweight 50
2. Medical History: Blood Pressure 10
3. Family History (Superior) 15
3. Occupation: Hazardous 15
4. Residence : Normal
5. Personal Habits: Normal
6. Insurance History: 15
20 year endowment plan 75 25
Total Rating: 100 + 75 - 25 = 150
Using this method, a typical insurer might offer coverage to applicants rated between 75
percent and 500 percent. Applicants who are rated between 75 and 125 are considered as
standard risks and those between 125 percent and 500 percent are subdivided into several
sub-standard classifications. In the above example, the proposal will be considered as a sub-
standard risk. since the total rating is 150. Individuals whose rating is greater than 500 will
be denied insurance coverage as uninsurable. However, such individuals may be able to
obtain coverage through an insurer who specialises in high-risk policies. These figures may
vary from insurer to insurer.
The rating, thus, makes it easier to classify the risk.
Preferred! Standard! Sub-Standard ........ .1 Uninsurable
......... 75 85 100 125 130 150 ......... 500 550 600 ......
An underwriter has to take into account the nature and combined effects of extra risks
e.g. impairments jointly causing additional extra risks. In these cases some additions are
made to the arrived rates calculated independently.
The main advantage of numerical rating method lies in the manner in which it enables
direct usage of the results of various actuarial investigations. It ,helps the insurers to evolve
a uniform underwriting procedure and classify risks in identical groups. However, there is
much impairment concerning which knowledge is too limited to permit the assignment of
numerical values.
FACTORS AFFECTING THE PREMIUM DETERMINATION

Life insurance is an institution which converts uncertainty into certainty. It is not
humanly possible to prevent the occurrence of an event (peril) insured against. But the
uncertainty of financial loss suffered by a few, because of the happening of the events, can be
eliminated and!or reduced to a great extent, by the distribution of a large number of people.
Thus, instead of being borne by one, the loss can be distributed equally among all persons
facing the risk. Every one of the group of people makes a contribution to a common fund. The
measure of this common contribution is called premium.
The premium to be charged under a life insurance policy depends on three factors:
(a) Rate of mortality
(b) Rate of interest
(c) Operational expenses
(a) Mortality Rate and Premium:

The establishment of any plan of insuring against death requires some means of giving
mathematical values to the probabilities of death. This can be accomplished thorough the
mortality statistics, i.e., mortality rate. Mortality tables are presentations of such data
organised in a form to be usable in estimating the course of future death. The cost of
insurance coverage (i.e., premium) is calculated simply by multiplying the sum assured and
the value of mortality at a particular age. This is called natural premium.
For example, if at the age of 30, mortality rate is 0.00117, it means that out of a group of
1, 00,000 persons all aged 30 years, 11% are expected to die before they reach age 31. If all
these persons wish to take a policy of Rs. 1 lakh for a term of one year, then the premium
will be Rs. 117.
(b) Rate of Interest and Premium:

The second factor which affects premium is interest. In the simplest insurance contracts,
the premium is paid in a lump sum when the policy is issued. But the claim payments are
made over time', (say after a certain number of years). Insurers invest the premium amount
collected in different investment areas and earn interest. This interest is reflected in the
calculation of premium. In other words, the premium reflects the time value of money.
The insurance company assumes a certain rate of interest based on its experience, while
computing the rates of premium. The premium calculated based on the combination of both
mortality rates and interest factor is called Net Premium.
Consider the previous example, at the end of the year, 117 persons will claim the sum
assured, i.e., insurance company need 117 lakhs at the end of the year. In case of natural
premium, i.e., if the insurance company only consider the mortality rate, the y collect 117
lakhs rupees from all 1 lakh people. If the insurance company earns 6% interest, then they
have to collect only 110.38 lakhs (117/1.06) from llakh people. This, the premium charged
per person will be Rs. 110.38.
(c) Expenses and Premium:

The third factor which goes into the computation of premiums is the expense factor.
There are two types of expenses: (i) Premium related expenses such as agent's commission,
renewal expenses (ii) Policy related expenses are added to the net premium to calculate the
final premium. This is called Gross Premium or Office Premium. Process of adding these
expenses to the net premium is called loading. Thus, the gross premium includes the net
premium and loading.
L What are the major objectives of rate-making in insurance?

2. What are the different methods of class rating in insurance?
3. Why equity among policyholders should always be maintained?
4. What do you mean by insurable risk? On what basis will you determine the
insurability of a risk selected?
5. Explain the various methods o( treating a sub-standard risk while determining life
premium.
6. Write short note on :
(a) Schedule Rating
(b) Retrospective Rating
7. List the major factors affecting the insurability of a person.
S•. Explain the concept of numerical rating method with the help of s suitable
illustration.
9. What do you mean by 'adverse selection'? How does it affect rate-making in life
insurance?
10. What are the major factors which affect premium determination in life insurance?
·Determination of
Net Single Premium
INTRODUCTION
Net single premium is that premium which is received by insurer in a lump sum and is
exactly adequate along with the return earned there on, to pay the amount of claim
whenever it arises either at death or at maturity. The steps in the premium calculation
varies according to the nature of the policy. First the net single premium is calculated and
the other premiums are based on this calculation. In this chapter, we discuss the methods of
calculating net single premium for various kinds of life assurances such as whole life
assurance, endowment assurance, term assurance and etc.
TERM ASSURANCE
Term assurance is the simplest form of a life insurance contract issued insuring against
premature death. Term policies usually run for five, ten, fifteen ,or twenty years, and
promise to pay the sum insured if the policyholder should die within this period, nothing
being paid if death does not occur during the designated term. Term policies are also known
as Temporary Assurance Policies.
The premium is received in advance and it will not be returned if the life assured
survives. Two facts are to be remembered while calculating net single premium for a term
assurance policy.
(i) The insurance premium is paid only once in a lump sum at the inception ofthe risk,
i.e. at the commencement of the policy.
DETERMINA nON OF NET SINGLE PREMIUM 383
(ii) The death claim will be paid at the end of the year in which the death occurs and not
at the end of the term of the policy.
The latter fact has an important bearing on the interest which will be earned and
therefore on the method of computing the premium. To calu~e the net single premium, the
probability of death in each year along with the present value of the claim· for each year will
be calculated.
In case of 1 year :
No. of persons at age x = lx
No. of deaths during the year =d x
Let 8 be the sum assured.
Let i be the rate of interest per period.
.
Total amount of claim payable =No. of deaths x Amount of policy
Amount of total claim =8 x d x
PV (Present Value) of total claims =8 x d x x (1 + i)-1
=8 dxv
v =(1 + i)-I is called the present value factor or discounting factor
. PV of total claims
P remlum =Total number of persons
Ie--N8p=~:v'1
If the interest is not considered, then the Net Single Premium is given by
. [NSP:¥' I
In case of the term more than 1 year :
Consider a temporary assurance of person aged x at entry for the term of 'n' years.
The present value of claims of death at a particular age = No. of death x Amt. of claim
x Present 'Value of Re. 1.
Let 8 be the amount of policy or sum assured and i, the discounting rate.
Now
PV of claims on deaths occurring in 1st year = 8 dx v
PV of claims on deaths occurring in 2nd year =8 d x + 1 v2
PV of claims on deaths occurring in nth year = 8 dx + n -1 v n

PV of total claims =8 d x v + 8 d x + 1 V 2 + 8 d x + 2 V 3 + ...... + 8 d x + n _ 1 V n
= 8 [dxv + d x + IV 2 + d x + 2V3 + ...... + d x + n_1Vn ]
384 FINANCIAL IfATHEIfA TICS
NSP _ Total amount of claims

- Number of persons paying premium
NSP =S [d% V + d% + 1 v2 + d% +t v 3
+ ...... d% + n -1 Vn]
%
This is also expressed as

I NSP =SA} :'1iJ
d% V + d% + 1 V 2 + d% + 2 V 3 + ...... d% + n _ 1 v n
where A}: 1iJ = 1
n
If the interest is not considered, then the NSP is given by
I NSP =S [d, + d,. • 1 + d,. i: + ...... d, .. -11 I

Example 1 : 2,000 persons all aged 50 years are insured for Rs. 1,00,000 for 1 year. If the
rate of mortality (qSlY is 0.004. Calculate the NSP of this term assurance.
(a) if the insurer earns no interest.
(b) if'the insurer earns interest at 6%.
Solution: 150 =2,000

Q50 =0,004
d 50 =150 x Q50
=2,000 x 0.004
=8
(a) If the insurer earns no interest:
NSP is given by
Sd%
, NSP =-1-
%
1,00,000 x d 50
NSP =
150
_ 8,00,000 _ 400
Premium - 2000 - .
(b) If the insurer earns interest:
r = 6% = 0.06
Sd%v
NSP =-Z-
%
1,00,000 X d 50 x (1.06)-1
NSP = 2,000
7
Premium = 7,~ =377.35.
The net single premium is Rs. 377.35.
DETERMINA TlON OF NET SINGLE PREMIUM 385
Example 2 : The following particulars are given by

x: 30 31 32 33 34 35
35,800 35,680 35,552 35,420 35,281 35,136
120 128 132 139 145 150
\
Calculate the Net Single Premium for a temporary assurance of Rs. 50,000 for 5 years for
a person aged 30, assuming that
(a) the insurer earns interest at a rate of 5% per annum
(b) the insurer earns no interest.
Solution: Sum assured S =Rs. 50,000

Age of entry, x= 30 years
No. ofliviilgs at age 30, lao = 35,800
No. of years, n =5 years.
(a) In case the insurer earns interest:
Rate of Interest i =5% =0.05
The present value of claim of Re. 1 payable in each of the 5 policy years are given in the
following table:
Years (n) Age (x + n-l) lx + n-l dx + n - 1 vn =(1 + i)-n =(1.05]-n d x + n - 1 xv n
1 30 35,800 120 0.95238095 114.285714
2 31 35,680 128 0.90702948 116.0997732
3 32 35,552 132 0.86383760 114.0265630
4 33 35,420 139 0.8227(" 114.3556440
5 34 35,281 145 0.783526~1 113.6112941
Total 572.3789887
Present value of total claims =S x »Ix + n -1 vn

=50,000 x 572.3789887
=Rs. 2,86,18,949.43
[Here lx = lao]
NSP =50,000 x 5723:~8
NSP =Rs. 799.41
The net single premium is Rs. 799.41.
(b) In case the insurer earns no interest:

Net single premium is given by
S[dx + d x + 1 + d x + 2 + ...... d x + n - 1]
NSP = 1
x
N8P _ 50,000 [d 30 + d S2 + d ss + d 34 ]
- 35,800
N8P _ 50,000 [120 + 128 + 132 + 139 + 145]
- 35,800
NSP = 50'~864 = 927.37

:. The net single premium is Rs. 927.37
I
INCREASING TERM ASSURANCE

U~der increasing temporary assurance, the sum payable on death in-creases by uniform
amount every year. If death occurs in 1 st year, singie sum assured will be given; on death in
2 nd year double of sum assured is given; on death in 3n1 year triple sum assured is given; ~d
soon.
Consider a temporary assurance for a person aged % at entry for a term of 'n' years.
Let 8 be the sum assured and "i' be the rate of interest.
PV of claims on deaths }
occurring in 1st year
PV of claim on deaths }
occurring in 2nd year
PV of claim on deaths }
occurring in 3n1 year
PV of claims on deaths}
occurring in nth year
PVoftotal claims =8 d~ v + 2S d~ +1 v2 + 38 d~ +2 VS + ... n8 d%+ n-1 vn
8 d~ v + 28 d~ +1 v2 + 38 d~ +2 vS + ... n8 d~ + n -1 vn
N8P= 1
~

N8P =8 (lA)):: /ill
where
n
(lA)l: /il =d~ v + 2 d~ + 1 v2 + 3 d~ + 2 V3
1
x
+ ... + n d~ +n_1 V
If the interest is considered, the N8P is given by

. 8 [d~ + 2 d~ +1 + 3 d~ +2 + ... + n. d~ + n - 1]
..N8P= l~
OETERMINATION OF NET SINGLE PREMIUM 387
Example 3 : Calculate the /V.et Single Premium for an Increasing Term Assurance of
Rs. 1 lakh for a period of 5 years, for a person aged 30 using the table given below at 3% rate
of interest.
30 31 32 33 34 35
10,000 9,950 9,890 9,820 9,740 9,650
50 60 70 80 90 100
Solution: Sum Assured S =Rs. 1,00,000

Age at entry x =30 years
Rate of interest i =3% =0.03
No. of years n = 5 years
The present value of claim Of Re. 1 payable in each of the 5 policy years are given in the
following table:
Years (n) Age (x + n-l) I" + n-l d,,+n-l vn =(1 + iJ-n =(1.03~ n xc4+n_lxvn
I 1 30 10,000 50 0.970873786 48.5436893
2 31 9950 60 0.942595908 113.1115089
3 32 9890 70 0.915141658 192.1797481
4 33 9820 80 0.888487046 284.3158547
5 34 9740 90 0.862608782 388.1739519
Total 1026.324752
Present value of total claims =S ~ n x d:x;+ n -1 X v n
=1,00,000 x 1,026.324752
=10,26,32,475.20
No. of insured 130 = 10000
n
" NSP =S ~ n x ~ + n _ 1 X v
"
NSP =10,2{~5. Rs. 10,263.25
. . Net single premium is Rs. 10,263.25
. WHOLE-LIFE ASSURANCE
A whole-life policy continues for the whole of life and promises to pay its face value upon
the death of the insured to his beneficiary. There is a possibility that the insured may live to
an advanced age and this must be taken into consideration in computing the premium. This
policy is like the term contracts just considered with the exception that, instead of being
limited to a definite number of years, it continues for the largest possible length of life and
will certainly be paid at some time. Since the Lie. (1970-73)0 Ultimate Table of mortality
assumes that aU persons die by the end of the 102nd year, the maximum possible age for
which insurance against death needs to provide in this case will be 102. The net single
premium on a whole-life policy issued at age 45 must, therefore, provide against the
possibility that the insured will die during his 45th year his 46th year and so during every
year up to and including nis 102nd year. The separate probabilities insured against will be
fifty-eight in number, i.e., for the year from 45 to 102, including 102. Therefore calculation of
premium will start from the date of commencement ofthe policy and ends at 102nd year.
The number of death in each separate year will be multiplied by the face value of the
policy (sum assured) and this amount is discounted by the present value factor for the
period. !
I
_ The net single premium (NSP) in a whole life policy is give~ by \

I S [d. v+ d", 1 V' + d,. • , v' + ...... upto end]
NSP= 1
" . I
Simply NSP=S .A"
where
Example 4 : On the basis of the Hm table, calculate the net single premium for a whole
life assurance of Rs. 10,000 for a person aged 40 at 5% per annum.
Solution:
Sum assumed S =Rs. 10,000
No. of survival at age 40, 140 =82,277
The present values of claim of Re. 1 payable in each year are given by
Years (n) Age (x + n-l) lx+n-l dx+n-l vn = (1+iyn dx+n":l x if
1 40 82277 823 0.95238095 783.8095238
2 41 81454 846 0.90702948 767.3469388
3 42 80608 871 0.86383760 752.4025483
4 43 79737 895 0.82270247 .736.3187149
5 44 78842 924 0.78352617 723.9781778
~
6 45 77918 954 0.74621540 711.8894884

7 46 76964 986 0.71068133 700.7317915
8 47 75978 . 1021 0.67683936 691.0529886
9 48 74957 1061 0.64460892 683.9300601
10 49 73896 1101 0.61391325 675.9184921
11 50 72795 1144 0.58467929 668.8731067
12 51 71651 1193 0.55683742 664.3070399
13 52 I 70458 1243 0.53032135 659.1894389
14 53 I ' 69215 1296 0.50506795 654.5680671
DETERMINA TlON OF NET SINGLE PREMIUM
, 389
15 54 67919 1353 0.48101710 650.8161337

16 55 66566 1414 0.45811152 647.7696921
17 56 65152 1475 0.43629669 643.5376142
18 57 63677 1541 0.41552065 640.3173292
19 58 62136 1612 0.39573396 637.9231387
20 59 60524 1682 0.37688948 633.9281102
21 60 58842 1755 0.35894236 629.9438499
22 61 57087 1830 0.34184987 625.5852641
·23 62 55257 1906 0.32557131 620.5389088
24 63 53351 1983 0.31006791 614.8646661
25 64 51368 2059 0.29530277 608.0284069
26 65 49309 2133 0.28124073 599.8864876
27 66 47176 2204 0.26784832 590.3376951
. 28 67 44972 2273 0.25509364 579.8278372
29 68 42699 2334 0.24294632 567.0367134
30 69 40365 2388 0.23137745 552.5293474
31 70 37977 2434 0.22035947 536.3549619
32 71 35543 2468 0.20986617 517.9496991
33 72 33075 2490 0.19987254 497.6826236
34 73 30585 2496 0.19035480 475.1255799
35 74 28089 2487 0.18129029 450.8689397
36 75 25602 2459 0.17265741 424.5645826
37 76 23143 2412 0.16443563 396.6187467
38 77 20731 2343 0.15660536 366.9263696
39 78 18388 2255 0.14914797 336.3286643
40 79 16133 2146 0.14204568 304.8300342
4":' 80 13987 2018 0.13528160 272.9982732
42 81 '11969 1873 0.12883962 241.3166104
43 82 10096 1712 0.12270440 210.0699346
44 83 8384 1540 0.11686133 179.9664549
45 84 6844 1361 0.11129651 15i.4745486
46 85 5483 1180 0.10599668 125.0760767
47 86 4303 1002 0.10094921 101.1511129
48 87 3301 830 0.09614211 79.79795046
49 88 2471 671 0.09156391 61.43938584
50 89 1800 527 0.08720373 45.95636411
51 '90 1273 402 0.08305117 33.38656976
52 91 871 296 0.07909635 23.41251989

53 92 575 209 0.07532986 15.74394034
54 93 366 144 0.07174272 10.33095197
55 94 222 93 0.06832640 6.354355376 .
56 95 129 58 0.06507276 3.774220295
57 96 71 34 0.06197406 2.107118063
58 97 37 18 0.05902291- 1.062412469
59 98 19 10 0.05621230 0.562122999
60 99 9 5 0.05353552 0.267677619
61 100 4 3 0.05098621 0.152958639
62 101 1 1 0.04855830 0.048558298
- Total 25590.88789
Present value of total claim =S I dx + n _ 1 V n
=10,000 x 25,590.88789
SP _ S
1t.. T I dx + n _ 1 V n
lVl - 1 '
x
10,000 x 25,590.88789
=
82,277
=3,110.33
.. Net single premium is Rs. 3,110.33
INCREASING WHOLE LIFE ASSURANCE

Under this policy, the sum assured payable on death increases in uniform manner every
year like increasing temporary assurance with only difference that the policy will be lasting
till the death of the life assured. If the person dies in 20th year, the claim amount will be
twenty times more than the sum assured.
In case of increasing whole life assurance, the net single premium is given by
NSP =S [dx v + 2d x + 1 v~x+ 3dx + 2 va + ...... ]
It is also expressed as
I NSP = S (1A)% I
dx v + 2d% + 1 V 2 + 3dx + 2 va + ......
where (1A )x =" lx
PURE ENDOWMENTS
!
A pure-eridowment contract promises to pay the insured value in case the policyholder
survives a certain fixed period. The person can get the policy amount at the end of the
endowment period. If the insured person dies during this period no claim will be paid and
DETERMINAnON OF NET SINGLE PREMIUM 391
the entire premium paid is' forfeited. Thus, a five-year pure endowment issued at age 35 will
pay the policyholder the sum assured, if he lives five years from the date of issue i.e. if he
reaches age 40. It is to be noted that in case of pure endowment assurance, irrespective of
the term (number of years) of the policy, the claim is made only once at the end of the term.
A clear distinction must be made between a pure endowment 'and a savings-bank
account which is left to accumulate at an agreed rate of interest. The insured cannot get
possession of the money invested in a pure endowment before the expiration of the
endowment period. If he dies during this period aU the money paid is lost, i.e. it goes to swell
the fund which will be paid to the survivors. A savings-bank account on the other hand is not
lost through death of the investor.
Suppose that a person aged x purchase a pure endowment policy for on' years and for a
sum assured'S'.
The persons who reach the age 'x + n' will make th,e claim.
. . The number of claim =l% + n
Total-amount of claim =S l% + n
PV of total amount of claim = S ~ +n vn
The net single premium is given by
' _ S 1% + n vn
N SP - 1%
.\ NSP=A%:~ I
1 l,,+n xvn
where A,,: iii = l"
'1' is placed over the term on' to denote that, for the sum assured to become payable, the
term of n years must be completed.
Unlike term assurances in case of pure endowment policy, the claim will be made only
once at the end of the policy.
If the insurer does not earn interest, then the net single premium is given by
1" -+n
NSP=S x-
l%
Example IS : Using the data given below,

125 =9,87,095, l28 =9,83,330
Calculate the Net Single Premium for a pure endowment policy of Rs. 3,000 for a person
aged 25 years, payable on survival at the end of 3rd year, assuming 6% rate of interest ?
Solution : Since, the sum assured is payable on the survival of the persons, it is a case
of pure endowment assurance.
Net Single Premium is given by

8
lI. 1 _S X vn x 1x + n
lV, P - 1
x
n =3 years
1x =125 =9,87,095
lx + n =125 ... 3 =128 =983330
Sum assured (S) = Rs. 3,000
Rate of interest (i) = 6% = 0.06
.. Net Single Premium is given by
NSP =3,000 x (1.06)-3 x 9,83,330
9,87,095
NSP = 3,000 x 0.839619283 x 9,83,330
9,87,095
NSP = Rs. 2,509.25
The net single premium is Rs. 2,509.25
Example 6 : Consider a group of 15,000 people all aged 27 selecting an amount of

Rs. 10,000 in case of the survivals for the next 5 years.
x: 27 28 29 30 31 32
1x: 15,000 14,908 14,810 ,14,705 14,595 14,479
~: ~ ~ 1~ 1.10 116 125
Calculate the Net Single Premium if
(a) the insurer earns interf;;st @ 5% p.a.
(b) the insurer earns no interest.
Solution.: Since the sum assured payable on the survival of the persons, it is a case of
pure endowment assurance.
(a) In case of rate of interest is 5% p.a. :
S x vn xIx t n
NSP = 1
x
Age at entry x = 27 years
n = 5 years
Ix =127 =15,000
1x+n = 127+5 =132 = 14,479
Sum Assured S =Rs. 10,000
Rate of Interest i = 5% =0.05
, OF NET SINGLE PREMIUM
DETERMINATION 393
.. The NSP is given by

NSP = 10,000 x (1.05)-5 x 14,479
15,000
NSP =10,000 x 0.783526167 x 14,479
15,000
NSP =Rs. 7,563.17
.. The net single premium is Rs. 7,563.17
(b) In case of insurer earns no interest:

NSP =S X:x+n
x
.. The Net Single Premium is:
NSP _ 10,000 x 14,479
- 15,000
NSP =Rs. 9,652.67
ORDINARY ENDOWMENT ASSURANCE

The combination in which the features of both pure endowment assurance and term
assurance are brought together is technically known as endowment assurance.· This policy is
also referred to as an ordinaJ'ly endowment assurance. It promises to pay a certain sum to the
insured in case he dies within the term of the policy or a like sum at the end of the term in
case of survival. This is an assurance against both survival and death. Payment of benefit is.
thus certain in endowment assurance. Since the claim is based on both death and survival,
net single premium is calculated on both death and survival rates separately and combined
together. Determination of net single premium on the basis of death rate has been discussed
in term assurance and on the basis of survival in pure endowment. For illustration, a five-
year endowment-insurance policy issued at age 35 will pay the sum insured if the
policyholder dies during the first, the second, the third, the fourth, or the fifth years, or it
will pay the same sum if he survives the fifth year.
Endowment Assurance =Term Assurance + Pure Endowment Assurance
1
NSP =S A 1. ii] + S A x: ii]
NSP =S [A}: ii] + A x: ~]
NSP =S A x : ii] I
. d x v + d x + 1 v2 + ...... d x + n -1 vn 1x + n vn
whereAx.:n = 1 + l'
x x
.394 FINANCIAL MATHEMATICS
If the interest factor is not considered, the net single premium is gi\7en by
S [d% + d% + 1 + ...... d% + 11-1] lu 11
NSP= 1 +-l-
% %
Example 7 : From the following mortality table, calculate the Net Single Premium for 5
year endowment assurance, assuming 5% rate of interest and Rs. 10,0'00 policy amount on
each policy.
25 26 27 28 29 30
1,00,000 9~50 98,900 98,200 97,400 96,500
500 600 700 800 900 1,000
Solution: Ordinary endowment assurance is the sum of temporary assurance and pure
endowment assurance. .
In case of Temporary assurance:
Sum assured S =Rs. 10,000
Age at enetry x = 25 years
No. oflivings at age 25, 125 = 1,00,000
No. of years n =5 years
following table:
Year(n) Age (x + n-1) 1% + 11-1 d%+11_1 V" = (1 + iF" =(1.05)-" d%+ 11-1 X V"
1 25 1,00,000 500 0.95238095 476.190475
2 26 99,500 600 0.90702948 544.217688 I
3 27 98,900 700 0.86383760
I 604.686320
4 28 98,200 800 0.82270247 658.161976
5 29 97,400 900 0.78352617 705.173553 II
Total 2988.430012 J
Present value of total claims =S x I d% + 11-1 V"
=10,000 x 2,988.430012
=2,98,84,300.12
~d V"
NSP =S x ~ % +l: - 1
lHSP - 10 000 2,988.430012

J.V, - , x 100000
, ,
NSP =Rs. 298.8430012.
DETERMINATION OF NET SINGLE PREMIUM
i
In case of Pure endowment assurance:

NSP =S x u~%xl+n
n = 5 years
Ix =l25 =1,00,000
lx + n = l25 + 5 =lao =96,500
Rate of interest (i) =5% =0.05
.. The NSP is given by
NSP =10,000 x (1.05)-5 x 96,500
1,00,000
NSP =Rs. 7,561.02 ... (2)
For ordinary endowment,

NSP =Term Assurance + Pure Endowment Assurance
NSP = Rs. 298.84 + Rs. 7,561.02
NSP =Rs. 7,859.86
. . The net single premium is Rs. 7,859.86
DOUBLE ENDOWMENT ASSURANCE

Under this assurance, the benefit payable on the survival of the life assured at the end of
the term of the policy is double of the basic sum assured whereas the benefit payable on
death of the life assured during the term of the policy is only the sum assured. This is a
combination of a term assurance and two pure endowments.
S [d x u + dx + 1 u 2 + ...... dx + n _lUn] 2S x lx +n un
.. NSP = 1 + 1
x x
NSP = S [A 1: iil + 2A x; ~ ]
Double Endowment Assurance = term assurance + 2 x (pure endowment)
= term assurance + pure endowment + pure endowment
=endowment assUrance + pure endowment assurance
Thus it is first like an ordinary endowment assurance with only difference that one more
premium on the basis of pure endowment is added to the premium of ordinary endowment
policy.
Thus,
1
NSP = SAl: iil t 2Ax: iil
=> NSP = (SA 1: iil + S A x: ~) + S A %: ~

=> NSP =S AX:iil + SAx: iil1
If the interest factor is not considered, then the NSP is given by

S [d% + d% + 1+ ...... d% + n -1] S x l% + n
]V,SP = 1
%
+2 l
%
Example 8 : Calculate the. Net Single Premium for endowment assurance of Rs. 10,000
for a person aged 60, the assured benefit being Rs. 10,000 in case of his death before attaining
the age 63 and Rs. 20,000 in case of his survival to age 63, using the following morality table
and 5% rate of interest. .
60 61 62 63 64
1,000 980 958 933 900
20 22 25 33 40
Solution: Since the benefit is Rs. 10,000 in case of death and Rs. 20,000 in case of
survival, this is a case of Double Endowment Assurance.
Double Endowment Assurance =Term Assurance + 2 x Pure Endo:wment Assurance
In case of Term Assurance:
No. oflivings at age 60, 160 = 1,000
No. of years n =3 years.
following table :
Year Age (x + n-1) l% + n-1 d%+n-1 v n =(1 + iJ-n. =(1.05r' d%+n-1 X v n
1 60 1,000 20 0.95238095 19.04761900
2 61 980 22 0.90702948 19.95464856
3 62 958 25 0.86383760 21.59594000
Total 60.59820756
Present value of Total claims =S x }:d% +n _ 1 un
=10,000 x 60.59820756
=Rs. 6,05,982.07
No. of insured 1% = 1,000 [Here l% =lao]
DETERMINATION OF NET SINGLE PREMIUM 397
$ •
NSP = 10,000 x 60.59820756

1,000
NSP =Rs. 605.98
In case of Pure endowment Assurance:
The rate of interest is charged 5% p.a.
Net S~ngle Premium is given by
NSP =S x vn x lx + n
zx
No. of living years n = 3 years.
lx = lao = 1,000
lx + n =lao + 3 =l63 =933
.. The Net Single Premium is given by
NSP _ 10,000 x (1.05)-3 x 933
.- rooo
NSP _ 10,000 x 0.863837598 x 933
- 1,000
NSP =Rs. 8,059.60
For Double Endowment,
NSP =Term Assurance + 2 ~ Pure Endowment Assurance
NSP =Rs" (605.98 + 2 x 8059.60)
NSP =Rs. 1,6725.18
Example 9 : Using Hm mortality table, at 5% rate of interest, calculate the value of an

anticipated endowment assurance for a person aged 35 with the following benefits:
(a) A sum of Rs.l,OOO probable on survival at the end of 2nd year.
(b) A sum of Rs. 2,000 probable on survival at the end of 3m year.
(t) A sum of Rs. 3,000 probable on survival at the end of 5th year.
(d) A sum of Rs. 6,000 at whenever he dies during the 5 years period.
Solution : In this anticipated policy four different benefits are given.

.. We first calculate· them separately. The first three benefits are Pure endowment
Assurance and the fourth one is Term Assurance.
(a) It is a Pure Endowment policy ofRs. 1,000 for two years.
So, the NSP is given by
S x vn x lx +n
NSP = l
x
Here Sum Assured S =Rs. 1,000
Rate of interest i = 5% =0.05
398 FINANCIAL MA THEMAnCS
No. of livings aged at 35, l36 =86137

Ix + n =135 + 2 =137 =84639
NSP = 1,000 x (1.05)-2 x 84639
86137
. . NSP =Rs. 891.25
(b) It is a Pure Endowment policy of Rs. 2,000 for a term of 3 years.
Sum Assured S = Rs. 2,000
No. of years n = 3
No. oflivings aged at 35, 135 =86137
lx + n =135 + 3 =138 =83869
" Net Single Premium is given by
NSP = 2,000 x (1.05)-3 x 83869
86137
NSP =Rs. 1,682.18
(c) It is a Pure Endowment policy ofRs. 3,000 for a term of 5 years.
Rate of Interest i =5% =0.05
No. of years n = 5
No. of livings aged at 35, 135 = 86137
Ix + n =l35 + 5 =l40 = 82277
.. Net Single Premium is given by
NSP = 3,000 x (1.05)-5 x 82277 _
86137 -
NSP =Rs. 2,245.24
(d) It is a Term Assurance of Rs. 6,000 for a term of 5 years.
Rate of Interest i =5% = 0.05
No. of years n = 5
No. of livings aged at 35,135 =86137
Present value of claim ofRe. 1 payable in each of the 5 po9licy years are given in the
following table:
Year Age (x + n-l) d x + n- 1 vn =(1.05~n d x + n - 1 Xvn
1 35 742 0.95238095 706.6666649
I 2 36 756 0.90702948 685.7142868
3 37 770 0.86383760 665.1549520
4 38 786 0.82270247 646.6441414
5 39 806 0.78352617 631.522093
i I 3335.702137
DETERMINAnON OF NET SINGLE,PREMIUM 399
Present value of total claim =S x Id% + n -1 V n

=6000 x 3335.702137
=Rs. 2,00,14,212.82
No. of insured (l%) =86137 [Here (" =l35]
vn
NSP = S x Idi+n-l
%
NSP _ 2,00,14,212.82
- 86137
NSP =Rs. 232.35
The NSP of the anticipated endowment assurance
=,Rs. (891.25 + 1,682.18 + 2,245,24 + 232.35)
=Rs. 5,051.02
" Net single premium is Rs. 5,051.02
RXED TERM (MARRIAGE) ENDOWMENT ASSURANCE

This is' a special purpose endowment policy in which the sum assured to be kept aside for
the expenses of marriage of the policyholder's children. Under this plan, the policy amount is
payable only at the end of the selected term, irrespective of whether the policyholder
survives till the term or not, i.e., the survival or death benefit is payable at the same time. In
case the policyholder dies during the term of the policy, the sum assured, is then paid to the
family at the end ofthe policy's term.
Let B be the sum assured. Here it is the amount payable by the insurer at the end of the
term of n years.
Let i be the rate of interest per year.
The present value ofRs. S payable at the end ,of n years is given by S . (1 + irn, i.e., Svn.
This is the amount to be paid as premium at the commencement of the policy.
Thus, the net single premium is given by
I
NSP=S v n I
This is also given by
N-S-P-=s-A-nJ--'1
'---1
whereAnJ =vn.
Example'10 : A (zxed term (marriage) endowment assurance of Rs. 10,000 is taken by a

person aged 35 years fat the marriage of his daughter (aged 7 years) 15 years hence. Find the
value of the benefit at 6% p.a. interest.
Solution: Net single premium for a fixed term (marriage) endowment is given by
NSP =S . vn =S . (1 + i'r-n

Rate of Interest i = 6% = 0.06
No. of years n = 15
. . NSP = 10,000 (1 + 0.06)-15 == 10,000 (1.06)-15
NSP =Rs. 4,172.65
. . The net single premium is Rs. 4,172.65.
1 Write a short note on the following:

(a) Whole Life Assurance
(b) Term Assurance
(c) Endowment Assurance.
& ~ •
2. Describe in detail any three life insurance policies. Also explain the method of
calculating net single premium for them.
3. A group of 5,000 persons all aged 40 years are insured for a one-year Term
Assurance of Rs. 2,00,000. If the mortality rate at age 40 is 0.005, calculate the Net
Single Pr.emium.
(a) If the insurer earns no interest.
(b) If the insurer earns interest@ 6% p.a. [ADs. (a) Rs. 1,000; (b) Rs. 943.40]
4. Consider a group of 10,000 persons all aged 35 seeking an amount of Rs. 1,00,000 to
their families in case of death during the next 10 years.
x 35 36 37 38 39 40 41 42 43 44 45
(" 10,000 9,972 9,941 9,9q7 9,869 9,827 9,780 9,728 9,671 9,608 9,538
d x, 28 31 34 38 42 47 52 57 63 70 75
Calculate the net Single premium for their term assurance, if
(a) the insurer earns interest @ 6% p.a.
(b) the insurer earns no interest. [ADs. (a) Rs. 3,238.92; (b) Rs. 4,620]
5. Consider a group of 50,000 persons all aged 30 seeking a term assurance of
Rs. 2,00,000 for a term of 5 years. .
x 30 31 32 33 34 35
Ix 50,000 49,800 49,550 49,250 48,900 48,500
dx 200 250 300 350 400 450
Calculate the Net Single Premium for the term assurance if the insurer earns
interest @ 5% p.a. [ADs. Rs. 2,594.28]
6. Using the LIC (1970-73) Ultimate table, and 4% rate of interest, calculate net single
premium for a person aged 37 for a sum assured of Rs. 50,000, if he dies during the
next 3-year period. [ADs. Rs. 320.40]
DIUc'RMINATlON OF NET SINGLE PREMIUM 401
7. From the following morality table, calculate the Net Single Premium for increasing
Term Assurance for 5 years, Assuming 5% rate of interest and Rs. 10,000 on each
policy.
25 26 27 28 29 30
1,00,000 99,500 98,900 98,2~0 \ 97,400 96,500
500 600 700 800 900 1,000
[ADs. Rs. 953.72]
8. On the basis of LIC (1970-73) Ultimate Table at 6% per annum, calculate the net
single premium for a sum assured ofRs. 20,000 for a whole life assurance on (30).
[ADs. Rs. 2,319.18]
9. Calculate t~e net single premium for a pure endowment assurance of Rs. 2,000 for a
person aged 30 years, payable on survival at the end of 5 years, assuming 6% rate of
interests. (Given lao =479500, l36= 474370) [ADs. Rs. 1,478.53]
10. Calculate the Net Single Premium for a Pure endowment Assurance of Rs. 2,00,000
for a person aged 40 payable on survival at the end of 5 years, assuming 5% rate of
interest, using the following table:
40 41 42 43 44 45
37,350 37,268 37,178 37,076 ·36,967 36,852
82 90 102 109 115 122
[ADs. Rs. 1,54,615.83]
lL Calculate value of an assurance of Rs. 1,000 for a person aged 40 under which the
sum assured is payable in case of death between age 40 and 45 or on survival to the
age 45 from the following data; assuming the rate of interest is 6%.
40 41 . 42 43 44 45
9,827 9,780 9,728 9,671 9,608 9,538
47 52 57 63 70 75
[ADs. Rs. 749.77]
12. From the following mortality table, calculate Net Single Premium in Term Insurance
for five years , Pure Endowment Insurance for five years, Ordinary Endowments for
. five years and Double Endowment for five years, assuming 5 per cent rate of interest
and Rs. 1,000 policy amount in each policy.
x ~ M ~ ~ ~ 00
l:" 1,00,000 99,500 98,900 98,200 97,400 96,500
d" 500 600 700 800 900 1,000
[Ans. Rs. 29.88, Rs. 756.10, Rs. 785.98, Rs. 1,542.08]
13. Calculate the value of an anticipated endowment assurance for a person aged 25
with the following benefits:
(a) a sum ofRs. 1,000 payable on survival at the end of 2nd year.
(b) a sum ofRs. 2,000 payable on survival at the end of3rd year.
(c) a sum ofRs. 3,000 payable on survival at the end of 5th year.
402 RNANCIAL MATHEMAncS
(d) a ~l1m of Rs. 6,000 wherever he dies during the 5 years period.
(UseLIC (1970-73) mortality table and interest rate 6%). [Ans. Rs. 4,820.32]
14. Using LlC (1970-73) ultimate mortality table at 6% \.ation of interest, calculate for a,
person aged 40.
(a) The net single premium of whole life assurance ofRs. 10,000.
(b) The net single premium of double endowment assurance of Rs. 10,000 for 15
years' term. Also calculate the net single premium of endowment assurance and
pure endowment assurance each for Rs. 10,000 for 15 years term. Show that the
sum of two values is equal to the net single premium of Double endowment
assurance. [Ans. Rs. 1,882.17; (b) Rs. 8,121.70, Rs. 4,222.98, Rs. 3,798.72]
15. A (fixed term) marriage endowment assurance of Rs. 1,000 is taken by a person aged
35 years payable for the marriage of his doughtier (aged 7 years) 15 years hence,.
Find the net single premium for this benefit at 6% per annum interest.
[Ans. Rs. 417.27]
16. The following particulars are given:
x ~ ~ ~ ~ ~ 00
1% 97,380 97,088 96,794 96,496 96,194 95,887
d% 292 294 298 302 307 313
Find the net single premium for an assurance ofRs. 1,000 for a person aged 25 under
which the sum assured is payable in case of death between ages 28 and 30 or
survival to age 30 years, assuming rate of interest at 6% per annum.
[Ans. Rs. 740.62]
Determinat'ion of
Net Level Premium
INTRODUCTION
We have seen that the present value of claims is used to determine the net single
premium to be paid at the beginning of a life insurance contract to secure the desired
benefits. This amount is paid by the insured as premium. If the period of insurance is more
than one year, it is possible to pay the premium in equal periodic instalments at the
beginning of every period. Such instalments are called level premiums. In this chapter, we
discuss lhe methods of determining net level premium for various insurance plan.
THE LEVEL OR PERIODIC PREMIUM SYSTEM

The system of charging single premium can be replaced by a level or periodic premium
system wherein persons taking insurance policies pay uniform premiums throughout the
term of insurance. ~nder the level premium system, the premium payments can be made
annually, semi-annually, quarterly, monthly or even weekly.
Premium is generally determined on annual basis. This is known as level annual
premium. Determination of periodic premium (payment period less than one year) is possible
only after the annual premium has been ascertained.
It should be noted that tJle payment of first premium should be made at the
commencement of the policy to signify the assumption of risk by the insurer and the
subsequent (annual or periodic) premiums are payable at the beginning ()f each year or
period.
Advantages
It is ,very important to know why most insured persons choose the level premium system
rather than the single premium method of paying for insurance. Following are the two
reasons favouring the choice of level premium methoq :
(a) The first reason is that it may not be possible for all persons desirous of having
insurance protection to pay single premium, a lump sum contribution, to secure
benefits under an assurance plan. It is a man's earning power which enables him to
pay the cost of insurance. Majority of people do not obtain their capital by
inheritance. It is the current income from which premiums are paid. So payment of a
lump sum premium is clearly impossible.
(b) The second reason for the choice oflevel premium lies in the reduced cost of a policy
purchased in case of early death. For example, suppose that the net single premium
is Rs. 3,640 and net annual level premium is Rs. 270 for a 15 year assurance plan. If
the insured dies within one year after the issue of his policy, this insurance would
cost him Rs. 3,640 under single premium system and but the cost would be Rs. 270
under the level premium system. In both cases the sum assumed remains same, even
though the costs of insurance differ. Therefore the annual plan of premium payments
is the cheaper to the policyholder whenever death occurs in early years.
Disadvantages
There is a corresponding disadvantage in the level premium plan. If the insured lives
beyond a certain time period, then he will have to pay more than what he would pay in case
of single premium. If the insured dies in 15th year, the total premium he would have paid is
Rs. 4,050 (Rs. 270 x 15) as level premium where as the single premium is Rs. 3,640, which is
less than the level p;remium. In general, among the policyholders of an insurance company
for everyone who pays in less than the amount of the single premium, there must be
someone who pays eJltITespondingly more than that amount.
COMPUTATION OF NET ANNUAL LEVEL PREMIUM

As we have discussed earlier, computation of periodic level premium depends upon the
computation of annual level premium. We first study the method of computing net annual
level premium.
While computing the net level premium the basic principal followed is :
Sum of present values of premium } _ {sum of present values of claims
charged at the beginning of every year - made at the end of every year
Method of calculating present value of claims has been discussed in the previous chapte;r,
"Determination of Net Single Premium",
Present value of premium of a particular year can be estimated as follows :
Let 'P be the net annual level premium and 'x' be the age at entry.
Let i be the rate of interest.
No. of persons paying premium at the beginning of nth year = Ix +n-1
:. Total premium collected at beginning of nth year =P x Ix + n-1
DETERMINATION OF NET LEVEL PREMIUM 405
Present value of this premium is PI% + ,,-1 V,,-1

Thus, the present value of premium of a particular year is given by
PV of premium =amount of annual premium
x No. of survivals at the beginning of the year
x Present value of Re. 1 at compound interest i per annum.
Remark: Since the premium is collected at the beginning of the age x + n, while
computing the present value, it is discounted for n - 1 years.
TERMS ASSURANCE
Under this plan, the life assured aged x pays the level annual premium, P, at the
beginning of each policy year for n years.
Now,
PV of premium paid }
at the beginning of 1st year
PV of premium paid at }
the beginning of 2nd year = P l% + 1 V
the beginning of 3rd year = Pix +2 v2
the beginning of nth year = Pix +n-l v n- 1
. . Present value of total premiums paid

