Course 3 #3

[Trisha]

Can someone please give me a step by step explanation to this answer I still don't get it. I keep seeing the term summations going from 0-1 and the deferred part starting at 2...I dont' get this even now?? :-? Help!!!

[Bama Gambler]

The best way to see the problem is to draw a line like this

*--------*--------*--------*--------*
60 61 62 63 64

Basically if you die when your 62 or if you die when you 63 then you get $1 at the end of the year of death. [60] means a 60 year selected at age 60. So we start in the upper left hand corner of the table. Then you read the number from left to right. So the prob. that this 60 year old dies before age 61 is .09. Given that the 60 year old lives to age 61, he dies before age 62 with prob .11. And so on.

So we need for him to live to age 62 = .91 * .89 = .8099
Then if he dies in the next year we will give him $1 at time 3 (labeled 63 on the graph above).
PV of this payment = .8099 * .13 * (1.03)^-3 = .09635252

Or he can live to age 63 and then die before age 64, and we give him a dollar at time t = 4 (or what whould be his 64th birthday).
PV of this payment = .8099 * .87 * .15 * (1.03)^-4 = .093905929

Total PV = .19

[Bama Gambler]

BTW, each of those ages (60, 61, etc) should line up with the stars. This problem is hard to write up, but really easy on paper.

[Trisha]

sorry Bama I still don't get it I know how to use the select mortality tables thats not the issue what I dont' understand is how do you know to stop at age 64?? if its a 2 year deferred then doesn't the payment go on like a whole life?? or did I just read this question all wrong :shake:

[3rookie]

It's 2 year deferred, 2 year term

[Trisha]

Crap!! ARRGG I understand now this bloody question has really really poor wording, what they should have said was a 2 year term starting at age x+2 or something to that effect. I understand now that the deferred period starts first and then the 2 year term continues....AARRGG what an easy question I've muddled up on :swear: :furious: