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Financial Mathematics Exam—April 2013

Accumulation function e. Nominal rate k. Write the equation of value given a set of cash flows and an interest rate. Given any two of interest rate. immediate (or due). Discount factor h. LEARNING OBJECTIVES I. b. all forms of the test are comparable in content and passing criteria. c. Annuities with payments that are not contingent (5-20%) 1. Geometric increasing/decreasing payment annuity h. Simple interest c. Inflation and real rate of interest m. Equation of value 2. or Payable continuously e. Annuity-immediate b. Compound interest d. Interest rate (rate of interest) b. Payable m-thly. the nominal interest rate convertible mthly. present value. Discount rate (rate of discount) i. calculate the third based on simple or compound interest. The candidate will be able to: a. The candidate will be able to: a. interest rate. and any three of present value. B. On occasion. or the force of interest. The ranges of weights shown in the Learning Objectives below are intended to apply to the large majority of exams administered. (or payable continuously). Annuity-due c. future value. Interest Theory (65-80%) A. Future value f. Given any one of the effective interest rate. Present value/net present value g.days. or future value. Term of annuity 2. Level payment annuity f. payable m-thly. the weights of topics on an individual exam may fall outside the published range. Given an annuity with level payments. the effective discount rate. Perpetuity d. the nominal discount rate convertible m-thly. . Convertible m-thly j. Force of interest n. Effective rate l. The methodology that has been adopted is used by many credentialing programs that give multiple forms of an exam. Time Value of Money (5-15%) 1. The candidate will be able to define and recognize the definitions of the following terms: a. Candidates should also recognize that some questions may cover multiple learning objectives. The candidate will be able to define and recognize the definitions of the following terms: a. Arithmetic increasing/decreasing payment annuity g. calculate all of the other items.

balloon payment) f. coupon rate. Convexity f. Price. Term of loan d. and term calculate the remaining two items. Yield rate d. D. par value/face value. Yield rate/rate of return b. callable/non-callable 2. future value. Principal b. payment amount. Loans (5-20%) 1. C. calculate the remaining items.payment. The candidate will be able to define and recognize the definitions of the following terms: Price. interest rate. Amortization g. Duration (Macaulay. Redemption value. payment period. Interest c. principal. immediate (or due). Forward rate . amortization of premium. the pattern of payment amounts. and any three of present value. Calculate the amount of interest and principal repayment in a given payment. point in time that a bond has a given book value. term of bond. Given the quantities. accumulation of discount. Given any four of term of loan. payable m-thly. (or payable continuously). Dollar-weighted rate of return/Time-weighted rate of return c. or accumulation of discount E. and term of annuity calculate the remaining two items. The candidate will be able to: a. amortization of premium. Outstanding balance e. book value. interest rate. redemption value. Coupon. accumulation of discount b. face value c. Bonds (5-20%) 1. a. yield rate. book value. General Cash Flows and Portfolios (5-20%) 1. The candidate will be able to define and recognize the definitions of the following terms: a. b. c. modified and effective) e. Portfolio and investment year allocation methods g. in a sinking fund arrangement calculate the missing quantity. coupon. Sinking fund 2. Final payment (drop payment. except one. the candidate will be able to calculate any of the remaining items. payment amounts. coupon rate e. Given an annuity with non-level payments. Calculate the outstanding balance at any point in time. d. The candidate will be able to define and recognize the definitions of the following terms: a. b. Spot rate h. Current value d. amortization of premium. Term of bond. Given sufficient partial information about the items listed below.

Calculate the portfolio yield rate. Call option. Derivative. Options (5-10%) 1. c. Credit risk h. The candidate will be able to: a. c. Strike price/Exercise price d. Expiration date c. Marking-to-market i. b. Maintenance margin. Short selling. Construct an investment portfolio to fully immunize a set of liability cash flows. American option. General Derivatives (0-5%) 1. f. European option. Calculate the price of a stock using the dividend discount model. Bid price. II. Financial Economics (20-35%) A. Spot price f. Over-the-counter market b. b. F. Ask price. b. Immunization (including full immunization). In-the-money. stock dividend 2. g. Yield curve j.i. Margin. 2. Calculate the current value of a set of cash flows. Cash-flow matching. Stock index e. Net profit/payoff g. Out-of-the-money f. The candidate will be able to: a. Calculate the duration and convexity of a set of cash flows. Use duration and convexity to approximate the change in present value due to a change in interest rate. Put option b. Calculate the dollar-weighted and time-weighted rate of return. Covered call. The candidate will be able to define and recognize the definitions of the following terms: a. Bid-ask spread c. At-the-money. d. Long position d. Naked writing . Short position. Bermudan option e. The candidate will be able to evaluate an investor's margin position based on changes in asset values. Redington immunization. c. The candidate will be able to define and recognize the definitions of the following terms: a. Construct an investment portfolio to exactly match a set of liability cash flows. e. Calculate either Macaulay or modified duration given the other. Expiration. Construct an investment portfolio to match present value and duration of a set of liability cash flows. Stock price. Underlying asset. Margin call 2. The candidate will be able to define and recognize the definitions of the following terms: a. B. Immunization (5-15%) 1.

