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Section 13. Page 12 - Offer basis

C

cipherap15

Member
The fourth bullet point says to multiply by 100/95(assume a 5% initial charge)

I would've just multiplied by 1.05. Why are we multiplying by 100/95? Also I'm assuming I would Multiply 100/95 by the appropriation price(102.0154) to get the Offer Price not multiply by the Bid price on an offer basis. The chart multiplies by the Bid Price.

In the notes it says ---- Offer Price = Appropriation Price + Initial Charge.

maybe I've studied too long today. But I'm not getting this.

Thanks
 
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Usually the initial charge is a % of the premium paid. Hence to achieve this we need to divide by .95 (otherwise it would be 5% of premium less charge).

Don't worry about taking a % of the bid price. The diagram applies we could take a % of the appropriation price, which is exactly what could happen.
 
There isn't a unique way to calculate unit prices and practice does vary between insurers. The approach shown in the notes is just one way to determine prices. The important thing in the exam is to follow the approach set by the examiners - if you think that more than one method is used then state the assumption you have made.


The fourth bullet point says to multiply by 100/95(assume a 5% initial charge)

I would've just multiplied by 1.05. Why are we multiplying by 100/95?
Click to expand...

As Muppet has said, we want to take a charge of 5% of the premium, so we want the bid price to be 95% of the offer price. As far as I am aware, all insurers follow this convention.

Also I'm assuming I would Multiply 100/95 by the appropriation price(102.0154) to get the Offer Price not multiply by the Bid price on an offer basis. The chart multiplies by the Bid Price.

In the notes it says ---- Offer Price = Appropriation Price + Initial Charge.
Click to expand...

The only difference between the appropriation price and the bid price is rounding. Rounding approaches vary considerably between insurers, so the offer price might be calculated from the unrounded appropriation price or the rounded bid price (there are other possibilities too).

October 2010 question 1 required a calculation of the offer price and in this case the examiners report followed the approach you suggested using the unrounded appropriation price. As I said above, if in doubt you should state which assumption you have used, ie whether to use the unrounded appropriation price or rounded bid price.

Best wishes

Mark
 
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