=P I% + P 1%+ 1 V + P 1%+ 2 v2 + ...... + P 1% + ,,_IV" -1
=P (l% + 1% + 1 V + I% + 2 v2 + ...... + 1% + " _ 1 v" - 1)
=pa%: iii ..• (1)
.. Ix + Ix + 1 V + 1% + 2 v2 + ...... 1% + " _ 1 v"

where a% : iii = I
%
. Present value of total claims payable to a life assured

=S A!. iii ... (2)
Present value of premium payable by a life assured =Present value of claims payable to
a life assured.
Pax: iii =S Al : iii
p=S~}:iI
a% : iii
.. Present value of total premiums payable per life for a single person is
P [ 1% + Ix + 1 V + 1% + 2 v;%+ ...... 1% +" _IV" -1 ]
Example 1 : Considering a group of 15,000 people all aged 27 insured for a five year-
Term Assurance, with sum assured is Rs. 1 lac.
27 28 29 30 31 32
15,000 14,908 14,810 14,705 14,595 14,479
92 ·98 105 110 116 125
Calculate the net level premium, if the insurer earns interest at 5% p.a.
Solution:
Rate of interest i = 5% = 0.05-
Let P be the net Level Premium.
No. of years n = 5
Age at entry x =27
No. oflivings aged 27, l27 = 15,000.
The present value of premium of Re. 1 receivable at the beginning of each year, is given
in the following table: .
Year Age (x + n-1) dx+n- 1 V1lr-l = (1 + ij-{n-l) =(1.05~n-l) lx+n-l xv n- 1
1 27 15,<.'00 1.00000000 15,000.00000
2 28 14,908 0.95238095 14,198.09520
3 29 14,810 0.90702948 13,433.10659
4 30 14,705 0.86383760 12,702.73190
5 31 14,595 0.82270247 12,007.34254
Total 67,341:27623
Present value of Total Premiums =P x Ilx + n -1 Un - 1
=67,341.27623P ... (1)
following table:
Year Age (x + n-1) lx + n-l d x + n-l vn =(1 + i)-l' =(l.05)-n dxxv n
1 27 15,000 92 0.95238095 87.61904740
2 28 14,908 98 0.90702948 88.88888904
3 29 14,810 105 0.86383760 90.70294800
4 30 14,705 110 0.82270247 90.49727170
5 31 14,595 116 0.78352617 90.88903572
I Total 448.59719186
Present value of Total claims =S x Idx + n -1 vn
= 1,00,000 x 448.59719186
=Rs. 4,48,59,719.19
Net level premium is given by
P.V. of Total Premium =P.V. of Total claim
DETERMlNAnON OF NET LEVEL PREMIUM 407
67,341.27623P = 4,48,59,719.19
P =Rs. 666.15
.. The Net level premium is Rs. 666.15
WHOLE LIFE ASSURANCE

Under a whole life assurance, the level annual premium is payable throughout the life
time of the life assured and the benefits are payable wherever the life assured dies.
Let P be the net annual premium.
The present value of total claims is
S [d% V +d% + 1 v2 + d% + 2 v3 + ...... + d w -1 Vw] ... (1)
where w is the extreme age in the table.
The present value of total premiums is
P [1% + lu 1 V + lu 2 v 2 + ...... + lw -1 Vw -1] •.. (2)
Equating these two present values we get the net annual level premium for a whole life
assurance.
Example 2 : Using LIe (1970-73) Ultimate Table at 6% calculate the net annual
premiums for a sum assured of Rs. 1,000 for a person who purchases a whole life assurance
policy at age 30.
Solution:
Sum assured S = Rs. 1,000
Present values of claims of Re. 1 payable in each year are shown in the following table.
Years (n) Age (x) Ix + n-l d x + n-l vn =(1 + irn dx+n-l xv
n
1 30 980776 1314 0.943396 1239.622642

2 31 979462 1361 0.889996 1,211.285155
I 3 32 978101 1428 0.839619 1198.976336
I
4 33 976673 1514 0.792094 1199.229806
I 5 34 975159 1609 0.747258 1202.338400
I
I 6 35 973550 1733 0.704961 1221.696617
II
I 7 36 971817 1876 0.665057 1247.647145
\ 8 37 969941 2046 0.627412 1283.685712
I 9 38 967895 2236 0.591898 1323.484964
10 39 965659 2453 0.558395 1369.742388
11 40 963206 2697 0.526788 1420.745956
I
i
12 41 960509 2968 0.496969 1475.005071
13 42 957541 3275 0.468839 1535.447798

14 43 954266 3617 0.442301 1599.802588
15 44 950649 3993 0.417265 1G66.139388
16 45 946656 4402 0.393646 1732.830941
17 46 942254 4853 0.371364 1802.231523
18 47 937401 5343 0.350344 1871.886876
19 48 932058 5881 0.330513 1943.747015
20 49 926177 6465 0.311805 2015.817559
21 50 919712 7100 0.294155 2088.503359
22 51 912612 7775 0.277505 2157.602128
23 52 904837 8514 0.261797 2228.941882
24 53 896323 9295 0.246979 2295.665607
25 54 887028 10139 0.232999 2362.373115
26 55 876889 11031 0.219810 2424.724427 .
27 56 865858 11983 0.207368 2484.890165
28 57 853875 12996 0.195630 2542.409340
29 58 840879 14059 0.184557 2594.683190
30 59 826820 15180 0.174110 2642.991787
31 60 811640 16346 0.164255 . 2684,909623
32 61 795294 17560 0.154957 2721.051886
33 62 777734 18813 0.146186 2750.201419
34 63 758921 20096 0.137912 2771.470135
35 64 738825 21389 0.130105 2782.820514
36 65 717436 22692 0.122741 2785.233598
37 66 694744 23996 0.115793 2778.573174
38 67 670748 25267 0.109239 2760.138026
39 68 645481 26510 0.103056 2732.001808
40 69 618971 27686 0.097222 2691.693489
41 70 591285 28778 0.091719 2639.490677
42 71 562507 29768 0.086527 2575.747672
43 72 532739 30627 0.081630 2500.070480
44 73 502112 31332 0.077009 2412.848457
45 74 . 470780 31853 0.072650 2314.122818
46 75 438927 32169 0.068538 2204.792681
47 76 406758 32264 0.064658 2086.135634
48 77 374494 32117 0.060998 1959.085720
49 78 342377 31718 0.057546 1825.233356
50 79 310659 31050 0.054288 1685.653634

51 80 279609 30122 0.051215 1542.711353
52 81 249487 28938 0.048316 1398.18139"
53 82 220549 27509 0.045582 1253.903008
54 83 193040 25862 0.043001 1112.103949
55 84 167178 24027 0.040567 974.7134498
56 85 143151 22042 0.038271 843.5727519
.,
57 86 121109 19953 0.036105 720.4002958
58 87 101156 17806 0.034061 606.4935460
59 88 83350 15652 0.032133 502.9488143
60 89 67698 13540 0.030314 410.4561323
61 90 54158 11519 0.028598 329.4253357
62 91 42639 9604 0.026980 259.1125838
63 92 33035 7939 0.025453 202.0674171
64 93 25096 6404 0.024012 153.7715338
65 94 18692 5054 0.022653 114.4864253
66 95 13638 3899 0.021370 83.32323591
67 96 9739 2936 0.020161 59.19200875
68 97 6803 2157 0.019020 41.02525669
69 98 4646 1545 0.017943 27.72195029
70 99 3101 1078 0.016927 18.24770252
,
- 71 100 2023 733 0.015969 11.70543455
72 101 1290 689 0.015065 10.37998971
73 102 601 601 0.014213 8.541739209
Total 113729.909
Sum of the present values of claim =S }:dz + n _ 1 V n
=1,000 x 1,13,729.909 ... (1) .
Present value! of premiums of Re. 1 payable at the beginning of each year are shown in
the following table:
Years (n) Age (x + n-l) lx+n-l dx+n-l vn- 1 =(l+iy(n-l) l x+n-lxVn-1
1 30 980776 1314 1.000000 980776.0000

2 31 979462 1361 0.943396 924020.7547
3 32 978101 1428 0.889996 870506.4080
4 33 976673 1514 0.839619 820033.4840
5 34 975159 1609 0.792094 772417.2645
6 35 973550 1733 0.747258 727493.1942
410
FINANCIAL MATHEMAnCS
7 36 971817 1876 0.704961 685092.6375

8 37 969941 2046 0.665057 645066.1618
9 38 967895 2236 0.627412 607269.2972
10 39 965659 2453 0.591898 571572.0784
11 40 963206 2697 0.558395 537849.1995
12 41 960509 2968 0.526788 505984.1592
13 42 957541 3275 0.496969 475868.5414
14 43 954266 3617 0.468839 447397.1384
15 44 950649 3993 0.442301 420472.9695
16 45 946656 4402 0.417265 395006.4733
17 46 942254 4853 0.393646 370914.7854
18 47 937401 5343 0.371364 348117.3774
19 48 932058 5881 0.350344 326540.7333
20 49 926177 6465 0.330513 306113.5485
21 50 919712 7100 0.311805 286770.5490
22 51 912612 7775 0.294155 268449.7504
23 52 904837 8514 0.277505 251096.8794
24 53 896323 9295 0.261797 234654.9066
25 54 887028 10139 0.246979 219076.8878
26 55 876889 11031 0.232999 204313.9361
27 56 865858 11983 0.219810 190324.2719
28 57 853875 12996 0.207368 177066.3097
29 58 840879 14059 0.195630 164501.2791
30 59 826820 15180 0.184557 152595.2027
31 60 811640 16346 0.174110 141314.7467
32 61 795294 17560 0.164255 130630.8891
"
33 62 777734 18813 0.154957 120515.6360
34 63 758921 20096 0.146186 110943.7948
35 64 738825 21389 0.137912 101892.4872
36 65 717436 22692 0.130105 93342.16740
37 66 694744 23996 0.122741 85273.41489
38 67 670748 25267 0.115793 77668.04465
39 68 645481 26510 0.109239 70511.60221
40 69 618971 27686 0.103056 63788.37763
41 70 591285 28778 0.097222 57486.02126
42 71 562507 29768 0.091719 51592.60485,
43 72 532739 30627 0.086527 46096.52106
DETERMINATION OF NET LEVEL PREMIUM
411
44 73 502112 31332 0.081630 40987.21353

45 74 470780 31853 0.077009 36254.33412
46 75 438927 32169 0.072650 31888.07918
47 76 406758 32264 0.068538 2787130089
48 77 374494 32117 0.064658 2421 14822
49 78 342377 31718 0.060998 20884.45034
50 79 310659 31050 0.057546 17877 .07829
51 80 279609 30122 0.054288 15179.51456
52 81 249487 28938 0.051215 12777.58540
53 82 220549 27509 0.048316 ' 10656.14446
54 83 193040 25862 0.045582 8799.063459
55 84 167178 24027 0.043001 7188.899314
56 85 143151 22042 0.040567 5807.267035
57 86 121109 19953 0.038271 4634.981055
58 87 101156 17806 0.036105 3652.223341
59 88 83350 15652 0.034061 2839.000172
60 89 67698 13540 0.032133 2175.353235
61 ' 90 54158 11519 0.030314 1641.763900
,
62 91 42639 9604 0.028598 1219.408533
63 92 33035 7939 0.026980 891.2728244
64 93 25096 6404 0.025453 638.7560021
65 94 18692 5054 0.024012 448.8284681
66 95 1'3638 3899 0.022653 308.9366578
67 96 9739 2936 0.021370 208.1264413
68 97 6803 2157 0.020161 137.1536906
69 98 4646 1545 0.019020 88.36501743
70 99 3101 1078 0.017943 55.64127370
71 100 2023 733 0.016927 34.24406512
72 101 1290 689 0.015969 20.60028726
73 102 601 601 0.015065 9.054243561
Total 15317814.27
Sum of the present value of premiums =P ~lx + n -1 V n - 1
=1,53,17,814.27 P ... (2)

Present value of premiums =Present value of claim
:. 1,53,17,814.27 P = 1,000 x 1,13,729.909
.. P=7.42
:. Net annual premium is Rs. 7.42.
LIMITED PAYMENT WHOLE LIFE ASSURANCE

Under a limited payment whole life assurance, the payment of premium is limited to a
certain number of years, say en' years. The benefi.t is payable to the beneficiary when the life
insured dies. The premiums are payable for en' years or till the death occurs, whichever is
earlier.
:. The sum of the present values of premiums is
P [Ix + Ix + 1 V + Ix + 2 v2 + ...... + Ix + ,,_ 1 v" -1] ... (1)
The sum of the present values of claims is
B [dx v + d x + 1 v 2 + d x + 2 vS + ...... d w -1 Vw]
Equating these two present values, we· get the net annual level premium of for a limited
payment whole life assurance.
Example 3 : Using LIe (1970·73) ultimq,te table, calculate the net annual premium for a
limited payment 'whole life assurance limited to 20 years for a person aged 30. Assume that
the sum assured is Rs. 1,000 and the interest rate is 6%.
Solution:
Age at entry x =30
No. of years of premium payment =20
Let P be the net annual premium
From example 2,
Present value of total claims =Rs. 11,37,29,909
Present value of premium of Re. 1 payable at the beginning of each year for 20 years are
shown in the following table:
Years (n) Age (x + n-l) lx+n-l dx+n-l v,,-1 =(1+iJ(n-l) 1x+n-lxv ,,-1
1 30 980776 1314 1.000000 980776.0000

2 31 979462 1361 0.943396 924020.7547
3 32 978101 1428 0.889996 870506.4080
4 33 976673 1514 0.839619 820033.4840
5 34 975159 1609 0.792094 772417.2645
6 35 973550 1733 0.747258 727493.1942
7 36 971817 1876 0.704961 685092.6375
8 37 969941 2046 0.665057 645066.1618
9 38 967895 2236 0.627412 607269.2972
10 39 965659 2453 0.591898 571572.0784
11 40 963206 2697 0.558395 537849.1995
DETERAfINAnON; OF NET LEVEL ,PREMIUM 413
12 41 960509 2968 0.526788 505984.1592

13 42 957541 3275 0.496969 475868.5414
14 43 954266 3617 0.468839 447397.1384
15 44 950649 3993 0.442301 420472.9695
16 45 - 946656 4402 0.417265 395006.4733
17 46 942254 4853 0.393646 370914.7854
18 47 937401 5343 0.371364 348117.3774
19 48 932058 5881 0.350344 326540.7333
20 49 926177 6465 0.330513 306113.5485
Total 11738512.21
Present value of total premium =P ~ (1& + n _ 1 vn - 1
=1173851.21 P
Present value of premiums =Present values of claims
.. 1,17,38,512.21 P = 113729909
P =9.69
. . The net annual premium is Rs. 9.69.
PURE ENDOWMENT ASSURANCE

Under a pure endowment assurance plan, the policyholder will pay the net annual
premium, P, at the beginning of each policy year for 'n' years, where 'n' is the term of the
policy. The payment of premium ceases from the policy anniversary following date Qf his
death, if he dies before 'n' years. Benefits under this plan is claimable, if life assured
survives n years.
Since the premium is payable at the beginning of every year for n years by the persons
surviving, the sum of the present values of premiums is
P [Ix + Ix + 1 V + Ix + 2 v2 + ...... + Ix + n-1 vn - 1]
Claims made made at the end of n years by Ix + n persons.
Let S be the sum assured.
:. Total claim amount =S Ix + n
The present value of total claim =S Ix +nvn ... (2)
To obtain the net level premium, .the present value of total premiums and the present
value of total claims are equated.
Example 4 : From the following mortality table, calculate the Net Level Premium for a 5-
year pure endowment assurance for a person aged 25 , assuming 6% rate 'of inteust and
Rs. 1,000 policy amount on each policy.
x: 25 26 27 28 29 30
Ix: 1,00,000 99,500 98,900 98,200 97,400 96,500
dx : 500 600 70 800 900 1,000
414 FINANCIAL IfATHEIfAnCS
Solution: Given that

Rate of interest i =6% = 0.06
Let P be the Net Level Premium.
Age at entry x = 25 years
The present value of premium of Re. 1 receivable at the beginning of each year, is given
the following table :
Years (n) Age (x + n-l) 1,,+ n-l vn 7 (1 + i)-(n-l) =(1.06)-<n-l) 1" + n-l x vn - 1
1 25 1,00,000 1.00000000 1,00,000.00000
2 26 99,500 0.94339623 93,867.92448
3 27 98,900 0.88999644 88,020.64 781
4 28 98,200 0.83961928 82,450.61349
5 29 97,400 0.79209367 77,149.92267
Total 4,41,489.10845
Present value of total premium = P x };lH n -1 . v n - 1
=4,41,489.10845 P ... (1)
P.V. of total claims =8 x vn .1" +n
Here sum assured (8) = Rs. 1,000
No. ofliving aged 25, l" ::: l25 = 1,00,000
No. of years n = 5
lx + n =l25 + 5 ::: Iso =96,500
Rate of interest i = 6% = 0.06
.. P.V. of total claims = 1,000 x (1.06)-5 x 96,500
=Rs. 7,21,10,413.69 ... (2)
.. Net Level Premium is given by
P. V. of Total Premiums =P. V. of total claims
4,41,489.10845 P = 7,21,10,413.69
P =Rs. 163.33
.. The Net level premium is Rs. 163.33.
ENDOWMENT ASSURANCE
We have already discussed that an Endowment assurance can be expressed as the sum
of a term assurance and a pure endowment assurance.
Present value of total premiums for an endowment assurance is given b:y
P [lx + lx + 1 V + Ix + 2 v 2 + ...... lx + n _ 1 v~ -1] ... (1)
Present value of total claims for an endowment assurance is the sum of the present value
of claims for a term assurance and the present value of claims for a pure endowment
assurance.
Present value of total claims for an endowment assurance is

S [dx v + d x + 1 v 2 + ...... d x + n -I vn] + S . lx + n vn
Present value of total premiums =Present value of total claims
Alternatively, the net level premium for an endowment assurance is given by
Net level premium for } _ {Net levels premium for} {Net level premium for a }
an endowment assurance - a term assurance + pure endowment assurance
Example 5 : Calculate on the basis of mortality table given below, Net Annual Premium
at 4% rdte of interest for a five-year endowment assurance of Rs. 1,000 for a person aged 60
years.
Age Number living (lxJ Number dying (dxJ
60 1,000 20
61 980 22
62 958 25
63 933 33
64 900 40
65 860 45
Solution:
Let P be the Net Level Premium
No. of years n = 5
No. oflivings aged 60, l60 = 1,000
Sum ~sured S = Rs. 1,000
The. present value of premium Re. 1 receivable at the beginning of each year for 5 years,
is given in the following table:
Years (n) Age (x + n-I) lx+ n-l vn - 1 =(1 + i)-{n-l) =(I.04)-<n-lJ lx + n-l x v n- 1
1 60 1,000 1.00000000 1,000.000000
2 61 980 0.96153846 942.3076908
3 62 958 0.92455621 885.7248491
4 63 933 0.88899635 829.4335945
5 64 900 0.85480418 769.3237701
Total 4,426.789903
P.V. of Total Premium =P x }: lx +n-I . v n - I
= 4,426.789903 x P
=4,426.789903 P ... (1)
The premium of Ordinary Endowment Assurance is the sum of the premium of Term
Assurance and premium of Pure Endowment Assurance.
Let PI be the Level Annual Premium
P.V. of Total Premium =4,426.789903 PI ... (2)
The present value of claim ofRe. 1 payable in each of the 5 policy years are given.in the
following table:
\
Year(n) Age (x + n-1) 1:1&+ ,,-1 \ d"+TI-1 v" = (1 + iF" = (1.04)-" d,,+,,-1 X v"
1 60 1,000 20 0.96153846 19.23076920
2 61 980 22 0.92455621 20.34023662
3 62 958 25 0.88899635 22.22490875
4 63 933 33 0.85480418 28.20853794
5 64 900 40 0.82192709 32.87708384
Total 122.88153635
Present value of total claims =S x }:d x + TI-l • vTl
= 1,000 x 122.88153635
= 1,22,881.5363
Net Level Premium is given by
P. V. of Total Premium =P. V. of Total claim
:. 4,426.789903 PI =1,22,881.5363
1,22,881.5363
P 1'= 4426.789903 = 27.26
PI =Rs. 27.76
In case of Pure Endowment Assurance:
Let P 2 be the Level Annual Premium.
P.V. of Total Premium =4426.789903 P 2 ... (3)
P. V. of Total claims =S x vTl . ('C. + n
I" = 160 = 1,000
Ix + " =160 + 5 =165 =860
.. P.V. of Total claims = 1,000 x (1.04)-5 x 860
= 7,06,857.312
.. Net Level Premium is given by
P.V. of Total Premium =P.V. of Total claims
4,426.789903 P 2 ='7,06,857.312
P2 = 159.68
DETERMINA TlON OF NET LEVEL PREMIUM 417
For ordinary endowment Assurance P =PI + P 2

=Rs. 27.76 + Rs. 159.68
=Rs. 187.44
.. The Net Level Premium is Rs. 187.44
DOUBLE ENDOWMENT ASSURANCE

We know that a double endowment assurance is given by
Double Endowment Assurance =Term Assurance + 2 x Pure Endowment Assurance
Let S be the sum assured and P be the net level annual premium.
u is the discount factor.
Let n be the term of the assurance.
Present value of total premiums is given by
P [Ix + Ix + I U + Ix + 2 u2 + ...... Ix + n _ I un - I] ... (1)
Now, present value of total claims
= ;Present value of total claims for a term assurance
+ 2 x Present value of total claims for a pure endowment assurance
... Present value total claims is
. S [d x u + d x + I u2 + ...... d x + n _ I un] + 2 S Ix + n un ... (2)
Net level annual premium for a double endowment assurance is obtained by equating
the present value of total premiums payable and the present value of total claims.
Alternatively, the net level premium for a double endowment assurance is given by
P =PI + 2P2
where P I is net level premium for a term assurance and
P2 is net level premium for a pure endowment assurance.
Example 6 : Calculate, at 6% rate of interest Net Level Premium for an Assurance of

Rs. 1,000 for a person aged 31, assured benefit being Rs. 1,000 in case of his death before
attaining the aged 34 and Rs. 2,000 if he survives to age 34, using the following table:
x: 30 31 32 33 34 35
1,,: 10,000 9,950 9,890 9,820 9,740 9,650
dx : 50 60 70 80 90 100
Solution: Since benefit is Rs. 1,000 on death within 3 years and Rs. 2,000 on survival
up to 3 years, so it is a double endowment assurance.
Let P be the Net Levei Premium
Age at entry x=31 years
Term of the policy n = 3 years
The present value of premium of Re. 1 receivable at the beginning of each year is given
in the following table:
Year(n) Age (x + n-1) l,,+n-l v n - 1 = (1 + i)-<n-l) = (1.06)-<n-l) d,,+ n-l x v n - 1
1 31 9,950 1.00000000 9,950.0000
2 32 9,890 0.94339623 9330.1887
3 33 9,820 0.88999644 8739.7650
Total 28,019.9537
P.V. of Total Premium =P X ~1%+n-' vn - 1
= 28,019.9537 x P
= 28,019.9537 P ... (1)

Let P 1 be the Level Annual Premium
P.V. of Total Premium =28,019.9537 P 1 ... (2)
The Present value of claim of Re. 1 payable in each of the 3 policy years are given in the
following table:
Year(n) Age (x + n-1) l:t+n-l d,,+n-l vn = (1 + iJ-n = (1.06)-" d,,+n_l XVn
1 31 9,950 60 0.94339623 56.60377356
2 32 9,890 70 0.88999644 62.29975073
<-
.:, 33 9,820 80 0.83961928 67.16954256
Total 186.07306685
Present value of total claims = B x ~d%+ n -1 . v n
= 1,000 x 186.0730667
= 186073.06685
Net Level Premium is given by
P.V. of total premiums =P.V. of total claim
28,019.9537 P 1 = 1,86,073.0667
P 1 = Rs. 6.64
In case of Pure Endowment Assurance:

Let P 2 be the Level Annual Premium
P. V. of total premium = 28,019.9537 P 2 ... (3)
P. V. of Total claims = S x vn x 1%+ n
1x+n = 131+3 = 134= 9,740
.. P.V. of Tot"al claims = 1,000 x (1.06)-3 x 9740
= 81,77,891.90
.. Net Level Premiu~ is given by
P. V. of total Premium =P. V. of Total claims
28,019.9537 P 2 = 81,77,891.90
DETERMINA nON OF NET LEVEL PREMIUM 419
P 2 =Rs. 291.86
. . For Double Endowment Assurance
The Net Level Premium is given by
NLP =Term Assurance + 2 x Pure Endowment Assurance
=P l + 2P2
=Rs. 6.64 + 2 x Rs. 291.86
=Rs. 590.36
So, therefore, the Net Level Premium is Rs. 590.16.
Example 7 : On the basis of LIe (1970-73) Ultimate table, at 6%, calculate the net
annual premium ceasing after 15 years or at previous death for a money back policy on (45) to
secure the following benefits:
(i) Rs. 1,500 on survivance to the end of 5 years.
(ii) Rs. 1,500 on survivance to the end of 10 years.
(iii) Rs. 3,000 on survivance to the end of 15 years.
(iv) Rs. 6,000 on death at any time within 15 years.
Solution:
Let P be the level annual premium
The present value of premium of Re. 1 payable at the beginning of each year is shown in
the following table:
Year(n) Age (x + n-1) lx + n-l dx +n-l vn - 1 =(1+i)-1rt-l) 1x+n-l xvn-l
1 45 946656 4402 1.000000 946656.0000
2, 46 942254 4853 0.943396 888918.8679
3 47 937401 5343 0.889996 834283.5529
4 : 48 932058 5881 0.839619 782573.8697
5 49 926177 6465 0.792094 733618.9327
6 50 919712 7100 0.747258 687262.3087
7 51 912612 7775 0.704961 643355.4487
8 52 904837 8514 0.665057 601768.2835
9 53 896323 9295 0.627412 562364.1389
10 54 887028 10139 0.591898 525030.5103
11 55 876889 11031 0.558395 489650.2375
12 56 865858 11983 0.526788 456123.1932
13 57 853875 12996 0.496969 424349.7153
14 58 840879 14059 0.468839 394236.8882
15 59 826820 15180 0.442301 365703.2834
Total 9335895.231
.. The present value of total premiums =P Ilx + n -1 Un - 1

\=93,35,895.231 P
Present value of total claim is the sum of the present values of all the given four benefits.
In case ofRs. 1,500 on survivance to the end of 15 years:
It is a pure endowment assurance
P. V. of Total claims =S x un . lu n
No. ofliving at age 45,1 45 =9,46,656
No. of years n =5
1x + n =145 + 5 = 150 = 9,19,712
.. P.V. of Total claims = 1,500 x (1.06)-5 x 9,19,712
=Rs. 1,03,08,93,462 ... (1)
In case ofRs. 1,500 on survivance to the end of 10 years:
No. of living at age 45, l45 = 9,46,656
No. of years n = 10
Ix + n = 145 + 10 = 8,76,889
P. V. of Total claims = 1,500 x (1.06)-10 x 8,76,889
=Rs. 73,44,75,357.70 ... (2)
In case of Rs. 3,000 on survivance to the end of 15 years:

No. of years n = 15
I, + = 145 + 15 =160 = 8,11,640
1/
.. P.V. of Total claims = 3,000 x (1.06)-15 x 8,11,640

=Rs. 1,01,60,07,042 ... (3)
In case of Rs. 6,000 on death at any time within 15 years:

following table :
Years (n) Age (x + n-l) 1x+n-l dx+n-l un =(1+ ii n dx+n-l xu
n
1 45 946656 4402 0.943396 4152.830189

2 46 942254 4853 0.889996 4319.152723
3 47 937401 5343 0.839619 4486.085829
4 48 932058 5881 0.792094 4658.302834
5 49 926177 6465 0.747258 4831.024088
DETERMINATION OF NET LEVEL PREI)IUM 421
6 50 919712 7100 0.704961 5005.219837

7 51 912612 7775 0.665057 5170.819058
8 52 904837 8514 0.627412 5341.78893
9 53 896323 9295 0.591898 5501.696219
10 54 887028 10139 0.558395 5661.564643
11 55 876889 11031 0.526788 5810.993193
12 56 865858 11983 0.496969 5955.183884
13 57 853875 12996 0.468839 6093.031933
14 58 840879 14059 0.442301 6218.309258
15 59 826820 15180 0.417265 6334.083622
Total 79540.08624
Present value of Total claims =S x Idx + n -1 . vn
Here, Sum Assured S = Rs. 6,000
:. P.V. of Total claims = 6,000 x 79,540.08624
= Rs. 47,72,40,517.40 ... (4)
Now, theP.V. of total expected claims =(1) + 2) + (3) + (4)

=Rs. 3,25,86,16,378
:. Net Level Premium is given by
Present value of total premiums =Present value of total claims
93,35,895.231 P = Rs. 3,25,86,16,378
P =Rs. 349.04
L Define net level premium. What are the advantages and disadvantages of net level
premium? .
2. Distinguish between net single premium and net level premium. Why level premium
is more advantageous than single premium?
3. Consid~r a group of 10,000 persons all aged 35 seeking an amount of Rs. 1,00,000 to
their families in case of death during the next 10 years.
x: 35 36 37 38 39 40 41 42 43 44 45
I,,: 10,000 9,972·9,941 9,907 9,869 9,827 9,780 9,728 9,671 9,608 9,538
d" : 28 31 34 38 42 47 52 57 63 70 75
Calculate the net level annual premium for this term assurance, if
(a) Insurer earns interest @ 6% per annum
(b) Insurer earns no interest. [ADs. (a) Rs. 421.44; (b) Rs. 470]
4. Calculate Net Level Premium for a 3-year pure endowment assurance for a person
aged 35, assuming rate of interest 4% per annum and Rs. 1,000 sum assured [Using
LIC (1970-73) ultimate table]. [ADs. Rs. 306.78]
5. On the basis of LIC (1970-73) table, at 5% rate of interest, calculate the net annual
premium for a 4-year endowment assurance ofRs. 800 for a person aged 40.
[ADs. Rs. 177.70]
6. A portion of a mortality table is given below:
x: 25 26 27 28 29 30
lx: 97,380 97,088 96,794 96,496 96,194 95,887
dx : 292 294 298 302 307 313
Calculate, at 6% rate of interest, the net annual level premium for a double
endowment assurance of Rs. 1,000 for a person aged 26, the assured benefit being
Rs. 1,000 in case of his death before the attainment of age 29 and Rs. 2,000, if he
survives to age 29. [ADs. Rs. 591.84]
7. On the basis of the LIC (1970-73) Ultimate table, at 6% per annum rate of interest,
calu~te the net annual premium for a person aged 30, assuming the sum assured of
Rs. 1,000, for the following assurances:
(a) Endowment assurance for 25 years
(b) Endowment assurance for 25 years, premiums limited to 15 years.
[ADs. (a) Rs. 18.85; (b) Rs. 24.52]
8. From the following mortality table, calculate net level premium in case of term
assurance for five years, endowment assurance for five years, pure endowment for
five 'years and double endowment for five years, assuming 5% rate of interest and
Rs. 1,000 policy amount in each policy:
x: 25 26 27 28 29 30
lx: 1,00,000 - 99,500 98,900 98,200 97,400 96,500
dx : 500 600 700 800 900 1,000
[ADs. Rs. 6.65, Rs. 168.24, Rs. 174.89, Rs. 343.13]
9. Using the mortality table, given in Exercise 6, calculate the level annual premium
for assurances given below:
(i) Ignoring interest and expenses
(ii) at 6% rate of interest.
(a) A temporary assurance ofRs. 1,000 for 2 years for a person aged 25.
(b) An endowment assurance ofRs. 1,000 for 4 years to a person aged 25.
(c) A pure endowment of Rs. 600 for a person aged 27 payable at the end of 3 years.
(d) A double endowment assurance ofRs. 1,000 for a person aged 26, assured benefit
being Rs. 1,000, if case of his death before attaining age 29 and Rs. 2,000, if he
survives up to age 29.
[ADs. (i) (a) Re. 3.01; (b) Rs. 497.71; (c) Rs. 198.74; (d) Rs. 665.62.
(ii) (a) Rs. 2.84; (b) Rs. 216.83; (c) Rs. 176.66; (d) Rs. 592.75]
10. A life aged 40 effected a special endowment ~surance policy for Re. 5,000 payable at
the end of 15 years or at previous death, with the condition that the premium
payable during the first five years is three times, the premium payable thereafter.
DETERMlNAnON OF NET LEVEL' PREMIUM 423
Using LIC (1970-73) table at 6% rate of interest, calculate the net annual premium
payable during the first 5 years. LAns. Rs. 342.96]
U Calculate for a life aged 35, the net annual premium limited to 15 payments for a
whole life assurance for Rs. 1,000, using LIC (1970-73) Ultimate table at 6% interest.
[Ans. Rs. 37.13]
12. Calculate the net annual level premium for a double endowment assurance of
Rs. 100 for a person aged 60 years, the assured benefit being Rs. 100 in the case of
his death before attaining age 63 and Rs. 200 if he survives to age 63. Use the
following mortality table and 5% rate C?f interest.
x: ~ ~ ~ ~ ~ ~
1x: 1,000 980 958 933 900 860
~: ~ ~ U ~ ~ ~
[Ans. Rs. 59.69]
18. Using LIC (1970-73) ultimate table, calculate the net annual premium, for a life aged
25 for an endowment assurance of Rs. 1,000 for 20 years, premiums limited to 10
years. (Interest rate 6% p.a.). [Ans. Rs. 66.40]
14. Calculate net annual premium limited to 15 years for a temporary assurance on age
40 providing the following benefits.
(a) Rs. 5,000 on death during the first 5 years
(b) Rs. 10,000 on death during the next 5 years
(c) Rs. 15,000 on death during the last 10 years.
[Use LIC (1970-73) ultimate table or 6% interest]. [Ans. REi. 90.75]
15. On the basis ofLIC (1970-73) table at 5%, calculate the net annual premium ceasing
after 10 years or it previous death for a money back policy 01\ (30) to secure the
following benefits:
(i) Rs.1,000 on survivance to the end of3 years.
(ii) Rs. 1,000 on survivance to the end of 7 years
(iii) Rs. 2,000 on survivance to the end of 10 years
(ilJ) Rs. 3,000 on death at any time within 15 years. [Ans. }(.s. 348.69][
18. Under a marriage endowment policY, the sum assured is payable only at the end of
the term of assurance in the event of death of the proposer within the term of
assurance or on survivance to the end of the term. Premium are payable during the
life time of the proposer or till the end of the term, whichever is earlier. Calculate the
net annual premium for a proposer aged 35 for sum assured of Rs. 15,090 for term of
20 years. [Basis: The LIC (1970-73) ultimate table and 6% rate of interest].
[Ans. Rs. 394.22]
17. Calculate the net level annual premiums for sum assured of Rs. 5,000 for the
following assurances for a person aged 40, assuming 6% per annum rate of interest.
. (a) Pure endowment assurance for 20 years.
(b) Temporary 'assurance for 20 years. [Ans. (a) Rs. 112.46; (b) Rs. 32.54]
Determination of
Premium for Annuity Plans
INTRODUCTION
We have so far se~n the methods of determining single or level premium for a particular
sum assured which is"payable either on survival or death of the policyholder. The sum
assured is payable generally in a lump sum to the policyholder 'on his survival or to the
beneficiaries on his death. Benefits under a life insurance policy can also be made as a series
of payments to the insured till he is alive or for a certain designated period of time. These
kinds of insurance policies are known as 'Annuity Plans'. Periodical benefits are usually
made annually, but may also be made periodically; period less than one year. Through out
the chapter, we assume that the payment interval is one year. In this chapter we discuss the
methods of calculating premium for various kinds of annuity plans.
CLASSIFICATION OF ANNUITIES
Annuity is the term used to describe a series of periodic payments at successive intervals
of time. In its most general sense, an annuity is an agreement for one person or organization
to pay another a stream or series of payments. An annuity contract involves one or more
people and an insurance company.
An annuity plan is an insurance plan for which one makes premium, either in a single
lump sum or through installments paid over a certain number of years; in return for which
he receives back a specific sum every year, every half-year or every month, either for life or
for a fixed number of years. After the death of the annuitant or after the fixed annuity period
expires for annuity payments, the invested annuity fund is refunded, perhaps along with a
small addition, calculated at that time.
DETERMINA
;
TlON OF PREMIUM FOR ANNUITY PLANS 425
There are many categories of annuity plans. They can be classified as follows:
• Fixed annuity or variable annuity
• Immediate annuity, annuity due or deferred annuity (immediate or due)
• Temporary annuity, or lifetime annuity
• Single premium annuity or flexible premium annuity
An annuity can be classified in several of these categories at once. For example, a person
may buy a single premium deferred variable annuity.
Fixed or Variable annuities: Annuities can be classified as fixed or variable annuities
on the basis of the nature of the underlying benefits. If the periodic payments under an
annuity plan are equal, then the annuity plan is referred as uniform or fixed annuity. In a
fixed annuity, the insurance company guarantees the principal and a minimum rate of
interest. On the other hand, if the periodic payments are unequal, then it is called variable
annuity. Benefits under a variable annuity vary from time to time. Money in a variable
annuity is invested in a fund-like a mutual fund.
Immediate, Due or Deferred annuities: Annuity payments are made either at the
end of the successive periods or at the beginning of the successive periods depending upon
the insurance contract. If the periodic payments are to be made at the end of each successive
period then the annuity is known as immediate annuity. The time period depends on how
often the benefit is to be paid. For example, if the payment is monthly, the first payment
comes' one month after the immediate annuity is bought.
On the other hand, an annuity due refers to a series of payments In which the periodic
payments are made at the beginning of each interval of time. For example, if the insurance
benefit is payable monthly, the first payment comes immediately after the annuity due plan
is bought. In both types of annuity plans, since the annuitant receives the benefit under the
policy from the very first period, premium has to be paid in a lump sum (single premium
system) at the commencement of the policy.
There is another type of annuity, called deferred annuity. Under such annuity plans, the
successive payments are to be made after the completion of a deferment period. A deferred
annuity may be a fixed deferred annuity or a variable deferred annuity. Deferred annuities
may also have the nature of an immediate annuity or a annuity due. Deferred annuity plans
can be had either on single premium basis or on level premium basis. Majority of annuity
plans in insurance market are deferred annuity plans.
Lifetime annuity or Temporary annuity: Annuities can be classified as life or
temporary annuities on the basis of the nature of pay-out commitment. A life annuity is a
series of periodical payments to an insured as long as he is alive. That is, a lifetime annuity
provides income for the remaining life of a person. Life time annuity payments are generally
annual payments. The annual payments may be at the end of each year of life or at the
beginning of each year of life. In the former case, it is an immediate life annuity, and in the
later case, it is a life annuity due.
A temporary or a fixed period annuity pays an income for a specified period of time, such
as ten years. The annuity will cease on death of the person or after 10 payments are made,
which ever is earlier. The amount that is paid doesn't depend on the age of the person who
buys the annuity; the payments depend instead on the premium paid into the annuity, the
length of the payout period, and (if it's a fixed annuity) an interest rate that the insurance
company believes it can support for the length of the pay-out period.
Single premium annuity or Flexible premium annuity: Annuities can be classified
as single premium or flexible level premium annuities on the basis of Premium payment
arrangement. A single premium annuity is an annuity funded by a single payment, where as
a flexible premium or level premium annuity is an annuity that is intended to be funded by a
series of payments. Flexible premium annuities are only deferred annuities.
ANALOGY BElWEEN PERIODIC PREMIUMS AND ANNUITIES

If a policyholder is given the choice of paying for his insurance by an annual or periodic
premium, he has to pay regularly during his life, or for a limited number of years, whichever
is earlier. This is the definition of an annuity, as stated in the previous section of this
chapter. Periodic premiums, therefore, are annuities but they differ in three important
respects from the annuities thus far considered.
• In the first place, periodic premiums are annuities paid by the insured to the
company, while regular annuities are paid by the company to the insured. To be sure
both annual premiums and annuities are based on the life of the same person, viz.,
the insured, but this does not affect the principle involved.
• Annuities can be purchased, ordinarily, by a single premium, i.e. a single cash sum.
If periodic premiums are analogous to annuities, the method of how periodic
premiums are purchased is to be stated. Insurance companies promise cash upon the
happening of some future event and this future promise of money has a present
value at the commencement of the policy. This present value, which is comparable to
the cash payment for annuities, is the basis for the periodic premium.
• Third and fundamental difference between periodic premiums and annuities exists
with reference to the time when they respectively begin. It will be remembered that
the cost of an immediate life annuity is computed on the assumption that the first
payment of annual income is received one year from the date of issue of the contract.
But it is impossible to issue a life-insurance policy, allowing the premium to be paid
on any such basis. The law of contracts requires the payment of premium as a
necessary preliminary to the creation of the contract. Hence the first periodic, say
annual, annual premium is always payable when the policy is issued, and not one
year later, as is the case with annuities. Life annuities due are not sold as annuity
contracts.
We shall now discuss in detail the procedure of determining net single premium and net
level annual premium for various kinds of annuity plans.
DETERMINATION OF PREMIUM
An annuity may be either a life annuity which is a series of periodic payments thr~ug
out the life of the insured or a temporary annuity which is a series of a certain limited
number of periodic payments. Similarly an annuity may be an immediate, a due OJ' a
DETERMINATION OF PREMIUM FOR ANNUITY PLANS 427
deferred annuity. Keeping these classification of annuities in mind, we classify the methods
of determination of premium for an annuity as follows:
Annuity
I
Life Annuity Temporary Annuity
Immediate Life Annuity Immediate Temporary

Annuity
Life Annuity Due Temporary Annuity
Due
Deferred Life Annuity Deferred Temporary
Annuity
Further, premium may be either single premium or level premium. Since the benefits
are payable from the very first year (either at the end or beginning of the year) under
immediate annuity plans and annuity due plans, only the single premium system will be
applicable. For a deferred annuity plan, premium may be either single or level, as required
by the annuitant.
IMMEDIATE LIFE ANNUITY

Immediate life annuity is an annuity in which the annual payments are made at the end
of every year of life.
Let Rs. S be annual payment
We find the present value of an immediate life annuity to a person aged x.
There are l% persons who reach age x.
Out of l% persons, only l% + 1 persons will survive at the end of the first year to receive the
first payment ofRs. S.
Amount to be received at the end of the first year is Rs. S X l% + l'
The present value of this total payments to be made at the end of first year is
S x v X l% + 1
Similarly, the number of persons who will survive to receive the second payment ofRs. S
at the end of second year is l% + 2'
Amount to be received is S x l% + 2
The present value of this payments to be made the end of second year is
S x v2 X l% +2
In this manner, we compute the present value total payments to be made at the end of
every year till the last person survives.
Present value of all such payments is
Svl% + 1 + Sv~% +2 + Sv 3l% + 3 + ......
This is the present value of the immediate life annuity to 1x persons.

