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SEPTEMBER 2005 Q11

A

AKS01

Very Active Member
Hi,

In September 2005 Q11 the maturity benefit is 115% of the bid value of units.
I would have calculated the extra expected maturity cost in the non unit fund by doing 0.15*27592.14*(1-q64)
The examiners report seems to have only calculated it as 0.15*27592.14 = 4138.821 ... i.e not included the probability. Why is this?
 
The maturity cost they have shown in the profit table (before provisions) is not the correct value, because it should indeed be multiplied by the survival probability, as you say. :)
However, this omission has not caused the final answer (NPV and profit margin) to be wrong in this case, because they have allowed for the maturity cost correctly when calculating the provisions by "adding back" the bit of the maturity cost that was overstated (ie by multiplying it by [1-p64] to compensate for the error! - in the line that says "Provision required at the start of year 3").
Then, because holding provisions will cause the resulting profit to be then zero, they have correctly calculated the profit for the final year as zero in the NPV (you will see that these is no profit included for year 3 in the NPV calculation).
So you are quite right, and all is well. (Hopefully, though, your final answer should agree with theirs?)
Good luck for tomorrow. But if you're spotting this kind of thing, you are going well :)
Robert
 
Hey guys,
I wanna know while calculating maturity cost at the end of 3rd year why only p64 is multiplied and not 3p62.
Maturity benefit would be paid to anyone who survives 3 years from age 62 but why only we have considered 1 year survival probability after age 64 ??
 
profit testing as explained in the notes is in principle based on dividing the coverage period into uniform periods and testing for profits in each period. year 3 starts when person is aged 64 not aged 62. so if we are looking to compute profits in year of age 64 to 65, it is intuitive to look at p64. kind of crude logic if it helps :)
 
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