Sect 3 1

Chapter 3. Annuities.
Manual for SOA Exam FM/CAS Exam 2.

Chapter 3. Annuities. Section 3.1. Geometric series. c 2009. Miguel A. Arcones. All rights reserved.
Extract from: Arcones Manual for the SOA Exam FM/CAS Exam 2, Financial Mathematics. Fall 2009 Edition, available at http://www.actexmadriver.com/
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c 2009. Miguel A. Arcones. All rights reserved.
Section 3.1. Geometric series.
We use the summation notation
n i = m xi
to mean
xm + xm+1 + + xn1 + xn . Usually arithmetic rules hold. In particular:

n i =m (xi
+ yi ) =
n i = m xi
n i = m yi
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n i = m xi
to mean

n i =m (xi + yi ) n i =m axi = a
n i = m xi
n i = m yi
n i = m xi .
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n i = m xi
to mean

n i = m xi
n i = m yi
n i = m xi .
If m k n,
n k n
xi =
i =m i =m
xi +
i =k +1
xi .
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n i = m xi
to mean

n i = m xi
n i = m yi
n i = m xi .
If m k n,
n k n
xi =
i =m n i =m i =m
xi +
i =k +1
xi .
1 = n m + 1.
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Denition 1
The sequence of real numbers arithmetic sequence.
n=0
= {a + nd } n=0 is called an
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Denition 1
n=0
The sequence {xn } n=0 = {a + nd }n=0 satises that for each n 1, xn1 + d = xn . Notice that
xn1 + d = a + (n 1)d + d = a + nd = xn .
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Denition 1
n=0
xn1 + d = a + (n 1)d + d = a + nd = xn .
Theorem 1
If a sequence {xn } n=0 of real numbers satises xn = xn1 + d, for each n 1, then xn = x0 + nd for each n 1.
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Denition 1
n=0
xn1 + d = a + (n 1)d + d = a + nd = xn .
Theorem 1
If a sequence {xn } n=0 of real numbers satises xn = xn1 + d, for each n 1, then xn = x0 + nd for each n 1.
Proof.
The proof is by induction on n. The case n = 0 is obvious. Assume that the case n holds. Then, xn+1 = xn + d = x0 + nd + d = x0 + (n + 1)d .
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Theorem 2
n j =1 j
n(n+1) . 2
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Theorem 2
n j =1 j
n(n+1) . 2
Proof.
n
2
j =1
j = (1 + 2 + + (n 1) + n) + (1 + 2 + + (n 1) + n)
=(1 + 2 + + (n 1) + n) + (n + (n 1) + + 2 + 1) =(1 + n) + (2 + n 1) + (3 + n 2) + (n + 1) =(n + 1) + (n + 1) + (n + 1) + (n + 1) = n(n + 1).
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Theorem 2
n j =1 j
n(n+1) . 2
Proof.
n
2
j =1
j = (1 + 2 + + (n 1) + n) + (1 + 2 + + (n 1) + n)
=(1 + 2 + + (n 1) + n) + (n + (n 1) + + 2 + 1) =(1 + n) + (2 + n 1) + (3 + n 2) + (n + 1) =(n + 1) + (n + 1) + (n + 1) + (n + 1) = n(n + 1).
Previous theorem can be proved by induction.
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Theorem 2
n j =1 j
n(n+1) . 2
Proof.
n
2
j =1
j = (1 + 2 + + (n 1) + n) + (1 + 2 + + (n 1) + n)
=(1 + 2 + + (n 1) + n) + (n + (n 1) + + 2 + 1) =(1 + n) + (2 + n 1) + (3 + n 2) + (n + 1) =(n + 1) + (n + 1) + (n + 1) + (n + 1) = n(n + 1).
Previous theorem can be proved by induction. Note that in the summation n j =1 j , there are n numbers and the average of these numbers is
n+1 2 .
Hence,
n j =1 j
n(n+1) . 2
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For an arithmetic sequence,

n n n
(a + jd ) =
j =0 j =0
a+d
j =0
j = (n + 1)a + d
n(n + 1) . 2
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Example 1
Find
100 k =10 k.
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Example 1
Find
100 k =10 k.
Solution 1: 100 k =10 k =
100 k =1 k
9 k =1 k
(100)(101) 2
(9)(10) 2
= 5005.
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Example 1
Find
100 k =10 k.
Solution 1: 100 k =10 k =
100 k =1 k
9 k =1 k
(100)(101) 2
(9)(10) 2
= 5005.
Solution 2: By the change of variables k = j + 9,