In otherwords, this is the amount to be collected as premium from 1x persons at the
commencement of the policy.
Therefore, the present value of an immediate life annuity for a single person aged x, i.e.,
the net single premium is
_ SvZx + 1 + Sv 21x + 2 + Sv 31x + 3 + ..... .
SP
N, - 1
x
i.e. NSP =S [VZ:c+ 1 + v21:c+ 21: v31:c+ 3 + ...... ]
It can also be given by

NSP=Sa x
where
ax is the present value of an immediate life annuity of Re. 1 payable at the end of every
year during the life time of a person aged x.
LIFE ANNUITY DUE

A life annuity due is an annuity in which, a series of annual payments are made at the
beginning of every year of life.
Consider lx lives who reach age x.
Since the payments are to be made at the beginning of each year, 1x persons will receive
the first payment ofRs. S immediately.
Amount to be received by lx persons at the beginning of first year is Slx.
Since the first year payment is made immediately, the present valu~ of this claim
amount is
SIx
The number of persons who will receive the second payment of Rs. S at the beginning of
second year is1x + 1.
Total amount to be received at the beginning of second year is Six + 1.
The present value ofthe payments to be made at the beginning of the second year is
Svi x + 1
Similarly, the present value of the payments to be made at the beginning of the third
year is
Sv 2Ix +2 •
.In this manner, we compute the present value ~f total payments to be made at the
beginning of every year,_till the last person survives.
DETERMINAnON OF PREMIUM FOR ANNUITY PLANS 429
The present value of all such payments is

Sl% + S,,1% + 1 + S,,7i%+ 2 + ..... .
This is the amount to be paid as premium by 1% persons.
Therefore the amount to be paid as premium by a single person in a lump sum is
Sl% + S"l% + 1 + S,,2l% + 2 + ......
l%
In other words,
NSP =S [l% + ,,1%+ 1 + ~21%+ 2 + ...... ]
It can also be expressed as

NSP=Sa%
.. 1% + ,,1% + 1 + v21% + 2 + ......
where a% = 1
%
a% is the present value of a life annuity due ofRe. 1 payable at the beginning of every year
during the life time of a person aged x.
Remark: We have seen that a% is given by

"Ix + 1 + ,,21% + 2 + ,,31% + 3 + ......
ax = 1
%
and ax is given by
.. lx + "lx + 1 + ,, 21x + 2 + ..... .
ax = 1
x
This implies that
. Ix "Ix + 1 + ,, 2lx + 2 + ......
ax =f+
x
1x
DEFERRED LIFE ANNUITY

A deferred life annuity is an annuity in which a series of annual payments are made to a
person during his life time,' the first being made after the expiry of a deferment period of
certain time, say, m years.
Let lx be the number of survivals at age x.
Here, we discuss a deferred life annuity for which the annual payments are made at the
end of every year after the expiry of the deferment period.
The first payment of Rs. S is to be made at the end of m + 1 years.
Number of persons who will receive the first payment of Rs. S at the end of m + 1 years
is
430 RNANCMLMATHEMAncs
Total amount to be received at the end of m + 1 years is Slx + m + 1.

The present value of total amount to be received at the end of m + 1 years is
Sum + 1 lx + m + 1
The number of persons who will received the second payment of Rs. S at the end of m + 2
years is 1x + m + 2 and the total amount to be received is Slx + m + 2.
The present value of total amount to be received at the end of m + 2 years is
Sum + 2lx +m + 2
We continue this process of calculating the present value of payments, till the last person
survives.
The present value of all such payment is
Sum + Ilx +m + 1 + SUm +2lx+m+ 2 + SUm +3lx+m +3 + ..... .
This is the amount to be paid by lx persons at age x.
Therefore, the net single premium for a deferred immediate life annuity for a person
aged x is
It can also be written as

NSP=S m/ax
m/ax is the present vale of Re. 1 payable at the end of every year to a person aged x
deferred for m years.
Remark : If the first payment is to be made at the beginning of every year after the
expiry of deferment period of m years, the annuity is known as Deferred life annuity due.
The net single premium for a deferred life annuity due is given by
NSP =S.mla x
.. umlx + m + um + Ilx + m + 1 + um + 2lx + m + 2 + ..... .
where mlax = 1
x
IMMEDIATE TEMPORARY ANNUITY

A temporary immediate annuity is annuity in which the annual payments are made at
the end of every year for certain fixed number of years, say n years. This annuity will cease
on death of the person or after n years, whichever is earlier.
Let Rs. S be the annual payment for this annuity.
Since the payment are limited to n years, the present value of all payments to be made
at the end of every year for n years is given by
Su1 x + 1 + Su2[x + 2 + ...... SlI'lx + n
This is the amount to be collected as premium from lx persons at the beginning.
OETERMINA TlON OF PREMIUM FOR ANNUITY PLANS 431
" The premium to be paid by a single person aged x is given by

1I.TS _ Sul x + 1 + Su 2lx + 2 + ...... Sunl x + n
nP- 1
x
1I.T [Ulx + 1 + u2lx + 2 + ...... unlx + n]

i.e. J.YSP : S 1
x
It can also be expressed as follows:

NSP : S ax : iii
ax : iii is the present value of an immediate temporary annuity of Re. 1 payable at the end
of every year for n years.
TEMPORARY ANNUITY DUE

A temporary annuity due is an annuity in which a series of annual payments are made
at the beginning of every year for n years.
Since the payments are to be made at the beginning of each year, lx persons will receive
the first payment ofRs. S; lx + 1 persons will receive the second payment ofRs. S; ...... lX+n-1
persons will receive the nth payment ofRs. S.
The present value of all these payment is :
Slx + Sulx + 1 + Sv2ix + 2 + ...... + SUn - 1lx + n - 1
This is the amount to be received as premium from lx persons. Therefore, premium
payable by a single person at age x is given by
Slx + Sulx + 1 + Su 2lx + 2 + ...... SVn -1 lx + n -1
NSP: 1
x
2
Lx + Vlx+1 + v lx +2 + ...... vn-1lx+n_1]
i.e. NSP: [ 1
x
It can also be expressed as follows:

NSP : S ax + iii
ax :iii is the present value of a temporary annuity due of Re. 1 payable at the beginning of
every year for n years.
Remark: ax :iii is given by
.. lx + vlx + 1 + u2lx + 2 + ...... vn - 1 lx + n - 1
ax: iii: 1
x
.. lx vl x + 1 + v lx + 2 + ...... vn - 1lx + n-1
2
i.e. ax :iii : -l + 1
x x
DEFERRED TEMPORARY ANNUITY

A deferred temporary annuity is an annuity in which a series of annual payments are
made to a person for n years, the first being made after the expiry of a deferment period of m
years.
A deferred temporary annuity may be either a deferred immediate temporary annuity or

a deferred temporary annuity due.
Consider a deferred immediate temporary annuity for which the annual payments are
made at the end of every year for n years, after the expiry of the determent period of m
years.
Here (" + m +1 persons will receive the first payment of Rs. S at the end of m + 1 years;
1% + m + 2 persons will receive the second payment of Rs. S at the end of m + 2 years; ..... .
1% + m + n persons will receive the nth payment ofRs. S at the end of m + n years.
The present value of all such payment is
Sum + 11% + m + 1 + SUm + 21% + m + 2 + ...... Sum + n 1% + m + n
This is the total premium to be paid by 1% persons at the beginning of age x.
Therefore, the premium (NSP) for a deferred immediate temporary annuity for a person
aged x is given by
um + 11% + m + 1 + um + 2[% + m + 2 + ...... + um + n1% + m + n ]
NSP=S [ 1
%
This
NSP =S. m/a%:1iI
m/a%: iii is the present value of Re. 1 payable at the end of every year for n years after the
expiry of the deferment period ofm years.
Remark 1 : If the first payment is to be made at the beginning of every year for n years,
then the annuity is known as deferred temporary annuity due.
The net single premium for a deferred temporary annuity due is given by
NSP =S . mla% : iii
.. um1% + m + um + 1[% + m + 1 + ...... um + n -11% + m + n -1
where m/a%: iii = [%
Remark 2 :
um + 11% + m + 1 + Um+ 21% + m + 2 + ...... um + nIx + m + n
m/a%: iii = --_. - I
%
This can be written as follows:

m/ax : iii = [u1x + 1 + u21x + 2 + u31x + 3 + ...... um + nlx + m+ n]
- [u1x + 1 + u21x +2 + u31x +3 + ... ; Um1x+m]
Thus, m/ax : iii = ax : m + nl- ax : nil
Similarly we get,
m/ax iii =ax: m + nl- ax : in)
or m/ax iii = ax: m + n - 11 - a% : m-11
NET LEVEL PREMIUM

Level premium system can be adopted for only a deferred life annuity. Here we discuss
the level premium payable annually.
Level premium is generally paid for a certain limited number of years.
We have already discussed the method of calculating the pr~sent value of all premiums
payable in chapter 24.
If the annual premium is limited to a certain number of years, say t years, then the
present value of all premiums payable towards a deferred life annuity is given by
P1" + Pv1" + 1 + Pv2i.u 2 ...... pvt-1l,,+ t-l]
i.e.
The above expression is the present value of premium payable by all the life assured.
The present value of premiums payable by a single life for t years is given by
2 t
P [1" + vI" + 1 + v 1" + 2 1: ...... + v - 11" +t - 1]
i.e.
In case of Deferred Imedi~t temporary annuity

The present value Rs. 8 payable at the end of every year for n years, after the expiry of
m years is
8. m/a,,: 1i\
Present value of premium = Present value of claim
P a" :11 =8 . m/~ :1i\
m/a,,: 1i\
Thus, P=8-.-.....::...:...=
a" :11
In case of deferred temporary annuity due

The present value of Rs. 8 payable at the beginning of every year for n years, after the
expiry of m years is
8. m/a,,: 1i\
Pa,,: 11 = 8.m/a,,: 1i\
mia,,: 1i\
Thus, P=8·-.-....::...:....=
a" :11
434 FINANCIAL MATHEMA ncs
In case of deferred immediate HIe annuity

/ The present value of Rs. 8 payable at the end of ever year during the life time of a person
after the expiry of m year is
8 =mJax
Pax: 11 = 8.m/ax
, m/a
Thus, P=8-,,-x
a x :11
In case of deferred HIe annuity due

The present value of Rs. 8 payable at the beginning of ever year during the life time of a
person, after the expiry of the deferment period of m years is
8. m/ax
Pax: 11 = 8.m/ax
mlax
Thus, P= 8 - -
ax: 11
Remark: It should be noted that generally the premium payment period (t years) will
be equal to or less than the deferment period (m years) for a deferred annuity.
Example 1 : The following particulars are given:

x: 40 41 G 43 ~ 45
lx: 96,463 96,190 95,888 95,552 95,177 94,759
dx : 273 302 336 375 418 467
Calculate the value of a temporary annuity of Rs. 2,000 per annum for a person aged 40
years for 5 ye~rs, the first payment being made immediately.
(a) ignoring interest
(b) allowing interest at 5% per annum.
Solution: Since the first payment is made immediately, it is a temporary annuity due.
Term of the annuity is 5 years.
Amount of annuity 8 is Rs. 2,000
(a) In case of ignoring interest:

Present value of all annuity payments
=Sl40 + Sl41 + Sl42 + Sl43 + Sl44
=S(l40 + l41 + l42+ l43 + l44)
= 2000 [96,463 + 96,190 + 95,888 + 95,552 + 95,177]
=Rs. (2,000 x 4,79,270)
DETERMINATION OF PREMIUM FOR ANNUITY PLANS . 435
This is the amount to be paid as premium by 140 persons.

.. The value of this temporary annuity to a single person aged 40.
44
S }: lx
x :40
= 140
= 2,000 x 4,79,270 _ 9 936 87

96,463 -, .
.. Net single premium is Rs. 9,936.87.
(b) In case of allowing 5% per annum interest: \
Present values of annuity ofRe. 1 is payable at the beginning of each year for 5 yeats
are shown in the following table:
Years Age
n x+n-1 lx +n-l vn - 1 =(1.05~n-l) vn - 1 Xlx+n-l
1 40 96,463 1.00000000 96,463.00
2 41 96,190 0.95238095 91,609.52
3 42 95,888 0.90702948 86,973.24
4 43 95,552 0.86383760 82,541.41
5 44 93,177 0.82270247 78,302.35
Total 4,35,889.52
Present value of annuity due ofRe. 1 = Rs. 4,35,889.52
:. Present value of annuity due ofRs. 2,000 } =R (2000 x 435889.52)
payable for 5 years s., "
This is the amount to be paid as premium by 140 , i.e., 96,463 persons.
.. The value of the temporary annuity due ofRs. 2,000 to a single person aged 40.
_ 2,000 x 4,35,889.52 Rs 9 037 44
- 96,463 .,.
The net single premium is Rs. 9,037.44.
Example 2: Using the data of Example 1, calculate the Net Single Premium of an
immediate temporary annuity of Rs. 2,000 per annum for a person aged 40 for 5 years.
(a) Ignoring interest
(b) allowing interest at 5% per annum.
Solution: In case of an immediate temporary annuity, annuity payments are made at

the end of every year during the term of annuity.
Term of this annuity is 5 years.
Annual annuity payment is Rs. 2,000.
Age at entry is 40 years.
(a) In case ofno interest:

Since the first payment is made at the end of first year, 141 will receive the first payment.
Present value of all annuity payments
=S [1 41 + 142 + 143 + 144 + 145]
=2,000 [96,190 + 95,888 + 95,552 + 95,177 + 94,759]
=Rs. [2,000 x 4,77,566]
This is the amount to be paid as premil,lm by 140 , i.e., 96,463 persons.
.. Net single premium of this immediate temporary annuity to a single person aged 40
=Rs. 2,000 x 4,77,566 _ 9 901 54
96,463 -,.
. . Net single premium is Rs. 9,901.54.
(b) In case of allowing 5% per annum interest:

Present values of annuity of Re. 1 payable at the end of each year for 5 years are shown
in the following table:
Year Age
n x+n 1" + n vn =(1.05)-" l,,+n xvn
1 41 96,190 0.95238095 91,609.52
2 42 95,888 0.90702948 86,973.24
3 43 95,552 0.86383760 82,541.41
4 44 95,177 0.82270247 78,302.35
5 45 94,759 0.78352617 74,246.17
Total 4,13,672.69
Present value of all annuity payment of Re. 1 } _ Rs 4 13 67 69

payable at the end of ever year for 5 years -.".
Present value of annuity ofRe. 1 payable to a person aged x is given by
~vnl,+
a" :iii = 1
"
4,13,672.69
•• a4O: 5J~= 96,463 = Rs. 4.28840789

NSP = S a" : iii
NSP = 2,000 x 4.28840789 = Rs. 8,576.82
. . The net single premium is Rs. 8,576.82
Example 3. Consider the following data:

x: 35 36 37 38 39 40 41 42 43 44 45
1,,: 10,000 9,972 9,941 9,907 9,869 9,827 9,780 9,728 9,671 9,608 9,538
d" : 28 31 34 38 42 47 52 57 63 70 79
Assuming 6% per annum rate of interest, calculate the net single premium of a deferred
temporary annuity of Rs. 1,500 per annum for a person agea 35 years for 4 years, deferred for
a period of 6 years, if
(a) annuity payments are made at the end of every year.
(b) annuity payments are made at the beginning of every year.
Solution : Age at entry x =35 years

Term of the annuity n =4 years
Period of deferment m =6 years
Annual annuity payment S =Rs. 1,500
(a) In case of annuity payments, payable at the end of every year:
It is a deferred'immediate temporary annuity.
Here the first payment is made at the end of 7 years from the commencement of the
party.
In other words, the first payment is made to the persons who complete age 41, i.e.,
reach age 42.
Present values of all payments of this annuity of Re. 1 are shown in the following
table:
Year Age
n x+m+n lx+m+n vm+n vm+nlx +m+n
i.e. (41 + n) i.e. (l41 +n) =(1.06)-<m + n)
1 42 9,728 0.665057 6,469.67
2 43 9,671 0.627412 6,067.70
3' 44 9,608 0.591898 5,686.96
4 45 9,538 0.558395 5,325.97
Total 23,550.30
4
I vm+n xlx+m+n = 23,550.30
n=1
lx =-la5 = 10,000
Present value of annuity of Re. 1 payable to a person aged x is given by
I
m,ax: ii1 =
Ivm + n lx.lx+m+n
23,550.30 03
6ta a5 : 41 = 10,000 =2.355
The net single premium is,given by
NSP =S . mlax :ii1
•
NSP =1,500 x 2.35503 =Rs. 3,532.55
Net single premium is Rs. 3,532.55
(b) In case of annuity payments, payable at the beginning of every year:

It is a deferred temporary annuity due.
Here, the first payment is made at the beginning of 7th year from the commencement
of the policy, that is, the persons who reach age 41 will receive the first payment of
this annuity.
Present value of all payments of this annuity of Re. 1 are shown in the following
table:
Year x+m+n-1 l,,+m+n-l vm+n - 1 (3) x (4)
n i.e. (41 + n - 1) i.e. (l41 + n-1) i.e. (1.06J-{m + n -1)
(1) (2) (3) (4)
1 41 9,780 0.704961 6,894.52
2 42 9,728 0.665057 6,469.67
3 43 9,671 0.627412 6067.70
4 44 9,608 0.591898 5686.96
Total 25,118.85
~vm+n-l l,,+m ... n-l = 25,118.85
X
Present value of a deferred temporary annuity due of Re. 1 payable to a person aged
x is given by
-
, .. ~(vm+n-lx,_).
m a,,: 1i1 = 1
"
I" 25,118.86
6,a35: 41 = 10,000 =2.511885
N ~t single premium is give~ ~y
NSP =S. mlf!,,,:1i1
NSP = 1,500 x 6/ii35: 41
=1,500 x 2.511885 =3,767.83
. . The net single premium is Rs. 3,767.83.
Example 4 : Using the data of Example 3, calculate the net level premium, limited to 5
years of a deferred temporary annuity of Rs. 2,000 per annum for a person aged 35 years for 4
years, deferred for a period of 6 years, if,
(a) annuity payments are made at the end of every year
(b) annuity payments are made at the beginning of every year.
Solution: Age at entry x =35 years

Term of the annuity n =4 years
Period of deferment m =6 years
Premium payment period t = 5 years •
Annual payment of annuity S =Rs. 2,000
Rate "of interest i =r =6% =0.06
First we calculate the present value of premium payable for 5 years.

The present value of all premiums of Re. 1 p~yable at the beginning of every year for 5
years are given in the following table:
Years Age
t x+t-1 I" +t-l vt -1 = (1.06)-<t -1) v t -1 )(
I" + t-l
1 35 10,000 1.00000000 10,000.00
2 36 9,972 0.94339623 9,407.55
3 37 9,941 0.88999644 8,847.45
4 38 9,907 0.83961928 8,318.11
5 39 9,869 0.79209366 7817.17
l Total 44,390.28
5
L (v t -1 X (" + t -1) =44,390.28
t =1
Present value of premiums of Re. 1 payable by a single life for t years is given by
.. 44,390.28
aS5 : 51 = 10,000 =4.439028
Present value of premium, P, payable by a single person for t years is Pa" :1\
.. PaS5: 51 =4.439028 P .; .(1)
(a) In case of annuity payments payable at the end of each year:

It is a deferred immediate temporary annuity.
Present value of this annuity of Re. 1 payable to a single person at the end of every
year is given by
6/aS5: J1 2: 2.35503 [Refer Example 3(a)]
Present value of deferred immediate temporary annuity of Rs. 2,000 payable to a
single person is given by
S . m/a,,: 1i\ = 2,000 )( 6/as5 : 41
=2,000 x 2.35503 =4,710.06 ... (2)
Net level premium is given by equating the present value of premiums and present
value of annuity claims.
4.439028 P =4,710.06
4710.06
P 4.439028 =1,061.06
.. The net level premium is Rs. 1,061.06.
440 RNANCIAL "ATHEliA ncs
(b) In case of annuity payments payable at the beginning of each year :

It is a deferred temporary annuity due.
Present value of a deferred temporary annuity due payable to a single ~rson at the
beginning of every year is
6/aS5: 41 = 2.511885 [Refer Example 3(b)]
Present value of this annuity ofRs. 2,000 payable to a single person is:
S m/a% : nJ =2,000 )( 6/aS5 : 41
=2,000 )( 2.511885
=5,023.77 ... (3)
-
Net level annual premium is given by
PalC : 11 =S . m/~ : nJ
4.439028 P = 5;023.77 [Equating (1) and (3)]
5,023.77
P = 4:439028 = 1,131.73
:. The net level premium is Rs. 1,131.73.
Example 5 : Using LIe (1970-73) ultimate Table, calculate the value of an immediate
life annuity of Rs. 800 per annum for a person aged 45, assuming the interest rate 5% per
annum.
Solution: It is an immediate life annuity.

Amount annuity payment, S =Rs. 800
Rate of interest, i =r =5% =0.0(:
Age of entry, X= 45 years
Since the payments are made at the end of every year, the first payment is made to the
persons those who complete age 45, (i.e. 146 persons)
145 =9,46,656
Present value of annuity of Re. 1 payable at the end of every year through out the life are
shown in the following table:
Year Age
n x+n l%+" v" =(1.05)-" v" )( l% +"
1 46 942254 0.95238095 897384.76
2 47 937401 0.90702948 850250.34
3 48 932058 0.86383760 805146.74
4
5
.
49
50
926177
919712
0.82270247
0.78352617
761968.11
720618.42
6 51 912612 0.74621540 681005.13
7 52 904837 0.71068133 643050.76
DETERMINAnON OF PREMIUM FOR ANNUITY PLANS
441
8 53 896323 0.67683936 606666.69
9 54 887028 0.64460892 571786.16
10 55 876889 0.61391325 538333.78
11 56 865858 0.58467929 506249.24
12 57 853875 0.55683742 475469.55
13 58 840879 0.53032135 445936.09
14 59 826820 0.50506795 417600.28
15 60 811640 0.48101710 390412.72
16 61 795294 0.45811152 364333.34
17 62 777734 0.43629669 339322.77
18 63 758921 0.41552065 315347.35
19 64 738825 0.39573396 292378.14
20 65 717436 0.37688948 270394.08
21 66 694744 0.35894236 249373.05
22 67 670748 0.34184987 229295.12
23 68 645481 0.32557131 210150.09
24 69 618971 0.31006791 191923.04
25 70 591285 0.29530277 174608.10
26 71 562507 0.28124073 158199.88
27 72 532739 0.26784832 142693.25
28 73 502112 0.25509364 128085.58
29 74 470780 0.24294632 114374.27
30 75 438927 0.23137745 101557.81
31 76 406758 0.22035947 89632.98
32 77 374494 0.20986617 78593.62
33 78 342377 0.19987254 68431.76
34 79 310659 0.19035480 59135.43
35 80 279609 0.18129029 50690.40
36 81 249487 0.17265741 43075.78
37 82 220549 0.16443563 36266.11
38 83 193040 0.15660536 30231.10
39 84 167178 0.14914797 24934.26
40 85 143151 0.14204568 20333.98
41 86 121109 0.13528160 16383.82
42 87 101156 0.12883962 13032.90
43 88 83350 0.12270440 10227.41
44 89 67698 0.11686133 7911.28
442· FINANCIAL MATHEMAncS
45 90 54158 0.11129651 6027.60

~6 91 42639 0.10599668 4519.59
47 92 33035 0.10094921 3334.86
48 93 25096 0.09614211 2412.78
49 94 18692 0.09156391 1711.51
50 95 13638 0.08720373 1189.28
51 96 9739 0.08305117 808.84
52 97 6803 0.07909635 538.0~
53 98 4646 0.07532986 349.98
54 99 3101 . 0.07174272 222.47
55 100 2023 0.06832640 138.22
56 101 1290 0.06507276 83.94
57 102 601 0.06197406 37.25
Total 13164170
57
Here }: lx + n V n = 1,31,64,170
n=l
The present value of annuity of Re. 1 payable to a single person aged x at the end of
every year through out his life-is given by
L l4~+nV
a45 = 1
45
= 1,31,64,170 =13.90597
9,46,656
Value (NSP) of this life annuity is given by
NSP=S. ax
NSP =800 x 13.90597 =11,124.78
.. The net single premium is Rs. 11,123.78.
Example 6 : On the basis of the LIe (1970·73) ultimate table at 6% per annum rate of
interest, calculate the net annual premium for a life annuity of Rs. 3,000 per annum for a
person aged 40 years, the first payment being made at the end of age 65 years. .
Payment of premiums is limited to 20 years.
Solution: Since the payments are made at the end of every year, it is an immediate life
annuity.
First payment is made at the end of age 65 years.
:. There is a period of deferment (m) of 25 years.
:. It is a deferred immediate life annuity.
Also payment of premium is limited to 20 years.
First we calculate the present value of annuity of Rs. 3,000 payable to a person aged 40
years.
•
Present values of annuity payments of Re. 1 are showing the following table:
Year Age
n x+m+n lx+m+n vm + n =(1.06)-{25+n) vm +lllx + m +n
(40 + 25 + n) (l65+n)
1 66 694744 0.21981003 152711.70

2 67 670748 0.20736795 139091.64
3 68 645481 0.19563014 126275.54
4 69 618971 0.18455674 114235.27
5 70 591285· 0.17411013 102948.71
6 71 562507 0.16425484 92394.50
7 72 532739 0.15495740 82551.85
8 73 502112 0.14618622 73401.86
9 74 470780 0.13791153 64925.99
10 75 438927 0.13010522 57106.69
11 76 406758 0.12274077 49925.79
12 77 374494 0.11579318 43363.. 85
13 78 342377 0.10923885 37400.87·
I 14 79 310659 0.10305552 32015.12
15 80 279609 0.09722219 27184.20
16 81 249487 0.09171905 22882.71
17 82 220549 0.08652740 19083.53
18 83 193040 0.08162962 15757.78
19 84 167178 0.07700908 12874.22
20 85 143151 0.07265007 10399.93
21 86 121109· 0.06853781 8300.55
22 87 101156 0.06465831 6540.58
23 88 83350 0.06099840 5084.22
24 89 67698 0.05754566 3895.73
25 90 54158 0.05428836 2940.15
26 91 42639 0.05121544 2183.78
I 27 92 33035 0.04831645 1596.13
I
28 93 25096 0.04558156 1143.91

29 94 18692 0.04300147 803.78
30 95 13638 0.04056742 553.26
31 96 9739 0.03827115 372.72
32 97 6803 0.03610486 245.62
33 98 4646 0.03406119 158.25
34 99 3101 0.03213320 99.65
35 100 2023 0.03031434 61.33
36 101 1290 0.02859843 36.89
37 102 601 0.02697965 16.21
Total 1310565
Here, Iv m + n l" + m + n =13,10,565
and l40 = 9,63,206
Present value of annuity of Re. 1 payable to a person aged x is given by
~ vm+nl,,+m+n
m/a" = 1
"
I 13,10,565
25,a40 = 9,63,206 =1.3606279
Present value of annuity of Rs. 3,000 payable to a person aged x is given by
PV1 = S. m/a"
PV1 =3,000 x 1.3606279
PV1 =4,081.88 ... (1)
Now we calculate the present value of premiums payable by a person aged 40 for 20
years.
Let P be the net level annual premium
The present value of all premiums of Re. 1 payable at the beginning of every year for 20
years are given in the following table:
Year Age
t x+t-1 l" +1-1 vt - 1 =(1.06)-{t-l) vt - 1l" + t-l
1 40 963206 1.00000000 963206.00
2 41 960509 0.94339623 906140.57
3 42 957541 0.88999644 852208.08
4 43 954266 0.83961928 801220.13
5 44 950649 0.79209366 753003.05
6 45 946656 0.74725817 707396.43
7 46 942254 0.70496054 664251.89
8 47 937401 0.66505711 623425.20
9 48 932058 0.62741237 584784.72

10 49 926177 0.59189846 548202.74
11 50 919712 0.55839478 513562.38
12 51 912612 0.52678753 480752.62
13 52 904837 0.49696936 449676.27
14 53 896323 0.46883902 420231.20
15 54 887028 0.44230096 392333.34
16 55 876889 0.41726506 365895.14
17 56 865858 0.39364628, 340841.78
18 57 853875 0.37136442 317098.79
19 58 840879 0.35034379 294596.74
20 59 826820 0.33051301 273274.77
Total 112521.02
I vt-1Iut_l =1,12,52,102
Present value of premiums of Re. 1 payable by a single person for t years is given by
•
.. ~ v t - 1 Ix + t _ 1
a x :71 = I
x
.. 1,12,52,102 2
a40: 201 = 9,63,206 =11.6819 7.
Present value of premium, Rs. P payable by a single person aged 4~ for 20 years is :
• P. a40: 201 = 11.681927 P ... (2)
yo Equating \he present value of annuity payment of Rs. 3,000 and the present value of
premium ofRs. P, we get
11.681927 P =4081.88
~ P = 349.42
. . The net level premium is Rs. 349.42
L What do you mean by an annuity plan ? What are the various categories of annuity
plan?
2. Distinguish between life and temporary annuity.
3. "Periodic payments of premium are annuities." Discuss.
4. Establish the following relationship mathematically:
1
(a) ax :1i]-ax :1i] = 1-A:x:1i]
(b) ax = 1-ax
(c) ax :1i] = 1 + ax :n=I\'

5. The following particulars are given

x: 25 26 27 28 29 30
lx: 97,380 97,088 96,794 96,496 96,194 95,887
dx : 292 294 298 302 307 313
6. Calculate the value of a temporary annuity ofRs. 1,200 per annum for a person aged
26 years for 4 years, the first being made immediately,
(b) allowing interest at 6% per annum. [ADs. (a) Rs. 4,778, (b) 4,388.41]
7. Using LlC (1970-73) Ultimate Table, at 6% per annum rate of interest, find the
values of a30 and 201a30' [ADs. 14.618, 3.357]
8. Using the data of Exercise 5, calculate the net single premium for an immediate
temporary annuity ofRs. 1,800 per annum for a person aged 25 years for 5 years.
(b) allowing interest at 6% per annum. [ADs. (a) Rs. 8,917.91, (b) Rs. 7,515.82]
9. Using Hm (Makeham Graduation) Table, calculate the net single premium of a
deferred temporary annuity of Rs. 2,400 per annum for a person aged 40 years, for 15
years. Annuity payments are made at the end of every year after the expiry of the
deferment period of 10 years. (Assume rate of interest at 4% per annum).
[ADs. Rs. 13,726.77]
10. Using LIC (1970-73) Ultimate Table, assuming 5% per annum rate of interest,
calculate the value of a deferred temporary annuity due of Rs. 2,000 per annum for a
person aged 30 years for 20 years, deferred for 10 years. [ADs. Rs. 15,128.95]
1L Using the LlC (1970-73) Ultimate Table, assuming 5% rate of interest, calculate the
net level premium, premium linked to 10 years, of a deferred temporary an~uity due
ofRs. 3,000 per annum for a person aged 30 years for 20 years, deferred for 10 years.
[Ans. Rs. 1,877.86]
12. On the basis of Hm (Makeham Gradiation) Table, at 6% per annum rate of interest,
find the present value of a life annuity of Rs. 1,00 per annum for a person aged 50,
the first being made imme4iately. [ADs. Rs. 11,388]
13. On the basis of LIC (1970-73) Ultimate Table, at 4% per annum rate of interest,
calculate the net level annual premium, limited to 10 years for a life annuity of
Rs. 2,000 per annum for a person aged 40, the first being made at the end of age 60
years. [ADs. Rs. 992.85]
Determination of
Gross Premium
INTRODUCTION
We have so for seen the method of calculating net premium, single or level, which is
based on the mortality rate likely to be experienced by the lives insured and the rate of
interest likely to be realized by the insurer. Net premium is determined by equating the
present value of premiums receivable and the present value of benefits 'Payable. But net
premium is not the actual cost of insurance, because net premium does not consider the
expenses that are nee'ded by the insurer in managing the insurance business. Adding these
expenses to the net premium (known as loading), we determine the gross premium. In this
chapter, we discuss different kinds of expenses, methods of loading and determination of
gross premium.
GROSS PREMIUM
The gross premium is that premium which is charged by the insured to meet the amount
of claims and expenses. Thus, the gross premium includes the net premium and loading.
Loading is the process of adding the expenses to net premium. The policy holders are
required to pay this gross premium and they even do not know the net premium. The gross
premium is also known as 'Office Premium'. The practice of paying bonus has become so
firmly established that the loadings on participating policies are almost invariably made
with the further idea of creating a surplus for future dividends. Therefore, loading may also
add a certain amount to meet the bonus charges on participating policies.
The policy holders are required to pay amount to meet the cost of claim, expenses of
business, and loading for bonus if the policy is participating one. Thus, net premium, when
suitably adjusted to provide for the expenses and margin, is called gross premium or office
premium.
CLASSIFICATION OF EXPENSES
Insurance company expenses can be classified as direct expenses and indirect expenses.
Direct expenses are those expenses that can be directed attributed to a specific life insurance
product. For example, agents' commission, medical examination expenses are direct
expenses. All pricing systems include direct expenses. Indirect expenses are those expenses
that can not be attributed to a specific product. Expenses such as salary of employees,
accounting expenses, utilities and information system are some indirect expenses.
Many classifications of life-insurance expenses 'have been made, often in a more or less
formal way or with no other purpose than to abbreviate a long and complex list of items. But
classifications of any sort can be justified only on the ground that the purpose of a
classification of life-insurance expenses should be a clear statement of the problems of
loading. Generally we classify the expenses that a life insurance company faces either
directly or indirectly, into five groups as follows:
(a) New Business Expenses: New business expenses are those expenses which incurred
at first before or at the time of issuing the policy. New business expenses are also
known as initial expenses. These are the costs of procuring, underwriting, and
issuing new business. Initials expenses include commissions attributable to the first
year premium, medical expenses, fee for inspection of risk, advertising, printing and
salaries incurred in getting new business and etc.
(b) Renewal Expenses: The various costs of maintaining and servicing outstanding
policies, as well as renewal commissions, are regarded as renewal expenses or
recurring expenses. These expenses are incurred every year of the policy. Some of
them are limited to the premium payment period. Recurring expenses include
agents· renewal commissions, collection fees, expenses on premium payment notices
and premium receipt, taxes on premiums, if any, and etc.
(c) Claims Expenses: Claim expenses, also known as final expenses, are incurred at the
time of settlement of claims. Claims expenses are those expenses which include
claim litigation costs such as cost of investigation of death, cost ~f approving and
paying for claims, and cost resisting unjust claims and appropriate amounts for
salaries, rent, utilities, and so on, which are attributable to the claim department.
(d) General Expenses: General expenses are those expenses which incurred for the
business as a whole. These are also known as administrative expenses. General
expenses include salaries, rent, and utilities which are attributable to administrative
function (e.g., expenses on general supervision, actuarial expenses, legal expenses,
accounting expenses). These expenses are not related to a particular policy.
(e) Investment Expenses: Investment expenses include the cost of making, handling and
protecting investments, Bad debts, Losses over gains, Taxes and repairs on assets,
DETERMINATION OF GROSS PREMIUM 449
These expenses are directly related to the production of investment income.

Investment expenses are taken into account in determining the net rates of interest.
to be used in calculating premium and are not considered explicitly in connection
with loading.
But, for the purpose of determining gross premium or the amount ofloading, the various
insurance expenses are classified into three major, groups. They ate
(a) The expenses that vary with the amount of premium (e.g., first year or renewal
commissions, and premium taxes, if any).
(b) The expenses that vary with the amount of insurance (e.g., underwriting costs that
tend to vary with policy amount such as medical expenses, stamp duty, etc.).
(c) The expenses that vary with the number of policies (e.g., cost of preparing policies,
cost of maintaining accounting records, and all other administrative expenses).
METHODS OF LOADING
The expenses can be allocated by any of the following methods:
1. Constant Addition Loading
Under this method a fixed amount per thousand of sum assured is loaded to the net
premium. This method is not scientific because it assumes that all expenses vary according
to the amount of the policy which is not correct. Some expenses vary according to variation
in the rate of premium.
2. Percentage Addition Loading
According to this method a fixed percentage of net premium is added to the net
premium. It assumes that all expenses vary according to the premium amount. But there are
certain expenses which vary according to the policy amount or per policy.
3. Modifzed Percentage Method
Under the method, the loading is divided into two parts (i) expenses varying according to
net level premium of the given policies and (ii) expenses varying according to net level
premium of the whole life policy issued at the given age. This method is modification of the
above two methods; but it does not relate the expenses according to their variations.
4. Constant and Percentage Addition Method
Under this method, the loading is done under two parts (a) a constant amount per
. thousand of the sum assured and (b) a fixed percentage related to the net premium of the
policy. The percentages are determined on the basis of past experience. This method
assumes that the expenses vary either with the net premium or the sum assured: but the
expenses also vary with the amount per policy which is not taken into account. However,
this method is more scientific than the methods discussed above.
DETERMINATION OF GROSS PREMIUM

Apart from mortality rate and interest rate, premium also depends upon the expenses
occurred in carrying on insurance business. Insurers usually employ agents to approach the
public and canvass them for insurance. In the first year of insurance a higher rate of
commission is paid to the agents. In addition to agents, insurers employ salaried staff.
Advertisement Expenses, Medical examination fees, Cost of stamp duty, and etc are some
other expenses which arise only at the time of selling an insurance policy but do not occur
again during the term of the policy. All the above mentioned expenses are known as initial
expenses. Initial expenses are classified into two broad categories:
(a) Initial expenses related to first year premium, like agent's commission, expressed as
a percentage of premium for the first year (11)'
(b) Initial expenses related to sum assured, expressed as a fixed addition to premium for
every unit sum assured (12 ),
Apart from the initial expenses, expenses, like annual commission for agents, occur
during subsequent years through out the term of the policy. These expepses are known as
renewal expenses. These expenses are much lower when compared to those in the first year.
Therefore, a major part of initial expenses are distributed through out the duration of the
policy to maintain uniformity of premiums. For the purpose of loading, renewal expenses are
classified into two broad categories:
(a) Renewal expenses expressed as a percentage of premium for the second and
subsequent years (K}).
(b) Renewal expenses expressed as a fixed addition to premium for the second and
subsequent years (K2 ).
There are also some other expenses, incurred in servicing the policyholders, which are
neither related to premium nor to sum assured. They are more or less related to number of
policies in force. These expenses are expressed as a constant addition to the premium per
unit sum assured. They can also be expressed as a percentage addition to the premium.
The office premium is obtained from the following relationship:
Present Value Of} _ {present Value} {present Value}
{ Gross Premium - of Benefits + of Expenses
We now obtain general expression for office premium for various plans.
ENDOWMENT ASSURANCE
Let 8 be the sum assured to a person aged x at entry and P' be the office premium.
The expression for P' is given by
P' ax : iii = 8 . Ax : iii + lIP' + 128 + KIP' ax :n -11 + K~ ax : n - 11 ... (1)
p'ax : iii = 8 . Ax: iii + lIP' + 128 + KIP' [ax +1iI- 1] + K 28 [ax: iii-I]
= p'ax :iii = 8Ax: iii + I}P' + 128 + KIP' ax +1iI -KIP' + K~ ax: iii -K~
= p'ax :iii = 8Ax: iii + (11 -Kl) P' + (12 -K2) 8 + K 1P'ax :1iI + K~ax: iii
= p'ax :iil - (11 -Kl) P' - K 1P'ax :iii =8Ax: iii + (12 -K2) 8 + K 28ax :iii
= p'[a x : iii - (11 - K 1 ) - K 1a x :iii ] = 8 [Ax: iii + (12 - K 2 ) + K~x : iii ]
Dividing both sides by a" :iii, we get
P'[I_(ll-
..
K l)_K]=s[Ax:1iI (12- K 2)
1 .. +.. + A2 v]
a" : iii a" :iii a" : iii
P,,:1iI
where P,,: iii =-.. -
a" :iii
In the above expression, S.P,,:1iI is the net premium for an endowment assurance. So if
the net premium is given the above expression can be written as
NLP + (12.-:- K 2) S + K,fl

P' = a" :iii
l_a~-K) Kl
a" :iii
If there is any constant expenses or other expenses, they are added to the right hand side
of the above expression.
Example 1 : Evaluate office a.nnual premium under a 7-year Term Assurance on (30) for
a sum assured of Rs. 30,000. The loading for expenses are,' First year-Rs. 5%0 sum assured
and 71/2%0 of premium, Renewal-Rs. 3%0 sum assured and 5% of premium. Basic,' LIe
(1970-73) Table and 6% rate of interest.
Solution: Let P' be the office premium,

lIP' =7i % of P' =0.075 P'.
12S = 5%0 of S = 0.005 x 3000 = 150
KIP' = 5% of P' = 0.05 P'
K,fl = 3%0 of 8 = 0.003 x 30000 = 90
i = 6% = 0.06
Gross premium P' is given by
P'a,,: iii =S . Ai: iii + lIP' + 12S + K IP'a,,:n:1I + K,fla,,: n:1I
For a person aged 30 for 7 years
P'a30: 71 =8 A§o: 71 + lIP' + 128 + KIP' a30:6\ + K,fl a30: 6\
P'(1 + a30: 6]) = 8 A§o: 71 + lIP' + 12S + K IP'a30:6\ + K,fla30: 6\
Pl(l + a30: 6\) = 30,000 Aio: 71 + 0.075P' + 150 + 0.05P' a30: 6\ + 90.a30: 6\ ... (1)
Now we calculate Aio: 71.

Year(n) Age (x + n) d"+11_1 VII

v"d" +11-1
1 30 1314 0.94339623 1239.622642
2 31 1361 0.88999644 1211.285155
3 32 1428 0.83961928 1198.976336
4 33 1514 0.79209366 1199.229806
5 34 1609 0.74725817 1202.338400
6 35 1733 0.70496054 1221.696617
7 36 1876 0.66505711 1247.647145
Total 8520.796101
Al _}: vll d"+11_1

~:'iI- 1
l "
8,520.796101
A 30: 71 = 9,80,776 =0.00868781
Now we compute aao: 61
Year(n) Age (x + n) l" + II VII v ll l,,+11
1 31 979462 0.94339623 924020.7547
2 32 978101 0.88999644 870506.4080
3 33 976673 0.83961928 820033.4840
4 34 975159 0.79209366 772417.2645
5 35 973550 0.74725817 727493.1942
6 36 971817 0.70496054 685092.6375
\
Total 4799563.743
47,99,563.743
aao: 61 = 9,80,776 = 4.89363906
Now from equation (1), pl(1 + 4.89363906) =(30,000 x 0.00868781) + 0.075 P' + 150
. + (0.05 X 4.89363906PI) + (90 x 4.89363906)
PI(5.89364) = 260.6343 + 0.075P'+ 150 + 0.24468P + 440.4275
5.57396P' =851.0618
P' = 152.68
. . The Gross premium is Rs. 152.68
Example 2 : Calculate office annual premium for an endowment assurance for

Rs. 15,000 to a person aged 40 for 15 years. Provide for initial expenses at 55%0 sum assured,
other expenses at 8% of all premiums and constant expenses of 3%0 sum, assut-ed. (Use LIC
(1970-73) Ultimate table and 6% per annum rate of interest.
Solution : Let P' be the office annual premium.

