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The Innite Actuarys

Joint Exam 2/FM


Sample Exam 1
by James Washer, FSA, MAAA
last updated - August 1, 2014
Take this sample exam under strict exam conditions. Start a timer for 3
hours and stop immediately when the timer is done. Do not stop the clock
when you go to the bathroom. Do not look at your notes. Do not look at
the answer key.
This exam contains 35 questions. Do not spend too much time on any one
question. Choose the best available answer for each question.
1
1. Which of the following is not a way to create a 40-45-50 buttery?
A. buy 40-strike call, write two 45-strike calls, buy 50-strike call
B. buy 40-strike put, write two 45-strike puts, buy 50-strike put
C. buy 40-strike put, write 45-strike call, write 45-strike put, buy 50-strike call
D. buy 40-strike call, write 45-strike call, write 45-strike put, buy 50-strike put
E. all of the above will create a 40-45-50 buttery
2. Let
t
=
1
4 + t
, 0 t 15
What is the rst year for which the eective rate of discount is less than
12.5%?
A. 3 B. 4 C. 5 D. 6 E. 7
3. A bond will pay a coupon of 100 at the end of each of the next three years
and will pay the face value of 1000 at the end of the three-year period. The
bonds modied duration when valued using an annual eective interest rate
of 20% is X.
Calculate X.
A. 2.25 B. 2.61 C. 2.70 D. 2.77 E. 2.89
c 2009 The Innite Actuary, LLC 2 Joint Exam 2/FM - Sample Exam 1
4. You are given the following table of interest rates:
Calendar
Year of Portfolio
Original Rates
Investment Investment Year Rates (in %) (in %)
y i
y
1
i
y
2
i
y
3
i
y
4
i
y
5
i
y+5
1992 8.25 8.25 8.40 8.50 8.50 8.35
1993 8.50 8.70 8.75 8.90 9.00 8.60
1994 9.00 9.00 9.10 9.10 9.20 8.85
1995 9.00 9.10 9.20 9.30 9.40 9.10
1996 9.25 9.35 9.50 9.55 9.60 9.35
1997 9.50 9.50 9.60 9.70 9.70
1998 10.00 10.00 9.90 9.80
1999 10.00 9.80 9.70
2000 9.50 9.50
2001 9.00
A person deposits 1000 on January 1, 1997. Let the following be the accu-
mulated value of the 1000 on January 1, 2000.
P: under the investment year method
Q: under the portfolio yield method
Calculate P + Q.
A. 2575 B. 2595 C. 2610 D. 2655 E. 2700
5. A loan is repaid with 10 annual payments. The rst payment occurs one
year after the loan. The rst payment is 100 and each subsequent payment
increases by 10. The annual eective rate of interest is 5%. The amount of
principal repaid in the 4th payment is X.
Determine X.
A. 71 B. 76 C. 80 D. 84 E. 91
c 2009 The Innite Actuary, LLC 3 Joint Exam 2/FM - Sample Exam 1
6. A 1000 par value 10-year bond that pays 9% coupons semiannually is pur-
chased for X. The coupons are reinvested at a nominal rate of 7% convertible
semiannually.
The bond investors nominal annual yield rate convertible semiannually over
the 10-year period is 9.2%.
Determine X.
A. 924 B. 987 C. 1024 D. 1386 E. 1442
7. Bill writes a $100-strike call option on stock XYZ with 6 months to expiration
for a premium of $7.24. The risk-free rate is 5% convertible semiannually.
For what range of prices at expiration does Bill make a prot?
A. [0, 92.58) B. (92.58, ) C. [0, 107.42) D. (107.42, ) E. [0, 107.60)
8. 10 deposits of $2000 are made every other year with the rst deposit made
immediately. The resulting fund is used to buy a perpetuity with payments
made once every 3 years following the pattern X, 4X, 7X, 10X, . . . The
rst perpetuity payment is made 3 years after the last deposit of $2000. The
annual eective rate of interest is 6%.
Determine X.
A. 408 B. 458 C. 471 D. 512 E. 603
9. John buys a perpetuity-due with annual payments that are adjusted each
year for ination. The rst payment is 100. Ination is 3% for years 1-5 and
2% thereafter.
Calculate the price of the perpetuity if the yield rate is an eective 6% per
annum.
A. 2750 B. 2760 C. 2770 D. 2780 E. 2790
c 2009 The Innite Actuary, LLC 4 Joint Exam 2/FM - Sample Exam 1
10. Given the following information about the treasury market:
Term Coupon Price
1 0% 96.62
2 0% X
3 0% 88.90
It is known that the 1-year forward rate starting in two years is 4.5%.
Calculate X.
A. 87.65 B. 89.70 C. 92.90 D. 93.45 E. 95.50
11. A 20-year bond is priced at par and pays R% coupons semiannually. The
bonds duration is 13.95 years.
Determine R.
A. 2 B. 3 C. 4 D. 5 E. 6
12. Which of the following is not true?
A. An asset insured with a oor is equivalent to investing in a zero-coupon bond
and buying a call option on the asset.
B. A short position insured with a cap is equivalent to writing a zero-coupon
bond and buying a put option on the asset.
C. A covered written call is equivalent to investing in a zero-coupon bond and
writing a put option on the asset.
D. A covered written put is equivalent to writing a zero-coupon bond and writing
a call option on the asset.
E. All of the above are true.
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13. A fairly smart actuary (also know as an FSA) is oered the following rates
on a loan:
1. X% nominal annual rate of interest compounded monthly
2. X% nominal annual rate of discount compounded monthly
3. X% annual eective rate of interest
4. X% annual eective rate of discount
5. X% constant force of interest
Which rate does the FSA take?
A. 1 B. 2 C. 3 D. 4 E. 5
14. An annuity pays 1 at the beginning of each year for n years. Using an
annual eective interest rate of i, the present value of the annuity at time 0
is 8.55948. It is also known that (1 + i)
n
= 3.172169.
Find the accumulated value of the annuity immediately after the last pay-
ment.
A. 27.152 B. 28.456 C. 29.324 D. 30.765 E. 31.973
15. Deposits are made at the beginning of every month into a fund earning a
nominal annual rate of 6% convertible monthly. The rst deposit is 100
and deposit increase 2% every year. In other words, deposits 1-12 are 100,
deposits 13-24 are 100 1.02 = 102, deposits 25-36 are 100 1.02
2
= 104.04,
and so on.
Calculate the fund balance at the end of 10 years.
A. 16,569 B. 16,893 C. 17,257 D. 17,770 E. 17,859
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16. On January 1 a fund has a balance of $100. Sometime during the year a
withdrawal of $20 is made. Immediately before the withdrawal the fund
balance is $110. At year-end the balance is $95.
If the time weighted and dollar weighted rates for the year are equal, then in
what month was the $20 withdrawal made?
A. June B. July C. August D. September E. October
17. A common stock pays annual dividends at the end of each year. The earnings
per share in the year just ended were J. Earnings are assumed to grow 10%
per year in the future. The percentage of earnings paid out as a dividend
will be 0% for the next 5 years and 50% thereafter.
Calculate the theoretical price of the stock to yield the investor 21%.
A.
5J
(1.1)
4
B.
5J
(1.1)
5
C.
5J
(1.1)
6
D.
10J
(1.1)
5
E.
10J
(1.1)
6
18. You are the CFO of Innite Life. Innite Life only has one liability of $5000
due in 8 years. Innite Life uses a nominal rate of 6% convertible semiannual
to discount all liability cash ows.
You call up your favorite bond broker and ask him what bonds he has for
sale today. Your broker says he has 5-year and 10-year bonds. Both bonds
are priced to yield 6% convertible semiannually. The 5-year bond pays 6%
coupons semiannually and the 10-year bond is a zero-coupon bond. The
bonds can be bought in any face amount.
What face amount of the 5-year bond should you buy in order to meet the
rst two conditions of immunization?
A. 777 B. 888 C. 999 D. 1111 E. 2222
c 2009 The Innite Actuary, LLC 7 Joint Exam 2/FM - Sample Exam 1
19. You are given the following prices for $100 zero-coupon bonds:
Term Price
1 95.24
2 89.00
3 81.63
R is the swap rate in a 3-year swap contract.
Determine R.
A. 5.7% B. 6.1% C. 6.5% D. 6.9% E. 7.2%
20. A fund earns simple interest of i. Which of the following are true?
1. The eective rate of interest is constant for each period.
2. The amount of interest is constant for each period.
3. The equivalent force of interest is ln(1 + i).
A. 1 only B. 2 only C. 3 only D. 2 and 3 only
E. The correct answer is not given by A, B, C or D.
21. If
t
=
t
1 + t
2
, t 0 and