C. Forward contract. b. E. Simple commodity swap. The candidate will be able to define and recognize the definitions of the following terms: a. Swap term. Explain the relationship between forward price and future stock price. box. Cost of carry e. Interest rate swap d. Deferred swap 2. forward price. calculate the remaining item using the put-call parity formula. Forwards and Futures (0-10%) 1. D. Synthetic forwards c. e. Explain how derivative securities can be used as tools to manage financial risk. Swaps (0-5%) 1. Lease rate f. Straddles (including strangles. Dividends h. written straddles and butterfly spreads) f. Given any four of call premium. c. The candidate will be able to define and recognize the definitions of the following terms: a. Convertible bond. b. Put-call parity 2. Paylater strategy e. Nondiversifiable risk c. Outright purchase. and ratio spreads) d. Hedging and Investment Strategies (5-15%) 1. Collars (including zero-cost collars). Evaluate the payoff and profit of hedging strategies. Spreads (including bull. d. Swap spread. Futures contract 2. Determine forward price from prepaid forward price. put premium. c. Arbitrage b. The candidate will be able to evaluate the payoff and profit of basic derivative contracts. Prepaid forward contract b.g. Explain the reasons to hedge and not to hedge. Notional Amount c. Use the concept of no-arbitrage to determine the theoretical value of futures and forwards. Diversifiable risk. bear. strike price and interest rate. The candidate will be able to define and recognize the definitions of the following terms: a. Implied repo rate d. Fully leveraged purchase c. . Prepaid swap b. The candidate will be able to: a. The candidate will be able to use the concept of no-arbitrage to determine the theoretical values of swaps. Mandatorily convertible bond 2. Swap. Hedging. Explain the relationship between forward price and futures price. The candidate will be able to: a.

3.9) Chapter 5 (5. and Vaaler.2-1.2) Daniel.Text References Knowledge and understanding of the financial mathematics concepts are significantly enhanced through working out problems based on those concepts. Interest Theory There is not a single textbook required for the learning objectives in Section I.10) Chapter 2 (2.2 and 2.2-7.4.2-4.1-6.2-5. The Theory of Interest (Third Edition).2) Chapter 4 (4. The Mathematical Association of America: [Candidates may also use the First Edition of Mathematical Interest Theory (Publisher: Prentice Hall).W. 3.1-3.1 and 3. candidates are encouraged to work out the textbook exercises related to the listed readings. The same chapter references apply.8) .2-3.12. The texts listed below are representative of the textbooks available to cover the material on which the candidate may be tested.3.7) Chapter 2 (2.2) Chapter 6 (6.1-9.2. Not all topics may be covered at the same level in each text.5) Chapter 11 (11..3.9. 6.4) Chapter 6 (6.1-1.1 -2. 8.2-10.2-6.2) Chapter 8 (8. L. The candidate may wish to use one or more texts in his/her preparation for the examination.3 excluding 6.11.1) Chapter 5 (5. 1..2-11.3.7) Chapter 9 (9.3-1. S.2-4.6) Chapter 5 (5.6) Chapter 3 (3.] Chapter 1 (1.1-7.1-4.1) Chapter 8 (8.J. ACTEX Publications: Chapter 1 (1.1 and 8.2-5.5) Kellison.1.14) Chapter 2 (2.8) Chapter 4 (4.. 2010.2) Chapter 7 (7..2-6. Suggested Textbooks for Learning Objectives in Section I. S. Broverman.7.2.9) Chapter 7 (7.4. Thus.1-5.2-3.4.G. whichever of the source textbooks candidates choose to use. J.F. excluding 3.1.6) Chapter 6 (6.2-2. 2009.6. Mathematics of Investment and Credit (Fifth Edition).13) Chapter 4 (4.7) Chapter 3 (3.4 excluding 2. Irwin/McGraw-Hill: Chapter 1 (1.A.3 excluding 5.3) Chapter 3 (3. 2008. Mathematical Interest Theory (Second Edition).10) Chapter 7 (7.3-2.4.1–8.4) Chapter 10 (10. in preparing for the Financial Mathematics exam.3) Chapter 9 (9.3. 6.4 and 5.

1–5. BPP Professional Education: Chapter 1 Chapter 2 Chapter 3 (3.. 2006 Second Edition.3 and 15.7) Chapter 5 Chapter 6 (6.B) Chapter 8 (8.4) Chapter 2 (2.4) Chapter 5 (5. Errata.9) Chapter 4 (4. Derivatives Markets (Second Edition).7) Chapter 7 (7. since 2000. Financial Mathematics for Actuaries. Financial Mathematics: A Practical Guide for Actuaries and other Business Professionals (Second Edition). 2011.1–4.1-3.A) Chapter 3 (3.1. J.1-4. Pearson] Chapters 1–3 Chapter 4 (4.1-4. can be found here. and Francis.3 excluding 6.4 and Appendix 5.3) Chan.1-2. and Tse.9) Chapter 8 (8. C.1-1.1-3. 2005.1-8.1.4 only) OTHER RESOURCES: Derivatives Markets.1-7. 2006. Addison Wesley: Chapter 1 (1.1-5.6-6.L.1-6..1-8. [Candidates may also use Third Edition. McGraw-Hill Education (Asia): Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6 Chapter 7 Chapter 8 plus Supplementary Notes for Financial Mathematics for Actuaries Textbook for Learning Objectives in Section II.3) Chapter 15 (Sections 15..Ruckman.4) Chapter 5 (5.B) Chapter 8 (8.1–8. R. Wai-Sum. Exam FM/2 Sample Questions and Solutions Samples Questions and Solutions for Derivatives Markets . McDonald Notation and terminology used for Exam FM/Exam 2 All released exam papers.5) Chapter 4 (4.4 and Appendix 5. Yiu-Kuen. by R. 2013.2).6 and Appendix 2. Financial Economics McDonald.

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