Age at entry x=40 years

Term of the policy = 15 years.
Initial expenses I =55%0 =0.055
Other expenses, 0 =8% =0.08
P' a%:iiI =S~: iii + IS + O.Pa%:iiI
P '=S~:iI ..
a% : iii
+..~
a% : iii
OP
+.
Adding the constant expenses to this P we get the required gross premium.
A%: iii IS
.. P'=S-
.. -+~O.PC
,- a%: iii u% : n
Constant Expenses = 3%0 of S = 0.003 )( 15,000 = 45

For a person aged 40 for 15 years
P' =15,000 ~40:

151 + .. 825 + 0.08 P' + 45 •.. (1)
151 a40: 151 a40:
First, we calculate A 40 : 151.
A 40 : 151 =AJo : 151 + A40 : lil
A %:iiI-
l __ I v n
c4 +II - 1
l%
Year(n) Age (x + n-l) d%+n-l vn =(1.06}-11 V
n
c4+n-l
1 40 , 2697 0.94339623 2544.339623
2 41 2968 0.88999644 2641.509434
3 42 3275 0.83961928 2749.753152
4 43 3617 0.79209366 2865.002780
5 44 3993 0.74725817 2983.801884
6 45 4402 0.70496054 3103.236299
7 46 4853 0.66505711 3227.522172
8 47 5343 0.62741237 3352.264300
9 48 5881 0.59189846 3480.954864
10 49 6465 0.55839478 3610.022233
11 50 7100 0.52678753 3740.191430
12 51 7775 0.49696936 3863.936802
13 52 8514 0.46883902 3991.695435
14 53 9295 0.44230096 4111.187464
15 54 10139 0.41726506 4230.650451
I Total 50496.06832
1 50,496.06832
A 40: 15\ = 9,63,206 = 0.05242
1 V
n lx+ n
Now, Ax:1i1= = lx
1 (1.06)-15 l55
A40:rn= 1
40
0.41726506 x 876889
=
963206
1
A 40 : 15\ =0.37987
Now, A 40 : 15\ = 0.05242 + 0.37987
A 40 : 15\ = 0.43229
Now we compute a40 : 15\
Year (n) Age (x + n) lx + n v n =(1.06r vn lx+ n
1 41 960509 0.94339623 906140.5660
2 42 957541 0.88999644 852208.0812
3 43 954266 0.83961928 801220.1347
4 44 950649 0.79209366 753003.0489
5 45 946656 0.74725817 70396.4~
6 46 942254 0.70496054 664251.8891
7 47 937401 0.66505711 623425.2034
8 48 932058 0.62741237 584784.7200
I 9 49 , 926177 0.59189846 548202.7433
10 50 919712 0.55839478 513562.3771
11 51 912612 0.52678753 480752.6171
12 52 904837 0.49696936 449676.2680
13 53 896323 0.46883902 420231.1989
14 54 887028 0.44230096 392333.3398
Total 8697188.620
I vnl:r:+n
ax: 1i1 = lx
I v 14 l x + 14
.. a40: 141 = 1
40
86,97,188.620
a40: 141 = 9,63,206
a40: 141 = 9.02942
Now ax :1i1 = 1 + ax: n::11
a40:15\ = 1 +a40:141
ii 40 : 151 = 1 + 9.02942 = 10.02942
DETERMINATION OF GROSS PREMIUM 455·
0.43229 ) 825 .
Now (1) ~ P' = 15,000 x ( 10.02942 + 10.02942 + 0.08P' + 45
~ P' - 0.08P' =646.532895 + 82.257997 + 45

~ 0.92P' = 728.79 + 45
~ 0.92P' = 773.79
P' = 841.08
The required premium is Rs. 841.08
WHOLE LIFE ASSURANCE

Let Rs. 8 be the sum assured and P' be the gross premium.
Let x be the age at entry into the insurance contract.
The expression for P' is given by
P'ax =8Ax + lIP' +128 + K1P'a" + K~ a"
~ P'ax = 8Ax + lIP' + 128 + K1P'(lix -1) + K~ (a" -1)
~ P'ax = 8Ax + (11 -K1) P' + K 1P'ax + (12 -K2) 8 + K2 8ax
~ P'ax - (11 -Kl) P' -K1P'ax =8Ax + (12 -K2) 8 + K2 8a"
~ p'[a x - (11 -Kl) - KIa,,] =8 [8 x + (12 -K2) + K 2 a,,]
Dividing both sides by ax, we get
K
P , [ 1 - It
- -Kl
..- - K 1 ] =8 [Ax
-::- + (12-.. 2) + K2 ]
ax ax ax
This expression is used to find the gross premium for a whole life assurance.
Example 3 : Calculate office annual premium under a whole life assurance for
Rs. 18,000 to a person aged 37. Provided for first year expenses at 45% of premium and
Rs. 16 per thousand sum assured, and renewal expenses of 6% of premiums and Rs. 4 per
thousand sum assured. (Use LIC (1970-73) Ultimate table and 6% per annum rate of
interest).
Solution : Let P' be the office premium

Sum assured 8 =Rs. 18,000
Initial expenses 11=45% = 0.45
Initial expenses 12 =16%0 = 0.016
Renewal expenses K1 = 6% = 0.06
Renewal expenses K2 = 4%0 = 0.004

S [p% + 12~%K+]
P'=~-
[ 1- (II ~%Kl) -K1]
whereP% =-..
Ax
a%
1
Ax =f [vd% + v2dx+ 1 + v 3dx+ 2 + ...... ]
%
.. A37 =1-Z [(1.06)-1 d 37 + (1.06)-2 d 38 + ...... + (1.06)-66d 102 ]

37
A _ 1,58,195.6057
37 - 9,69,941
A37 =0.163098
1 .
a% =f [1% + V1.x+l + v21.x+2 + .......]
%
1
.. a37 =1- [1 37 + (1.06)-11 38 + (1.06)-21 39 + ...... (1.06)-651 102 ]
37
.. 1,43,40,835.30
a37 = 9,69,941
a37 = 14.785266
A37
Now, P S7 =-
.. -
a37
0.163098
P 37 =14.785266 =0.011031'12
S [P 37 + 12.-:-K2
a37
+ K2]
P'_~-
- (ll- K l)
1-.. -Kl
a37
0.016 - 0.004 ]
18,000 [ 0.01103112 + 14.785266 + 0.004
.. P' = 0.45 - 0.06
1- 14.785266 - 0.06
P' _ 18,000 [0.01103112 + 0.00081162 + 0.004
- 1 - 0.02637761 - 0.06
I 285.16932 •
P =0.91362239 =312.13
The office premium is Rs. 312.13
L What are the various expenses of an insurer?

2. Discuss the need of maintaining consistency in premium rates for various classes of
policies?
3. Define loading. Explain the methods ofloading.
4. Calculate office single premium under a 2-year temporary assurance for sum assured
ofRs. 20,000 for a person aged 40. Provide for expenses at 9% of single premium and
3%0 sum assured. (Use LIC (1970-73) Ultimate table and 6% per annum rate of
interest) [Ans. Rs. 184.18]
5. Calculate office annual premium for a whole life assurance for Rs. 20,000 to a person
aged 40. Provide for first year expenses at 55% of preniiums and 17%0 sum assured;
and renewal expenses of 5% of premium and 6%0 sum assured (Use LIC (1970-73)
Ultimate table and 6% per annum rate of interest) [Ans. 432.62]
8. Calculate office annual premium for an endowment assurance for Rs. 15,000 to a
person aged 35 for 25 years. Provide for first year expenses at 50% of premiums and
15%0 sum a.ssured and renewal expenses of 5% of premiums and 6%0 sum assured.
(Use LIC (1970-73) Ultimate table and 6% per annum rate of interest).
[Ans. Rs. 434.19]
7. lfthe annual premium for an endowment assurance ofRs. 1,000 for a person aged 40
years for a term of 20 years is Rs. 30.00. Provide for initial expenses at Rs. 40 per
1,000 sum assured; renewal expenses at 10%. of office premium; and a
constant expense of Rs. 2.50 per thousand sum assured. Calculate the office
premium. (a40: 19\ =16.00).
Credibility Theory
INTRODUCTION
We have so far discussed the methods of premium determination for various kinds of life
insurance policies. Unlike life insurance, the past experience plays a major role in
determining price for a non-life insurance product. For example, insurance companies use
past loss information of an insured or group of insureds to estimate the cost to provide future
insurance coverage. Credibility theory provides tools to deal with the randomness of data
that is used for predicting future events or costs. Credibility theory is usually presented as a
mathematically dense body of formulas. In this chapter we discuss different models of
classical theory in detail.
CREDIBILITY: DEFINITION
Credibility theory is all about weighted averages. Different estimates of a quantity are to
be weighted together. The more credible estimates get more weight.
In actuarial parlance the term credibility was originally attached to experience rating
formulas that were convex combinations (weighted averages) of individual and class
estimates of the individual risk premium. Credibility theory, thus, was the branch of
insurance mathematics that explored model-based principles for construction of such
formulas.
In the context of estimating expected losses for a member of a class, there are two
natural estimates: the experience of the member itself, and the average of the entire class.
The former is more relevant but also more volatile than the latter. Two general approaches
have been taken to calculating weights in this case. The limited fluctuation approach is
willing to accept the member experience at face value if it meets a pre-defined standard of
CREDIBILITY THEORY 459
stability (full credibility) and if not reduces the weight enough for the weighted average to
meet the stability requirement. The greatest accuracy approach measures relevance as well
as stability and looks for the weights that will minimize an error measure. The average of
the entire class could be a very stable quantity, but if the members of the class tend to be
quite different from each other, it could be of less relevance for any particular class. So the
relevance of a wider class average to any member's mean is inversely related to the
variability among the members of the class.
Insurance losses arise from random occurrences. The average annual cost of paying
insurance losses in the past few years may be a poor estimate of next year's costs. The
expected accuracy of this estimate is a function of the variability in the losses. This data by
itselr'may not be acceptable for calculating insurance rates. Rather than relying solely on
recent observations, better estimates may be obtained by combining this data with other
information. For example, suppose that recent experience indicates that carpenters should
be charged a rate of Rs. 5 (per Rs. 100 of payroll) for workers compensation insurance.
Assuming that the current rate is Rs. 10, it is to decide whether the new rate should be Rs.5,
Rs. 10, or somewhere in between. Credibility is used to weight together these two estimates.
The basic formula for calculating credibility weighted estimates is:
Estimate = Z x [Observation] + (1 - Z) x [Other Information],
where 0 ~ Z ~ 1.
The weight z in the above formula is named credibility factor assigned to the
observation, since it measures the amount of credence attached to the individual experience.
1 - Z is generally referred to as the complement of credibility.
If the quantity of observed data is large and not likely to vary much from one period to
another, then Z will be closer to one. On the other hand, if the observation consists oflimited
data, then Z will be closer to zero and more weight will be given to other information.
When Z =1, then it is known as "full credibility" and it indicates that claim experience is
used solely to determine the premium.
When Z = 0, then it is known as "no credibility" where claims experience is ignored and
external information is used as the sole basis of pre~ium setting. .
Following is another example demonstrating how credibility can help produce better
estimates:
Example 1 : In a large population of automobile drivers, the average driver has one
accident every five years or, equivalently, an annual frequency of 0.20 accidents per year. A
driver selected randomly from the population had three accidents during the last five years
for a frequency of 0.60 accidents per year. What is your estimate of the expected future
frequency rate for this driver? Is it 0.20,0.60, or something in between?
Solution: If we had no information about the driver other than that he came from the
population, we should go with the 0.20. However, we know that the driver's observed
frequency was 0.60. This can not be our estimate for his future accident frequency. There is a
460 RNANCMLMATHEMAncs
correlation between prior accident frequency and future accident frequency, but they are not
perfectly correlated. Accidents occur randomly and even good drivers with low expected
accident frequencies will have accidents. On the other hand, bad drivers can go several years
without an accident.
A better answer than either 0.20 or 0.60 is most likely something in between.
This driver's Expected Future Accident Frequency =Z x 0.60 + (1-Z) x 0.20.
The key objective is the calculation of the value of Z, i.e., the calculation of how much
credibility should be assigned to the information known. Following are the three basic
credibility models:
(a) Classical Credibility
(b) Buhlmann Credibility
(c) Bayesian Credibility
CLASSICAL CREDIBILITY
It is also referred to as limited fluctuation credibility because it attempts to limit the
effect that random fluctuations in the observations will have on the estimates. The
credibility Z is a function of the expected variance of the observations versus the selected
variance to be allowed in the first terIll of the credibility formula, Z x [Observation]:
In Classical Credibility, one determines how much data one needs before one will assign
to it 100% credibility. This amount of data is referred to as the Full Credibility Criterion
or the Standard for Full Credibility. If one has this much data or more, then Z =1; if one
has observed less than this amount of data then 0 s; Z s; 1.
For example, if we observed 1,000 full-time carpenters, which is sufficient, then we
might assign 100% credibility to their data. Then if we observed 2,000 full-time carpenters,
which is also sufficient, we would also assign them 100% credibility. One hundred full-time
carpenters might be assigned 30% credibility. In this case the observation has been assigned
Partial Credibility, i.e., less than full credibility.
Example 2 : The observed claim frequency is 120. The credibility given to this data is '
25%. 'I'he complement of credibility is given to the prior estimate of 200. What 'is the new
estimate of the claim frequency?
Solution : Credibility weighted estimate is given by
Estimate =Z x [Observation] + (1 - Z) x [Other Information]
Here, Observed frequency = 120
Estimated frequency = 200
Credibility assigned = 25% = 0.25
The new estimate of claim frequency is
Z = 0.25 x 120 + (1 - 0.25) x 200 = 180.
Therefore, the new estimate is 180.
CREDIBILITY THEORY 461
BUHLMANN CREDIBILITY
The second form of credibility covered in this chapter is called Least Squares or
Buhlmann Credibility. It is also referred as greatest accuracy credibility. The goal with this
approach is the minimization of the square of the error between the estimate and the true
expected value of the quantity being estimated.
The credibility is given by the formula:
N
Z = (N+K)
where N is the number of observations and K is the Buhlmann Credibility Parameter.