100 91
k=
k =10 j =1
(j + 9) =
(91)(92) + (9)(91) = 5005. 2
Notice that if k = 10, then j = 9; and if k = 100, then j = 91.
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Denition 2
The sequence {ar n } n=0 is called a geometric sequence.
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Denition 2
The sequence {ar n } n=0 is called a geometric sequence. The geometric sequence {ar n } n=0 satises that for each n 1, rxn1 = rar n1 = ar n = xn , where xn = ar n .
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Theorem 3
If a sequence satises xn = rxn1 , for each n 1, then xn = x0 r n for each n 1.
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Theorem 3
If a sequence satises xn = rxn1 , for each n 1, then xn = x0 r n for each n 1.
Proof.
The proof is by induction on n. The case n = 0 is obvious. Assume that the case n holds. Then, xn+1 = rxn = rx0 r n = x0 r n+1 = xn+1 .
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Theorem 4
For any r R, r
n+1 n
1 = (r 1)
j =0
rj.
Proof.
n j 2 n j =0 r (r 1) = (1 + r + r + + r )(r 1) 2 n +1 2 (r + r + + r ) (1 + r + r + + r n )
= r n+1 1.
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In particular, we that (x 2 1) = (x 1)(1 + x ), (x 3 1) = (x 1)(1 + x + x 2 ), (x 4 1) = (x 1)(1 + x + x 2 + x 3 ), (x 5 1) = (x 1)(1 + x + x 2 + x 3 + x 4 ).
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Corollary 1
(i) If r = 1, (ii) If r = 1,
n r n+1 1 j j =0 r = r 1 . n j j =0 r = n + 1.
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Corollary 1
(i) If r = 1, (ii) If r = 1,
n r n+1 1 j j =0 r = r 1 . n j j =0 r = n + 1.
Proof.
(i) If r = 1, from r n+1 1 = (r 1)
n n j j =0 r ,
we get that
rj =
j =0
r n+1 1 . r 1
(ii) If r = 1,
n n
rj =
j =0 j =0
1 = n + 1.
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Example 2
Find
20 k k =5 2 .
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Example 2
Find
20 20 k k =5 2 .
Solution:
20 4
2 =
k =5 k =0
2
k =0
2k =
221 1 25 1 = 221 25 = 2097120. 21 21
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We also have that for 1 m n and r = 1,

n n m 1
r =
j =m j =0
r
j =0
rj =
r n+1 1 r m 1 r n+1 r m = . r 1 r 1 r 1
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n n m 1
r =
j =m j =0
r
j =0
rj =
r n+1 1 r m 1 r n+1 r m = . r 1 r 1 r 1
Example 3
Find
20 k k =5 2 .
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n n m 1
r =
j =m j =0
r
j =0
rj =
r n+1 1 r m 1 r n+1 r m = . r 1 r 1 r 1
Example 3
20 k k =5 2 . 20 k Solution: k =5 2
Find
221 25 2 1
= 221 25 = 2097120.
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Theorem 5
For |r | < 1,
j j =0 r
1 1 r .
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Theorem 5
For |r | < 1,
j j =0 r
1 1 r .
Proof.
If |r | < 1, then ln(|r |) < 0 and |r n+1 | |r |n+1 = e (n+1) ln(|r |) 0, as n . Hence,
n
r j = lim
j =0
r j = lim
j =0
1 r n+1 1 = . n r 1 1r
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Corollary 2
For |r | < 1,
rj =
j =n
rn . 1r
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Corollary 2
For |r | < 1,
rj =
j =n
rn . 1r
Proof.
By the change of variables j = k + n,

rj =
j =n k =0
r k +n = r n
k =0
rk =
rn . 1r
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Example 4
Find
k k =9 3 .
35/??
Example 4
Find
k k =9 3 .
Solution:
3 k =
k =9
39 = 0.0000762079. 1 (1/3)
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Theorem 6
For r = 1,
n
jr j =
j =1
nr n+2 (n + 1)r n+1 + r . (r 1)2
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Theorem 6
For r = 1,
n
jr j =
j =1
nr n+2 (n + 1)r n+1 + r . (r 1)2
Proof.
Taking derivatives with respect to r in the inequality n r n+1 1 j j =0 r = r 1 , we get that
n j 1 j =1 jr
(n+1)r n (r 1)(r n+1 1) (r 1)2
nr n+1 (n+1)r n +1 (r 1)2
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Corollary 3
For |r | < 1,
j j =1 jr
r . (r 1)2
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Corollary 3
For |r | < 1,
j j =1 jr
r . (r 1)2
Proof.
If |r | < 1, then
n
jr = lim
j =1
jr j = lim
j =1
nr n+2 (n + 1)r n+1 + r r = . 2 n (r 1) (r 1)2
40/??
Example 5
Find
k k =1 k 4 .
41/??
Example 5
Find
k k =1 k 4 .
Solution:
k 4 k =
k =1
41 4 = = 0.4444444444. (1 41 )2 9
42/??

