Institute of Actuaries of India 2005 Subject CA3 ,Communications - Question Paper

1)Your friend has recently bought a car for £15,000, and has financed this partly by
taking out a car loan with a finance company.
Your friend has signed up to a four year loan which was said as having a flat interest
rate of 5%. He has mentioned to you that he believes he negotiated a preferential loan
rate with the car dealer, provided that bank interest rates were just under 5%.
He has received his opening statement from the loan company explaining the loan and
the repayments as follows:
Total cash price of goods £15,000 A
Deduct:
Deposit £1,000
Trade-in of old car £500
£1,500 B
Amount of finance £13,500 C=A B
interest charge £2,700
Acceptance fee £140
Settlement fee £95
£2,935 D
Total charge for credit £16,435 E=C+D
Total amount payable £17,935 F=B+E

Your repayments
Basic monthly repayment £337.50
First Repayment £477.50 (including Acceptance Fee)
Followed by: 46 repayments of £337.50 per month
Plus a final repayment of £432.50 (including Settlement Fee)


Annual Percentage Rate (APR) 10.6%
Example early termination payments
Lump sum repayable if you wish to £10,784 Sum of repayments already
terminate after 12 payments made = £4,190
Lump sum repayable if you wish to £7,519 Sum of repayments already
terminate after 24 payments made = £8,240
Lump sum repayable if you wish to £3,923 Sum of repayments already
terminate after 36 payments made = £12,290

Notes
1. The Annual Percentage Rate is the effective annual compound interest rate
underlying the loan, allowing for the Acceptance Fee and the Settlement Fee.
2. The interest charge for the loan is computed as Amount of Finance
Quoted Interest Rate Term.
Your friend wonders whether a mistake has been made, as he can see that the APR is
more than double the interest rate he thought he had agreed to.
He has therefore asked you to discuss how his repayments have been calculated, and
whether he is paying 10.6% or 5% interest.
Draft a letter to your friend in approximately 450 words. [50]

2)You work for a life insurance company. It offers a 16 year unit-linked endowment,
with a review of premium at the fifth and tenth anniversary. When the product was
initially introduced seven years ago, most new customers were aged 25 to 35. Nearly five
years ago, a niche market was identified which attracted a number of customers aged
about 70.
You are concerned that your senior management team may be expecting the impact of
the premium reviews for the niche group to be similar to the reviews for the original
customer group carried out over the last two years.
You have received the subsequent internal tech. presentation, which explored the
tech. aspects and reported on the progress of work within the tech. team.
Draft a presentation of six to eight slides for the senior management team explaining the
impact for the niche group of customers, and why it is various to the impact for the
original group.
Note: No comment is needed on the appropriateness of the investment returns and
mortality tables. [50]

Earning:   Approval pending.