As the number of observations N increases, the credibility Z approaches 1. That is, as N
increases, Nand N + K will De closer, because K is constant and consequently Z will
approach 1. If N is small or decreases, Z will be decreasing from 1.
The Buhlmann Credibility Parameter, K is calculated as follows:
K _ Expected Value of Process Variance (EPV)
- Variance of Hypothetical Means (VHM)
where the Expected Value of the Process Variance and the Variance of the Hypothetical
Means are each calculated for a single observation of the risk process.
In order to apply Buhlmann Credibility to various real-world situations, one is typically
required to calculate or estimate the so-called Buhlmann Credibility Parameter K. This
involves being able to apply analysis of varin~e: the calculation of the expected value of the
process variance and the variance of the hypothetical means.
In general one computes the EPV and VHM for a single observation and then plugs into
the formula for Buhlmann Credibility the number of observations N. If one is estimating
claim frequencies or pure premiums then N is in exposures. If one is estimating claim
severities then N is in number of claims. (N is in the units of whatever is in the 4enominator
of the quantity one is estimating).
One computes the Expected Value of the Process Variance (EPV) by weighting together
the process variances 'for each type of risk using as weights the chance of having each type of
risk.
One can compute the Variance of the Hypothetical Means (VHM) by the usual technique;
compute the first and second moments of the hypothetical means.
The total variance has been split into two pieces.
Total Variance =Expected Value of the Process Variance
+ Variance of the Hypothetical Means
Using Buhlmann Credibility, the new estimate is calculated as follows:
Estimate =Z x [Observation] + (l-Z) x [Prior Mean]
The prior mean, or a priori expected value, serves as the "other information" to which we
apply the complement of credibility. To the extent that our observed data is not credible, we
would rely on the prior mean for our estimate.
BAYESIAN ANALYSIS
Another approach to combining current observations with prior information to produce a
better estimate is Bayesian analysis. Bayes Theorem is the foundation for this analysis.
Bayesian Analysis is the technique to update a prior hypothesis based on observations,
closely related to the use of Buhlmann Credibility. In fact, the use of Buhlmann Credibility
is the least squares linear approximation to Bayesian Analysis. For this reason Buhlmann
credibility is also referred as Bayesian credibility.
Bayes theorem helps to determine the probability of occurrence of an event A, given that
another event B has already observed. This probability calculated is called posterior
probability and denoted by p (AlB). Bayesian analysis has been discussed in the chapter:
"Theory of Probability". The probability of A given B is
(AlB) _ p(BIA) x p(A)
p - p(B)
This posterior probability computed with' the help of Bayesian analysis can be used to
estimate the change of a claim, if the same risk is observed again.
p(Risk Type I Obser:) =p(Obser: I Risk Type) x p(Risk Type) I p(Obser:)
Not only do we have probabilities posterior to an observation, but we can use these to
estimate the chance of a claim if the same risk is observed again. The posterior estimate is a
weighted average of the hypothetical means for the different types of risks.
L What do you mean by creditability theory? What is the use of creditability theory in
insurance?
2. What are the different models of credibility theory? Discuss in detail.
3. Define full credibility. How does it differ from partial credibility?
4. The observed claim frequency is 200. The credibility given to this data is 40%. The
complement of credibility is given to the prior estimate of 300. What is the new
estimate of the claim frequency?
5. Define Buhlmann . credibility parameter. Explain how it is used to estimate
credibility factor?
6. What is the Expected Value of the Process Variance?
7. Why is Buhlmann credibility referred as Bayesian credibility?
Table I
·· Logarithm Tables
Tablell · Amount of Re. 1 at Compound Interest
Table III · Present Value of Re. 1 at Compound Interest
Table IV · Amount of an Annuity of Re. 1
Table V · Present Value of an Annuity of Re. 1
Table VI · Value of eX and e-«
Table VII : LIC (1970 - 73) Ultimate Table
Table VIll: Hm Table (Makeham Graduation)
Table IX : Area under the Standard Normal Curve
•. ..l....-
TABLE I
LOGARITHMS
0 1 2 3 4 5 8 7 8 9 1 2 3 4 5 8 7 8 9
10 0000 0043 0086 0128 0170 5 9 13 17 21 26 30 34 38
0212 0253 0294 0334 0374 4 8 12 16 20 24 28 32 36
11 0414 0453 0492 0531 0569 4 8 12 16 20 23 27 31 35
0607 0645 0682 0719 0775 4 7 11 15 18 22 26 29 33
12 0792 0828 0864 0899 0934 3 7 11 14 18 21 26 28 32
0969 1004 1038 1072 1106 3 7 10 14 17 20 24 27 31
13 1139 1173 1206 1239 1271 3 6 10 13 16 19 23 26 29
1303 1335 1367 1399 1430 3 7 10 13 16 19 22 25 29
14 1461 1492 1523 1553 1584 3 6 9 12 15 19 22 25 28
1614 1644 1673 1703 1732 3 6 9 12 14 17 20 23 26
15 176) 1790 1818 1847 1875 3 6 9 11 14 17 20 23 26
1903 1931 1959 1987 2014 3 5 8 11 14 17 19 22 25
16 2041 2068 2095 2122 2148 3 6 8 11 14 16 19 22 24
2175 2201 2227 2253 2279 3 6 8 10 13 16 18 21 23
17 2304 2330 2355 2380 2405 3 5 8 10 13 15 18 20 23
2430 2455 2480 2504 2529 3 5 8 10 12 15 17 20 22
18 2553 2577 2601 2625 2648 2 5 7 9 12 14 17 19 21
2672 2695 2718 2742 2765 2 4 7 9 11 14 16 18 21
19 2788 2810 2833 2856 2878 2 4 7 9 11 13 16 18 20
2900 2923 2945 2967 2989 2 4 6 9 11 13 15 17 19
20 3010 3032 3054 3075 3096 3118 3139 3160 3181 3201 2 4 6 8 11 13 15 17 19
21 3222 3243 3263 3284 3304 3324 3345 3365 3385 3404 2 4 6 8 10 12 14 16 18
22 3424 3444 3464 3483 3502 3522 3541 3560 3579 3598 2 4 6 8 10 12 14 15 17
23 3617 3636 3655 3674 3692 3711 3729 3747 3766 3784 2 4 6 7 9 11 13 15 17
24 3802 3820 3838 3856 3874 3892 3909 3927 3945 3962 2 4 5 7 9 11 12 14 16
25 3979 3997 4014 4031 4048 4065 4082 4099 4116 4133 2 3 5 7 9 10 12 14 15
28 4150 4166 4183 4200 4216 4232 4249 4265 4281 4298 2 3 5 7 8 10 11 13 15
27 4314 4330 4346 4362 4378 4393 4409 4425 4440 4456 2 3 5 6 8 9 11 13 14
28 4472 4487 4502 4518 4533 4548 4564 4579 4594 4609 2 3 5 6 8 9 11 12 14
29 4624 4639 4654 4669 4683 4698 4713 4728 4742 4757 2 3 4 6 7 9 10 12 13
30 4771 4786 4800 4814 4829 4843 4857 4871 4886 4900 1 3 4 6 7 9 10 11 13
31 4914 4928 4942 4955 4969 4983 4997 5011 5024 5038 1 3 4 -
6 7 8 10 11 12
32 5051 5065 5079 5092 5105 5119 5132 5145 5159 5172 1 3 4 5 7 8 9 11 12
33 5185 5198 5211 5224 5237 5250 5263 5276 5289 5302 1 3 4 5 6 8 9 10 12
34 5315 5328 5340 5353 5366 5378 5391 5403 5416 5428 1 3 4 5 6 8 9 10 11
36 5441 5453 5465 5478 5490 5502 5514 5527 5539 5551 1 2 4 5 6 7 9 10 11
38 5563 5575 5587 5599 5611 5623 5635 5647 5658 5670 1 2- 4 5 6 7 8 10 11
37 5682 5694 5705 5717 5729 5740 5752 5763 5775 5786 1 2 3 5 6 7 8 9 10
38 5798 5809 5821 5832 5843 5855 5866 5877 5888 5899 1 2 3 5 6 7 8 9 10
39 5911 5922 5933 5944 5955 5966 5977 5988 5999 6010 1 2 3 4 5 7 8 9 10
40 6021 6031 6042 6053 6064 6075 6085 6096 6107 6117 1 2 3 4 5 6 8 8 10
41 6128 6138 6149 6160 6170 6180 6191 6201 6212 6222 1 2 3 4 5 6 7 8 9
42 6232 6243 6253 6263 6274 6284 6294 6304 6314 6325 1 2 3 4 5 6 7 8 9
43 6335 6345 6355 6365 6375 6385 6395 6405 6415 6425 1 2 3 4 5 6 7 8 9
44 6435 6444 6454 6464 6474 6484 6493 6503 6513 6522 1 2 3 4 5 6 7 8 9
45 6532 6542 6551 6561 6571 6580 6590 6599 6609 6618 1 2 3 4 5 6 7 7 9
46 6628 6637 6646 6656 6665 6675 6684 6693 6702 6712 1 2 3 4 5 6 7 7 8
47 6721 6730 6739 6749 6758 6767 6776 6785 6794 6803 1 2 3 4 5 5 6 7 8
48 6812 6821 6830 6839 6648 6857 6866 6875 6884 6893 1 2 3 4 4 5 6 7 8
49 6902 6911 6920 6928 6937 6946 6955 6964 6972 6981 1 2 3 4 4 5 6 7 8
APPENDIX 465
TABLE I
LOGARITHMS
0 1 2 3 4 5 6 7 8 9 1 2 3 4 5 6 7 8 9
50 6990 6998 7007 7016 7024 7033 7042 7050 7059 7067 1 2 3 3 4 5 6 7 8
51 7076 7084 7093 7101 7110 7118 7126 7135 7143 7152 1 2 3 3 4 5 6 7 8
52 7160 7168 7177 7185 7193 7202 7210 7218 7226 7235 1 2 2 3 4 5 6 7 7
53 7243 7251 7259 7267 7275 7284 7292 7300 7308 7316 1 2 2 3 4 5 6 6 7
54 7324 7332 7340 7348 7356 7364 7372 7380 7388 7396 1 2 2 3 4 5 6 6 7
55 7404 7412 7419 7427 7435 7443 7451 7459 7466 7474 1 2 2 3 4 5 5 6 7
56 7482 7490 7497 7505 7513 7520 7528 7536 7543 7551 1 2 2 3 4 5 5 6 7
57 7559 7566 7574 7582 7589 7597 7604 7612 7619 7627 1 2 2 3 4 5 5 6 7
58 7634 7642 7649 7657 7664 7672 7679 7686 7694 7701 1 1 2 3 4 4 5 6 7
59 7709 7716 7723 7731 7738 7745 7752 7760 7767 7774 1 1 2 3 4 4 5 6 7
60 7782 7789 7796 7803 7810 7818 7825 7832 7839 7846 1 1 2 3 4 4 5 6 6
61 7853 7860 7868 7875 7882 7889 7896 7903 7910 7917 1 1 2 3 4 4 5 6 6
62 7924 7931 7938 7945 7952 7959 7966 7973 7980 7987 1 1 2 3 3 4 5 6 6
63 7993 8000 8007 8014 8021 8028 8035 8041 8048 8055 1 1 2 3 3 4 5 5 6
64 8062 8069 8075 8082 8089 8096 8102 8109 8116 8122 1 1 2 3 3 4 5 5 6
65 8129 8136 8142 8149 8156 8162 8169 8176 8182 8189 1 1 2 3 3 4 5 5 6
66 8195 8202' 8209 8215 8222 8228 8235 8241 8248 8254 1 1 2 3 3 4 5 5 6
67 8261 8267 8274 8280 8287 8293 8299 8306 8312 8319 1 1 2 3 3 4 5 5 6
68 8325 8331 8338 -8344 8351 8357 8363 8370 8376 8382 1 1 2 3 3 4 4 5 6
69 8388 8395 8401 8407 8414 8420 8426 8432 8439 8445 1 1 2 2 3 4 4 5 6
70 8451 8457 8463 8470 8476 8482 8488 8494 8500 8506 1 1 2 2 3 4 4 5 6
71 8513 8519 8525 8531 8537 8543 8549 8555 8561 8567 1 1 2 2 3 4 4 5 5
72 8573 8579 8585 8591 8597 8603 8609 8615 8621 8627 1 1 2 2 3 4 4 5 5
73 8633 8639 8645 8651 8657 8663 8669 8675 8681 8686 1 1 2 2 3 4 4 5 5
74 8692 8698 8704 8710 8716 8722 8727 8733 8739 8745 1 1 2 2 3 4 4 5 5
75 8751 8756 8762 8768 8774 8779 8785 8791 8797 8802 1 1 2 2 3 3 4 5 5
76 8808 8814 8820 8825 8831 8837 8842 8848 8854 8859 1 1 2 2 3 3 4 5 5
77 8665 8871 8876 8882 8887 8893 8899 8904 8910 8915 1 1 2 2 3 3 4 4 5
78 8921 8927 8932 8938 8943 8949 8954 8960 8965 8971 1 1 2 2 3 3 4 4 5
79 8976 8982 8987 8993 8998 9004 9009 9015 9020 9025 1 1 2 2 3 3 4 4 5
80 9031 9036 9042 9047 9053 9058 9063 9069 9074 9079 1 1 2 2 3 3 4 4 5
81 9085 9090 9096 9101 9106 9112 9117 9122 9128 9133 1 1 2 2 3 3 4 4 5
82 9138 9143 9149 9154 9159 9165 9170 9175 9180 9186 1 1 2 2 3 3 4 4 5
83 9191 9196 9201 9206 9212 9217 9222 9227 9232 9238 1 1 2 2 3 3 4 4 5
84 9243 9248 9253 9258 9263 9269 9274 9279 9284 9289 1 1 2 2 3 3 4 4 5
85 9294 9299 9304 9309 9315 9320 9325 9330 9335 9340 1 1 2 2 3 3 4 4 5
86 9345 9350 9355 9360 9365 9370 9375 9380 9385 _ 9390 1 1 2 2 3 3 4 4 5
87 9395 9400 9405 9410 9415 9420 9425 9430 9435 9440 0 1 1 2 2 3 3 4 4
88 9445 9450 9455 9460 9465 9469 9474 9479 9484 9489 0 1 1 2 2 3 3 4 4
89 9494 9499 9504 9509 9513 9518 9523 9528 9533 9538 0 1 1 2 2 3 3 4 4
90 9542 9547 9552 9557 9561 9566 9571 9576 9581 9586 0 1 1 2 2 3 3 4 4
91 9590 9595 9600 9605 9609 9614 9619 9624 9628 9633 0 1 1 2 2 3 3 4 4
92 9638 9643 9647 9652 9657 9661 9666 9671 9675 9680 0 1 1 2 2 3 3 4 4
93 9685 9689 9694 9699 9703 9708 9713 9717 9722 9727 0 1 1 2 2 3 3 4 4
94 9731 9736 9741 9745 9750 9754 9759 9763 976B 9773 0 1 1 2 2 3 3 4 4
95 9777 9782 9786 9791 9795 9800 9805 9809 9814 9818 0 1 1 2 2 3 3 4 4
96 9823 9827 9832 9836 9841 9845 9850 9854 9859 9863 0 1 1 2 2 3 3 4 4
97 9868 9872 9877 9881 9886 9890 9894 9899 9903 9908 0 1 1 2 2 3 3 4 4
98 9912 9917 9921 9926 9930 9934 9939 9943 9948 9952 0 1 1 2 2 3 3 4 4
99 9956 9961 9965 9969 9974 9978 9983 9987 9991 9996 0 1 1 2 2 3 3 3 4
TABLE I
,
ANTILOGARITHMS
0 1 2 3 4 Ii 6 7 8 9 1 2 3 4 Ii 8 7 8 9
.00 1000 1002 1005 1007 1009 1012 1014 1016 1019 1021 0 0 1 1 1 1 2 2 2
.01 1023 1026 1028 1030 1033 1035 1038 1040 1042 1045 0 0 1 1 1 1 2 2 2
.02 1047 1050 1052 1054 1057 1059 1062 1064 1067 1069 0 0 1 1 1 1 2 2 2
.03 1072 1074 1076 1079 1081 1084 1086 1089 1091 1094 0 0 1 1 1 1 2 2 2
.04 1096 1099 1102 1104 1107 1109 1112 1114 1117 1119 0 1 1 1 1 2 2 2 2
.05 1122 1125 1127 1130 1132 1135 1138 1140 1143 1146 0 1 1 1 1 2 2 2 2
.06 1148 1151 1153 1156 1159 1161 1164 1167 1169 1172 0 1 1 1 1 2 2 2 2
.07 1175 1178 1180 1183 1186 1189 1191 1194 1197 1199 0 1 1 1 1 2 2 2 2
.08 1
1202 1205 1208 1211 1213 1216 1219 1222 1225 1227 0 1 1 1 1 2 2 2 3
.09 1230 1233 1236 1239 1242 1245 1247 1250 1253 1256 0 1 1 1 1 2 2 2 3
.10 1259 1262 1265 1268 1271 1274 1276 1279 1282 1285 0 1 1 1 1 2 2 2 3
I .11 1288 1291 1294 1297 1300 1303 1306 1309 1312 1315 0 1 1 1 2 2 2 2 3
I .12
.13 'I
1318
1349
1321
1352
1324
1355
1327
1358
1330
1361
1334
1365
1337
1368
1340
1371
1343
1374
1346
1377
0 1 1 1
0 1 1 1
2
2
2
2
2
2
2
3
3
3
.14 1380 1384 1387 1390 1393 1396 1400 1403 1406 1409 0 1 1 1 2 2 2 3 3
.15 1413 1416 1419 1422 1426 1429 1432 1435 1439 1442 0 1 1 1 2 2 2 3 3
.16 1445 1449 1452 1455 1459 1462 1466 1469 1472 1476 0 1 1 1 2 2 2 3 3
.17 1479 1483 1486 1489 1493 1496 1500 1503 1507 1510 0 1 1 1 2 2 2 3 3
.18 1514 1517 1521 1524 1528 ·1531 1535 1538 1542 1545 0 1 1 1 2 2 2 3 3
.19 1549 1552 1556 1560 1563 1567 1570 1574 1578 1581 0 1 1 1 2 2 3 3 3
.20 1585 1589 1592 1596 1600 1603 1607 1611 1614 1618 0 1 1 1 2 2 3 3 3
.21 1622 1626 1629 1633 1637 1641 1644 1648 1652 1656 0 1 1 2 2 2 3 3 3
.22 1660 1663 1667 1671 1675 1679 1683 1687 1690 1694 0 1 1 2 2 2 3 3 3
.23 1698 1702 1706 1710 17]4 1718 1722 1726 1730 1734 0 1 1 2 2 2 3 3 4
.24 1738 1742 1746 1750 1754 1758 1762 1766 1770 1774 0 1 1 2 2 2 3 3 4
.25 1778 1782 1786 1791 1795 1799 1803 1807 1811 1816 0 1 1 2 2 2 3 3 4
.26 1820 1824 1828 1832 1837 1841 1845 1849 1854 1858 0 1 1 2 2 3 3 3 4
.27 1862 1866 1871 1875 1879 1884 1888 1892 1897 1901 0 1 1 2 2 3 3 3 4
.28 1905 19100 1914 1919 1923 1932 1928 1936 1941 1945 0 1 1 2 2 3 3 4 4
.29 1950 1954 1959 1963 1968 1972 1977 1982 1986 1991 0 1 1 2 2 3 3 4 4
.30 1995 2000 2004 2009 2014 2018 2023 2028 2032 2037 0 1 1 2 2 3 3 4 4
.31 I 2042 2046 2051 2056 2061 2065 2070 2075 2080 2084 0 1 1 2 2 3 3 4 4
.32 2089 2094 2099 2104 2109 2113 2118 2123 2128 2133 0 1 1 2 2 3 3 4 4
.33 2138 2143 2148 2153 2158 2163 2168 2173 2178 2183 0 1 1 2 2 3 3 4 4
.34 2188 2193 2198 2203 2208 2213 2218 2223 2228 2234 1 1 2 2 3 3 4 4 5
I .35 2239 2244 2249 2254 2259 2265 2270 2275 2280 2286 1 1 2 2 3 3 4 4 5
.38 2291 2296 2301 2307 2312 2317 2323 2328 2333 2339 1 1 2 2 3 3 4 4 5
.37 2344 2350 2355 2360 2366 2371 2377 2382 2388 2393 1 1 2 2 3 3 4 4 5
.38 2399 2404 2410 2415 2421 2427 2432 2438 2443 2449 1 1 2 2 3 3 4 4 5
.39 2455 2460 2466 2472 2477 2483 2489 2495 2500 2506 1 1 2 2 3 3 4 5 5
.40 2512 2518 2523 2529 2535 2541 2547 2553 2559 2564 1 1 2 2 3 4 4 5 5
.41 2570 2576 2582 2588 2594 2600 2606 2612 2618 2624 1 1 2 2 3 4 4 5 5
.42 2630 2636 2642 2649 2655 2661 2667 2673 2679 2685 1 1 2 2 3 4 4 5 6
.43 2692 2698 2704 2710 2716 2723 2729 2735 2742 2748 1 1 2 3 3 4 4 .5 6
.4.4 2754 2761 2767 2773 2780 -2786 2793 2799 2805 2812 1 1 2 3 3 4 4 5 6
.45 2818 2325 2831 2838 2844 2851 2858 2864 2871 2877 1 1 2 3 3 4 5 5 6
.46 2884 2891 2897 2904 2911 2917 2924 2931 2938 2944 1 1 2 3 3 4 5 5 6
.47 2951 2958 2965 2972 2979 2985 2992 2999 3006 3013 1 1 2 3 3 4 5 5 6
.48 3020 3027 3034 3041 3048 3055 3062 3069 3076 3083 1 1 2 3 4 4 5 .6 6·
.<!(J 3090 3097 3105 3112 3119 3126 3133 3141 3148 3155 1 1 2 3 4 4 5 6 6
APPENDIX 467
TABLE I'
ANTILOGARITHMS
o 1 2 3 4 5 6 8 9 o 1 234 5 6 7 8 9
.50 3162 3170 3177 3184 3192 3199 3206 3214 3221 3228 1 1 2 3 4 4 5 6 7
.51 3236 3243 3251 3258 3266 3273 3281 3289 3296 3304 1 2 2 3 4 5 5 6 7
.52 3311 3319 3327 3334 3342 3350 3357 3365 3373 3381 1 2 2 3 4 5 5 6 7
.53 3388 3396 3404 3412 3420 3428 3436 3443 3451 3459 1 2 2 3 4 5 6 6 7
.54 3467 3475 3483 3491 3499 3508 3516 3524 3532 3540 1 2 2 3 4 5 6 6 7
.55 3548 3556 3565 3573 3581 3589 3597 3606 3614 3622 1 2 2 3 4 5 6 7 7
.56 3631 3639 3648 3656 -3664 3673 3681 3690 3698 3707 1 2 3 3 4 5 6 7 8
.57 3715 3724 3733 3741 3750 3758 3767 3776 3784 3793 1 2 3 3 4 5 6 7 8
.58 3802 3811 3819 3828 3837 3846 3855 3864 3873 3882 1 2 3 4 4 5 6 7 8
.59 3890 3899 3908 3917 3926 3936 3945 3954 3963 3972 1 2 3 4 5 5 6 7 8
/
.60 3981 3990 3999 4009 4018 4027 4036 4046 4055 4064 1 2 3 4 5 6 6 7 8
,61 4074 4083 4093 4102 4111 4121 4130 4140 4150 4159 1 2 3 4 5 6 7 8 9
.62 4169 4178 4188 4198 4207 4217 4227 4236 4246 4256 1 2 3 4 5 6 7 8 9
.63 4266 4276 4285 4295 4305 4315 4325 4335 4345 4355 1 2 3 4 5 6 7 8 9
.64 4365 4375 4385 4395 4406 4416 4426 4436 4446 4457 1 2 3 4 5 6 7 8 9
.65 4467 4477 4487 4498 4508 4519 4529 4539 4550 4560 1 2 3 4 5 6 7 8 9
.66 4571 4581 4592 4603 4613 4624 4634 4645 4656 4667 1 2 3 4 5 6 7 9 10
.67 4677 4688 4699 4710 4721 4732 4742 4753 4764 4775 1 2 3 4 5 7 8 9 10
.68 4786 4797 4808 4819 4831 4842 4853 4864 4875 4887 I.? 3 4 6 7 8 9 10
.69 4898 4909 4920 4932 4943 4955 4966 4!J77 4989 5000 1 2 3 5 6 7 8 9 10
,70 5012 5023 5035 5047 5058 5070 5082 5093 5105 5117 1 2 4 5 6 7 8 9 11
.71 5120 5140 5152 5164 5176 5188 5200 5212 5224 5236 1 2 4 5 6 7 8 10 11
.72 5248 5260 5272 5284 5297 5309 5321 5333 5346 5358 1 2 4 5 6 7 9 10 11
.73 5370 5383 5395 5408 5420 5433 5445 5458 5470 5483 1 3 4 5 6 8 9 10 11
.74 5495 5508 5521 5534 5546 5559 5572 5585 5598 5610 1 3 4 5 6 8 9 10 12
.75 5623 5636 5649 5662 5675 5689 5702 5715 5728 5641 1 3 4 5 7 8 9 10 12
.76 5754 5768 5781 5794 5808 5821 5834 5848 5861 5875 1 3 4 5 7 8 9 11 12
.77 5888 5902 5916 5929 5943 5957 5970 5984 5998 6012 1 3 4 5 7 8 10 11 12
.78 6026 6039 6053 '6067 6081 6095 6109 6124 6138 6152 1 3 4 6 7 8 10 11 13
.79 6166 6180 6194 6209 6223 6237 6252 6266 6281 6295 1 3 4 6 7 9 10 11 13
.80 6310 6324 6339 6353 6368 6383 6397 6412 6427 6442 1 3 4 6 7 9 10 12 13
.81 6457 6471 6486 6501 6516 6531 6546 6561 6577 6592 2 3 5 6 8 9 11 12 14
.82 6607 6622 6637 6653 6668 6683 6699 6714 6730 6745 2 3 5 6 8 9 11 12 14
.83 676 L 6776 6792 6808 6823 6839 6855 6871 6887 6902 2 3 5 6 8 9 11 13 14
.84 6918 6934 6950 6966 6982 6998 7015 7031 7047 7063 2 3 5 6 8 10 11 13 15
.85 7079 7096 7112 7129 7145 7161 7178 7194 7211 7228 2 3 5 7 8' 10 12 13 15
.86 7244 7261 7278 7295 7311 7328 7345 7362 7379 7396 2 3 5 7 8 10 12 13 15
.87 7413' 7430 7447 7464 7482 7499 7516 7534 7551 7568 2 3 5 7 9 10 12 14 16
.88 7586 7603 7621 7638 7656 7674 7691 7709 7727 7745 2 4 5 7 9 11 12 14 16
.89 7762 7780 7798 7816 7834 7852 7870 7889 7907 7925 2 4 5 7 9 11 13 14 16
90 7943 7962 7980 7998 8017 8035 8054 8072 8091 8110 2 4 6 7 9 11 13 15 17
.91 8128 8147 8166 8185 8204 !!222 8241 8260 8279 8299 2 4 6 8 9 11 13 15 17
.92 8318 8337 8356 8375 8395 8414 8433 8453 8472 8492 2 4 6 8 10 12 14 15 17
.93 8511 8531 8551 8570 8590 8610 8630 8650 8670 8690 2 4 6 8 10 12 14 16 18
.94 8710 8730 8750 8770 8790 8810 8831 8851 8872 8892 2 4 6 8 10 12 14 16 18
.95 8913 8933 8954 8974 8995 9016 9036 9057 9078 9099 2 4 6 8 10 12 15 17 19
.96 9120 9141 9162 9183 9204 9226 9247 9268 9290 9311 2 4 6 8 11 13 15 17 19
.97 9333 9354 9376 9397 9419 9441 9462 9484 9506 9528 2 4 7 9 11 13 15 17 20
.98 9550 9572 9594 9616 9638 9661 9683 9705 9727 9750 2 4 7 9 11 13 16 18 20
.99 9772 9795 9817 9840 9863 9886 9908 9931 9954 9977 2 5 7 9 11 14 16 18 20
TABLE II
Amount of Re. 1 at Compound Interest
S =(1 + i)1I
Periods Rate i
n 0.0025 (i%) 0.004167 (fz %) 0.5(~) 0.005833 (tz %) 0.0075 (f%)
1 1.00250000 1.00416667 1.00500000 1.00583333 1.00750000
2 1.00500625 1.00835069 1.01002500 1.01170069 1.01505625
3 1.00751877 1.01255216 1.01507513 1.01760228 1.02266917
4 1.01003756 1.01677112 1.02015050 1.02353830 1.03033919
"
5 1.01256266 1.02100767 1.02525125 1.02950894 1.03806673
6 1.01509406 1.02526187 1.03037751 1.03551440 1.04585224
7 1.01763180 1.02953379 1.03552940 1.04155490 1.05369613
8 1.02017588 1.03382352 1.04070704 1.04763064 1.06159885
9 1.02272632 1.03813111 1.04591058 1.05374182 1.06956084
10 1.02528313 1.04245666 1.05114013 1.05988865 1.07758255
11 1.02784634 1.04680023 1.05639583 1.06607133 1.08566441
12 1.03041596 1.05116190 1.06167781 1.07229008 1.09380690
13 1.03299200 1.05554174 1.06698620 1.07854511 1.10201045
14 1.03557448 1.05993983 1.07232113 1.08483662 1.11027553
15 1.03816341 1.06435625 1.07768274 1.09116483 1.11860259
16 1.04075882 1.06879106 1.08307115 1.09752996 1.12699211
17 1.04336072 1.07324436 1.08848651 1.10393222 1.13544455
18 1.04596912 1.07771621 1.09392894 1.11037182 1.14396039
19 1.04858404 1.08220670 1.09939858 1.11684899 1.15254009
20 1.05120550 1.08671589 1.10489558 1.12336395 1.16118414
21 1.05383352 1.09124387 1.11042006 1.12991690 1.16989302
22 1.05646810 1.09579072 1.11597216 1.13650808 1.17866722
23 1.05910927 1.10035652 1.12155202 1.14313771 1.18750723
24 1.06175704 1.10494134 1.12715978 1.14980602 1.19641353
25 1.06441144 1.10954526 1.13279558 1.15651322 1.20538663
26 1.06707247 1.11416836 1.13845955 1.16325955 1.21442703
27 1.06974015 1.11881073 1.14415185 1.17004523 1.22353523
28 1.07241450 1.12347244 1.14987261 1.17687049 1.23271175
29 1.07509553 1.12815358 1.15562197 1.18373557 1.24195709
30 1.07778327 1.13285422 1.16140008 1.19064069 1.25127176
31 1.08047773 1.13757444 1.16720708 1.19758610 1.26065630
32 1.08317892 1.14231434 1.17304312' 1.20457202 1.27011122
33 1.08588687 1.14707398 1.17890833 1.21159869 1.27963706
34 I 1.08860159 1.15185346 1.18480288 1.21866634 1.28923434
35 1.09132309 1.15665284 1.19072689 1.22577523 1.29890359
36 1.09405140 1.16147223 1.19668052 1.23292559 1.30864537
37 J.09678653 1.16631170 1.20266393 1.24011765 1.31846021
38 1.09952850 1.17117133 1.20867725 1.24735167 1.32834866
39 1.10227732 1.17605121 1.21472063 1.25462789 1.33831128
40 1.10503301 1.18095142 1.22079424 1.26194655 1.34834861
41 1.10779559 1.18587206 1.22689821 1.26930791 1.35846123
42 1.11056508 1.19081319 1.23303270 1.27671220 1.36864969
43 1.11334149 1.19577491 1.23919786 1.28415969 1.37891456
44 1.11612485 1.20075731 1.24539385 1.29165062 1.38925642
45 1.11891516 1.20576046 1.25162082 1.29918525 1.39967584
46 1.12171245 1.21078446 1.25787892 1.30676383 1.41017341
47 1.12451673 1.21582940 1.26416832 1.31438662 1.42074971
48 1.12732802 1.22089536 1.27048916 1.32205388 1.43140533
49 1.13014634 1.22598242 1.27684161 1.32976586 1.44214087
50 1.13297171 1.23109068 1.28322581 1.33752283 1.45295693
APPENDIX 469
TABLE II
=
S (1 + i)n
Periods Rate i
n 0.0025 (t%) 0.004167 (k %) 0.005 (l%) 0.005833 (k%) 0.O75~%)
50 1.13297171 1.23109068 1.28322581 1.33752283 1.45295693
51 1.13580414 1.23622022 1.28964194 1.34532504 1.46385411
52 1.13864365 1.24137114 1.29609015 1.35317277 1.47483301
53 1.14149026 1.24654352 1.30257060 1.36106628 1.48589426
54 1.14434398 1.25173745 1.30908346 1.36900583 1.49703847
55 1.14720484 1.25695302 1.31562887 1.37699170 1.50826626
56 1.15007285 1.26219033 1.32220702 1.38502415 1.51957825
57 1.15294804 1.26744946 1.32881805 1.39310346 1.53097509
58 1.15583041 1.27273050 1.33546214 1.40122990 1.54245740
59 1.15871998 1.27803354 1.34213946 1.40940374 1.55402583
60 1.16161678 1.28335868 1.34885015 1.41762526 1.56568103
61 1.16452082 1.28870601 1.35559440 1.42589474 1.57742363
62 1.16743213 1.29407561 1.36237238 1.43421246 1.58925431
63 1.17035071 1.29946760 1.36918424 1.44257870 1.60117372
64 1.17327658 1.30488204 1.37603016 1.45099374 1.61318252
65 1.17620977 1.31031905 1.38291031 1.45945787 1.62528139
66 1.17915030 1.31577872 1.38982486 1.46797138 1.63747100
67 1.18209817 1.32126113 1.39677399 1.47653454 1.64975203
68 1.18505342 1.32676638 1.40375785 1.48514766 1.66212517
69 1.18801605 1.33229458 1.41077664 1.49381102 1.67459111
70 1.19098609 1.33784580 1.41783053 1.50252492 1.68715055
71 1.19396356 1.34342016 1.42491968 1.51128965 1.69980418
72 1.19694847 1.34901774 1.43204428 1.52010550 1.71255271
73 1.19994084 1.35463865 1.43920450 1.52897279 1.72539685
74 1.20294069 1.36028298 1.44640052 1.53789179 1.73833733
75 1.20594804 1.36595082 1.45363252 1.54686283 1.75137486
76 1.20896291 1.37164229 1.46090069 1.55588620 1.76451017
77 1.21198532 1.37735746 1.46820519 1.56496220 1.77774400
I
i 78
I:
1.21501528 1.38309645 1.47554622 1.57409115 1.79107708
79 1.21805282 1.38885935 1.48292395 1.58327334 1.80451015
80 I
"
1.22109795 1.39464627 1.49033857 1.59250910 1.81804398
81 1.22415070 1.40045729 1.49779026 1.60179874 1.83167931
82 I 1.22721108 1.40629253 1.50527921 1.61114257 1.84r>·H6:H
83 1.23027910 1.41215209 1.51280561 1.62054090 1.85~it37
II 84 1.23335480 1.41803605 1.52036964 1.62999405 1.873!:,;O196
85 1.23643819 1.42394454
I 86 1.23952928 1.42987764
1.52797148
1.53561134
1.63950235
1.64906612
1.88725098
1.90140536
87 1.24262811 1.43583546 1.54328940 1.65868567 1.91566590
88 1.24573468 1.44181811 1.55100585 1.66836134 1.93003339
89 1.24884901 1.44782568 1.55876087 1.67809344 1.94450865
90 1.25197114 1.45385829 1.56655468 1.68788232 1.95909246
91 1.25510106 1.45991603 1.57438745 1.69772830 1.97378565
92 1.25823882 1.46599902 1.58225939 1.70763172 1.98858905
93 1.26138441 1.47210735 1.59017069 1.71759290 2.00350346
94 1.26453787 1.47824113 1.59812154 1.72761219 2.01852974
95 1.26769922 1.48440047 1.60611215 1.73768993 2.03366871
I 96 1.27086847 1.49058547 1.61414271 1.74782646 2.04892123
97 1.27404564 1.49679624 1.62221342 1.75802211 2.06428814
98 1.27723075 1.50303289 1.63032449 1.76827724 2.07977030
99 1.28042383 1.50929553 1.63847611 1.77859219 2.09536858
100 1.28362489 1.51558426 1.64666849 1.78896731 2.11108384
TABLE II
S (1 + i)n =
Periods Rate i
n 0,01 (1%) 0.01125 (1~ %) 0.0125 u! %) 0.015 u~%) 0.~75 u£%)
1 1.01000000 1.01125000 1.01250000 1.01500000 1.01750000
2 1.02010000 1.02262656 1.02515625 1.03022500 1.03530625
3 1.03030100 1.03413111 1.03797070 1.04567838 1.05342411
4 1.04060401 1.04576509 1.05094534 1.06136355 1.07185903
5 1.05101005 1.05752994 1.06408215 1.07728400 1.09061656
6 1.06152015 1.06942716 1.07738318 1.09344326 1.10970235
7 1.07213535 1.08145821 1.09085047 1.10984491 1.12912215
8 1.08285671 1.09362462 1.10448610 1.12649259 1.14888178
9 1.09368527 1.10592789 1.11829218 1.14338998 1.16898721
10 1.10462213 1.11836958 1.13227083 1.16054083 1. .. 8944449
11 1.11566835 1.13095124 1.14642422 1.17794894
12 1.21025977
1.12682503 1.14367444 1.16075452 1.19561817
13 1.23143931
1.13809328 1.15654078 1.17526395 1.21355244
14 1.25298950
1.14947421 1.16955186 1.18995475 1.23175573 1.27491682
15 1.16096896 1.18270932 1.20482918 1.25023207
16 1.29722786
1.17257864 1.19601480 1.21988955 1.26898555
17 1.31992935
1.18430443 1.20946997 1.23513817 1.28802033
18 1.34302811
1.19614748 1.22307650 1.25057739 1.30734064
19 1.36653111
1.20810895 1.23683611 1.26620961 1.32695075 1.39044540
20 1.22019004 1.25075052 1.28203723 1.34685501
21 1.41477820
1.23'239194 1.26482146 1.29806270 . 1.36705783
22 1.43953681
1.24471586 1.27905071 1.31428848 1.38756370 1.46472871
23 1.25716302 1.29344003 1:33071709 1.40837715
24 1.49036146
1.26973465 1.~:J7923 1.34735105 1.42950281 1.51644279
25 1.28243200 1.32270f13 1.36419294 1.45094535 1.54298054
26 1.29525631 i,337586:57 1.38124535 1.47270953 1.56998269
27 1.30820888 1.35263442 1.39851092 1.49480018 1.59745739
28 1.32129097 1.36785156 1.41599230 1.51722218
29 • 1.62541290
1.33450388 1.38323989 1.43369221 1.53998051 1.65385762
30 1.34784892 1.39880134 1.45161336 1.56308022 1.68280013
31 1.36132740 1.41453785 1.46975853 1.58652642 1.71224913
32 1.37494068 1.43045140 1.48813051 1.61032432 1.74221349
33 1.38869009 1.44654398 1.50673214 1.63447918 1.77270223
34 1.40257699 1.46281760
35
36
1.41660276
. 1.43076878
. 1.47927430
1.49591613
1.52556629
1.54463587
1.56394382
1.65899637
1.68388132
1.80372452
1.83528970
1.70913954 1.86740727
37 1.44507647 1.51274519 1.58349312 1.73477663 1.90008689
38 1.45952724 1.52976357 1.60328678 1.76079828 1.93333841
39 1.47412251 1.54697341 1.62332787 1.78721025 1.96717184
40 1.48886373 1.56437687 1.64361946 1.81401841 2.00159734
41 1.50375237 1.58197611 1.66416471 1.84122868 2.03662530
42 1.51878989 1.59977334 1.68496677 1.86884712 2.07226624
43 1.53397779 1.61777079 1.70602885 1.89687982 2.10853090
44 1.54931757 1.63597071 1.72735421 1.92533302 2.14543019
45 1.56481075 1.65437538 1.74894614 l.95421301 2.18297522
46 l.58045885 l.67298710 1.77080797 1.98352621 2.22117728
47 1.59626344 1.69180821 l.79294306 2.0132791 2.26004789
48 1.61222608 l.71084105 1.81535485 2.04347829 2.29959872
49 1.62834834 1.73008801 1.83804679 2.07413046 2.33984170
L_~.749510
I
~ l.64463182 l.86102237
I 2.10524242 2.38078893
APPENDIX
471
TABLE II
S (1 + i)n =
Periods Rate i
n 0.Q1 (1%) 0.01125 (1t %) 0.0125 (1~ %) 0.015 (1~%) 0.0175 (1~ %)
50 1.64463182 1.74955150 1.86102237 2.10524242 2.38078893
51 1.66107814 1.76923395 1.88428515 2.13682106
52 2.42245274
1.67768892 1.78913784 1.90783872 . 2.16887337 2.46484566
53 1.69446581 1.80926564 1.93168670 2.20140647 2.50798046
54 1.71141047 1.82961988 1.95583279 2.23442757 2.55187012
55 1.72852457 1.85020310
56
57
1.74580982
1.76326792
1.87101788
1.89206684
1.98028070
2.00503420
2.03009713
2.26794398
2.30196314
2.33649259
2.59652785
2.64196708
2.68820151
I
58 1.78090060 1.91335259 2.05547335 2.37153998 2.73524503
59 1.79870960 1.93487780 2.08116676 2.40711308 2.78311182
60 1.81669670 1.95664518 2.10718135 2.44321978 2.83181628
61 1.83486367 1.97865744 2.13352111 2.47986807 2.88137306
62 1.85321230 2.00091733 2.16019013 2.51706609 2.93179709
63 1.87174443 2.02342765 2.18719250 2.55482208 2.98310354
64 1.89046187 2.04619121 2.21453241 2.59314442 3.03530785
65
66
1.90936649
l.92846015
2.06921087
2.09248949
2.24221407
2.27024174
2.63204158
2.67152221
3.08842574
3.14247319
II
67 1.94774475 2.11602999 2.29861976 2.71159504 3.19746647
68 l.96722220 2.13983533 2.32735251 2.75226896 3.25342213
69 1.98689442 2.16390848 2.35644442 2.79355300 3.31035702
70 2.00676337 2.18825245 2.38589997 2.83545629 3.;)6828827
71 2.02683100 2.21287029 2.41572372 2.87798814 3.42723331
72 2.04709931 2.23776508 2.44592027 2.92115796 3.48720990
73 2.06757031 2.26293994 2.47649427 2.96497533 3.54823607
74 2.08824601 2.28839801 2.50745045 3.00944996 3.61033020
75
76
2.10912847
2.13021975
2.31414249 2.53879358 3.05459171 3.673510S0 I
77 2.15152195
2.34017659
2.36650358
2.57052850
2.60266011
3.10041059
3.14691674
3.73779742
3.80320888
II
78
79
2.17303717
2.19476754
2.39312675
2.42004942
2.63519336
2.66813327
3.19412050
3.24203230
3.86976503
3.93748592 I
80 2.2167i522 2.44727498 2.70148494 3.29066279
I
I
81 2.23888237 - 2.47480682 2.73525350 3.34002273
4.00639192
4.!}7650378
82 2.26127119 2.50264840 2.76944417 3.39012307 4.14784260
83 I 2.28388390 2.53080319 2.80406222 3.44097492 .\ ~ ,042984
84 2.30672274 2.55927473 2.83911300 3.49258954 l.:lili428737 I
I
85 2.32978997 2.58806657 2.87460191 3.54497838 4.36943740
86 2.35308787 2.61718232 2.91053444 3.59815306 4.44590255
87 2.37661875 2.64662562 2.94691612 3.65212535 4.52370584
88 2.40038494 2.67640016 2.98375257 3.70690723 4.60287070
89 2.42438879 2.70650966 3.02104948 3.76251084 4.68342093
90 2.44863267 2.73695789 3.05881260 3.81894851 4.76538080
t
91 2.47311900 2.76774867 3.09704775 3.87623273
I 92
93
2.49785019
2.52282869
2.79888584
2.83037331
3.13576085
3.17495786
3.93437622
3.99339187
4.84877496
4.93362853
5.01996703
I
94 2.54805698 2.86221501
I 95 2.57353755 2.89441492
3.21464483
3.25482789
4.05329275
4.11409214
5.10781645
5.19720324
96 2.59927293 2.92697709 3.29551324 4.17580352 5.2881542?
97 2.62526565 2.95990559 3.33670716 4.23844057
I 5.38069699
I
98 2.65151831 2.99320452 . 3.37841600 4.30201718 5.47485919
99 2.67803349 3.02687807 3.42064620 4.36654744 5.57066923
100 2.70481383 3.06093045 3.46340427 4.43204565 5.66815594
TABLE II
S =(1 + i)"
Periods Rate i
n 0.02 (2 %) 0.0225 (2~ %) 0.025 (~%) 0.0275 (2~%) 0.03 (3 %)
1 1.02000000 1.02250000 1.02500000 1.02750000 1.03000000
2 1.04040000 1.04550625 1.05062500 1.05575625 1.06090000
3 1.06120800 1.06903014 1.07689063 1.08478955 1.09272700
4 1.08243216 1.09308332 1.10381289 1.11462126 1.12550881
5 1.10408080 1.11767769 1.13140821 1.14527334 1.15927407
6 1.12616242 1.14282544 1.15969342 1.17676836 1.19405230
7 1.14868567 1.16853901 1.18868575 1.20912949 1.22987387
8 1.17165938 1.19483114 1.21840290 1.24238055 1.26677008
9 1.19509257 1.22171484 1.24886297 1.27654602 1.30477318
10 1.21899442 1.24920343 1.28008454
11 1.24337431
- 1.27731050 1.31208666
1.31165103 1.34391638
1.34772144 1.38423387
12 1.26824179 1.30604999 1.34488882 1.38478378 1.42576089
13 1.29360663 1.33543611 1.37851104 1.42286533 1.46853371
14 1.31947876 1.36548343 1.41297382 1.46199413 1.51258972
15 1.34586834 1.39620680 1.44829817 1.50219896 1.55796742
16 1.37278571 1.42762146 1.48450562 1.54350944 1.60470644
17 1.40024142 1.45974294 1.52161826 1.58595595 1.65284763
18 1.42824625 1.49258716 1.55965872 1.62956973 1.70243306
19 1.45681117 1.52617037 1.59865019 1.67438290 1.75350605
20 1.48594740 1.56050920 1.63861644 1.72042843 1.80611123
21
22
1.51566634
1.54597967 I 1.59562066
1.63152212
1.67958185
1.72157140
1.76774021
1.81635307
1.86029457
1.91610341
23 1.57689926 1.66823137 1.76461068 1.86630278 1.97358651
24 1.60843725 1.70576658 1.80872595 1.91762610 2.03279411
25 1.64060599 1.74414632 1.85394410 1.97036082 2.09377793
26 1.67341811 1.78338962 1.90029270 2.02454575 2.15659127
27 1.70688648 1.82351588 1.94780002 2.08022075 2.22128901
28 1.74102421 1.86454499 1.99649502 I 2.13742682 2.28792768
29 1.77584469 1.90649725 2.04640739 2.19620606 2.35656551
I
I
30 1.81136158 1.94939344 2.09756758 2.25660173 2.42726247
31 1.84758882 1.99325479 2.15000677 2.31865828 2.50008035
32 1.88454059 2.03810303 2.20375694 2.38242138 2.57508276
33 1.92223140 2.08396034 2.25885086 2.44793797 2.65233524
34 1.96067603 2.13084945 2.31532213 2.51525626 2.73190530
35 1.99988955 2.17879356 2.37320519 2.58442581 2.81386245
36 2.03988734 2.22781642 2.43253532 2.65549752 2.89827833
37 2.08068509 2.27794229 2.49334870 2.72852370 2.98522668
38 2.12229879 2.32919599 2.55568242 2.80355810 3.07478348
39 2.16474477 2.38160290 2.61957448 2.88065595 3.16702698
40 2.20803966 2.43518897 2.68506384 2.95987399 3.26203779
41 2.25220046 2.48998072 2.75219043 3.04127052 3.35989893
42 2.29724447 2.54600528 2.82099520 3.12490546 3.46069589
43 2.34318936
44 . 2.39005314
2.60329040
2.66186444
2.89152008
2.96380808
3.21084036
3.29913847
3.56451677
3.67145227
45 2.43785421 2.72175639 3.03790328
I
3.38986478 3.78159584
46 2.48661129 2.78299590 3.11385086 3.48308606 3.89504372
47 2.53634352 2.84561331 3.19169713 3.57887093 4.01189503
48 2.58707039 2.90963961 3.27148956 3.67728988 4.13225188
49 2.63881179 2.97510650 3.35327680 3.77841535 4.25621944
50 2.69158803 3.04204640 3.43710872 3.88232177 4.38390602
APPENDIX
473
TABLE II
S =(1 + i)ll
Periods Rate i
n 0.02 (2 %) 0.0225 (2~%) 0.025 (~%) 0.0275 (2~ %) 0.03 (3 %)
50 2.69158803 3.04204640 3.43710872 3.88232177 4.38390602
51 2.74541979 3.11049244 3.52303644 3.98908562 4.51542320
52 2.80032819 3.18047852 3.61111235 4.09878547 4.65088590
53 2.85633475 3.25203929 3.70139016 4.21150208 4.79041247
54 2.91346144 3.32521017 3.79392491 4.32731838 4.93412485
55 2.97173067 3.40002740 3.88871303 4.44631964 5.08214859
56 3.03116529 3.47652802 3.98599236 4.56859343 5.23461305
57 3.09178859 3.55474990 4.08564217 4.69422975 5.39165144
58 3.15362436 3.63473177 4.18778322 4.82332107 5.55340098
59 3.21669685 3.71651324 4.29247780 4.95596239 572000301
60 3.28103079 3.80013479 4.39978975 5.09225136 5.89160310
61 3.34665140 3.88563782 4.50978449 5.23228827 6.06835120
62 3.41358443 3.97306467 4.62252910 5.37617620 6.25040173
63 3.48185612 4.06245862 4.73809233 5.52402105 6.43791379
64 3.55149324 4.15386394 4.85654464 5.67593162 6.63105120
65 3.62252311 4.24732588 4.97795826 5.83201974 6.82998273
66 3.69497357 4.34289071 5.10240721 5.99240029 7.03488222
67 3.76887304 4.44060576 5.22996739 6.15719130 7.24592868
68 3.84425050 4.54051939 5.36071658 6.32651406 7.46330654
69 3.92113551 4.64268107 5.49473449 6.50049319 7.68720574
70 3.99955822 4.74714140 5.63210286 6.67925676 7.91782191
71 4.07954939 4.85395208 5.77290543 6.86293632 8.15535657
72 4.16114038 4.96316600 5.91722806 7.05166706 8.40001727
73 4.24436318. 5.07483723 6.06515876 7.24558791 8.65201778
74 4.32925045 5.18902107 6.21678773 7.44484158 8.91157832
75 4.41583546 5.30577405 6.37220743 7.64957472 9.17892567
76 4.50415216 5.42515396 6.53151261 7.85993802 9.45429344
77 4.59423521 5.54721993 6.69480043 8.07608632 9.73792224
78 4.68611991 5.67203237 6.86217044 8.29817869 10.03005991
79 4.77984231 5.79965310 7.03372470 8.52637861 10.33096171
80
81
4.87543916
4.97294794
5.93014530
6.06357357
7.20956782
7.38980701
. 8.76085402
9.00177751
10.64089056
10.96011727
82 5.07240690 6.20000397 7.57455219 9.24932639 11.28892079
I
83
84 I 5.17385504
5.27733214
6.33950406
6.48214290
7.76391599
7.95801389
9.50368286
9.76503414
11.62758842
11.97641607
85 5.38287878 6.62799112 8.15696424 10.03357258 12.33570855
I 86
87
Ii 5.49053636
5.60034708
6.77712092
6.92960614
8.36088835
8.56991055
10.30949583
10.59300696
12.70577981
13.08695320
88 5.71235402 7.08552228 8.78415832 10.88431465 13.47956180
89 5.82660110 7.~49653 9.00376228 11.18363331 13.88394865
90 5.94313313 7.40795782 9.22885633 11.49118322 14.30046711
91 6.06199579 7.57463688 9.45957774 11.80719076 14.72948112
92 6.18323570 7.74506621 9.69606718 12.13188851 15.17136556
93 6.30690042 7.91933020 9.93846886 12.46551544 15.62650652
94 6.43303843 8.09751512 10.18693058 12.80831711 16.09530172
95 6.56169920 8.27970921 10.44160385 13.16054584 16.57816077
96 6.69293318 8.46600267 10.70264395 13.52246085 17.07550559
97 6.82679184 8.65648773 10.97021004 13.89432852 17.58777076
98 6.96332768 8.85125871 11.24446530 14.27642255 18.11540388
99 7.10259423 9.05041203 11.52557693 14.66902417 18.65886600
100 7.24464612 9.25404630 11.81371635 15.07242234 19.21863198
TABLE II
Amount of Re. 1 ,at Compound Interest
=
S (1 + i)n
Periods Rate i
n 0.035 (3~%) 0.04 (4 %) 0.45(~%) 0.05 (5%) 0.5(~%)
1 1.03500000 1.04000000 1.04500000 1.05000000 1.05500000
2 1.07122500 1.08160000 1.09202500 1.10250000 1.11302500
3 1.10871788 1.12486400 1.14116613 1.15762500 1.17424138
4 1.14752300 1,16985856 1.19251860 1.21550625 1.23882465
5 1.18768631 1.21665290 1.24618194 1.27628156 1.30696001
6 1.22925533 1.26531902 1.30226012 1.34009564 1.37884281
7 1.27227926 1.31593178 1.36086183 1.40710042 1.45467916
8 1.31680904 1.36856905 1.42210061 1.47745544 1.53468651
9 1.36289735 1.42331181 1.48609514 1.55132822 1.61909427
10 1.41059876 1.48024428 1.55296942 1.62889463 1.70814446
11 1.45996972 1.53945406 1.62285305 1.71033936 1.80209240
12 1.51106866 1.60103222 1.69588143 1.79585633 1.90120749
13 1.56395606 1.66507351 1.77219610 1.88564914 2.00577390
14 1.61869452 1.73167645 1.85194492 1.97993160 2,11609146
15 1.67534883 1.80094351 1.93528244 2.07892818 2.23247649
16 1.73398604 1.87298125 . 2.02237015 2,18287459 2.35526270
17 1.79467555 1.94790050 • 2.11337681 2.29201832 2.48480215
18 1.85748920 2.02581652 i·20847877 2.40661923 2.62146627
19 1.92250132 2.10684918 .30786031 2.52695020 2.76564691
20 1.98978886 2.19112314 2.41171402 2.65329771 2.91775749
21 2.05943147 2.27876807 2.52024116 2.78596259 3.07823415
22 2.13151158 2.36991879 2.63365201 2.92526072 3.24753703
23 2.20611448 2.46471554 2.75216635 3.07152376 3.42615157
24 2.28332849 2.56330416 2.87601383 3.22509994 3.61458990
25 2.36324498 2.66583633 3.00543446 3.38635494 3.81339235
26 2.44595856 2.77246978 3.14067901 3.55567269 4.02312893
27 2.53156711 , 2.88336,858 3.28200956 3.73345632 4.24440102
28 2.62017196 2.99870332 3.42969999 3.92012914 4.47784307
29 2.71187798 3.11865145 I
3.58403649 4.11613560 4.72412444
30 , 2.80679370 3.24339751 3.74531813 '4.32194238 4.98395129
31 2.90503148 3.37313341 3.91385745 4.53803949 5.25806861
32 3.00670759 3.50805875 4.08998104 4.76494147 5.54726238
33 3.11194235 3.64838110 4.27403018 5.00318854 5.85236181
!
34
35
3.22086033
3.33359045
3.79431634
3.94608899
4.46636154
4.66734781
5.25334797
I 6.17424171
5.51001537 6.51382501
36 3.45026611 4.10393255 4.87737846 5.79181614 6.87208538
37 3.57102543 4.26808986 . 5.09686049 6.08140694 7.25005008
38 3.69601132 4.43881345 5.32621921 6.38547729 7.64880283
39
40
3.82537171 4.61636599 5.56589908 6.70475115 I 8.069486g9
3.95925972 4.80102063 5.81636454 7.03998871 8.51330877
41 4.09783381 4.99306145 6.07810094 7.39198815 8.98154076
42 4.24125799 5.19278391 6.35161548 7.76158756 9.4755256
43 4.38970202 5.40049627 6.63743818 8.14966693 9.9966794
44 4.54334160 5.61651508 6.93612290 8.56715028 10.64649677
45 4.70235855 5.84117668 7.24824843 8.98600779 11,12655409
46 4.86694 1 10 6.07482271 7.57441961 9.43426818 11.73851456
47 5.03728404 6,:n781562 7.91526849 9.90597109 12.38413287
48 5.21358898 . 6.57052824 8.27145557 10.40126965 13.06526017
49 5.39606459 6.83334937 8.64367107 10.92133313 13.78384948
50 5.58492686 7.10668335 9.03263627 11.46739979 14.54196120 I
APPENDIX
475
TABLE II
S =(1 + i)n
Periods Rate i
n 0.06 (6 %) 0.065 (~%) 0.07 (7 %) 0.075 (7j%) 0.08 (8 %)
1 1.06000000 1.06500000 1.07000000 1.07500000
2 1.08000000
1.12360000 1.13422500 1.14490000 1.15562500 1.16640000
3 1.19101600 1.20794963 1.22504300 1.24229688 1.25971200
4 1.26247696 1.28646635 1.31079601 1.33546914 1.36048896
5 1.33822558 1.37008666 1.40255173 1.43562933 1.46932808
6 1.41851911 1.45914230 1.50073035 1.54330153 1.58687432
7 1.50363026 1.55398655 1.60578148 1.65904914 1.71382427
8 1.59384807 1.65499567 1.71818618 1.78347783 1.85093021
9 1.68947896 1.76257039 1.83845921 1.91723866 1.99900463
10 1.79084770 1.87713747 1.96715136 2.06103156 2.15892500
11 1.89829856 1.99915140 2.10485195 2.21560893 2.33163900
12 2.01219647 2.12909624 2.25219159 2.38177960 2.51817012
13 2.13292826 2.26748750 2.40984500 2.56041307 2.71962373
14 2.26090396 2.41487418 2.57853415 2.75244405 2.93719362
15 2.39655819 2.57184101 2.75903154 2.95887735 3.17216911
16 2.54035168 2.73901067 2.95216375 3.18079315 3.42594264
17 2.69277279 2.91704637 3.15881521 3.41935264 3.70001805
18 2.85433915 3.10665438 3.37993228 3.67580409 3.99601950
19 3.02559950 3.30858691 3.61652754 3.95148940 4.31570106
20 3.20713547 3.52364506 3.86968446 4.24785110 4.66095714
21 3.39956360 3.75268199 4.14056237 4.56643993 5.03383372
22 3.60353742 3.99660632 4.43040174 4.90892293 5.43654041
23 3.81974966 4.25638573 4.74052986 5.27709215 5.87146365
24 4.04893464 4.53305081 5.07236695 5.67287406 6.34118074
25 4.29187072 4.82769911 5.42743264 6.09833961 6.84847520
26 4.54938296 5.14149955 5.80735292 6.55571508 7.39635321
27 4.82234594 5.47569702 6.21386763 7.04739371 7.98806147
28 5.11168670 5.83161733 6.64883836 7.57594824 8.62710639
29 5.41838790 6.21067245 7.11425705 8.14414436 9.31727490
30 5.74349117 6.61436616 7.61225504 8.75495519 10.06265689
31 6.08810064 7.04429996 8.14511290 9.41157683 10.86766944
32 6.45338668 7.50217946 8.71527080 10.11744509 11.73708300
33 6.84058988 7.98982113 9.32533975 10.87625347 12.67604964
34 7.25102528 8.50915950 9.97811354 11.69197248 13.69013361
35 7.68608679 9.06225487
I 36
37
8.14725200
8.63608712
9.65130143
10.67658148
11.42394219
12.56887042
13.51153570
14.78534429
15.96817184
10.27863603 12.22361814 14.52490088 17.24562558
38 9.15425234 10.94674737 13.07927141 15.61426844 18.62527563
39 9.70350749 11.65828595 13.99482041 16.78533858 20.11529768
40 10.28571794 12.41607453 14.97445784 18.04423897 21.7245215
41 10.90286101 13.22311938 16.02266989 19.39755689 23.46248322
42 11.55703267 14.08262214 17.14425678 20.85237366 25.33948187
43 12.25045463 14.99799258 18.34435475 22.41630168 27.36664042
44 12.98548191 15.97286209 19.62845959 24.09752431 29.55597166
45 13.76461083 17.01109813 21.00245176 25.90483863 31.92044939
46 14.59048748 18.11681951 22.47262338 27.84770153 34.47408534
47 15.46591673 19.29441278 24.04570702 29.93627915 37.23201217
48 16.39387173 20.54854961 25.72890651 32.18150008 40.21057314
49 17.37750403 21.88420533 27.52992997 34.59511259 43.42741899
50 18.42015427 23.30667868 29.45702506 37.18974603 46.90161251
TABLE II
=
S (1 + i)n
Periods Rate i
n 0.085 (~ %) 0.09 (9 %) 0.10 (10 %) 0.11 (11 %) 0.12 (12 %)
1 1.08500000 1.09000000 1.10000000 1.11000000 1.12000000
-
2 1.17722500 1.18810000 1.21000000 1.23210000 1.25440000
3 1.27728913 1.29502900 1.33100000 1.36763100 1.40492800
4 1.38585870 1.41158161 1.46410000 1.51807041 1.57351936
5 1.50365669 1.53862396 1.61051000 1.68505816 1.76234168
6 1.63146751 1.67710011 1.77156100 1.87041455 1.97382269
7 1.77014225 1.82803912 1.94871710 2.07616015 2.21068141
8 1.92060434 1.99256264 2.14358881 2.30453777 2.47596318
9 2.08385571 2.17189328 2.35794769 2.55803692 2.77307876
10 2.26098344 2.36736368 2.59374246 2.83942099 3.10584821
11 2.45316703 2.58042641 2.85311671 3.15175730 3.47854999
12 2.66168623 2.81266478 3.13842838 3.49845060 3.89597599
13 2.88792956 3.06580461 3.45227121 3.88328016 4.36349311
14 3.13340358 3.34172703 3.79749834 4.31044098 4.88711229
15 3.39974288 3.64248246 4.17724817 4.78458949 5.47356576
16 3.68872102 3.97030588 4.59497299 5.31089433 6.13039365
17 4.00226231 4.32763341 5.05447029 5.89509271 6.86604089
18 4.34245461 4.71712042 5.55991731 6.54355291 7.68996580
19 4.71156325 5.14166126 6.11590905 7.26334373 8.61276169
20 5.11204613 5.60441077 6.72749995 8.06231154 9.64629309
21 5.54657005 6.10880774 7.40024994 8.94916581 10.80384826
22 6.01802850 6.65860043 8.14027494 9.93357404 12.10031006
23 6.52956092 7.25787447 8.95430243 11.02626719 13.55234726
24 7.08457369 7.91108318 9.84973268 12.23915658 15.17862893
25 7.68676236 8.62308066 10.83470594 13.58546380 17.00006441
26 8.34013716 9.39915792 11.91817654 15.07986482 19.04007214
27 9.04904881 10.24508213 13.10999419 16.73864995 21.32488079
28 9.81821796 11.16713952 14.42099361 18.57990145 23.88386649
29 10.65276649 12.17218208 15.86309297 20.62369061 26.74993047
30 11.55825164 13.26767847 17.44940227 22.89229657 29.95992212
31 12.54070303 14.46176953 19.19434250 25.41044919 33.55511278
32 13.60666279 15.76332879 21.11377675 28.20559861 37.58172631
31.30821445 42.09153347
I
33 14.76322913 17.18202838 23.22515442
34 16.01810360 18.72841093 25.54766986 34.75211804 47.14251748
1
35 17.37964241 20.41396792 28.10243685 38.57485103 I 52.79961958
36 18.85691201 22.25122503 30.91268053 42.81808464 59.13557393
37 20.45974953 24.25383528 34.00394859 47.52807395 66.23184280
38 22.19882824 26.43668046 37.40434344 52.75616209 74.17966394
39 24.08572865 28.81598170 41.14477779 58.55933991 83.08122361
40 26.13301558 31.40942005 45.25925557 65.00086731 93.05097044
41 28.35432190 34.23626786 49.78518112 72.15096271 104.2170869
42 30.76443927 37.31753197 54.76369924 80.08756861 116.7231373
43 33.37941660 40.67610984 60.24006916 88.89720115 130.7299138
I 44
45
36.21666702
39.29508371
44.33695973
48.32728610
66.26407608
72.89048369
98.67589328
109.5302415
146.4175035
163.9876039
46 42.63516583 52.67674185 80.17953205 121.5785681 183.6661163
I 47 4625915492 57.41764862 88.19748526 134.9522106 205.7060503
48 50.19118309 62.58523700 97.01723378 149.7969538 230.3907763
49 54.45743365 68.21790833 106.7189572 166.2746187 258.0376695
50 59.08631551 74.35752008 117.3908529 184.5648267 289.0021898
APPENDIX
TABLE III
Present Value of Re. 1 at Compound Interest
v JJ =(1 + i)-fI
Periods Rate i
n 0.0025 (:%) 0.004167 (li %) 0.005 (~) 0.005833 (li %) 0.75~%)
1 0.99750623 0.99585062 0.99502488 0.99420050 0.99255583
2 0.99501869 0.99171846 0.99007450 0.98843463 0.98516708
3 0.99253734 0.98760345 0.98514876 0.98270220 0.97783333
4 0.99006219 0.98350551 0.98024752 0.97700301 0.97055417
5 0.98759321 0.97942457 0.97537067 0.97133688 0.96332920
6 0.98513038 0.97536057 0.97051808 0.96570361 0.95615802
7 0.98267370 0.97131343 0.96568963 0.96010301 0.94904022
8 0.98022314 0.96728308 0.96088520 0.95453489 0.94197540
9 0.97777869 0.96326946 0.95610468 0.9'4899906 0.93496318
10 0.97534034 0.95927249 0.95134794 0.943495>':;4 0.92800315
11 0.97290807 0.95529211 0.94661487 0.93802354 0.92109494
12 0.97048187 0.95132824 0.94190534 0.93258347 0.91423815
13 0.96806171 0.94738082 0.93721924 0.92717495 0.90743241
14 0.96564759 0.94344978 0.93255646 0.92179779 0.90067733
15 0.96323949 0.93953505 0.92791688 0.91645182 0.89397254
16 0.96083740 0.93563657 0.92330037 0.91113686 0.88731766
17 0.95844130 0.93175426 0.91870684 0.90585272 0.88071231
18 0.95605117 0.92788806 0.91413616 0.90059922 0.87415614
19 0.95366700 0.92403790 0.90958822 0.89537619 0.86764878
20 0.95128878 0.92920372 0.90506290 0.89018346 0.86118985
21 0.94891649 0.91638544 0.90056010 0.88502084 0.85477901
22 0.94655011 0.91258301 0.89607971 0.87988815 0.84841589
23 0.94418964 0.90879636 0.89162160 0.87478524 0.84210014
24 0.94183505 0.90502542 0.88718567 0.86971192 0.83583140
25 0.93948634 0.90127013 0.88277181 0.86466802 0.82960933
26 0.93714348 0.89753042 0.87837991 0.85965338 0.82343358
27 0.93480646 0.89380623 0.87400986 0.85466782 0.81730380
28. 0.93247527 0.89009749 0.86966155 0.84971117 0.81121966
29 0.93014990 0.88640414 0.86533488 0.84478327 0.80518080
30 0.92783032 0.88272611 0.86102973 0.83988394 0.79918690
31 0.92551653 0.87906335 0.85674600 0.83501303 0.79323762
32 0.92320851 0.87541578 0.85248358 0.83017037 0.78733262
33 0.92090624 0.87178335 0.84824237 0.82535580 0.78147158
34 0.91860972 0.86816599 0.84402226 0.82056914 0.77565418
35 0.91631892 0.86456365 0.83982314 0.81581025 0.76988008
36 0.91403384 0.86097624 0.83564492 0.81101896 0.76414896
37 0.91175445 0.85740373 0.83148748 0.80637510 0.75846051
38 0.90948075 0.85384604 0.82735073 0.80169853 0.75281440
39 0.90721272 0.85030311 0.82323455 0.79704907 0.74721032
40 0.90495034 0.84677488 0.81913886 0.79242659 0.74164796
41 I 0.90269361 0.84326129 0.81506354 0.78783091 0.73612701
42 0.90044250 0.83976228 0.81100850 0.78326188 0.73064716
43 0.89819701 0.83627779 0.80697363 0.77871935 0.72520809
44 0.89595712 0.83280776 0.80295884 0.77420316 0.71980952
45 0.89372281 0.82935212 0.79896402 0.76971317 0.71445114
46 0.89149407 0.82591083 0.79498907 0.76524922 0.70913264
47 0.88927090 0.82248381 0.79103390 0.76081115 0.70385374
48 0.88705326 0.81907102 0.78709841 0.75639883 0.69861414
49 0.88484116 0.81567238 0.78318250 0.75201209 0.69341353
50 0.88263457 0.81228785 0.77928607 0.74765079 0.68825165
TABLE III
v n =(1 + i)-A
Periods Rate i
n 0.0025 <~%) 0.004167 <fi %) 0.005 <~) 0.005833 <k %) 0.0075 <I%)
50 0.88263457 0.81228785 0.77928607 0.74765079 0.68825165
51 0.88043349 0.80891736 0.77540902 0.74331479 0.68312819
52 0.87823790 0.80556086 0.77155127 0.73900393 0.67804286
53 0.87604778 0.80221828 0.76771270 0.73471808 0.67299540
54 0.87386312 0.79888957 0.76389324 0.73045708 0.66798551
55 0.87168391 0.79557468 0.76009277 0.72622079 0.66301291
56 0.86951013 0.79227354 0.75631122 0.72200907 0.65807733
57 0.86734178 0.78898610 0.75254847 0.71782178 0.65317849
58 0.86517883 0.78571230 0.74880445 0.71365877 0.64831612
59 0.86302128 0.78245208 0.74507906 0.70951990 0.64348995
60 0.86086911 0.77920539 0.74137220 0.70540504 0.63869970
61 0.85872230 0.77597217 0.73768378 0.70131404 0.63394511
62 0.85658085 0.77275237 0.73401371 0.69724677 0.62922592
63 0.85444474 0.76954593 0.73036190 0.69320308 0.62454185
64 0.85231395 0.76635279 0.72672826 0.68918285 0.61989266
65 0.85018848 0.76317291 0.72311269 0.68518593 0.61527807
66 0.84806831 0.76000621 0.71951512 0.68121219 0.61069784
67 0.84595343 0.75685266 0.71593544 0.67726150 0.60615170
68 0.84384382 0.75371219 0.71237357 0.67333372 0.60163940
69 0.84173947 0.75058476 0.70882943 0.66942872 0.59716070
70 0.83964037 0.74747030 0.70530291 0.66554637 0.59271533
71 . 0.83754650 0.74436876 0.70179394 0.66168653 0.58830306
72 0.83545786 0.74128009 0.69830243 0.65784908 0.58392363
73 0.83337442 0:'13820424 0.69482829 0.65403388 0.57957681
74 0.83129618 0.73514115 0.69137143 0.65024081 0.57526234
75 0.82922312 0.73209078 0.68793177 0.64646973 0.57097999
76 0.82715523 0.72905306 0.68450923 0.64272053 0.56672952
77 0.82509250 0.72602794 0.68110371 0.63899307 0.56251069
78 0.82303491 0.72301537 0.67771513 0.63528723 0.55832326
79 0.82098246 0.72001531 0.67434342 0.63160288 0.55416701
80 0.81893512
-
0.71702770 0.67098847 0.62793989 0.55004170
81 0.81689289 0.71405248 0.66765022 0.62429816 0.54594710
82 0.81485575 0.71108960 0.66432858 0.62067754 0.54188297
83 0.81282369 0.70813902 0.66102346 0.61707792 0.53784911
84 0.81079670 0.70520069 0.65773479 0.61349917 0.53384527
85 0.80877476 0.70227454 0.65446248 0.60994118 0.52987123
86 0.80675787 0.69936054 0.65120644 0.60640382 0.52592678
87 0.80474600 0.69645863 0.64796661 0.60288698 0.52201169
88 0.80273915 0.69356876 0.64474290 0.59939054 0.51812575
89 0.80073731 0.69069088 0.64153522 - 0.59591437 0.51426873
90 0.79874046 0.68782495 0.63834350 0.59245836 0.51044043
91 0.79674859 0.68497090 0.63516766 0.58902240 0.50664063
92 0.79476168 0.68212870 0.63200763 0.58560636 0.50286911
93 0.79277973 0.67929829 0.62886331 0.58221014 0.49912567
94 0.79080273 0.67647962 0.62573464 0.57883361 0.49541009
95 0.78883065 0.67367265 0.62262153 0.57547666 0.49172217
96 0.78686349 0.67087733 0.61952391 0.57213918 0.48806171
97 0.78490124 0.66809361 0.61644170 0.56882106 0.48442850
98 0.78294388 0.66532143 0.61337483 0.56552218 0.48082233
99 0.78099140 0.66256076 0.61032321 0.56224243 0.47724301
100 0.77904379 0.65981155 0.60728678 0.55898171 0.47369033
APPENDIX 479
TABLE III
V" =(1 + i)-n
Periods Rate i
n 0.01 (1%) 0.01125 (l~ %) 0.0125 (l~ %) 0.015 (1~%) 0.0175 (l~ %)
1 0.99009901 0.98887515 0.98765432 0.98522167 0.98280098
2 0.98029605 0.97787407 0.97546106 0.97066175 0.96589777
3 0.97059015 0.96699537 0.96341833 0.95631699 0.94928528
4 0.96098034 0.95623770 0.95152428 0.94218423 0.93295851
5 0,95146569 0.94559970 0.93977706 0.92826033 0.91691254
6 0.94204524 0.93508005 0.92817488 0.91454219 0.90114254
7 0.93271805 0.92467743 0.91671593 0.90102679 0.88564378
8 0.92348322 0.91439054 0.90539845 0.88771112 0.87041157
9 0.91433982 0.90421808 0.89422069 0.87459224 0.85544135
10 0.90528695 0.89415880 0.88318093 0.86166723 0.84072860
11 0.89632372 0.88421142 0.87227746 0.84893323 0.82626889
12 0.88744923 0.87437470 0.86150860 0.83638742 0.81205788
13 0.87866260 0.86464742 0.85087269 0.82402702 0.79809128
14 0.86996297 0.85502835 0.84036809 0.81184928 0.78436490
15 0.86134947 0.84551629 0.82999318 0.79985150 0.77087459
16 0.85282126 0.83611005 0.81974635 0.78803104 0.75761631
17 0.84437749 0.82680846 0.80962602 0.77638526 0.74458605
18 0.83601731 0.81761034 0.79963064 0.76491159 0.73177990
19 0.82773992 0.80851455 0.78975866 0.75360747 0.'71919401
20 0.81954447 0.79951995 0.78000855 0.74247042 0.70682458
21 0.81143017 0.79062542 0.77037881 0.73149795 0.69466789
22 0.80339621 0.78182983 0.76086796 0.72068763 0.68272028
23 0.79544179 0.77313210 0.75147453 0.71003708 0.67097817
24 0.78756613 0.76453112 0.74219707 0.69954392 0.65943800
25 0.77976844 0.75602583 0.73303414 0.68920583 0.64809632
26 0.77204796 0.74761516 0.72398434 0.67902052 0.63694970
27 0.76440392 0.73929806 0.71504626 0.66898574 0.62599479
28 0.75683557 0.73107348 0.70621853 0.65909925 0.61522829
29 0.74934215 0.72294040 0.69749978 0.64935887 0.60464697
ao 0.74192292 0.71489780 0.68888867 0.63976243 0.59424764
31 0.73457715 0.70694467 0.68038387 0.63030781 0.58402716
32 0.72730411 0.69908002 0.67198407 0.62099292 0.57398247
33 0.72010307 0.69130287 0.66368797 0.61181568 0.56411053
34 0.71297334 0.68361223 0.65549429 0.60277407 0.55440839
35 0.70591420 0.67600715 0.64740177 0.59386608 . 0.54487311
36 0.69892495 0.66848667 0.63940916 0.58508974 0.53550183
37 0.69200490 0.66104986 0.63151522 0.57644309 0.52629172
38 0.68515337 0.65369578 0.62371873 0.56792423 0.51724002
39 0.67836967 0.64642352 0.61601850 0.55953126 0.50834400
40 0.67165314 0.63923216 0.60841334 0.55126232 0.49960098
41 0.66500311 0.63212080 0.60090206 0.54311559 -0.49100834
42 0.65841892 0.62508855 0.59348352 0.53508925 0.48256348
43 0.65189992 0.61813454 0.58615656 0.52718153 0.47426386
44 0.64544546 0.61125789 0.57892006 0.51939067 0.46610699
45 0.63905492 0.60445774 0.57177290 0.51171494 0.45809040
46 0.63272764 0.59773324 0.56471397 0.50415265 0.45021170
47 0.62646301 0.59108355 0.5'5774219 0.49670212 0.44246850
48 0.62026041 0.58450784 0.55085649 0.48936170 0.43485848
49 0.61411921 0.57800528 0.54405579 0.48212975 0.42737934
50 0.60803882 0.57157506 0.53733905 0.47500468 0.42002883
-
TABLE III
V" =(1 + i)-IJ
Periods Rate i
n 0.01 (1%) 0.01125 (151 %) 0.0125 (1± %) 0.015 (~%) 0.0175 (l! %)
50 0.60803882 0.57157506 0.53733905 0.47500468 0.42002883
51 0.60201864 0.56521637 0.53070524 0.46798491 0.41280475
52 0.59605806 0.55892843 0.52415332 0.46106887 0.40570492
53 0.59015649 0.55271044 0.51768229 0.45425505 0.39872719
54 0.58431336 0.54656162 0.51129115 0.44754192 0.39186947
55 0.57852808 0.54048120 0.50497892 0.44092800 0.38512970
56 0.57280008 0.53446843 0.49874461 0.43441182 0.37850585
57 0.56712879 0.52852256 0.49258727 0.42799194 0.37199592
58 0.56151365 0.52264282 0.48650594 0.42166694 0.36559796
59 0.55595411 0.51682850 0.48049970 0.41543541 0.35931003
60 0.55044962 0.51107887 0.47456760 0.40929597 0.35313025
61 0.54499962 0.50539319 0.46870874 0.40324726 0.34705676
62 0.53960358 0.49977077 0.46292222 0.39728794 0.34108772
63 0.53426097 0.49421090 0.45720713 0.39141669 0.33522135
64 0.52897126 0.48871288 0.45156259 0.38563221 0.32945587
65 0.52373392 0.48327602 0.44598775 0.37993321 0.32378956
66 0.51854844 0.47789965 0.44048173 0.37431843 0.31822069
67 0.51341429 0.47258309 0.43504368 0.36878663 0.31274761
68 0.50833099 0.46732568 0.42967277 0.36333658 0.30736866
69 0.50329801 0.46212675 0.42436817 0.35796708 0.30208222
70 0.49831486 0.45698566 0.41912905 0.35267692 0.29688670
71 0.49338105 0.45190177 0.41395462 0.34746495 0.29178054
72 0.48849609 0.44687443 0.40884407 0.34233000 0.28676221
73 0.48365949 0.44190302 0.40379661 0.33727093 0.28183018
74 0.47887078 0.43698692 0.39881147 0.33228663 0.27698298
75 0.47412949 0.43i12551 0.39388787 0.32737599 0.27221914
76 0.46943514 0.42731818 0.38902506 0.32253793 0.26753724
77 0.46478726 0.42256433 0.38422228 0.31777136 0.26293586
78 0.46018541 0.41786337 0.37947879 0.31307523 0.25841362
79 0.45562912 0.41321470 0.37479387 0.30844850 0.25396916
80 0.45111794 0.40861775 0.37016679 0.30389015 0.24960114
81 0.44665142 0.40407194 0.36559683 0.29939916 0.24530825
82 0.44222913 0.39957670 0.36108329 0.29497454 0.24108919
83 0:43785063 0.39513148 0.35662547 0.29061531 0.23694269
84 0.43351547 0.39073570 0.35222268 0.28632050 0.23286751
85 0.42922324 0.38638882 0.34787426 0.28208917 0.22886242
86 0.42497350 0.38209031 0.34357951 0.27792036 0.22492621
87 0.42076585 0.37783961 0.33933779 0.27381316 0.22105770
88 0.41659985 0.37363621 0.33514843 0.26976666 0.21725572
89 0.41247510 0.36947956 0.33101080 0.26577996 0.21351914
.
90 0.40839119 0.36536916 0.32692425 0.26185218 0.20984682
91 0.40434771 0.36130448 0.32288814 0'.25798245 0.20623766
92 0.40034427 0.35728503 0.31890187 0.25416990 0.20269057
93 0.39638046 0.35331029 0.31496481 0.25041369 0.19920450
94 0.39245590 0.34937976 0.31107636 0.24671300 0.19577837
95 0.38857020 0.34549297 0.30723591 0.24306699 0.19241118
96 0.38472297 0.34164941 0.30344287 0.23947487 0.18910190
97 0.38091383 0.33784861 0.29969666 0.23593583 0.18584953
98 0.37714241 0.33409010 0.29599670 0.23244909 0.18265310
99 0.37340832 0.33037340 0.29234242 0.22901389 0.17951165
100 0.36971121 0.32669805 0.28873326 0.22562944 0.17642422
APPENDIX 481
TABLE III
v n =(1 + i)-fl
\
Periods Rate i
n 0.02 (2 %) 0.0225 (2~ 0.025 (~
%) . %) 0.0275 (2~ %) 0.03 (3 %)
1 0.98039216 0.97799511 0.97560976 0.97323601 0.97087379

