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The Financial Mathematics exam is called Exam FM by the SOA and Exam 2 by the CAS. This threehour exam consists of 35 multiple-choice questions. The examination is administered by Preliminary Actuarial Examinations/SOA. The examination is jointly sponsored and administered by the CAS, SOA, and the Canadian Institute of Actuaries (CIA). The examination is also jointly sponsored by the American Academy of Actuaries (AAA) and the Conference of Consulting Actuaries (CCA). The Financial Mathematics Exam is administered as a computer-based test. For additional details, please refer to Exam Rules The goal of the syllabus for this examination is to provide an understanding of the fundamental concepts of financial mathematics, and how those concepts are applied in calculating present and accumulated values for various streams of cash flows as a basis for future use in: reserving, valuation, pricing, asset/liability management, investment income, capital budgeting, and valuing contingent cash flows. The candidate will also be given an introduction to financial instruments, including derivatives, and the concept of no-arbitrage as it relates to financial mathematics. The Financial Mathematics Exam assumes a basic knowledge of calculus and an introductory knowledge of probability. The following learning objectives are presented with the understanding that candidates are allowed to use specified calculators on the exam. The education and examination of candidates reflects that fact. In particular, such calculators eliminate the need for candidates to learn and be examined on certain mathematical methods of approximation. Please check the Updates section on this exam's home page for any changes to the exam or syllabus. Each multiple-choice problem includes five answer choices identified by the letters A, B, C, D, and E, only one of which is correct. Candidates must indicate responses to each question on the computer. Candidates will be given three hours to complete the exam. As part of the computer-based testing process, a few pilot questions will be randomly placed in the exam (paper and pencil and computer-based forms). These pilot questions are included to judge their effectiveness for future exams, but they will NOT be used in the scoring of this exam. All other questions will be considered in the scoring. All unanswered questions are scored incorrect. Therefore, candidates should answer every question on the exam. There is no set requirement for the distribution of correct answers for the SOA/CAS/CIA multiple-choice preliminary examinations. It is possible that a particular answer choice could appear many times on an examination or not at all. Candidates are advised to answer each question to the best of their ability, independently from how they have answered other questions on the examination. Since the CBT exam will be offered over a period of a few days, each candidate will receive a test form composed of questions selected from a pool of questions. Statistical scaling methods are used to ensure within reasonable and practical limits that, during the same testing period of a few

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

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

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

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

9) Chapter 7 (7.4) Chapter 6 (6.6) Chapter 3 (3.9) Chapter 5 (5.2-3.G. Suggested Textbooks for Learning Objectives in Section I.1. 2009. and Vaaler.6) Chapter 5 (5.3-2.1-7.1) Chapter 8 (8. Mathematics of Investment and Credit (Fifth Edition).3) Chapter 9 (9.2. whichever of the source textbooks candidates choose to use.4. candidates are encouraged to work out the textbook exercises related to the listed readings.4 excluding 2. 3.F.Text References Knowledge and understanding of the financial mathematics concepts are significantly enhanced through working out problems based on those concepts.2-6.4.1–8.1 -2. 6. 6.5) Kellison.7) Chapter 9 (9.11. Irwin/McGraw-Hill: Chapter 1 (1.2-10. ACTEX Publications: Chapter 1 (1.3-1.7) Chapter 2 (2.4 and 5.8) Chapter 4 (4.4.1 and 8. Interest Theory There is not a single textbook required for the learning objectives in Section I.2) Chapter 7 (7. Broverman.1-1.2-1.1-4. Thus. 2008.7) Chapter 3 (3..2-3.6. The Mathematical Association of America: [Candidates may also use the First Edition of Mathematical Interest Theory (Publisher: Prentice Hall).5) Chapter 11 (11. L.2) Chapter 8 (8. 8.1 and 3.2-2.6) Chapter 6 (6.2..2-5.2) Daniel. The same chapter references apply. 1. The texts listed below are representative of the textbooks available to cover the material on which the candidate may be tested.1) Chapter 5 (5. excluding 3.2-4. Mathematical Interest Theory (Second Edition). S.1-6.2-6.2) Chapter 4 (4.3.4) Chapter 10 (10.12.2-11..1. The candidate may wish to use one or more texts in his/her preparation for the examination.1-5.7..10) Chapter 7 (7.2) Chapter 6 (6.A.] Chapter 1 (1.1-3.1-9.10) Chapter 2 (2.2 and 2.3 excluding 5. J. 3.3.13) Chapter 4 (4. Not all topics may be covered at the same level in each text.8) .2-4.3) Chapter 3 (3.2-5.3 excluding 6.4.14) Chapter 2 (2.3.9.3. The Theory of Interest (Third Edition).J. in preparing for the Financial Mathematics exam. 2010.2-7. S.W.

2006 Second Edition. Financial Mathematics: A Practical Guide for Actuaries and other Business Professionals (Second Edition).1-1.1-7.1-8.1-3.B) Chapter 8 (8. Financial Mathematics for Actuaries. and Francis.B) Chapter 8 (8.1-2.4 and Appendix 5. Yiu-Kuen.6-6. 2006.1-5.1-4.A) Chapter 3 (3. C.4) Chapter 5 (5.5) Chapter 4 (4.1-8. 2005.1.1–8. [Candidates may also use Third Edition.4) Chapter 5 (5. Exam FM/2 Sample Questions and Solutions Samples Questions and Solutions for Derivatives Markets .1-6.3 excluding 6. R. J. 2013. BPP Professional Education: Chapter 1 Chapter 2 Chapter 3 (3. by R.9) Chapter 8 (8. Wai-Sum.1-3.7) Chapter 5 Chapter 6 (6. Errata.3) Chan. and Tse.4 and Appendix 5. 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.6 and Appendix 2.1–4.4) Chapter 2 (2.4 only) OTHER RESOURCES: Derivatives Markets.9) Chapter 4 (4.1-4. can be found here. 2011.3) Chapter 15 (Sections 15.Ruckman..L.3 and 15.. Pearson] Chapters 1–3 Chapter 4 (4. Addison Wesley: Chapter 1 (1. McDonald Notation and terminology used for Exam FM/Exam 2 All released exam papers..1–5.7) Chapter 7 (7. Financial Economics McDonald.1. since 2000. Derivatives Markets (Second Edition).2).

Review of Calculator Functions for the Texas Instruments BA-35 Review of Calculator Functions for the Texas Instruments BA II Plus .

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