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in BUS 3024S - Contingencies by (860 points)

Hi


Can someone please explain how the expression for the EPV of the benefit to the grandson is obtained in the memo.


Thanks


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1 Answer

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by (990 points)
Hi, I'm not a tutor but here's my reasoning:

So the grandson will be paid this annuity monthly when the at least one of the gparents die but only for a max of 8 years. 

Thus the memo has used an annuity payable monthly (so this is definite and has no probability attached [same as fin maths annuities]). However, this is cancelled out by the joint life annuity for every year that it holds. So this second annuity will fail when one of the grandparents die. 

So for example: if the one of them die in the first month, he will get paid this 'definite annutiy' every month commencing from when they die. If they never died in the 8 year term, he would never receive any annuity payments as this will be cancelled out by the joint life annuity. However, if one of them die, this joint life annuity falls away and he gets these definite payments after the death (so if they died in the first month he would receive (8*12-1) payments. 
by (860 points)
Thank you, that makes sense!
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