2 0.96116878 0.95647444 0.95181440 0.94718833 0.94259591
3 0.94232233 0.93542732 0.92859941 0.92183779 0.91514166\
4 0.92384543 0.91484335 0.90595064 0.89716573 0.88848705 )
5 0.90573081 0.89471232 0.88385429 0.87315400 0.86260878
6 0.88797138 0.87502427 0.86229687 0.84978491 0.83748426
7 0.87056018 0.85576946 0.84126524 0.82704128 . 0.81,.309151
8 0.85349037 0.83693835 0.82074657 0.80490635 0.78940923
9 0.83675527 0.81852161 0.80072836 0.78336385 0.76641673
10 0.82034830 0.80051013 0.78119840 0.76239791 0.74409391
11 0.80426304 0.78289499 0.76214478 0.74199310 0.72242128
12 0.78849318 0.76566748 0.74355589 0.72213440 0.70137988
13 0.77303253 0.74881905 0.72542038 0.70280720 0.68095134
14 0.75787502 0.73234137 0.70772720 0.68399728 0.66111781
15 0.74301473 0.71622628 0.69046556 0.66569078 0.64186195
16 0.72844581 0.70046580 0.67362493 0.64787424 0.62316694
17 0.71416256 0.68505212 0.65719506 0.63053454 0.60501645
18 0.70015937 0.66997763 0.64116591 0.61365892 0.58739461
19 0.68643076 0.65523484 0.62552772 0.59723496 0.57028603
20 0.67297133 0.64081647 0.61027094 0.58125057 0.55367575
21 0.65977582 0.62671538 0.59538629 0.56569398 0.53754928
22 0.64683904 0.61292457 0.58086467 0.55055375 0.52189250
23 0.63415592 0.59943724 0.56669724 0.53581874 0.50669175
24 0.62172149 0.58624668 0.55287535 0.52147809 0.49193374
25 0.60953087 0.57334639 0.53939059 0.50752126 0.47760557
26 0.59757928 0.56072997 0.52623472 0.49393796 0.46369473
27 0.58586204 0.54839117 0.51339973 0.48071821 0.45018906
28 I 057437455 0.53632388 0.50087778 0.46785227 0.43707675
29 I 0.56311231 0.52452213 0.48866125 0.45533068 0.42434636
30
31 II 0.55207089
0.54124597
0.51298008
0.50169201
0.47674269
0.46511481
0.44314421
0.43128391
0.41198676
0.39998715
32 0.53063330 0.49065233 0.45377055 0.4197~ 0.38833703
33 I 0.52022873 0.47985558 0.44270298 0.40850708 0.37702625
34 0.51002817 0.46929641 0.43190534 0.39757380 0.36604490
35 0.50002761 0.45896960 0.42137107 0.38693314 0.35538340
36 0.49022315 0.44887002 0.41109372 0.37657727 0.34503243
37 0.48061093 0.43899268
I
0.40106705 0.36649856 0.33498294
38 ' 0.47118719 0.42933270 0.39128492 0.35668959 0.32522615
39 0.46194822 0.41988528 0.38174139 0.34714316 0.31575355
40 0.45289042 0.41064575 0.37243062 . 0.33785222 0.30655684
41 0.44401021 0.40160954 0.36334695 0.32880995 0.29762800
42 0.43530413 0.39277216 0.35448483 0.32000968 0.28895922
43 0.42676875 0.38412925 0.34583886 0.31144495 0.28054294
44 0.41840074 0.37567653 0.33740376 0.30310944 0.27237178
45 0.41019680 0.36740981 0.32917440 0.29499702 0.26443862
46 0.40215373 0.35932500 0.32114576 0.28710172 0.25673653
47 0.39426836 0.35141809 0.31331294 0.27941773 0.24925876
48 0.38653761 0.34368518 0.30567116 0.27193940 0.24199880
49 0.37895844 0.33612242 0.29821576 0.26466122 0.23495029
i 50 0.37152788 0.32872698 0.29094221 0.25757783 0.22810708