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Chapter 3. Annuities.

Manual for SOA Exam FM/CAS Exam 2.

c 2009. Miguel A. Arcones. All rights reserved.

Manual for SOA Exam FM/CAS Exam 2.

Section 3.1. Geometric series.

We use the summation notation

xm + xm+1 + + xn1 + xn . Usually arithmetic rules hold. In particular:

c 2009. Miguel A. Arcones. All rights reserved.

Manual for SOA Exam FM/CAS Exam 2.

Section 3.1. Geometric series.

We use the summation notation

xm + xm+1 + + xn1 + xn . Usually arithmetic rules hold. In particular:

c 2009. Miguel A. Arcones. All rights reserved.

Manual for SOA Exam FM/CAS Exam 2.

Section 3.1. Geometric series.

We use the summation notation

xm + xm+1 + + xn1 + xn . Usually arithmetic rules hold. In particular:

c 2009. Miguel A. Arcones. All rights reserved.

Manual for SOA Exam FM/CAS Exam 2.

Section 3.1. Geometric series.

We use the summation notation

xm + xm+1 + + xn1 + xn . Usually arithmetic rules hold. In particular:

c 2009. Miguel A. Arcones. All rights reserved.

Manual for SOA Exam FM/CAS Exam 2.

Section 3.1. Geometric series.

c 2009. Miguel A. Arcones. All rights reserved.

Manual for SOA Exam FM/CAS Exam 2.

Section 3.1. Geometric series.

c 2009. Miguel A. Arcones. All rights reserved.

Manual for SOA Exam FM/CAS Exam 2.

Section 3.1. Geometric series.

c 2009. Miguel A. Arcones. All rights reserved.

Manual for SOA Exam FM/CAS Exam 2.

Section 3.1. Geometric series.

c 2009. Miguel A. Arcones. All rights reserved.

Manual for SOA Exam FM/CAS Exam 2.

Section 3.1. Geometric series.

c 2009. Miguel A. Arcones. All rights reserved.

Manual for SOA Exam FM/CAS Exam 2.

Section 3.1. Geometric series.

=(1 + 2 + + (n 1) + n) + (n + (n 1) + + 2 + 1) =(1 + n) + (2 + n 1) + (3 + n 2) + (n + 1) =(n + 1) + (n + 1) + (n + 1) + (n + 1) = n(n + 1).

c 2009. Miguel A. Arcones. All rights reserved.

Manual for SOA Exam FM/CAS Exam 2.

Section 3.1. Geometric series.

=(1 + 2 + + (n 1) + n) + (n + (n 1) + + 2 + 1) =(1 + n) + (2 + n 1) + (3 + n 2) + (n + 1) =(n + 1) + (n + 1) + (n + 1) + (n + 1) = n(n + 1).

Previous theorem can be proved by induction.

c 2009. Miguel A. Arcones. All rights reserved.

Manual for SOA Exam FM/CAS Exam 2.

Section 3.1. Geometric series.

=(1 + 2 + + (n 1) + n) + (n + (n 1) + + 2 + 1) =(1 + n) + (2 + n 1) + (3 + n 2) + (n + 1) =(n + 1) + (n + 1) + (n + 1) + (n + 1) = n(n + 1).

c 2009. Miguel A. Arcones. All rights reserved.

Manual for SOA Exam FM/CAS Exam 2.

Section 3.1. Geometric series.

For an arithmetic sequence,

c 2009. Miguel A. Arcones. All rights reserved.

Manual for SOA Exam FM/CAS Exam 2.

Section 3.1. Geometric series.

c 2009. Miguel A. Arcones. All rights reserved.

Manual for SOA Exam FM/CAS Exam 2.

Section 3.1. Geometric series.

Solution 1: 100 k =10 k =

c 2009. Miguel A. Arcones. All rights reserved.

Manual for SOA Exam FM/CAS Exam 2.