TABLE III
v n =(1 + i)~
Periods Rate i
----- -----
n 0.02 (2 %) 0.0225 (2~ %) 0.025 (~ %) 0.0275 (2~ %) 0.03 (3 %)
50 0.37152788 0.32872608 0.29094221 0.25757783 0.22810708
51 0.36424302 0.32149250 0.28384606 0.25068402 0.22146318
52 0.35710100 0.31441810 0.27692298 0.24397471 0.21501280
53 0.35009902 0.30749936 0.27016876 0.23744497 0.20875029
54 0.34323433 0.30073287 0.26357928 0.23109000 0.20267019
55 0.33650425 0.29411528 0.25715052 0.22490511 0.19676717
56 0.32990613 0.28764330 \ 0.25087855 0.21888575 0.19103609
57 0.32343738 0.28131374 0.24475956 0.21302749 0.18547193
58 0.31709547 0.27512347 0.23878982 0.20732603 0.18006984
59 0.31087791 0.26906940 . 0.23296568 0.20177716 0.17482508
60 0.30478227 0.26314856 0.22728359 0.19637679 0.16973309
61 0.29880614 0.25735801 0.22174009 0.19112097 0.16478941
62 0.29294720 0.25169487 0.21633179 0.18600581 0.15998972
63 0.28720314 0.24615635 0.21105541 0.18102755 . 0.15532982
64 0.28157170 0.24073971 0.20590771 0.17618253 0.15080565
65 0.27605069 0.23544226 0.20088557 0.17146718 0.14641325
66 0.27063793 0.23026138 0.19598593 0.16687804 0.14214879
67 0.26533130 0.22519450 0.19120578 0.16241172 0.13800853
68 0.26012873 0.22023912 0.18654223 0.15806493 0.13398887
69 0.25502817 0.21539278 0.18199241 0.15383448 0.13008628
70 0.25002761 0.21065309 0.17755358 0.14971726 0.12629736
71 0.24512511 0.20601769 0.17322300 0.14571023 0.12261880
72 0.24031874 0.20148429 0.16899805 0.14181044 0.11904737
73 0.23560661 ~
0.19705065 0.16487615 0.13801503 0.11557998
74 0.23098687 0.19271458 0.16085478 0.13432119 0.11221357
75 0.22645771 0.18847391 0.15693149 0.13072622 0.10894521
76 0.22201737 0.18432657 0.15310389 0.12722747 0.10577205
77 0.21766408 0.18027048 0.14936965 ~.12385 0.10269131
78 0.21339616 0.17630365 0.14572649 0.12050837 0.09970030
79 0.20921192 0.17242411 0.14217218 0.11728309 0.09679641
80 0.20510973 0.16862993 0.13870457 0.11414412 0.09397710
81 0.20108797 0.16491925 0.13532153 0.11108917 0.09123990
82 0.19714507 0.16129022 0.13202101 0.10811598 0.08858243
83 0.19327948 0.15774105 0.12880098 0.10522237 0.08600236
84 0.18948968 0.15426997 0.12565949 0.10240620 0.08349743
85 0.18577420 0.15087528 0.12259463 0.09966540 0.08106547
86 0.18213157 0.14755528 0.11960452 0.09699795 0.07870434
87 0.17856036 0.14430835 0.11668733 9.09440190 0.07641198
88 0.17505918 0.14113286 0.11384130 0.09187533 0.07418639
89 0.17162665 0.13802724 0.11106468 0.08941638 0.07202562
90 0.16826142 0.13498997 0.10835579 0.08702324 0.06992779
91 0.16496217 0.13201953 0.10571296 0.08469415 0.06789105
92 0.16172762 0.12911445 0.10313460 0.08242740 0.06591364
93 0.15855649 0.12627331 0.10061912 0.08022131 0.06399383
94 0.15544754 0.12349468 0.09816500 0.07807427 0.06212993
95 0.15239955 0.12077719 0.09577073 0.07598469 0.06032032
96 0.14941132 0.11811950 0.09343486 0.07395104 0.05856342
97 0.14648169 0.11552029 0.09115596 0.07197181 0.05685769
98 0.14360950 0.11297828 0.08893264 0.07004556 0.05520164
99 0.14079363 0.11049221 0.08676355 0.06817086 0.05359383
100 0.13803297 0.10806084 0.08464737 0.06634634 0.05203284
APPENDIX 483
TABLE III
v n =(1 + i)-ft
Periods Rate i
n 0.035 (:¥z %) 0.04 (4 %) 0.45(~%) 0.05 (5%) 0.5(~%)
1 0.96618357 0.96153846 0.95693780 0.95238095 0.94786730
2 0.93351070 0.92455621 0.91572995 0.90702948 0.89845242
3 0.90194271 0.88899636 0.87629660 0.86383760 0.85161366
4 0.87144223 0.85480419 0.83856134 0.82270247 0.80721674
\
5 0.84197317 0.82192711 0.80245105 0.78352617 0.76513435
6 0.81350064 0.79031453 0.76789574 0.74621540 0.72524583
7 0.78599096 0.75991781 0.73482846 0.71068133 0.68743681
8 0.75941156 0.73069021 0.70318513 0.67683936 0.65159887
9 0.73373097 0.70258674 0.67290443 0.64460892 0.61762926
10 0.70891881 0.67556417 0.64392768 0.61391325 0.58543058
11 . 0.68494571 0.64958093 0.61619874 0.58467929 0.55491050
12 0.66178330 0.62459705 0.58966386 0.55683742 0.52598152
13 0.63940415 0.60057409 0.56427164 0.53032135 0.49856068
14 0.61778179 0.57747508 0.53997286 0.50506795 0.47256937
15 0.59689062 0.55526450 0.51672044 0.48101710 0.44793305
16 057670591 0.53390818 0.49446932 0.45811152 0.42458109
17 0.55720378 0.51337325 0.47317639 0.43629669 0.40244663
18 0.53836114 0.49302812 0.45280037 . 0.41552065 0.38146590
19 0.52015569 0.47464242 0.43330179 0.39573396 0.36157906
20 0.50256588 0.45638695 0.41464286 0.37688948 0.34272896
21 0.48557090 0.43883360 0.39678743 0.35894236 0.32486158
22 0.46915063 0.42195539 0.37970089 0.34184987 0.30792567
23 0.45328563 0.40572633 0.36335013 0.32557131 0.29187267
24 0.43795713 0.39012147 0.34770347 0.31006791 0.27665656
25 0.42314699 0.37511680 0.33273060 0.29530277 0.26223370
26 0.40883767 0.36068923 0.31840248 0.28124073 0.24856275
27 0.39501224 0.34681657 0.30469137 0.26784832 0.23560450
28 0.38165434 0.33347747 0.29157069 0.25509364 0.22332181
29 0.36874815 0.32065141 0.27901502 0.24294632 0.21167944
30 0.35627841 0.30831867 0.26700002 0.23137745 0.20064402
31 0.34423035 0.29646026 0.25550241 0.22035947 0.19018390
32 0.33258971 0.28505794 0.24449991 0.20986617 0.18026910
33 0.32134271 0.27409417 0.23397121 0.19987254 0.17087119
34 0.31047605 0.26355209 0.22389589 0.19035480 0.16196321
35 0.29997686 0.25341547 0.21425444 0.18129029 0.15351963
36 0.28983272 0.24366872 0.20502817 0.17265741 0.14551624
37 0.28003161 0.23429685 0.19619921 0.16443563 0.13793008
38 0.27056194 0.22528543 0.18775044 0.15660536 0.13073941
39 0.26141250 0.21662061 0.17966549 0.14914797 0.12392362
40 0.25257247 0.20828904 0.17192870 0.14204568 0.11746314
41 0.24403137 0.20027793 0.16452507 0.13528160 0.11133947
42 0.23577910 0.19257493 0.15744026 0.12883962 0.10553504
43 0.22780590 0.18516820 0.15066054 0.12270440 0.10003322
44 0.22010231 0.17804635 0.14417276 0.11686133 0.09481822
45 0.21265924 0.17119841 0.13796437 0.11129651 0.08987509
46 , 0.20546787 0.16461386 C.!3202332 0.10599668 0.08518965
47 0.19851968 0.15828256 0.12633810 0.10094921 0.08074849
48 0.19180645 0.15219476 0.12089771 0.09614211 0.07653885
49 0.18532024 0.14634112 0.11569158 0.09156391 0.07254867
50 0.17905337 0.14071262 0.11070965 0.08720373 0.06876652
TABLE III
V" =(1 + j)-Il
Periods Rate i
n 0.06 (6 %) 0.65(~%) 0.07 (7 %) '0.075 (7i %) 0.08 (8 %)
1 0.94339623 0.93896714 \ 0.93457944 0.93023256 0.92592593
2 0.88999644 0.88165928 0.87343873 0.86533261 0.85733882 .
3 0.83961928 0.82784909 0.81629788 0.80496057 0.79383224
4 0.79209366 0.77732309 0.76289521 0.74880053 0.73502985
5 0.74725817 0.72988084 0.71298618 0.69655863 0.68058320
6 0.70496054 0.68533412 0.66634222 0.64796152 0.63016963
7 0.66505711 0.64350621 0.62274974 0.60275490 0.58349040
8 0.62741237 0.60423119 0.58200910 0.56070223 0.54026888
9 0.59189846 0.56735323 0.54393374 0.52158347 0.50024897
10 0.55839478 0.53272604 0.50834929 0.48519393 0.46319349
11 0.52678753 0.50021224 0.47509280 0.45134319 0.42888286
12 0.49696936 0.46968285 0.44401196 0.41985413 0.39711376
13 0.46883902 0.44101676 0.41496445 0.39056198 0.36769792
14 . 0.44230096 0.41410025 0.38781724 0.36331347 0.34046104
15 0.41726506 0.38882652 0.36244602 0.33796602 0.31524170
16 0.39364628 0.36509533 0.33873460 0.31438699 0.29189047
17 0.37136442 0.34281251 0.31657439 0.29245302 0.27026895
18 0.35034379 0.32188969 0.29586392 0.27204932 0.25024903
19 0.33051301 0.30224384 0.27650833 0.25306913 0.23171206
20 0.31180473 0.28379703 0.258+1900 0.23541315 0.21454821
21 0.29415540 0.26647608 0.24151309 0.21898897 0.19865575
22 0.27750510 0.25021228 0.22571317 0.20371067 0.18394051
23 0.26179726 0.23494111 0.21094688 0.18949830 0.17031528
24 0.24697855 0.22060198 0.19714662 . 0.17627749 0.15769934
25 0.23299863 0.20713801 0.18424918 0.16397906 0.14601790
26 0.21981003 0.19449579 0.17219549 0.15253866 0.13520176
27 0.20736795 0.18262515 0.16093037 0.14189643 0.12518682
28 0.19563014 0.17147902 0.15040221 0.13199668 0.11591372
29 0.18455674 0.16101316 0.14056282 0.12278761 0.10732752 i,
30 0.17411013 0.15118607 0.13136712 0.11422103 0.09937733
31 0.16425484 0.14195875 0.12277301 0.10625212 0.09201605
32 0.15495740 0.13329460 0.11474113 0.09883918 0.08520005
33 0.14618622 0.12515925 0.10723470 0.09194343 0.07888893
34 0.13791153 0.11752042 0.10021934 0.08552877 0.07304531
35 0.13010522 0.11034781 0.09366294 0.07956164 0.06763454
36 0.12274077 0.10361297 0.08753546 0.07401083 0.06262458
37 0.11579318 0.09728917 0.08180884 0.06884729 0.05798572
38 0.10923885 0.09135134 0.07645686 0.06404399 0.05369048
39 0.10305552 0.08577590 0.07145501 0.05957580 0.04971341
40 0.09722219 0.08054075 0.06678038 0.05541935 0.04603093
41 0.09171905 0.07562512 0.06241157 0.05155288 0.04262123
42 0.08652740 0.07100950 0.05832857 0.04795617 0.03946411
43 0.08162962 0.06667559 0.05451268 0.04461039 0.03654084
44 0.07700908 0.06260619 0.05094643 0.04149804 0.03383411
45 0.07265007 0.05878515 0.04761349 0.03860283 0.03132788
46 0.06853781 0.05519733 0.04449859 0.03590961 0.02900730
47 0.06465831 0.05182848 0.04158747 0.03340428 0.02685861
48 0.06099840 0.04866524 0.03886679 0.03107375 0.02486908
49 0.05754566 0.04569506 0.03632410 0.02890582 0.02302693
50 0.05428836 0.04290616 0.03394776 0.02688913 0.02132123
APPENDIX 485
TABLE III
Present Value ofRe. 1 at Compound Interest
=
v,. (1 + i)-fI.
Periods Rate i
n 0.85(~%) 0.09 (9 %) 0.10 (10 %) 0.11 (11 %) 0.12 (12 %)
1 0.92165899 0.91743119 0.90909091 0.90090090 0.89285714
2 0.84945529 0.84167999 0.82644628 0.81162243 0.79719388
3 0.78290810 0.77218348 0.75131480 0.73119138 0.71178025
4 0.72157428 0.70842521 0.68301346 0.65873097 0.63551808
5 0.66504542 0.64993139 0.62092132 0.59345133 0.56742686
6 0.61294509 0.59626733 0.56447393 0.53464084 0.50663112
7 0.56492635 0.54703424 0.51315812 0.48165841 0.45234922
8 0.52066945 0.50186628 0.46650738 0.43392650 0.40388323
9 0.47987968 0.46042778 0.42409762 0.39092477 0.36061002
10 0.44228542 0.42241081 0.38554329 0.35218448 0.32197324
11 0.40763633 0.38753285 0.35049390 0.31728331 0.28747610
12 0.37570168 0.35553473 0.31863082 0.28584082 0.25667509
13 0.34626883 0.32617865 0.28966438 0.25751426 0.22917419
14 0.31914178 0.29924647 0.26333125 0.23199482 0.20461981
15 0.29413989 0.27453804 0.23939205 0.20900435 0.18269626
16 0.27109667 0:25186976 0.21762914 0.18829220 0.16312166
17 0.24985869 0.23107318 0.19784467 0.16963262 0.14564434
18 0.23028450 0.21199374 0.17985879 0.15282218 0.13003959
19 0.21224378 0.19448967 0.16350799 0.13767764 0.11610678
~O 0.19561639 0.17843089 0.14864363 0.12403391 0.10366677
21 0.18029160 0.16369806 0.13513057 0.11174226 0.09255961
22 0.16616738 0.15018171 0.12284597 0.10066870 0.08264251
23 0.15314965 0.13778139 0.11167816 0.09069252 0.07378796
24 0.14115176 0.12640494 0.10152560 0.08170498 0.06588210
25 0.13009378 0.11596784 0.09229600 0.07360809 0.05882331
26 0.11990210 0.10639251 0.08390545 0.06631359 0.05252081
27 0.11050885 0.09760781 0.07627768 0.05974197 0.04689358
28 0.10185148 0.08954845 0.06934335 0.05382160 0.04186927
29 0.09387233 0.08215454 0.06303941 0.04848793 0.03738327
30 0.08651828 0.07537114 0.05730855 0.04368282 0.03337792
31 0.079740!}5 . 0.06914783 0.05209868 0.03935389 0.02980172
32 0.07349341 0.06343838 0.04736244 0.03545395 0.02660868
33 0.06773586 0.05820035 0.04305676
34 I 0.06242936 0.05339481 0.03914251
0.03194050
0.02877522
0.02375775
0.02121227
35
36
I 0.05753858
0.05303095
0.04898607
0.04494135
0.03558410 0.02592363 0.01893953
0.03234918 0.02335462 0.01691029
37 0.04887645 0.04123059 0.02940835 0.02104020 0.01509848
38 0.04504742 0.03782623 0.02673486 0.01895513 0.01348078
39 0.04151836 0.03470296 0.02430442 0.01707670 0.01203641
40 0.03826577 0.03183758 0.02209493 0.01538441 0.01074680
41 0.03526799 0.02920879 0.02008630 0.01385983 0.00959536
42 0.03250506 0.02679706 0.01826027 0.01248633 0.00856728
43 0.02995858 0.02458446 0.01660025 0.01124895 0.00764936
44 0.02761160 0.02255455 0.01509113 0.01013419 0.00682978
45 0.02M4848 0.02069224 0.01371921 0.00912990 0.00609802
46 0.02345482 0.01898371 0.01247201 0.00822513 0.00544466
47 0.02161734 0.01741625 0.01133819 0.00741003 0.00486131
48 0.01992382 0.01597821 0.01030745 0.00667570 0.00434045
49 0.01836297 0.01465891 0.00937041 0.00601415 0.00387540
50 0.01692439 0.01344854 0.00851855 0.00541815 0.00346018
486 FINANCIAL AfATHEAfAnCS
TABLE IV
Amount. of an Annuity of Re. 1
. (1 + i)" -1
B-;;) ~= i
Periods Ratei
n 0.0025 (:%) 0.004167 (i\ %) 0.005 (i%) 0.005833 (k %) '0.0075 (~%)
1 1.00000000 1.00000000 1.00000000 1.00000000 1.00000000
2 2.00250000 2.00416667 2.00500000 2.00583333 2.00750000
3 3.00750625 3.01251736 3.01502500 3.01753403
4 3.02255625
4.01502502 4.02506952 4.03010013 4.03513631 4.04522542
5 5.02506258 5.04184064 5.05025063 6.06867461 6.07566461
6 6.03762524 6.06284831 6.07550188 6.08818354 6.11363135
7 7.06271930 7.08811018 7.10587939 7.12369794 7.16948368
8 8.07035110 8.11764397 8.14140879 8.16525285 8.21317971
9 9.09062697 9.15146749 9.18211683 9.21288349 9.27477856
10 10.11325329 10.18959860 10.22802641 10.26662531 10.34433940
11 11.13853642.. 11.23206626 11.27916664 11.32661396 11.42192194
12 12. 1663827t 12.27885649 12.33556237 12.39258529 12.50768636
13 13.19679872' 13.33001739 13.39724018 13.46487537 13.60139325
14 14.22979072 .- 14.38555913 14.46422639 14.54342048 14.70340370
15 16.26636520 16.44549896 15.53654752 16.62825710 '15.81367923
16 16.30362861 16.50985520 16.61423026 16.71942193 16.93228183
17 17.34428743 17.57864627 17.69730141 17.81696189 18.06927394
18 18.38764816 18.65189063 18.78578791 18.92088411 19.19471849
19 19.43361727 19.72960684 19.87971686 20.03125593 ~0.3867
20 20.48220131 20.81181353 20.97911544 21.14810493 21.49121897
21 21.53340682 21.89852942 22.08401101 22.27146887 22.66240312
22 22.68724033 22.98977330 23.19443107 23.40138677 23.82229614
23 23.64370843 24.08656402 24.31040322 24.63789386 25.00096336
24 24.70281770 25.18592053 25.43196524 26.68103167 26.18847069
25 25.76457475 26.29086187 26.55911502 26.83083769 27.38488412
26 .2Q.82898619 27.40040713 27.69191059 27.98736081 28.69027075
27 27.89605865 28.51457549 28.83037015 29.15061036 29.80469778
28 28.96579880 29.63338622 29.97452200 30.32065558 31.02823301
29 30.0ae21330 30.76685866 31.12439461 31.49752607 32.26094476
30 31.11330883 31.88501224 32.28001658 32.68126164 33.50290184
31 32.19109210 33.01786646 33.44141666 33.87190233 34.75417361
32 33.27156983 34.15544090 34.60862375 35.06948843 36.01482991
33 34.36474876 36.29775524 35.78166686 36.27406046 37.28494113
34 35.44063563 36.44482922 36.96057520 37.48565913 38.56457819
35 36.52923722 37.59668268 38.14537807 38.70432548 39.85381253
36 37.62056031 38.75333552 39.33610496 39.93010071 41.16271612
37 38.71461171 39.91480775 40.53278549 41.16302630 42.46136149
38 39.81139824 41.08111945 41.73544942 42.40314395 43.77982170
39 40.91092673 42.25229078 42.94412666 43.65049562 46.10817037
40 42.01320405 43.42834199 44.15884730 44.90512362 46.44648164
41 43.11823706 44.60929342 45.37964153 46.16707007 47.79483026
42 44.22603265 45.79516547 46.60653974 47.43637798 49.15329148
43 45.33659774 46.98597866 47.83957244 48.71309018 50.52194117
44 46.44993923 48.18175357 49.07877030 49.99724988 61.90085573
45 4 7~58604 49.38251088 50.32416415 51.28890050 63.29011215
46 48.6849792,4 50.58827134 51.57578497 52.58808675 54.68978799
47 49.80669H)9 51. 79905581 52.83366390 53.89484959 56.09996140
48 50.93120842 53.01488521 54.09783222 55.20923621 67.52071111
49 52.05853644 54.23578056 55.36832138 56.53129009 68.95211644
50 53.18868278 55.46176298 56.64516299 57.86105595 60.39425732
APPENDIX 487
TABLE IV
Amount of an Annuity of Re. 1
. (1 + i)"-1
Bill £= •
1
Periods Rate i
n 0.0025 (~%) 0.004167 (~%) 0.005 (~%) 0.005833 (-k %) 0.75~%)
50 53.18868278 55.46176298 56.64516299 57.86105595 60.39425732
51 54.32165449 56.69285366 57.92838880 59.19857877 61.84721424
52 55.45745862 57.92907388 59.21803075 60.54390381 63.3ll06835
53 56.59610227 59.17044502 60.51412090 61.89707659 64.78590136
54 57.73759252 60.41698854 61.81669150 63.25814287 66.27179562
55 58.88193650 61.66872600 63.12577496 64.62714870 67.76883409
56 60.02914135 62.92567902 64.44140384 66.00414040 69.27710035
57 61.17921420 64.18786935 65.76361086 67.38916455 70.79667860
58 62.33216223 65.45531881 67.09242891 68.78226801 72.32765369
59 63.48799264 66.72804930 68.42789105 70.18349791 73.8701ll09
60 64.64671262 68.00608284 69.77003051 71.59290165 75.42413693
61 65.80832940 69.28944152 71.11888066 73.01052691 76.98981795
62 .66.97285023 70.57814753 72.47447507 74.43642165 78.56724159
63 68.14028235 71.87222314 73.83684744 75.870634ll 80.15649590
64 69.31063306 73.17169074 75.20603168 77.31321281 81.75766962
65
66
70.48390964
71.660ll942
74.47657278
75.78689183
76.58206184
77.96497215
78.76420655
80.22366442
83.37085214 I
84.99613353
67 72.83926971 77.10267055 79.35479701 81.69163580 86.63360453
68 74.02136789 78.42393168 80.75157099 83.16817034 88.28335657
69 75.20642131 79.75069806 82.15532885 84.65331800 89.94548174
70 76.39443736 81.08299264 83.56610549 86.14712902 91.62007285
71 77.58542345 82.42083844 84.98393602 87.64965394 93.30722340
72 78.77938701 83.76425860 86.40885570 89.16094359 95.00702758
78 79.97633548 85.11327634 87.84089998 90.68104909 96.71958028
74 81)7627632 86.46791499 89.28010448 92.21002188 98.44497714
I 75 82.37921701 87.82819797 90.72650500 93.74791367 100.1833145
76 83.58516505 89.19414880 92.18013752 95.29477650 101.9346893
77 84.79412797 90.56579108 93.64103821 96.85066270 103.6991995
78 86.006ll329 91.94314855 95.10924340 98.41562490 105.4769435
79 87.22112857 93.32624500 96.58478962 99.98971664 107.2680206
80 88.43918139 94.71510435 98.06771357 101.5729894 109.0725307
81 89.66027934 96.10975062 99.55805214 103.1654985 1108905747
82 90.88443004 97.51020792 101.0558424 104.7672972 112.'1~2540
83 92.ll164112 98.91650045 102.5611216 106.3784398 114 ,~·6709
84 93.34192022 100.3286525 104.0739272 107.9989807 116.4269284.
85 94.57527502 101.7466886 105.5942969 109.6289748 ll8.3001304
86 95.81171321 103.1706331 107.1222683 111.2684771 120.1873814
87 97.05124249 104.6005108 108.6578797 112.9175432 122.0887867
88 98.29387060 106.0363462 110.2011691 114.5762289 124.0044526
89 99.53960527 107.4781643 111.7521749 116.2445902 125.9344860
90 100.7884543 108.9259900 113.3109358 117.9226837 127.8789947
91 102.0404254 110.3798483 114.8774905 119.6105660 129.8380871
92 103.2955265 lll.8397643 116.4518779 121.3082943 131.8118728
93 104.5537653 113.3057634 118.0341373 123.0159260 133.8004618
94 105.8151497 114.7778707 119.6243080 124.7335189 135.8039653
95 107.0796876 116.2561118 121.2224295 126.4611311 137.8224951
96 108.3473868 117.7406123 122.8285417 128.1988210 139.8561638
i 97 109.6182553 119.2310978 124.4426844 129.9466475 141.9050850
98 110.8923009 120.7278940 126.0648978 131.7046696 143.9693731 '
99 112.1695317 122.2309269 127.6952223 133.4729468 146.0491434
100 113.4499555 123.7402224 129.3336984 135.2515390 148.1445120
TABLE IV
. (1+W-l
8-;;J ~ = i
Periods Rate i
n 0.D1 (1%) 0.01125 (1~ %) 0.0125 (1~ %) 0.15(~%) 0.0175 (1~ %)
1 1.00000000 1.00000000 1.00000000 1.00000000 1.00000000
2 2.01000000 2.01125000 2.01250000 2.01500000 2.01750000
3 3.03010000 3.03387656 3.03765625 3.04522500 3.05280625
4 4.06040100 4.06800767 4.07562695 4.09090338 4.10623036
5 5.10100501 5.11377276 5.12657229 5.15226693 5.17808939
6 6.15201506 6.17130270 6.19065444 6.22955093 6.26870596
7 7.21353521 7.24072986 7.26803762 7.32299419 7.37840831
8 8.28567056 8.32218807 8.35888810 8.43283911 8.50753046
9 9.36852727 9.41581269 9.46337420 9.55933169 9.65641224
10 10.46221254 10.52174058 10.58166637 10.70272167 10.82539945
11 11.56683467 11.64011016 11.71393720 11.86326249 12.01484394
12 12.68250301 12.77106140 12.86036142 13.04121143 13.22510371
13 13.80932804 13.91473584 14.02111594 14.23682960 14.45654303
14 14.94742132 15.07127662 15.19637988 15.45038205 15.70953253
15 16.09689554 16.24082848 16.38633463 16.68213778 16.98444935
16 17.25786449 17.42353780 17.59116382 17.93236984 18.28167721
17 18.43044314 18.61955260 18.81105336 19.20135539 19.60160656
18 19.61474757 19.82902257 20.04619153 20.48937572 20.94463468
19 20.81089504 21.05209907 21.29676893 21.79671636 22.31116578
20 22.01900399 - 22.28893519 22.56297854 23.12366710 23.70161119
21 23.23919403 23.53968571 23.8450157·7 24.47052211 25.11638938
22 24.47158598 24.80450717 25.14307847 25.83757994 26.55592620
23 25.71630183 26.08355788 26.45736695 27.22514364 28.02065490
24 26.97346485 27.37699790 27.78808403 28.63352080 29.511'01637
25 28.24319950 28.68498913 29.13543508 30.06302361 31.02745915
26 29.52563150 30.00769526 30.49962802 31.51396896 32.57043969
27 30.82088781 31.34528183 31.88087337 32.98667850 34.14042238
28 32.12909669 32.69791625 33.27938429 34.48147867 35.73781977
29 33.45038766 34.G6576781 34.69537659 35.99870085 37.36329267
30 34.78489153 35.4490076;) 36.12906880 37.53868137 39.01715029
31 36.13274045' 36.84780903 37.58068216 39.10176159 40.69995042
32 37.49406785 38.26234688 39.05044069 40.68828801 42.41219955
33 38.86900853 39.69279829 40.53857120 42.29861233 44.15441305
34 40.25769862 41.13934227 42.04530334 43.93309152 45.92711527
35 41.66027560 42.60215987 43.57086963 45.59208789 47.73083979
36 43.07687836 44.08143417 45.11550550 47.27596921 49.56612949
37 44.50764714 45.57735030 46.67944932 48.98510874 51.43353675
38 45.95272361 4'7.09009549 48.26294243 50.71988538 53.33362365
39 47.41225085 48.61985906 49.86622921 52.48068366 55.26696206
40 48.88637336 50.16683248 51.48955708 54.26789391 57.23413390
41 50.37528709 51.73120934 53.13317654 56.08191232 59.23573124
42 51.87898946 53.31318545 54.79734125 57.92314100 61.27235654
43 I 53.39777936 54.91295879 56.48230801 59.79198812 63.34462278
44 54.93175715 56.53072957 58.18833687 61.68886794 65.45315367
45 56.48107472 58.16670028 59.91569108 63.61420096 67.59858386
46 58.04588547 59.82107566 61.66463721 65.56841398 69.78155908
47 59.62634432 61.49406:l76 63.43544518 67.55194018 72.00273637
48 61.22260777 63. 18587t·97 65.22838824 69.56521929 74.26278425
49 62.83483385 64.8967U·01 67.04374310 71.60869758 76.56238298
50
I 64.46318218 66.62680002 68.88178989 73.68282804 78.90222468
APPENDIX 489
TABLE IV
. (1 + j)'"-l
B'iJ ,= i
Periods Rate i
n 0.01 (1%) 0.01125 (1~ %) 0.0125 (1~ %) 0.015 (1~%) 0.0175 (1~ %)
50 64.46318218 66.62680002 68.88178989 73.68282804 78.90222468
51 66.10781401 68.37635152 70.74281226 75.78807046 81.28301361
52 67.76889215 70.14558548 72.62709741 77.92489152 83.70546635
53 69.44658107 7l.93472332 74.53493613 80.09376489 86.17031201
54 71.14104688 73.74398895 76.46662283 82.29517136 88.67829247
55 72.85245735 75.57360883 78.42245562 84.52959893 91.23016259 '
56 74.58098192 77.42381193 80.40273631 86.79754292 93.82669043
57 76.32679174 79.29482981 82.40777052 89.09950606 96.46865752
58 78.09005966 81.18689665 84.43786765 91.43599865 99.15685902
59 79.87096025 83.10024923 86.49334099 93.80753863 101.8921041
60 81.66966986 85.03512704 88.57450776 96.21465171 104.6752159
61 83.48636655 86.99177222 90.68168910 98.65787149 107.5070322
62 85.32123022 88.97042966 92.81521022 101.1377396 110.3884052
63 87.17444252 90.97134699 94.97540034 103.6548057 113.3202023
64 89.04618695 92.99477464 97.16259285 106.2096277 116.3033058
65 90.93664882 95.04096586· 99.37712526 108.8027722 119.3386137
66 92.84601531 97.11017672 101.6193393 111.4348137 122.4270394
67 94.77447546 99.20266621 103.8895811 114.1063359 125.5695126
68 96.72222021 101.3186962 106.1882008 116.8179310 128.7669791
69 98.68944242 103.4585315 108.5155533 119.5701999 132.0204012
70 100.6763368 105.6224400 110.8719978 122.3637529 135.3307583
71 102.6831002 . 107.8106925 113.2578977 125.1992092 138.6990465
72 104.7099312 110.0235628 115.6736215 128.0771974 142.1262798
73 106.7570305 112.2613278 118.1195417 130.9983553 145.6134897
74 108.8246008 114.5242678 120.5960360 133.9633307 149.1617268
75 110.9128468 116.8126658 123.1034864 136.9727806 152.7720560
76 113.0219753 119.1268083 125.6422800 140.0273723 156.4455670
77 115.1521951 121.4669849 128.2128085 ' 143.1277829 160.1833644
78 117.3037170 123.8334886 130.8154686 146.2746997 163.9866733
79 119.4767542 126.2266152 133.4506620 149.4688202 167.8663383
80 121.6715217 128.6466646 136.1187953 152.7108525 171.7938242
81 123.8882369 131.0939396 138.8202802 156.0015163 175.8002162
82 126.1271193 133.6687464 141.5555337 159.3415380 179.8767199
83 128.3883905 136.0713948 144.3249779 162.7316611 184.0245625
84 130.6722744 138.6021980 147.1290401 166.1726360 188.2449924
85 132.9789971 141.1614727 149.9681531 169.6652255 192.6392798
86 135.3087871 143.7495393 152.8427550 173.2102039 196.9087172
87 137.6618750 146.3667216 155.7532896 176.8083569 201.3646197
88 140.0384937 149.0133472 158.7002066 180.4604823 205.8783256
89 142.4388787 151.6897474 161.6839581 184.1673895 210.4811962
90 144.8632675 154.3962571 164.7050076 187.9299004 215.1646172
91 147.3119001 157.1332149 167.7638202 191.7488489 219.9299980
92 149.7860191 159.9009636 170.8608680 196.6250816 224.7787729
93 152.2828693 162.6998495 173.9966288 199.5594578 229.7124015
94 154.8056980 165.5302228 177.1715867 203.5528497 234.7323685
95 157.3537550 168.3924378 180.3862315 207.6061425 239.8401849
96 159.9272926 171.2868627 183.6410694 211.7202346 245.0373882
97 1.62.5265655 174.2138298 186.9365726 215.8960381 250.3256426
98 165.1518311 177.1737354 190.2732798 220.1344787 256.7062395
99 167.8033494 180.1669399 193.6516958 224.4364959 261.1810987
100 170.4813829 183.1938180 197.0723420 228.8030433 266.7517679
490 FINANCIAL MA THEMATICS .
TABLE IV
-1
B-;J
.
J =(1 + i)JI
i
Periods Rate i
n 0.02 (2 %) 0.0225 (2~ %) 0.025 (2j%) 0.0275 (2~ %) 0.03 (3 %)
1 1.00000000 1.00000000 1.00000000 1.00000000 1.00000000
2 2.02000000 2.02250000 2.02500000 2.02750000 2.03000000
3 3.06040000 3.06800625 3.07562500 3.08325625 3.09090000
4 4.12160800 4.13703639 4.15251563 4.16804580 4.18362700
5 5.20404016 5.23011971 5.25632852 5.28266706 5.30913581
6 6.30812096 6.34779740 6.38773671 6.42794040 6.46840988
7 7.43428338 7.49062284 7.54743015 7.60470876 7.~24618
8 8.58296905 8.65916186 8.73611590 8.81383825 8.89233605
9 9.75462843 9.85399300 9:95451880 10.05621880 10.15910613
10 10.94972100 11.07570784 11.20338177 11.33276482 11.46387931
11 12.16871542 12.32491127 12.48346631 12.64441585 12.80779569
12 13.41208973 13.60222177 13.79555297 13.99213729 14.19202966
13 14.68033152 14.90827176 15.14044179 15.37692107 15.61779045
14 15.97393815 16.24370788 16.51895284 16.79978639 17.08632416
15 17.29341692 17.60919130 17.93192666 18.26178052 18.59891389
16 18.63928525 19.00539811 19.38022483 19.76397948 20.15688130
17 20.01207096 20.43301957 20.86473045 21.30748892 21.76158774
18 21.41231238 21.89276251 22.38634871 22.89344487 23.41443537
19 22.84055863 23.38534966 23.94600743 24.52301460 25.11686844
20 24.29736980 24.91152003 25.54465761 26.19739750 26.87037449
21 25.78331719 26.47202923 27.18327405 27.91782593 28.67648572
22 27.29898354 28.06764989 28.86285590 29.68556615 30.53678030
23 28.84496321 29.69917201 30.58442730 31.50191921 32.45288370
24 30.42186247 31.36740338 32.34903798 33.36822199 34.42647022
25 32.03029972 33.07316996 34.15776393 35.28584810 36.45926432
26 33.67090572 34.81731628 36.01170803 37.25620892 38.55304225
27 35.34432383 36.60070590 37.91200073 39.28075467 40.70963352 I
28 37.05121031 38.42422178 39.85980075 41.36097542 42.93092252
29 38.79223451 40.28876677 41.85629577 43.49840224 . 45.21885020
30 40.56807921 42.19526402 43.90270316 45.69460831 47.57541571
31 42.37944079 44.14465746 46.00027074 47.95121003 50.00267818
32 44.22702961 46.13791226 48.15027751 50.26986831 52.50275852
33 46.11157020 48.17601528 50.35403445 52.65228969 55.07784128
34 48.03380160 50.25997563 52.61288531 55.10022765 57.7.3017 52
35 49.99447763 52.39082508 54.92820744 57.61548391 60.46208181
36 51.99436719 54.56961864 57.30141263 60.19990972 63.27594427
37 54.03425453 56.79743506 59.73394794 62.85540724 66.17422259
38 56.11493962 59.07537735 62.22729664 65.58393094 69.15944927
39 58.23723841 61.40457334 64.78297906 68.38748904 72.23423275
40 60.40198318 63.78617624 67.40255354 71.26814499 75.40125973
41 62.61002284 66.22136521 70.08761737 74.22801898 78.66329753
42 64.86222330 68.71134592 72.83980781 77.26928950 82.02319645
43 67.15946777 71.25735121 75.66080300 80.39419496 85.48389234
44 69.50265712 73.86064161 78.55232308 83.60503532 89.04840911
45 71.89271027 76.52250605 81.51613116 86.90417379 92.71986139
46 74.33056447 79.24426243 84.55403443 90.29403857 96.50145723
47 76.81717576 82.02725834 87.66788530 93.77712463
I
100.3965009
48 79.35351927 84.87287165 90.85958243 97.35599556 104.4083960
49 81.94058966 87.78251126 94.13107199 101.0332854 108.5406479
50 , 84.57940145 90.75761776 97.48434879 104.8117008 . 112.7968673
APPENDIX
491
TABLE IV
. (1 + i)" -1
BnI' = i
Periods Rate i
II 0.02 (2 %) 0.0225 (2~ %) 0.025 (~%) 0.0275 (2~ %) 0.03 (3 %)
50 84.57940145 90.75761776 97.48434879 104.8117008 112.7968673
51 87.27098948 93.79966416 100.9214575 108.6940226 117.1807733
52 90.01640927 96.91015661 104.4444939 112.6831082 121.6961965
53 92.81673746 100.0906351 108.0556063 116.7818937 126.3470824
54 95.67307221 103.3426744 111. 7569965 120.9933957 131.1374949
55 98.58653365 106.6678846 115.5509214 125.3207141 136.0716197
56 101.5582643 110.0679120 119.4396944 129.7670337 141.1537683
57 104.5894296 113.5444400 123.4256868 134.3356272 146.3883814
58 107.6812182 117.0991899 127.5113289 139.0298569 151.7800328
59 110.8348426 120.7339217 131.6991121 143.8531780 157.3334338
60 114.0515394 124.4504349 135.9915900 148.8091404 163.0534368
61 117.3325702 128.2505697 140.3913797 153.9013917 168.9450399
62 120.6792216 132.1362075 144.9011642 159.1336800 175.0133911
63 124.0928060 136.1092722 149.5236933 164.5098562 181.2637928
64 127.5746622 140.1717308 154.2617856 170.0338773 187.7017066
65 131.1261554 144.3255948 159.1183303 175.7098089 194.3327578
66 134.7486785 148.5729207 164.0962885 181.5418286 201.1627406
67 138.4436521 152.9158114 169.1986957 187.5342289 208.1976228
68 142.2125251 157.3564171 174.~2863 193.6914202 215.4435515
69 146.0567756 161.8969365 179.7893797 200.0179343 222.9068580
70 149.9779111 166.5396176 185.2841142 206.5184275 230.5940637
71 153.9774694 171.2867590 190.9162171 213.1976842 238.5118856
72 158.0570188 176.1407111 196.6891225 220.0606205 246.6672422
73 162.2181591 181.1038771 202.6063506 227.1122876 255.0672595
74 166.4625223 186.1787143 208.6715093 234.3578755 263.7192773
75 170.7917728 191.3677354 214.8882970 241.8027171 272.6308556
76 175.2076082 196.6735094 221.2605045 249.4522918 281.8097813
77 179.7117604 202.0986634 227.7920171 257.3122298 291.2640747
78 184.3059956 207.6458833 234.4868175 265.3883162 301.0019969
79 188.9921155 2,13.3179157 241.3489880 273.6864948 311.0320568
80 193.7719578 219.1175688 248.3827126 ' 282.2128735 321.3630185
81 198.6473970 225.0477141 255.5922805 290.9737275 332.0039091
82 203.6203449 231.1112876 262.9820875 299.9755050 342.9640264
83 208.6927518 237.3112916 270.5566397 309.2248314 354.2529472
84 213.8666068 243.6507957 278.3205557 318.7285142 365.8805356
85 219.1439390 250.1329386 286.2785695 328.4935484 377.8569517
86 224.5268178 256.7609297 294.4355338 338.5271209 390.1926602
87 230.0173541 263.5380506 302.7964221 348.8366168 402.8984400
88 235.6177012 270.4676567 311.3663327 359.4296237 415.9853932
89 241.3300552 277.5531790 320.1504910 370.3139384 429.4649550
90 247.1566563 284.7981255 329.1542533 381.4975717 443.3489037
91 253.0997894 292.2060834 338.3831096 392.9887549 457.6493708
92 259.1617852 299.7807202 347.8426873 404.7959457 472.3788519
93 265.3450209 307.5257865 357.5387545 416.9278342 487.5502174
94 271.6519214 315.4451166 367.4 772234 429.3933496 503.1767240
95 278.0849598 323.5426318 377.6641540 442.2016667 519.2720257
96 284.6466590 331.8223410 388.1057578 455.3622126 535.8501865
97 291.3395922 340.2883437 398.8084018 468.8846734 552.9256920
98 298.1663840 348.9448314 409.7786118 482.7790019 570.5134628
99 305.1297117 357.7960901 421.0230771 497.0554245 588.6288667
100 312.2323059 366.8465021 432.5486540 511.7244487 607.2877327
TABLE IV
. (1 + i)JI_l
Bn] ,= i
Periods Ratei
n 0.035 (~%) 0.04 (4 %) 0.045 (4j %) 0.05 (5%) 0.5(~ %)
1 1.00000000 1.00000000 1.00000000 1.00000000 1.00000000
2 2.03500000 2.04000000 2.04500000 2.05000000 2.05500000
3 3.10622500 3.12160000 3.13702500 3.15250000 3.16802500
4 4.21494288 4.24646400 4.27819113 4.31012500 4.34226638
5 5.36246588 5.41632256 5.47070973 5.52563125 5.58109103
6 6.55015218 6.63297546 6.71689166 6.80191281 6.88805103
7 7.77940751 7.89829448 8.01915179 8.1"4200845 8.26689384
8 9.05168677 9.21422626 9.38001362 9.54910888 9.72157300
9 10.36849581 10.58279531 10.80211423 11.02656432 11.25625951
10 11.73139316 12.00610712 12.28820937 12.57789254 12.87535379
11 13.14199192 13.48635141 13.84117879 14.20678716 14.58349825
12 14.60196164 15.02580546 15.46403184 15.91712652 16.38559065
13 16.11303030 16.62683768 17.15991327 17.71298285 18.28679814
14 17.67698636 18.29191119 18.93210937 19.59863199 20.29257203
15 19.29568088 20.02358764 20.78405429 21.57856359 22.40866350
16 20.97102971 21.82453114 22.71933673 23.65749177 24.64113999
17 22.70501575 23.69751239 24.74170689 25.84036636 26.99640269
18 24.49969130 25.64541288 26.85508370 28.13238467 29.48120483
19 26.35718050 27.67122940 29.06354~ 30.53900391 32.10267110
20 28.27968181 29.77807858 31.37142277 33.06595410 34.86831801
21 30.26947068 31.96920172 33.78313680 35.71925181 37.78607550
22 32.32890215 34.24796979 36.30337795 38.50521440 40.86430965
23 34.46041373 36 161788858 38.93702996 41.43047512 44.11184669
24 36.66652821 39.08260412 41.68919631 44.50199887 47.53799825
25 38.94985669 41.64590829 44.56521015 47.72709882 51.15258816
26 41.31310168 44.31174462 47.57064460 51.11345376 54.96598051
27 43.75906024 47.08421440 50.71132361 54.66912645 58.98910943
28 46.29062734 49.96758298 53.99333317 58.40258277 63.23351045
29 48.91079930 52.96628630 57.42303316 62.32271191 67.71135353
30 51.62267728 56.08493775 61.00706966 66.43884750 72.43547797
31 54.42947098 59.32833526 64.75238779 70.76078988 77.41942926
32 57.33450247 62.70146867 68.66624524 75.29882937 82.67749787
33 60.34121005 66.20952742 72.75622628 80.06377084 88.22476025
34 63.45315240 69.85790851 77.03025646 85.06695938 94.07712207
35 66.67401274 73.65222486 81.49661800 90.32030735 100.2513638
36 70.00760318 77.59831385 86.16396581 95.83632272 106.7651888
37 73.45786930 81.70224640 91.04134427 101.6281389 113.6372742
38 77.02889472 85.97033626 96.13820476 107.7095458 120.8873242
39 80.72490604 90.40914971 101.4644240 114.0950231 128.5361271
40 84.55027775 95.02551570 107.0303231 120.7997742 136.6056141
41 88.50953747 99.82653633 112.8466876 127.8397630 145.1189228
42 92.60737128 104.8195978 118.9247885 135.2317511 154.1004636
43 96.84862928 110.0123817 125.2764040 142.9933387 163.5159891
44 101.2383313 115.4128770 131.9138422 151.1430056 173.5726685
45 105.7816729 121.0293920 138.8499651 159.7001559 184.1191653
46 110.4840314 126.8705677 146.0982135 168.6851637 195.2457194
47 115.3509725 132.9453904 153.6726331 178.1194218 206.9842339
48 120.3882566 139.2632060 161.5879016 188.0253929 219.3683668
49 125.6018456 145.8337343 169.8593572 198.4266626 232.4336270
50 130.9979102 152.6670837 178.5030283 209.3479957 246.2174764
APPENDIX 493
TABLE IV
. (1 + i)"-1
B;t' = i
Periods Rate i
n 0.06 (6 %) 0.065 (~ %) 0.07 (7 %) 0.075 (7~ %) 0.08 (8 %)
1 1.00000000 1.00000000 1.00000000 1.00000000 1.00000000
2 2.06000000 2.06500000 2.07000000 2.07500000 2.08000000
3 3.18360000 3.19922500 3.21490000 3.23062500 3.24640000
4 4.37461600 4.40717463 4.43994300 4.47292188 4.50611200
5 5.63709296 5.69364098 5.75073901 5.80839102 5.86660096
6 6.97531854 7.06372764 7.15329074 7.24402034 7.33592904
7 8.39383765 8.52286994 8.65402109 8.78732187 8.92280336
8 9.89746791 10.07685648 10.25980257 10.44637101 10.63662763
9 11.49131598 11.73185215 11.97798875 12.22984883 12.48755784
10 13.18079494 13.49442254 13.81644796 14.14708750 14.48656247
11 14.97164264 15.37156001 15.78359932 16.20811906 16.64548746
12 16.86994120 17.37071141 17.88845127 18.42372799 18.97712646
13 18.88213767 19.49980765 20.14064286 20.80550759 21.49529658 .
14 21.01506593 21.76729515 22.55048786 23.36592066 24.21492030
15 23.27596988 24.18216933 25.12902201 26.11836470 27.15211393
16 25.67252808 26.75401034 27.88805355 29.07724206 30.32428304
17 28.21287976 29.49302101 30.8402i730 32.25803521 33.75022569
18 30.90565255 32.41006738 33.99903251 35.67738785 37.45024374
19 33.75999170 35.51672176 37.37896479 39.35319194 41.44626324
20 36.78559120 38.82530867 40.99549232 43.30468134 45.76196430
21 39.99272668 42.34895373 44.86517678 47.55253244 50.42292144
22 43.39229028 46.10163573- 49.00573916 52.11897237 55.45675516
23 46.99582769 50.09824205 53.43614090 57.02789530 60.89329557
24 50.81557735 54.35462778 58.17667076 62.30498744 66.76475922
25 1 54.86451200 58.88767859 63.24903772 67.97786150 73.10593995
26 59.15638272 63.71537769 68.67647036 74.07620112 79.95441515
27 63.70576568 68.85687725 74.48382328 80.63191620 87.35076836
28 68.52811162 74.33257427 80.69769091 87.67930991 95.33882983
29 73.63979832 80.16419159 87.34652927 95.25525816 103.9659362
30 79.05818622 86.37486405 94.46078632 103.3994025 113.2832111
31 84.80167739 92.98923021 102.0730414 112.1543577 123.3458680
32 90.88977803 100.0335302 110.2181543 121.5659345 134.2135374
33 97.34316471 107.5357096 118.9334251 131.6833796 145.9506204
34 104.1837546 115.5255308 128.2587648 142.5596331 158.6266701
35 111.4347799 124.0346903 138.2368784 154.2516056 172.3168037
36 119.1208667 133.0969451 148.9134598 166.8204760 187.1021480
37 127.2681187 142.7482466 160.3374020 180.3320117 203.0703198
38 135.9042058 153.0268826 172.5610202 194.8569126 220.3159454
39 145.0584581 163.9736300 185.6402916 210.4711810 238.9412210
40 154.7619656 175.6319159 199.6351120 227.2565196 259.0565187
41 165.0476836 188.0479904 214.6095698 245.3007586 280.7810402
42 175.9505446 201.2711098 230.6322397 264.6983155 304.2435234
43 187.5075772 215.3537320 247.7764965 285.5506891 329.5830053
44 199.7580319 230.3517245 266.1208513 307.9669908 356.9496457
45 212.7435138 246.3245866 285.7493108 332.0645151 386.5056174
46 226.5081246 263.3356848 306.7517626 357.9693537 418.4260668
47 241.0986121 281.4525043 329.2243860 385.8170553 452.9001521
48 256.5645288 300.7469170 353.2700930 415.7533344 490.1321643
49 272.9584006 321.2954666 378.9989995 447.9348345 530.3427374
50 290.3359046 343.1796720 406.5289295 482.5299471 573.7701564
TABLE IV
. (1 + i)" -1
s-;;J ~= i
Periods Ratei
n 0.085 (~ %) 0.09 (9 %) 0.10 (10 %) 0.11 (11 %) 0.12(12 %)
t---
1 1.00000000 1.00000000 1.00000000 1.00000000 1.00000000
2 2.08500000 2.09000000 2.10000000 2.11000000 2.12000000
3 3.26222500 3.27810000 3.31000000 3.34210000 3.37440000
4 4.53951413 4.57312900 4.64100000 4.70973100 4.77932800
5 '5.92537283 5.98471061 6.10510000 6.22780141 6.35284736
6- 7.42902952 7.52333457 7.71561000 7.91285957 8.11518904
7 9.06049703 9.20043468 9.48717100 9.78327412 10.08901173
8 10.83063927 11.02847380 11.43588810 11.85943427 12.29969314
9 12.75124361 13.02103644 13.57947691 14.16397204 14.77565631
10 14.83509932 15.19292972 15.93742460 16.72200896 17.54873507
11 17.09608276 17.56029339 18.531167Q6 19.56142995 20.65458328
12 19.54924979 20.14071980 21.38428377 22.71318724 24.13313327
13 22.21093603 22.95338458 24.52271214 26.21163784 28.02910926
14 25.09886559 26.01918919 27.97498336 30.09491800 32.39260238
15 28.23226916 29.36091622 31. 77248169 34.40535898 37.27971466
16 31.63201204 33.00339868 35.94972986 39.18994847 42.75328042
17 35.32073306 36 ..97370456 40.54470285 44.50084281 48.88367407
18 39.32299538 41.30133797 45.59917313 50.39593551 55.74971496
19 43.66544998 46.01845839 51.15909045 56.93948842 63.43968075
20 48.37701323 51.16011964 57.27499949 64.20283215 72.05244244
21 53.48905936 56.76453041 64.00249944 72.26514368 81.69873554
22 59.03562940 62.87333815 71.40274939 81.21430949 92.50258380
23 65.05365790 69.53193858 79.54302433 91.14788353 104.6028939
24 71.58321882 76.78981305 88.49732676 102.1741507 118.1552411
25 78.66779242 84.70089623 98.34705943 114.4133073 133.3338701
26 86.35455478 93.32397689 109.1817654 127.9987711 150.3339345
27 94.69469193 102.7231348 121.0999419 143.0786359 169.3740066
28 103.7437407 112.9682169 134.2099361 159.8172859 190.6988874
29 113.5619587 124.1353565 148.6309297 178.3971873 214.5827539
30 124.2147252 136.3075385 164.4940227 199.0208779 241.3326843
31 135.7729768 149.5752170 181.9434250 221.9131745 271.2926065
32 148.3136799 164.0369865 201.1377675 247.3236237 304.8477192
33 161.9203427 179.8003153 222.2515442 275.5292223 342.4294455
34 176.6835718 196.9823437 245.4766986 306.8374368 384.5209790
35 192.7016754 215.7107547 271.0243685 341.5895548 431.6634965
36 210.0813178 236.1247226 299.1268053 380.1644058 484.4631161
37 228.9382298 258.3759476 .330.0394859 422.9824905 543.5986900
38 249.3979793 282.6297829 364.0434344 470.5105644 609.8305328
39 271.5968076 309.0664633 401.4477779 523.2667265 684.0101967
-
40 295.6825362 '337.8824450 442.5925557 581.8260664 767.0914203
41 321.8155518 369.2918651 487.8518112 646.8269337 860.1423908
42 350.1698737 403.5281330 537.6369924 718.9778964 964.3594777
43 380.9343130 440.8456649 592.4006916 799.0654650 1081.082615
44 414.3137296 481.5217748 652.6407608 887.9626662 1211.812529
45 450.5303966 525.8587345 718.9048369 986.6385595 1358.230032
46 489.8254803 574.1860206 791.7953205 1096.168801 1522.217636
47 532.4606461 626.8627625 871.9748526 1217.747369 1705.883752
48 578.7198011 684.2804111 960.1723378 1352.699580 1911.589803
49 628.9109842 746.8656481 1057.189572 1502.496533 2141.980579
50 683.3684178 815.0835564 1163.908529 1668.771152 2400.018249
APPENDIX 495
TABLE V
Present Value of an Annuity of Re. 1
. 1- (1 + i)....
anl'= i
Periods Rate i
n 0.0025 (~ %) 5
0.004167 (12 %) 1
0.005 ('2%) 0.005833 (r2· %) 0.0075 (~%)
1 0.99750623 0.99585062 0.99502488 0.99420050 0.99255583
2 l.99252492 l.98756909 l.98509938 l.98263513 • l.97772291
3 2.98506227 2.97517253 2.97024814 . 2.96533732 2.95555624
4 3.97512446 3.95867804 3.95049566 3.94234034 3.92611041
5 4.96271766 4.93810261 4.92586633 4.91367722 4.88943961
6 5.94784804 5.91346318 5.89638441 5.87938083 5.84559763
7 6.93052174 6.88477661 6.86207404 6.83948385 6.79463785
8 7.91074488 7.85205970 7.82295924 7.79401874 7.73661325
9 8.88852357 8.81532916 8.77906392 8.74301780 8.67157642
10 9.86386391 9.77460165 9.73041186 9.68651314 9.59957958
11 10.83677198 10.72989376 10.67702673 10.62453667 10.52067452
12 11.80725384 11.68122200 11.61893207 11.55712014 11.43491267
13 12.77531555 12.62860283 12.55615131 12.48429509 12.34234508
14 13.74096314 13.57205261 13.48870777 13.40609288 13.24302242
15 14.70420264 14.51158766 14.41662465 14.32254470 14.13699495
16 15.66504004 15.44722422 15.33992502 15.23368156 15.02431261
17 16.62348133 16.37897848 16.25863186 16.13953427 15.90502492
18 17.57953250 17.30686654 17.17276802 17.04013350 16.77918107
19 18.53319950 18.23090443 18.08235624 17.93550969 17.64682984
20 19.48448828 19.15110815 18.98741915 18.82569315 18.50801969
21 20.43340477 20.06749359 19.88797925 19.71071398 19.36279870
22 21.37995488 20.98007661 20.78405896 20.59060213 20.21121459
23 22.32414452 21.88887297 21.67568055 21.46538738 21.05331473
24 23.26597957 22.79389839 22.56286622. 22.33509930 2l.88914614
25 24.20546591 23.69516853 23.44563803 23.19976732 22.71875547
26 25.14260939 24.59269895 24.32401794 24.05942070 23.54218905
27 26.07741585 25.48650517 25.19802780 24.91408852 24.35949286
28 27.00989112 26.37660266 26.06768936 25.76379968 25.17071251
29 27.94004102 27.26300680 26.93302423 26.60858295 -25.97589331
30 28.86787134 28.14573291 27.79405397 27.44846689 26.77508021
31 29.79338787 29.02479626 28.65079997 28.28347993 27.56831783
32 30.71659638 29.90021205 29.50328355 29.11365030 28.35565045
33 31.63750262 30.77199540 30.35152592 29.93900610 29.13712203
34 32.55611234 3l.64016139 31.19554818 30.75957524 29.91277621
35 33.47243126 32.50472504 32.03537132 31.57538549 30.68265629
36 34.38646510 33.36570128 32.87101624 32.38646445 3l.44680525
37 35.29821955 34.22310501 33.70250372 33.19283955- 32.20526576
38 36.20770030 35.07695105 34.52985445 33.99453808 32.95808016
39 37.11491302 35.92725416 35.35308900 34.79158716 33.70529048
40 38.01986336 36.77402904 36.17222786 35.58401374 34.44693844
41 38.92255697 37.61729033 36.98729141 36.37184465 35.18306545
42 39.82299947 38.45705261 37.79829991 37.15510653 35.91371260
43 40.72119648 39.29333040 38.60527354 37.93382588 36.63892070
44 4l.61715359 40.12613816 39.40823238 38.70802904 37.35873022
45 42.51087640 40.95549028 40.20719640 39.47774221 38.07318136
46 43.40237047 4l. 78140J.11 41.00218547 40.24299143 38.78231401
47 44.29164137 42.60388492 41. 79321937 41.00380258 39.48616775
48 45.17869463 43.42295594 42.58031778 4l.76020141 40.18478189
49 46.06353580 44.23862832 43.36350028 42.51221349 40.87819542
I 50
I 46.94617037
I 45.05091617
I 44.14278635 ! 43.25986428 41.56644707
- -- ---
TABLE V
. 1- (1 + i)-
a-;;j ~=
Periods Rate i
n 0.0025 (~ %) 0.004167 (12 %) 0.005 (i%) 0.005833 (1~ %) 3
0.0075 (.%)
50 46.94617037 45.05091617 44.14278635 43.25986428 41.56644707
51 47.82660386 45.85983353 44.91819537 44.00317907 42.24957525
52 48.70484176 46.66539439 45.68974664 44.74218301 42.92761812
53 49.58088953 47.46761267 46.45745934 45.47690108 43.60061351
54 50.45475265 48.26650224 47.22135258 46.20735816 44.26859902
55 . 51.32643656 49.06207692 47.98144535 46.93357895 44.93161193
56 52.19594669 49.85435046 48.73775657 47.65558802 45.58968926
57 53.06328847 50.64333656 49.49030505 48.37340980 46.24286'176
58 53.92846730 51.42904885 50.23910950 49.08706856 46.89118388
59 54.79148858 52.21150093 50.98418855 49.79658846 47.53467382
60 55.65235769 52.99070632 51. 72556075 50.50199350 48.17337352
61 56.51107999 53.76667850 52.46324453 51.20330754 48.80731863
62 57.36766083 54.53943087 53.19725824 51.90055431 49.43654455
63 58.22210557 55.30897680 53.92762014 52.59375739 50.06108640
64 59.07441952 56.07532959 54.65434839 53.28294024 50.68097906
65 59.92460800 56.83850250 55.37746109 53.96812617 51.29625713
66 60.77267631 57.59850871 56.09697621 54.64933836 51.90695497
67 61.61862974 58.35536137 56.81291165 55.32659986 52.51310667
68 62.46247355 59.10907357 57.52528522 55.99993358 53.11474607
69 63.30421302 59.85965832 58.23411465 56.66936230 53.71190677
70 64.14385339 60.60712862 58.93941756 57.33490867 54.30462210
71 64.98139989 61.35149738 59.64121151 57.99659520 54.89292516
72 65.81685774 62.09277748 60,33951394 58.65444427 55.47684880
73 66.65023216 62.83098172 61.03434222 59.30847815 56.05642561
74 67.48152834 63.56612287 61. 72571366 59.95871896 56.63168795
75 68.31075146 64.29821365 62.41364543 60.60518869 57.29266794
76 69.13790670 65.02726670 63.09815466 61.24790922 57.76939746
77" 69.96299920 65.75329464 63.77925836 61.88690229 58.33190815
78 70.78603411 66.47631002 64.45697350 62.52218952 58.89023141
79 71.60701657 67.19632533 65.13131691 63.15379239 59.44439842
80 72.42595169 67.91335303 65.80230538 63.78173229 59.99444012
81 73.24284458 68.62740550 66.46995561 64.40603044 60.54038722
82 74.05770033 69.33849511 67.13428419 65.02670798 61.08227019
83 74.87052402 70.04663413 67.79530765 65.64378590 61.62011930
84 75.68132072 70.75183482 68.45304244 66.25728507 62.15396456
85 76.49009548 71.45410936 69.10750491 66.86722625 62.68383579
86 77.29685335 72.15346991 69.75871135 67.47363007 63.20976257
87 78.10159935 72.84992854 70.40667796 68.07651706 63.73177427
88 78.90433850 73.54349730 71.05142086 68.67590759 64.24990002
89 79.70507581 74.23418818 71.69295608 69.27182197 64.76416875
90 80.50381627 74.92201313 72.33129958 69.86428033 65.27460918
91 81.30056486 75.60698403 72.96646725 70.45330273 65.78124981
92 82.09532654 76.28911272 73.59847487 71.03890910
I 93 82.88810628 76.96841101 74.22733818 71.62111923
66.28411892
66.78324458
94 83.67890900 77.64489063 74.85307282 72.19995284 67.27865467
95 84.46773966 78.31856329 75.47569434 72.77542950 67.77037685
96 85.25460315 78.98944062 76.09521825 73.34756869 68.25843856
97 86.03950439 79.65753422 76.71165995 73.91638975 68.74286705
98 86.82244827 80.32285566 77.32503478 74.48191193 69.22368938
99 87.60343967 80.98541642 77.93535799 75.04415436 69.70093239
100 88.38248346 81.64522797 78.54264477 75.60313606 70.17462272
APPENDIX 497
TABLEY
. 1- (1 + i) .....
"-;;]'= i
Periods Rate i
n 0.Ql (1%) 0.01125 (1~ %) 0.0125 (1~ %) 0.15(~ %) 0.0175 (1~ %)
1 0.99009901 0.98887516 0.98765432 0.98522168 0.98280098 .
2 1.97039506 1.96674923 1.96311538 1.95588342 1.94869876
3 2.94098521 2.93374460 2.92653371 2.91220042 2.89798403
4 3.90196555 3.88998230 3.87805798 3.85438465 3.83094254
5 4.85343124 4.83558200 4.81783505 4.78264497 4.74785508
6 5.79547648 5.77066205 5.74600992 5.69718717 5.64899762
7 6.72819453 6.69533948 6.66272585 6.59821396 6.53464139
8 7.65167775 7.60973002 7.56812429 7.48592508 7.40505297
9 8.56601758 8.51394810 8.46234498 8.36051732 8.26049432
10 9.47130453 9.40810690 9.34552591 9.22218455 9.10122292
11 10.36762825 10.29231832 10.21780337 10.07111779 9.92'749181
12 11.25507747 1US669302 11.07931197 . 10.90750521 10.73954969
13 12.13374007 12.03134044 11.93018466 11.73153222 11.53764097
14 13.00370304 12.8863688<1 12.77055275 12.54338150 12.32200587
15 13.86505252 13.73188509 13.60054592 13.34323301 13.09288046
16 14.71787378 14.56799514 14.42029227 14.13126405 13.85049677
17 15.56225127 15.39480360 15.22991829 14.90764931 14.59508282
18 16.39826858 16.21241395 16.02954893 15.67256089 15.32686272
19 17.22600850 17.02092850 16.81930759 16.42616837 16.04605673
•
20 18.04555297 17.82044845 17.59931613 17.16863879 16.75288130
21 18.85698313 18.61107387 18.36969495 17.90013673 17.44754919
22 19.66037934 19.39290371 19.13056291 18.62082437 18.13026948
23 20.45582113 20.16603580 19.88203744 19.33086145 18.80124764
24 21.24338726 20.93056693 20.62423451 20.03040537 19.46068565
25 22.02315570 21.68659276 21.35726865 20.71961120 20.10878196
26 22.79520366 22.43420792 22.08125299 21.39863172 20.74573166
27 23.55960759 23.17350598 22.79629925 22.06761746 21.37172644
28 24.31644316 23.90457946 23.50251778 22.72671671 21.98695474
29 25.06578530 24.62751986 24.20001756 23.37607558 22.59160171
30 25.80770822 25.34241766 24.88890623 24.01583801 23.18584934
31 26.54228537 26.04936233 25.56929010 24.64614582 23.76987650
32 27.26958947 26.74844236 26.24127418 25.26713874 24.34385897
33 27.98969255 27.43974522 26.90496215 25.87895442 24.90796951
34 28.70266589 28.12335745 27.56045644 26.48172849 25.46237789
35 29.40858009 28.79936460 28.20785822 27.07559458 26.00725100
36 30.10750504 29.46785127 28.84726737 27.66068431 26.54275283
37 30.79950994 30.12890114 29.47878259 28.23712740 27.06904455
38 31.48466330 30.78259692 30.10250133 28.80505163 27.58628457
39 32.16303298 31.42902044 30.71851983 29.36458286 28.09462857
40 32.83468611 32.06825260 31.32693316 29.91584520 28.59422955
41 33.49968922 32.70037340 31.92783522 30.45896079 29.08523789
42 34.15810814 33.32546195 32.52131874 30.99405004 29.56780136
43 34.81000806 33.94359649 33.10747530 31.52123157 30.04206522
44 35.45545352 34.55485438 33.68639536 3!? .04062223 30.50817221
45 36.09450844 35.15931212 34.25816825 32.55233718 30.96626261
46 36.72723608 35.75704536 34.82288222 33.05648983 31.41647431
47 37.35369909 36.34812891 35.38062442 33.55319195 31.85894281
48 37.97395949 36.93263674 35.93148091 34.04255365 32.29380129
49 38.58807871 37.51064202 36.47553670 34.52468339 32.72118063
50 39.19611753 38.08221708 37.01287575 34.99968807 33.14120946
498 RN4C~LMA1HEnS
TABLEY
. 1-(1 + i)~
""i\'=
Periods
i
Rate i
,
n 0.01 (1%) 0.01125 (11 %) 0.0125 (1l%) 0.15(~ %) 0.0175 (1!%)
50 39.19611753 ' 38.08221708 37.01287575 34.99968807 33.14120946
51 39.79813617 38.64743345 37.54358099- 35.46767298 33.55401421
52 40.39419423 39.20636188 38.06773431 35.92874185 33.95971913
53 40.98435072 39.75907232 38.58541660 36.38299690 34.35844632
54 41.56866408 40.30563394 39.09670776 36.83053882 34.75031579
55 42.14719216 40.84611514 39.60168667 37.27146681 35.13544550
56 42.71999224 41.38058358 40.10043128 37.70587863 35.51395135
57 43.28712102 41.90910613 40.59301855 38.13387058 35.88594727
58 43.84863468 42.43174896 41.07952449 38.55553751 36.25154523
59 44.40458879 42.94857746 41.56002419 38.97097292 36.61085526
60 44.95503841 43.45965633 42.03459179 39.38026889 36.96398552
61 45.50003803 43.96504952 42.50330054 39.78351614 37.31104228
62 46.03964161 44.46482029 42.96622275 40.18080408 37.65213000
63 46.57390258 44.95903119 43.42342988 40.57222077 37.987-35135
64 47.10287385 45.44774407 43.87499247 40.95782~ 38.31680723
65 47.62660777 45.93102009 44.32098022 41.33778618 38.64059678
66 48.14515621 46.40891975 44.76146195 41.71210461 38.95881748
67 48.65857050 46.88150284 45.19650563 42.08089125 39.27156509
68 49.16690149 47.34882852 45.62617840 42.44422783 39.57893375
69 49.67019949 47.81095527 46.05054656 42.80219490 39.88101597
70 50.16851435 48.26794094 46.46967562 43.15487183 40.17790267
71 50.66189539 48.71984270 46.88363024 43.50233678 40.46968321
72 51.15039148 49.16671714 47.29247431 43.84466677 40.75644542
73 51.63405097 49.60862016 47.69627093 44.18193771 41.03827560
74 52.11292175 50.04560708 48.09508240 44.51422434 41.31525857
75 52.58705124 50.47773259 48.48897027 44.84160034 41.58747771
76 53.05648638 50.90505077 48.87799533 45.16413826 41.85501495
77 53.52127364 51.32761510 49.26221761 45.48190962 42.11795081
78 53.98145905 51.74547847 49.64169640 ' 45.79498485 42.37636443
79 54.43708817 52.15869317 50.01649027 46.10343335 42.63033359
80 54.88820611 52.56731092 50.38665706 46.40732349 42.87993474
81 55.33485753 52.97138286 50.75225389 46.7Q672265 43.12524298
82 55.77708666 53.37095957 51.11333717 47.00169720 43.36633217
83 56.21493729 53.76609104 51.46996264 47.29231251 43.60327486
84 56.64845276 54.15682674 51.82218532 47.57863301 43.83614237
85 57.07767600 54.54321557 52.17005958 47.86072218 44.06500479
86 57.50264951 54.92530588 52.51363909 48.13864254 44.28993099
87 57.92341535 55.30314549 52.85297688 48.41245571 44.51098869
88 58.34001520 55.67678169 53.18812531 48.68222237 44.72824441
89 58.75249030 56.04626126 53.51913611 48.94800234 44.94176355
90 59.16088148 56.41163041 53.84606036 49.20985452 45.15161037
91 59.56522919 56.77293490 54.16894850 49.46783696 45.35784803
92 59.96557346 57.13021992 54.48785037 49.72200686 45.56053860
93 60.36195392 57.48353021 54.80281518 49.97242055 45.75974310
94 60.75440982 5-7.83290997 55.11389154 50.21913355 45.95552147
95 61.14298002 58.17840294 55.42112744 bO.46220054 46.14793265
96 61.52770299 58.52005235 55.72457031 50.70167541 46.33703455
97 61.90861682 58.85790096 56.02426698 50.93761124 46.52288408
98 62.28575923 59.19199106 56.32026368 51.17006034 16.70553718
99 62.65916755 59.52236446 56.61260610 51.39907422 46.88504882
100 63.02887877 59.84906251 56.90133936 51.62470867 47.06147304
APPENDIX 499
TABLE V
. 1-(1 + i)~
"-;;J'= i
Periods Rate i
n 0.02 (2 %) 0.0225 (2~ %) 0.025 (~%) 0.0275 (2! %) 0.03 (3 %)
1 0.98039216 0.97799511 0.97560976 0.97323601 0.97087379
2 1.94156093 1.93446955 1.92742415 1.92042434 1.91346970
3 2.88388327 2.86989687 2.85602356 2.84226213 2.82861136
4 3.80772870 3.78474021 3.76197421 3.73942787 3.71709840
5 4.71345951 4.67945253 4.64582850 4.61258186 4J)7970719
6 5.60143089 5.55447680 5.50812536 5.46236678 5.41719144
7 6.47199107 6.41024626 6.34939060 6.28940806 6.23028296
8 7.32548144 7.24718461 7.17013717 7.09431441 7.01969219
9 8.16223671 8.06570622 7.97086553 7.87767826 7.78610892·
10 8.98258501 8.86621635 8.75206393 8.64007616 8.53020284
11 9.78684805 9.64911134 9.51420871 9.38206926 9.25262411
I 12 10.57534122 - 10.41477882 10.25776460 10.10420366 9.95400399
13 11.34837375 11.16359787 10.98318497 10.80701086 10.63495533
14 12.10624877 11.89593924 11.69091217 11.49100814 11.29607314
15 12.84926350 12.61216551 12.38137773 12.15669892 11.93793509
16 13.57770931 13.31263131 13.05500266 12.80457315 12.56110203
17 14.29187188 13.99768343 13. 71219772 13.43510769 13.16611847
18 14.99203125 14.66'766106 14.35336363 14.04876661 13.75351308
19 15.67846201 15.32289590 14.97889134 14.64600157 14.32379911 .
20 16.35143334 15.96371237 15.58916229 15.22725213 14.87747486
21 17.01120916 16.59042775 16.18454857 15.79294612 15.41502414
22 17.65804820 17.20335232 16.76541324 16.34349987 15.93691664
23 18.29220412 17.80278955 17.33211048 16.87931861 16.44360839
24 18.91392560 18.38903"624 17.88498583 17.40079670 16.93554212
25 19.52345647 18.96238263 18.42437642 17.90831795 17.41314769
26 20.12103576 19.52311260 18.95061114 18.40225592 17.87684242
27 20.70689780 20.07150376 19.46401087 18.88297413 18.32703147
28 21.28127236 20.60782764 19.96488866 19.35082640 18.76410823
29 21.84438466 21.13234977 20.45354991 19.80615708 19.18845459
30 I 22.39645555 21.64532985 20.93029259 20.24930130 19.60044135
31
32
33
I 22.93770152
23.46833482
23.98856355
22.14702186
22.63767419
23.11752977
21.39540741
21.84917796
22.29188094
20.68058520
21.10032623
21.50883332
20.00042849
20.38876553
20.76579178
34 24.49859172 23.58682618 22.72378628 21.90640712 21.13183668
35 24.99861933 24.04579577 23.14515734 22.29334026 21.48722007
36 25.48884248 24.49466579 23.55625107 22.66991753 21.83225250
I
37 25.96945341 24.93365848 23,95731812 23.03641609 22,16723544
38 26.44064060 25.36299118 24.34860304 23.39310568 22.49246159
.39 26.90258883 25.78287646 24.73034443 23.74024884 22.80821513
40 27 :35547924 26.19352221 25.10277505 24.07810106 23.11477197
41 27.79948945 26.59513174 25.46612200 24.40691101 23.41239997
42 28.23479358 26.98790390 25.82060683 24.72692069 23.70135920
43 28.66156233 27.37203316 26.16644569 25.03836563 23.98190213
44 29.07996307 27.74770969 26.50384945 25.34147507 24.25427392
45 29.49015987 28.11511950 26.83302386 25.63647209 24.51871254
46 29.89231360 28.47444450 27.15416962 25.92357381 24.77544907
47 30.28658196 28.82586259 27.46748255 26.20299154 25.02470783
48 30.67311957 29.16954777 27.77315371 26.47493094 25.26670664
49 31.05207801 29.50567019 28.07136947 26.73959215 25.50165693
50 31.42360589 29.83439627 28.36231168 26.99716998 25.72976401
TAlLEY
. 1-(1+0--
"iii'· i
Periods Ratei
.I n 0.02(2 %) 0.0225 (2l %) 0.025 (20} %) 0.0275 (2~ %) 0.03 (3 %)
50 31.42360589 29.83439627 28.36231168 26.99716998 25.72976401
51 31.78784892 30.15588877 ~8.64157 27.24785400 25.95122719
52 32.14494992 30.47030687 28.92308072 27.49182871 26.16623999
53 32.49504894 30.77780623 29.19324948 27.72927368 26.37499028
54
55
. 32.83828327
33.17478752
31.07853910
31.37265438
29.45682876
29.71397928
27.96036368
28.18526879
26.57766047
26.77442764
56 33.50469365 31.66029768 29.96485784 28.40415454 26.96546373
57 33.82813103 31.94161142 30.20961740 28.61718203 27.15093566
. 58 34.14522650 32.21673489 30.44840722 28.82450806 27.33100549
59 34.45610441 32.48580429 30.68137290 29.02628522 27.50583058
60 34.76088668 32.74895285 30.90865649 29.22266201 27.67556367
61 35.05969282 33.00631086 31.13039657 29.41378298 27.84035307
62 35.35264002 33.25800573 31.34672836 29.59978879 28.00034279
63 35.63984316 33.50416208 31.55778377 29.78081634 28.15567261
64 35.9~1486 33.74490179 31.76369148 29.95699887 28.30647826
65 36.19746555 33.98034405 31.96457705 30.12846605 28.45289152
66 36.46810348 34.21060543 32.16056298 30.29534409 28.59504031
67 36.73343478 34.43579993 32.35176876 30.45775581 28.73304884
68 36.99356351 34.65603905 32.53831099 30.61582074 28.86703771
69 37.24859168 34.87143183 32.72030340 30.76965522 28.99712399
70 37.49861929 35.08208492 32.89785698 30.91937247 29.12342135
71 37.74374441 35.28810261 33.07107998 31.06508270 29.24604015
72 37.98406314 35.48958691 33.24007803 31.20689314 29.36508752
73 38.21966975 35.68663756 33.40495417 31.34490816 29.48066750
74 38.45065662 35.87935214 33.56580895 31.47922936 29.59288107
75 38.67711433 36.06782605 33.72274044 31.60995558 29.70182628
76 38.89913170 36.25215262 33.87584433 31.73718304 29.80759833
77 39.11679578 36.43242310 34.02521398· 31.86100540 29.91028964
78 39.33019194 36.60872675 34.17094047 31.98151377 30.00998994
79 39.53940386 36.78115085 34.31311265 32.09879685 30.10678635
80 39.74451359 36.94978079 34.45181722 32.21294098 30.20076345
81 39.94560156 37.11470004 34.58713875 32.32403015 30.29200335 .
82 40.14274663 37.27599026 34.71915976 32.43214613 30.38058577
83 40.33602611 37.43373130 34.84796074 32.53736850 30.46658813
84 40.52551579 37.58800127 34.97362023 32.63977469 30.55008556
85 40.71128999 37.73887655 35.09621486 32.73944009 30.63115103
86 40.89342156 37.88643183 35.21581938 32.83643804 30.70985537
87 41.07198192 38.03074018 35.33250671 32.93083994 30.78626735
88 41.24704110 38.17187304 35.44634801 33.02271527 30.86045374
. 89 41.41866774 38.30990028 35.55741269 33.11213165 30.93247936
90 41.58692916 38.44489025 35.66576848 33.19915489 31.00240714
91 41.75189133 38.57690978 35.77148144 33.28384905 31.07029820
92 41.91361895 38.70602423 35.87461604 33.36627644 31.13621184
93 42.07217545 38.83229754 35.97523516 33.44649776 31.20020567
!A 42.22762299 38.95579221 36.07340016 33.52457202 31.26233560
95 42.38002254 39.07656940 36.16917089 33.60055671 31.32265592
96 42.52943386 39.19468890 36.26260574 33.67450775 31.38121934
97 42.67591555 39.31020920 36.35376170 33.74647956 31.43807703
98 ~2.81950 39.42318748 36.44269434 33.81652512 31.49327867
99 42.96031867 39.53367968 36.52945790 33.88469598 31.54687250
100 43.09835164 39.64174052 36.61410526 33.95104232 31.59890534
APPENDIX 501
TABLE V
'. 1-(1+0--
"iii'· i
Periods Rate i
n 0.035 (~%) 0.04 (4 %) 0.045 (4j%) 0.05(5%) 0.055 (51%)
1 0.96618358 0.96153846 0.95693780 0.95238095 0.94786730
2 1.89969428 1.88609468 1.87266775 1.85941043 1.84631971
3 2.80163698 2.77509103 2.74896435 2.72324803 2.69793338
4 3.67307921 3.62989522 3.58752570 3.54595050 3.50515012
5 4.51505238 4.45182233 4.38997674 4.32947667 4.27028448
6 5.32855302 5.24213686 5.15787248 5.07569207 4.99553031
7 6.11454398 6.00205467 . 5.89270094 5.78637340 5.68296712
8 6.87395554 6.73274488 6.59588607 6.46321276 6.33456599
9 7.60768651 7.43533161 7.26879050 • 7.10782168 6.95219525
10 8.31660532 8.11089578 7.91271818 . 7.72173493 7.53762583
11 9.00155104 8.76047671 8.52891692 8.30641422 8.09253633
12 9.66333434 9.38507376 9.11858078 8.86325164 8.61851785
13 10.30273849 9.98564785 9.68285242 9.39357299 9.11707853
14 10.92052028 10.56312293 10.22282528 9.89864094 9.5896479Q
15 11.51741090 11.11838743 10.73954573 10.37965804 10.03758094
16 12.09411681 11.65229561 11.23401505 10.83776956 10.46216203
17 12.65132059 12.16566885 11.70719143 11.27406625 10.86460856
18 13.18968173 12.65929697 12.15999180 11.68958690 11.24607447
19 13.70983742 13.13393940 12.59329359 12.08532086 11.60765352
20 14.21240330 13.59032634 13.00793645 12.46221034 11.95038248
21 14.69797420 14.02915995 13.40472388 12.82115271 12.27524406
22 15.16712484 14.45111533 13.78442476 13.16300258 12.58316973
23 15.62041047 14.85684167 14.14777489 13.48857388 12.87504239
24 16.05836760 15.24696314 14.49547837 13.79864179 13.15169895
25
26
. 16.48151459
16.89035226
15.62207994
15.98276918
14.82820896
15.14661145
14.09394457
14.37518530
13.41393266
13.66249541
27 17.28536451 16.32958575 15.45130282 14.64303362 13.89809991
28 17.66701885 16.66306322 15.74287351 14.89812726 14.12142172
29 18.03576700 16.98371463 16.02188853 15.14107358 14.33310116
,
30 18.39204541 17.29203330 16.28888854 15.37245103 14.53374517
31 18.73627576 17.58849356 16.54439095 15.59281050 14.72392907
32 19.06886547 17.87355150 16.78889086 15.80267667 14.90419817
33 19.39020818 18.14764567 17.02286207 16.00254921 15.07506936
34 19.70068423 18.41119776 17.24675796 16.19290401 15.23703257
35 20.00066110 18.66461323 17.46101240 16.37419429 15.390~2O
36 20.20049381 18.90828195 17.66604058 16.54685171 15.58606843
37 20.57052542 19.14257880 17.86223979 16.71128734 15.67399851
38 20.84108736 19.36786423 18.04999023 16.86789271 15.80473793
39 21.10249987 19.58448484 18.22965572 17.01704067 15.92866154
40 21.35507234 19.79277388 18.40158442 17.15908635 16.04612469
41 21.59910371 19.99305181 18.56610949 17.29436796 16.15746416
42 21.83488281 20.18562674 18.72354975 17.42320758 16.26299920
43 22.06268870 20.37079494 18.87421029 17.54591198 16.36303242
44 22.28279102 20.54884129 19.01838305 17.66277331 16.45785063
45 22.49545026 20.72003970 19.15634742 17.77406982 16.54772572
46 22.70091813 20.86465356 19.28837074 17.88006650 16.63291537
47 22.89943780 21.04293612 19.41470884 17.98101571 16.71366386
48 23.09124425 21.19513088 19.53560654 18.07715782 16.79020271
49 23.27656450 21.34147200 19.65129813 18.16872173 16.86275139
50 23.45561787 21.48218462 19.76200778 18.25592546 16.93151790
TABLE V
. 1- (1 + i) ....
anJ'= i
Periods Rate i
n 0.06 (6 %) 0.065 (~%) 0.07 (7 %) 0.075 (7~%) 0.08 (8 %)
1 0.94339623 0.93896714 0.93457944 0.93023256 0.92592593
2 1.83339267 1.82062642 1.80801817 1.79556517 1.78326475
3 2.67301195 2.64847551 2.62431604 2.60052574 2.57709699
4 3.46510561 3.42579860 3.38721126 3.34932627 3.31212684
5 4.21236379 4.15567944 4.10019744 4.04588490 3.99271004
6 4.91732433 4.84101356 4.76653966 . 4.69384642 4.62287967
7 5.58238144 5.48451977 5.38928940 5.29660132 5.20637006
8 6.20979381 6.08875096 5.97129851 5.85730356 5.74663894
9 6.80169227 6.65610419 6.51523225 6.37888703 6.24688791
10 7.36008705 7.18883022 7.02358154 6.86408096 6.71008140
11 7.88687458 7.68904246 7.49867434 7.31542415 7.13896426
12 8.38384394 8.15872532 7.94268630 7.73527828 7.53607802
13 8.85268296 8.59974208 8.35765074 8.12584026 7.90377594
14 9.29498393 9.01384233 8.74546799 8.48915373 8.24423698
15 9.71224810 9.40266886 9.10791401 8.82711975 8.55947869
16 10.10589527 9.76776418 9.44664860 9.14150674 8.85136916
17 10.47725969 10.11057670 9.76322299 9.43395976 9.12163811
18 10.82760348 10.43246638 10.05908691 9.70600908 9.37188714
19 11.15811649 10.73471022 10.33559524 9.95907821 9.60359920
20 fl.46992122 11.01850725 . 10.59401425 10.19449136 9.81814741
21 11.76407662 11.28498333 10.83552733 10.41348033 10.01680316
22 12.04158172 11.53519562 11.06124050 10.61719101 10.20074366
23 12.30337898 11.77013673 11.27218738 10.80668931 10.37105895
24 12.55035753 11.99073871 11.46933400 10.98296680 10.52875828
25 12.78335616 12.19787673 11.65358318 11.14694586 10.67477619
26 13.00316619 12.39237251 11.82577867 11.29948452 10.80997795
27 13.21053414 12.57499766 11.98670904 11.44138095 10.93516477
28 13.40616428 12.74647668 12.13711125 11.57337763 11.05107849
29 13.59072102 12.90748984 12.27767407 11.69616524 11.15840601
30 13.76483115 13.05867591 12.40904118 11.81038627 11.25778334
31 13.92908599 13.20063465 12.53181419 11.91663839 11.34979939
32. 14.08404339 13.33392925 12.64655532 12.01547757 11.43499944
33 14.23022961 13.45908850 12.75379002 12.10742099 11.51388837
34 14.36814114 13.57660892 12.85400936 12.19294976 11.58693367
35 14.49824636 13.68695673 12.94767230 12.27251141 11.65456822
36 14.62098713 13.79056970 13.03520776 12.34652224 11.71719279
37 14.73678031 13.88785887 13.11701660 12.41536952 11.77517851
38 14.84601916 13.97921021 13.19347345 12.47941351 11.82886899
39 14.94907468 14.06498611 13.26492846 12.53898931 11.87858240
40 15.04629687 14.14552687 13.33170884 12.594'40866 11.92461333
41 15.13801592 14.22115199 13.39412041 12.64596155 11.96723457
42 15.22454332 14.29216149 13.45244898 12.69391772 12.00669867
43 15.30617294 14.35883708 13.50696167 12.73852811 12.04323951
44 15.38318202 14.42144327 13.55790810 12.78002615 12.07707362
45 15.45583209 14.48022842 13.60552159 12.81862898 12.10840150
46 15.52436990 14.53542575 13.65002018 12.85453858 12.13740880
47 15.58902821 14.58725422 13.69160764 12.88794287 12.16426741
48 15.65002661 14.63591946 13.73047443 12.91901662 12.18913649
49 15.70757227 14.68161451 13.76679853 12.94792244 12.21216341
50 .15.76186064 14.72452067 13.80074629 12.97481157 12.23348464
APPENDIX
503
TABLE V
. 1-0 + i)....
anJl= i
Periods Rate i
n 0.085 (~%) 0.09 (9 %) 0.10 (10 %) 0.11 (11 %) 0.12 (12 %)
1 0.92165899 0.91743119 0.90909091 0.90090090
2 0.89285714
1.77111427 1.75911119 1.73553719 1.71252333 1.69005102
3 2.55402237 2.53129467 2.48685199 2.44371472
4 2.40183127
3.27559666 3.23971988 3.16986545 3.10244569 3.03734935
5 3.94064208 3.88965126 3.79078677 3.69589702
6 3.60477620
4.55358717 4.48591859 4.35526070 4.23053785 4.11140732
7 5.11851352 5.03295284 4.86841882 4.71219627 4.56375654
8 5.63918297 5.53481912 5.33492620 5.14612276 4.96763977
9 6.11906264 5.99524689 5.75902382 5.53704','53 5.32824979
10 6.56134806 6.41765770 6.14456711 5.88923201 5.65022302
11 6.96898439 6.80519055 6.49506101 6.20651533 5.93769913
12 7.34468607 7.16072528 6.81369182 6.49235615 6.19437423
13 7.69095490 7.48690392 7.10335620 6.74987040 6.42354842
14 8.01009669 7.78615039 7.36668746 6.98186523 6.62816823
15 8.30423658 8.06068843 7.60607951 7.19086958 6.81086449
16 8.57533325 8.31255819 7.82370864 7.37916178 6.97398615
17 8.82519194 8.54363137 8.02155331 7.54879440 7.11963049
18 9.05547644 8.75562511 8.20141210 7.70161657 7.24967008
19 9.26772022 8.95011478 8.36492009 7.83929421 7.36577686
20 9.46333661 9.12854567 8.51356372 7.96332812 7.46944362
21 , 9.64362821 9.29224373 8.64869429 8.07507038 7.56200324
22 9.80979559 9.44242544 8.77154026 8.17573908 7.64464575
23 9.96294524 9.58020683 8.88321842 8.26643160 7.71843370
24 10.10409700 9.70661177 8.98474402 8.34813657 7.78431581
25 10.23419078 9.82257961 9.07704002 8.42174467 7.84313911
26 10.35409288 9.92897212 9.16094547 8.48805826 7.89565992
27 10.46460174 10.02657992 9.23722316 8.54780023 7.94255350
28 10.56645321 10.11612837 9.30656651 8.60162183 7.98442277
29 10.66032554 10.19828291 9.36960591 8.65010976 8.02180604
1
30 10.74l84382 10.27365404 9.42691447 8.69379257 8.05518397
31 10.82658416 10.34280187 9.47901315 8.73314646 8.08498569
32 10.90007757 10.40624025 9.52637559 8.76860042 8.11159436
33 10.96781343 10.46444060 9.56943236 8.80054092 8.13535211
34 11.03024279 10.51783541 9.60857487 8.82931614 8.11'656438
35 11.08778137 10.56682148 9.64415897 8.85523977 8.17550391
36 11.14081233 10.61176282 9.67650816 8.87859438 8.19241421
37 11.18968878 iO.65299342 9.70591651 8.89963458 8.2075~69
38 11.23473620 10.69081965 9.73265137 8.91858971 8.22099347
39 11.27625457 10.72552261 9.75695579 8.93566641 8.23302988
40 11.31452034 10.75736020 9.77905072 8.95105082 8.24377668
41 11.34978833 10.78656899 9.79913702 8.96491065 8.25337204
42 11.38229339 10.81336604 9.81739729 8.97739698 8.26193932
43 11.41225197 10.83795050 9.83399754 8.98864593 8.26958868
44 11.43986357 . 10.86050504 9.84908867 8.99878011 ..8.27641846
45 11.46531205 10.88119729 9.86280788 9.00791001 8.28251648
46 11.48876686 10.90018100 9.87527989 9.01613515 8.28796115
47 11.51038420 . 10.91759725 9.88661808 9.02354518 8.29282245
48 11.53030802 10.93357546 9.89692553 9.03022088 8.29716290
49 11.54867099 10.94823436 9.90629594 9.03623503 8.30103831
50 11.56559538 10.96168290 9.91481449 9.04165318 8.30449849
504 FINANCIAL AfATHEMAncS
TABLE VI
Value of e" and r
.x eX . e-«
0.00 1.00000000 1.()()()C)OOOO
0,01 1.01005016 0.99004984
0.02 1.02020133 0.98019869
0.03 1.03045451 0.97044555
0.04 1.04081075 . 0.9678~
0.05 1.05127106 0.95122946

0.06 1.06183650 0.94176457
0.07 1.07250813 0.93239386
0.08 1.08328701 0.92311640
0.09 1.09417422 0.91393124
0.10 1.10517084 0.90483748
0.11 1.11627799 0.89583420
0.12 1.12749676 0.88692051
0.13 1.13882828 0.87809551
0.14 1.15027369 0.86935832
0.15 1.16183413 0.86070806
0.16 - 1.17351074 0.85214388
0.17 1.18530472 0.84366491
0.18 1.19721722 0.83527031
0.19 1.20924944 0.82695924
0.20 1.22140259 0.81873086
0.21 1.23367789 0.81058436
0.22 1.24607655 0.80251892
0.23 1.25859982 0.79453S73
, 0.24 1.27124895 0.78662799
0.25 1.28402520 0.77880091
0.26 1.29692986 0.77105172
0.27 1.30996421 0.76337963
0.28 . 1.32312956 0.75578388
0.29 1.33642723 0.74826371
0.30 1.34985854
0.31
0.32
. 1.36342483
0.74081837
0.73344711
1.37712747 0.72614919
0.33 1.39096782 0.71892389
0.34 1.40494727 0.71177049
0.35 1.41906721 0.70468826
0.36 1.43332907 0.69767650
0.37 1.44773425 0.69073450
.0.38 1.46228422 0.68386158
0.39 1.47698041 . 0.67705705
0.40 1.49182430 0.67032023
0.41
0.42
0.43
. 1.50681737
. 1.52196113
1.53725708
0.66365043
0.65704701
0.65050928
0.44 1.55270676 0.64403661
,
APPENDIX
505
:Ie e% e"""'"
0.45 1.56831171 0.63762834
0.46 1.58407349 0.63128384
0.47 1.59999369 0.62500247
0.48 1.6160738i 0.61878359
0.49 1.63231568 0.61262660
0.50 1.64872072 0.60653086
0.51 1.66529062 0.60049578
0.52 1.68202706 0.59452076
0.53 1.69893170 0.58860518
0.54 1.71600624 0.58274846
0.55 1.73325238 0.57695002
0.56 1.75067184 0.57120928
0.57 1.76826637 0.56552566
0.58 1.78603773 0.55989859
0.59 1.80398770 0.55432750
0.60 1.82211806 0.54881186
0.61 1.84043064 0.54335109.
0.62 1.85892727 0.53794466
0.63 1.87760978 0.53259203
0.64 1.89648006 0.52729265
0.65 1.91553999 0.52204601
0.66 1.93479148 0.51685156
0.67 1.95423644 0.51170881
0.68 1.97387683 0.50661722
0.69 1.99371461 0.50157630
0.70 2.01375176 0.49658554
0.71 2.03399029 0.49164443
0.72 2.05443222 0.48675249
0.73 2.07507959 0.48190923
0.74 2.09593447 0.47711415
0.75 2.11699895 0.47236679
0.76 2.13827513 0.46766667
0.77 2.15976514 0.46301331
0.78 2.18147112 0.45840625
0.79 2.20339526 0.45384504
0.80 2.22553973 0.44932921
0.81 2.24790676 0.44485831
0.82 2.27049859 0.44043190
0.83 2.29331746 0.43604953
0.84 2.31636567 0.43171077
0.85 2.33964551 0.42741518
0.86 2.36315933 0.42316233
0.87 2.38690946 0.41895179
0.88 2.41089828 0.41478316
0.89 2.43512819 0.41065600
0.90 2.45960162 0.40656991
0.91 2.48432101 0.40252447
0.92 2.50928884 0.39851929
0.93 2.53450759 0.39455396
0.94 2.55997980 0.39062808
506
FINANCIAL MATHEMATICS
x e" e""'"
0.95 2.58570801 0.38674127
0.96 2.61169479 0.38289313
0.97 2.6379427'4 0.37908329
0.98 2.66445449 0.37531135
0.99 2.69123268 0.37157694
1.00 2.71828000 0.36787969
1.10 3.00416380 0.33287133
1.20 3.32011424 0.30119446
1.30 3.66929346 0.27253203
1.40 4.05519615 0.24659720
,
1.50 4.48168455 0.22313039
1.60 4.95302709 0.20189674
1.70 5.47394113 0.18268373
1.80 6.04964014 0.16529909
1.90 6.68588590 0.14956881
:
2.00 7.38904616 0.13533547
2.10 8.16615838 0.12245660
2.20 9.02500014 0.11080332
2.30 9.97416702 0.10025900
2.40 11.02315859 0.09071810
2.50 ! 12.18247347 0.08208514
2.60 13.46371449 0.07427371
2.70 14.87970470 0.06720563
2.80 16.44461580 0.06081018
2.90 18.17410992 0.05502333
3.00 20.08549639 0.04978717 .
3.10, 22.19790499 0.04504930
3.20 24.53247739 0.04076229
3.30 27.11257874 0.03688325
3.40 29.96403152 0.03337335
3.50 33.11537400 0.03019745
3.60 36.59814582 0.02732379
3.70 40.44720369 0.02472359
3.80 44.70107023 0.02237083
3.90 49.40231951 0.02024196
4.00 54.59800313 0.01831569
4.10 60.34012119 0.01657272
4.20 66.68614264 0.01499562
4.30 73.69958053 0.0135686
4.40 81.45062760 0.01227738
4.50 90.01685882 0.01110903
4.60 99.48400782 0.01005187
4.70 109.9468249 0.00909531
4.80 121.5100252 0.00822977
4.90 134.2893371 0.00744661
,
5.00 148.4126600 0.00673797
5.10 164.0213446 0.00609677
5.20 181.2716078 0.00551658
5.30 200.3360958 0.00499161
I 5.40 221.4056120 0.00451660 • I
APPENDIX
507
x eX e-«
5.50 244.6910270 0.00408679
5.60 270.4253888 0.00369788
5.70 298.8662551 0.00334598
5.80 330.2982713 0.00302757
5.90 365.0360192 0.00273946
6.00 403.4271653 0.00247876
6.10 445.8559407 0.00224288
6.20 492.7469861 0.00202944
6.30 544.5696024 0.00183631
6.40 601.8424469
6.50
. 0.00166156
665.1387249 0.~534
6.60 735.0919258 0.00136037
6.70 812.4021638 0.00123092
6.80 897.8431849 0.00111378
6.90 992.2701102 0.00100779
7.00 1096.627995 0.00091189
7.10 12~.968 0.00082511
7.20 1339.424277 0.00074659
7.30 1480.292659 0.00067554
7.40 1635.976287 0.00061126
7.50 1808.033293 0.00055309
7.60 1998.185680 0.00050045
7.70 2208.336554 0.00045283
7.80 2440.589173 0.00040974
7.90 2697.267995 0.00037075
8.00 2980.941946 0.00033546 ,
8.10 3294.450125 0.00030354
8.20 3640.930225 0.00027466
8.30 4023.849929 0.00024852
8.40 4447.041621 0.00022487
8.50 4914.740740 0.00020347
8.60 5431.628170 0.00018411
8.70 6002.877088 0.00016659
8.80 6634.204736 0.00015073
8.90 7331.929646 0.00013639
9.00 8103.034873 0.00012341
9.10 8955.237887 0.00011167
9.20 9897.067811 0.00010104
9.30 10937.95078 0.00009142
9.40 12088.30430 0.00008272
9.50 13359.64146 0.00007485
9.60 14764.68622 . 0.00006773
9.70 16317.50073 0.00006128
9.80 18033.62605 0.00005545
9.90 19930.23772 0.00005018
10.00 22026.31763 0.00004540
TABLE VII
LIe (1970 -73) Intimate Mortality Functions
Age l. d. q. Age
x x
15 999999 1320 0.00132 15
16 998679 1308 0.00131 16 .
17 997371 1306 0.00131 17
18 996065 1295 0.00130 18
19 994770 1293 0.00130 19
20 993477 1292 0.00130 20
21 992185 1280 0.00129 21
22 990905 1278 0.00129 22
23 989627 1267 0.00128 23
24 988360 1265 0.00128 24
25 987095 1263 0.00128 25
26 985832 1252 0.00127 26
27 984580 1250 0.00127 27
28 983330 1268 0.00129 28
29 982Q62 1286 0.00131 29
30 980776 1314 0.00134 30
31 979462 ~3til 0.00139 31
32 978101 1428 0.00146 32
: 33 976673 1514 0.00155 33
34 975159 1609 0.00165 34
35 973550 1733 0.00178 35
36 971817 1876 0.00193 ·36
37 969941 2046 0.00211 37
38 967895 2236 0.00231 38
39 965659 2453 0.00254 39
40 963206 2697 0.00280 40
41 960509 2968 0.00309 41
42 957541 3275 0.00342 42
43 954266 3617 0.00379 43
44 950649 3993 0.00420 44
45 946656 4402 0.00465 45
46 942254 4853 0.00515 46
47 937401 5343 0.00570 47
48 932058 5881 0.00631 48
49 926177 6465 0.00698 49
50 919712 7100 0.00772 50
51 912612 7775 0.00852 51
52 904837 8514 0.00941 52
53 896323 9295 0.01037 ~3
54 887028 10139 0.01143 54
55 876889 11031 0.01258 55
56 865858 11983 0.01384 56
57 853875 12996 0.01522 57
513 840879 14059 0.01672 58
59 826820 15180 0.01836 59
APPENDIX
509
Age L. d. q. Age
x x
60 811640 16346 0.02014 60
61 795294 17560 0.02208 61
62 777734 18813 0.02419 62
63 758921 20096 0.02648 63
64 738825 21389 0.02895 64
65 717436 22692. 0.03163 65
66 694744 23996 0.03454 66
67 670748 25267 0.03767 67
68 645481 26510 0.04107 68
69 618971 27686 0.04473 69
70 591285 28778 0.04867 70
71 562507 29768 0.05292 71
72 532739 30627 0.05749 72
73 502112 31332 0.06240 73
74 470780 31853 0.06766 74
75 438927 32169 0.07329 75
76 406758 32264 0.07932 76
77 374494 32117 0.08576 77
78 342377 31718 0.09264 78
79 310659 31050 0.09995 79
80 279609 30122 0.10773 80
81 249487 28938 0.11599 81
82 220549 27509 0.12473 82
83 193040 25862 0.13397 83
84 167178 24027 0.14372 ·84
85 143151 22042 0.15398 85
86 121109 19953 0.16475 86
87 101156 17806 0.17603 87
88 83350 15652 0.18779 88
89 67698 13540 0.20001 89
90 54158 11519 0.21269 90
91 42639 9604 0.22523 91
92 33035 7939 0.24032 92
93 25096 6404 0.25520 93
94 18692 5054 0.27039 94
95 13638 3899 0.28588 95
96 9739 2936 0.30149 96
97 6803 2157 0.31713 97
98 4646 1545 0.33261 98
99 3101 1078 0.34772 99
100 2023 733 0.36221 100
101 1290 689 0.53394 101
102 601 601 1.00000 102
103 0 - - 103
510
RNAC~LM7HEnS
TABLE VIII
HM Table (Makeham Graduation>
The Life Table
Age I. d. q. P. L. T. e. Age
:x
:x
0 127283 14358 0.11280 0.88720 120104 6082031 47.784
1 112925 0
3962 0.03508 0.96492 110944 5961927 52.796 1
2 108963 2375 0.02179 0.97821 107776 5850983 53.697
3 106588 2
1646 0.01544 0.98456 105765 5743207 53.881 3
4 104942 1325 0.01263 0.98737 104279 5637442 53.719 4
5 103617 1061 0.01024 0.98976 103087 5533163 53.401 5
6 102556 852 0.00830 0.99170 102130 5430076 52.948 6
7 101704 683 0.00672 0.99328 101362 5327946 52.387 7
8 101021 557 0.00551 0.99449 100743 5226584 51.738 8
~
9 100464 464 0.00462 0.99538 100232 5125841 51.022 9
10 100000 408 0.00409 0.99591 99796 5025609 50.257 10
1 . 99592 369 0.00370 0.99630 99408 4925813 49.460 11
2 99223 346 0.00347 0.99653 99050 4826405 48.643 12
3 98877 337 0.00342 0.99658 98708 4727355 47.810 13
4 98540 337 0.00342 0.99658 98372 4628647 46.973 14
·15 98203 360 0.00365 0.99635 98023 4530275 46.132 15
6 97843 384 0.00393 0.99607 97651 4432252 45.299 16
7 97459 425 0.00437 0.99563 97246 4334601 44.476 17
8 97034 465 0.00478 0.99522 96802 4237355 43.669 18
9 96569 508 0.00526 0.99474 96315 4140553 42.877 19
20 96061 548 0.00572 0.99428 95787 4044238 42.101 20
1 95513 582 0.00608 0.99392 95222 3948451 41.339 21
2 94931 609 0.00643 0.99357 94626 3853229 40.590 22
3 94322 631 0.00668 0.99332 94607 : 3758603 39.849 23
4 93691 647 0.00691 0.99309 93367 3664596 39.114 24
25 93044 658 0.00707 0.99293 92715 3571229 38.382 25
6 92386 664 0.00720 0.99280 92054 3478514 37.652 26
7 91722 673 0.00732 0.99268 91386 3386460 36.921 27
8 91049 678 0.00746 0.99254 90710 3295074 36.189 28
9 90371 686 0.00759 0.99241 90028 3204364 35.458 29
30 89685 691 0.00771 0.99229 89339 3114336 34.726 30
1 88994 700 0.00787 0.99213 88644 3024997 33.991 ·31
2 88294 709 0.00803 0.99197 87940 2936353 33.257 32
3 87585 719 0.00821 0.99179 87225 2848413 32.521 33
4 86866 729 0.00839 0.99161 86502 2761188 31.787 34
35 86137 742 0.00842 0.99138 85766 2674686 31.051 35
6 85395 756 0.00885 0.99115 85017 2588920 30.317 36
7 84639 770 0.00910 0.99090 84254 2503903 29.584 37
8 83869 786 0.00937 0.99063 83476 2419649 28.850 38
9 83083 806 0.00969 0.99031 82680 2336173 28.118 39
40 82277 823 0.01001 0.98999 81865 2253493 27.389 40
1 81454 846 0.01038 0.98962 81031 2171628 26.661 41
2 80608 871 0.01081 0.98919 80173 2090597 25.935 42
3 79737 895 0.01122 0.98878 79289 2010424 25.214 43
4 78842 924 0.01172 0.98828 78380 1931135 24.493 44
45 77918 954 0.01224 0.98776 77441 1852755 23.778 45
6 76964 986 0.01281 0.98719 76471 1775314 23.066 46
7 75978 1021 0.01345 0.98655 75468' 1698843 22.360 47
8 74957 1061 0.01415 0.98585 74426 1623375 21.658 48
9 73896 1101 0.01490 0.98510 73346 1548949 20.961 49
APPENDIX
511
Age l. d. q. P. L. T.
4
e. Age
x , x
50 72795 1144 0.01572 0.98428 72223 1475603 20.271 50
1 71651 1193 0.01665 0.98335 71054 1403380 19.587
2 70458 51
1243 0.Gl764 0.98236 69837 1332326 18.909 52
3 69215 1296 0.01873 0.98127 68567 1262489 18.240
4 67919 53
1353 0.01992 0.98008 67242 1193922 17.579 54
55 66566 .1414 0.02123 0.97877 65859 1126680 16.926 55
6 65152 1475 0.02265 0.97735 64415 1060821 16.282 56
7 63677 1541 0.02420 0.97580 62906 996406 15.648 57
8 62136 1612 0.02593 0.97407 61330 933500 15.023 58
9 60524 1682 0.02779 0.97221 59683 872170 14.410 59
60 58842 1755 0.02983 0.97017 57965 812487 13.808 60
'1 57087 1830 0.03206 0.96794 56172 754522 13.217 61
2 55257 1906 0.03451 0.96549 54304 698350 12.638 62
3 53351 1983 0.03717 0.96283 52359 644046 12.072 63
4 51368 2059 0.04007 0.95993 50339 591687 11.519 64
65 49309 2133 0.04327 0.95673 48242 541348 10.979 65
6 47176 2204 0.04672 0.95328 46074 493106 10.452 66
7 44972 2273 0.05053 0.94947 43836 447032 9.940 67
8 42699 2334 0.05466 0.94534 41532 403196 9.443 68
9 40365 2388 0.05917 0.94083 39171 361664 8.960 69
70 37977 2434 0.06410 0.93590 ·36760 322493 8.492 70
1 35543 2468 0.06943 0.93057 34309 285733 8.039 71
2 33075 2490 0.07528 0.92472 31830 251424 7.602 72
3 30585 2496 0.08160 0.91840 29337 219594 7.180 73
4 28089 2487 0.08856 0.91144 26845 190257 6.773 74
75 25602 2459 0.09604 0.90396 24373 163412 6.383 75
6 23143 2412 0.10422 0.89578 21937 139039 6.008 76
7 20731 2343 0.11303 0.88697 19559 117102 5.649 77
8 18388 2255 0.12262 0.87738 17261 97543 5.305 78
9 16133 2146 0.13304 0.86696 15060 80282 4.976 79
80 13987 2018 0.14426 0.85574 12978 65222 4.663 80
1 11969 1873 0.15649 0.84351 11033 52244 4.365. 81
2 10096 1712 0.16958 0.83042 9240 41211 4.082 82
3 8384 1540 0.18368 0.81632 7614 31971 3.813 .83
4 6844 1361 0.19886 0.80114 6164 24357 3.559 84
85 5483 ll80 0.21522 0.78478 4893 18193 3.318 85
6 4303 1002 0.23285 0.76715 3802 13300 3.091 86
7 3301 830 0.25145 0.74855 2886 9498 2.877 87
8 2471 671 0.27155 0.72845 2135 6612 2.676 88
9 1800 527 0.29277 0.70723 1537 4477 2.487 89
90 1273 402 0.31579 0.68421 1072 2940 2.310 90
1 871 296 0.33984 0.66016 723 1868 2.145 91
2 575 209 0.36348 0.63652 470 ll45 1.992 92
3 366 144 0.39345 0.60655 294 675 1.844 93
4 222 93 0.41891 0.58109 176 381 1.716 94
95 129 58 0.44961 0.55039 100 205 1.593 95
6 71 34 0.47888 0.52112 54 105 l.486 96
7 37 18 0.48649 0.51351 28 51 1.392 97
8 19 10 0.52631 0.47369 14 23 1.237 98
9 9 5 0.55555 0.44445 6 9 1.056 99
100 4 3 0.75000 0.25000 ·3 3 0.750 100
1 1 1 1.00000 0.00000 0 ... 0.500 101
2 0 ... '" '" ....... 0.000 102
512 FINANCIAL MATHEliAncS
TABLE IX
Areas under the Standard Normal
Curve from 0 to z
[n(O sX:s: x) = n (O:s:Z :s:z)]
z 0.00 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 0.09
0.0 0.0000 0.0040 0.Q080 0.0120 0.0160 0.0199 0.0239 0.0279 0.0319 0.0359
0.1 0.0398 0.0438 0.0478 0.0517 0.0557 0.0596 0.0636 0.0675 0.0714 0.0753
0.2 0.0793 0.0832 0.0871 0.0910 0.0948 0.0987 0.1026 0.1064 0.1103 0.1141
0.3 0.1179 0.1217 0.1255 0.1293 0.1331 0.1368 0.1406 0.1443 0.1480 0.1517
0.4 0.1554 0.1541 0.1628 0.1664 0.1700 0.173"6 0.1772 0.1808 0.1844 0.1879
0.5 0.1915 01950 0.1985 0.2019 0.2054 0.2088 0.2123 0.2157 0.2190 0.2224
0.6 0.2257 0.2291 0.2324 0.2357 0.2389 0.2422 0.2454 0.2486 0.2517 0.2549
0.7 0.2580 0.2611 0.2642 0.2673 0.2703 0.2734 0.2764 0.2794 0.2823 0.2852
0.8 0.2881 0.2910 0.2939 0.2967 0.2995 0.3023 0.3051 0.3078 0.3106 0.3133
0.9 0.3159 0.3186 0.3212 0.3238 0.3264 0.3289 0.3315 0.3340 0.3365 0.3389
1.0 0.3413 0.3438 0.3461 0.3485 0.3508 0.3531 0.3554 0.3577 0.3599 0.3621
1.1 0.3643 0.3665 0.3686 0.3708 0.3729 0.3749 0.3770 0.3790 0.3810 0.3830
1.2 0.3849 0.3869 0.3888 0.3907 0.3925 0.3944 0.3962 0.3980 0.3997 0.4015
1.3 0.4032 ·0.4049 0.4066 0.4082 0.4099 0.4115 0.4131 0.4147 0.4162 0.4177
1.4 0.4192 0.4207 0.4222 0.4236 0.4251 0.4265 0.4279 0.4292 0.43Q6 0.4319
1.5 0.4332 0.4345 0.4357 0.4370 0.4382 0.4394 0.4406 0.4418 0.4429 0.4441
1.6 0.4452 0.4463 0.4474 0.4484 0.4495 0.4505 0.4515 0.4525 0.4535 0.4545
17 0.4554 0.4564 0.4573 0.4582 0.4591 0.4599 0.4608 0.4616 0.4625 0.4633
1.8 0.4641 0.4649 0.4656 0.4664 0.4671 0.4678 0.4686 0.4693 0.4699 0.4706
1.9 0.4713 0.4719 0.4726 0.4732 0.4738 0.4744 0.4750 0.4756 0.4761 0.4767
2.0 0.4772 0.4778 0.4783 0.4788 0.4793 0;4798 0.4803 0.4808 0.4812 0.4817
2.1 0.4821 0.4826 0.4830 0.4834 0.4838 0.4842 0.4846 0.4850 0.4854 0.4857
2.2 0.4861 0,4864 0.4868 0,4871 0,4875 0,4878 0,4881 0,4884 0.4887 0,4890
2.3 0.4893 0,4896 0,4898 0.4901 4904 0.4906 0,4909 0,4911 0.4913 0.4916
2.4 0.4918 0.4920 0.4922 0.4925 0.4927 0.4929 0.4931 0,4932 0.4934 0.4936
2.5 0.4938 0.4940 0.4941 0,4943 0.4945 0,4946 0.4948 0.4949 0.4951 0.4952
2.6 0,4953 0.4955 0.4956 0,4957 0.4959 0.4960 0.4961 0.4962 0.4963 0,4964
2.7 0.4965 0.4966 0.4967 0.4968 0.4969 0.4970 0,4971 0.4972 0.4!i73 0,4974
2.8 0.4974 0.4975 0.4976 0.4977 0,4977 0.4978 0.4979 0.4979 0,4980 0.4981
2.9 0,4981 0,4982 0.4982 0.4983 0.4984 0.4984 0.4985 0.4985 0.4986 0.4986
3.0 0.4986 0,4987 0.4987 0.4988 0.4988 0.4989 0.4989 0.4989 0.4990 0.4990
3.1 0.4990 0,4991 0.4991 0.4991 0.4992 0.4992 0.4992 0.4992 0.4993 0.4993
3.2 0.4993 0.4993 . 0.4994 0.4994 0.4994 0.4994 0.4994 0.4995 0.4995 0.499
3.3 0,4995 0.4995 0.4996 0.4996 0.4996 0.4996 0.4996 0.4996 0.4996 0.4997
3,4 0.4997 0,4997 0.4997 0.4997 0,4997 0.4997 0.4997 0.4997 0.4998 0.4998
3.5 0.4998 0,4998 0.4998 0.4998 0.4998 0.4998 0.4998 0.4998 0.4998 0.4998
3.6 0.4998 0.4998 0.4999 0.4999 0.4999 0.4999 0.4999 0.4999 0,4999 0.4999
3.7 0,4999 0.4999 0,4999 0.4999 0,4999 0.4999 0.4999 0.4999 0.4999 0.4999
3.8 0,4999 0,4999 0.4999 0.4999 0.4999 0.4999 0.4999 0.5000 0.5000 0.5000
3.9 0.5000 0.5000 0.5000 0.5000 0.5000 0.5000 0.5000 0.5000 0.5000 0.5000

Financial Mathematics Imi Gjlinmlaya Gfublishing Gjlouse Mumbai Delhi Bangalore Hyderabad Chennai Ernakulam Nagpur Pune Ahmedabad Lucknow

Uploaded by

Copyright:

Available Formats

Financial Mathematics Imi Gjlinmlaya Gfublishing Gjlouse Mumbai Delhi Bangalore Hyderabad Chennai Ernakulam Nagpur Pune Ahmedabad Lucknow

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Financial Mathematics Imi Gjlinmlaya Gfublishing Gjlouse Mumbai Delhi Bangalore Hyderabad Chennai Ernakulam Nagpur Pune Ahmedabad Lucknow

Uploaded by

Copyright:

Available Formats

FINANCIAL

A.. LENIN JOTHI

IFIRST EDITION :2009

I Typeset at Time~ Printogaph~s I

FUNDAMENTAL PRINCIPLE OF COUNTING

PRINCIPLE II : MULTIPLICATION PRINCIPLE

I X e:'·9 yCo~ jr-----'z

SQlution : The digits are 3, 5, 6 and 9.

No. of ways of choosing second digit = 3

Solution: Total number of digits = 5

This is shown as follows:

No. of was to filll's place =5

Solution : The numbers less than 1000 can be :

(ii) No. of ways of filling unit's place =5

(ii) No. of ways of filling unit's place = 5

Solution: First price goes to anyone of the 10 people

Example 11 ; Evaluate the following :

(c.) 2 6x !4! 6 x 5 x ~! =15

Example 12 : Which of the following statements are correct

The number of permutations ofn thlDgs taking r at a time is given by

Alternatively I nPr =(n iIiil ,Is r s n.

Example 13 : Evaluate the following:

Example 14 : If 5P (5, r) =2P (6, r -I), find r.

Solution: Given that

Example 16 :If 16"'P3 =13. ",+lPa. find n.

Example 18 : Prove thatnPr = n-IPr + r. n-1Pr _ l

Example 17 : In how many ways can five children stand in a queue?

Solution: Number of ways in which 5 children stan~ in queue

Solution: Total number of participant n =7

No. of even positions =4

Example 21: A family of 4 brothers and:J sisters is to be arranged for a photograph in

Solution: There are 10 digits (0, 1, 2, ... , 9).

Solution: No. ofletters in the word 'DELHI' =5

No. of words in which N is always included =3)( 7P2 =3)( 7 )( 6 =126

13. There are 8 students appearing in an examination of which 3 have to appear in a

PERMUTATIONS WHEN ALL OBJECTS ARE NOT DISTINCT

· . The no. of permutations of this word =; : = 1:0 =60

· . The required no. of permutation is 19958400.

.. No. of ways in which the 8 units can be arranged = 2 ~ ~ ! = 10080

In the single unit of 4 vowels, 'A' occurs twice

Total number of permutations =(4 !) t1!~ (2 !) = 34640.

No. of permutations =4~ ~ ! =840

Solution: There are 6 digits (0, 3, 3, 4, 4, 5).

Here 3 repeats twice and 4 repeats twice.

Example 34 : In how many ways can 7 persons sit in a round table?

Solution: The number of circular permutations of n different objects is given by (n - 1) !

Solution: No. of men =4

But the combination of 3 thing x, y, z taking 2 at a time are :

The number of combinations of n things taking r at a time is equal to

P f nC n! =(n - n'r). ! r -nC

Example 38 : Evaluate the following:

(a) 7~6 x5 =35

(b) 25C l x 24 x 23'x 22 =12650

Example 39 : Prove that if nand r natural members such that 1 ;$ r ;$ n, then

No. of ways to select 3 red balls =6Ca

No. of ways to select 3 blue balls =6e 3

Example 42 : A committee of 5 members is to be formed out of 6 men and 4 ladies. In

Example 43 : In how many ways can a student choose a programme of 5 courses if 9