I a

n
= 13.03567.
Determine n.
A. 10 B. 11 C. 12 D. 13 E. 14
c 2009 The Innite Actuary, LLC 8 Joint Exam 2/FM - Sample Exam 1
22. You are given the following information about 3 funds:
Fund
Eective Rate
Interest Payments
per Year
A j% paid directly to investor
B 5% paid directly to investor
C 4% automatically reinvested
An investor deposits $10,000 into fund A. He reinvests fund As interest
payments into fund B. He reinvests fund Bs interest payments into fund C.
The total value of all three funds after 10 years is $20,000.
Determine j.
A. 6 B. 7 C. 8 D. 9 E. 10
23. Which of the following are true?
1. Modied duration is greater for bonds with higher par values.
2. Modied duration is greater for yields compound more frequently.
3. The modied duration of a single cash ow is the time remaining until
the cash ow.
A. 1 only B. 2 only C. 3 only D. 2 and 3 only
E. The correct answer is not given by A, B, C or D.
24. An annuity-immediate has the following payments:
10, 20, 30, 40, 50, 40, 30, 20, 10
Which of the following expressions represents the present value of the annu-
ity?
A. 10a
5
a
5
B. 10a
5
a
5
C. 10a
5
a
4
D. 10a
5
a
4
E. 10 (Ia)
5
+ 10 (Da)
4
c 2009 The Innite Actuary, LLC 9 Joint Exam 2/FM - Sample Exam 1
25. You are given the following term structure of interest rates.
Term
Spot Rate
(in years)
1 5.00%
2 5.75%
3 6.25%
4 6.50%
Calculate 1000 (Da)
4
rounded to the nearest 100.
A. 8700 B. 8800 C. 8900 D. 9000 E. 9100
26. Suppose you desire to short-sale 200 shares of ABC stock, which has a bid
price of $24.82 and an ask price of $25.01. You cover the short position three
months later when the bid price is $21.45 and the ask price is $21.64.
Your broker charges a 0.3% commission to engage in the short-sale and a
0.3% commission to close the position. He also requires a 50% haircut on
the net proceeds of the short-sale. The market rate of interest is 6% con-
vertible continuously and the short-rebate on the haircut is 4% convertible
continuously. No dividends were paid on the stock during the three months.
Calculate the prot on the short-sale.
A. $595.60 B. $608.13 C. $652.33 D. $671.50 E. $684.12
c 2009 The Innite Actuary, LLC 10 Joint Exam 2/FM - Sample Exam 1
27. Which of the following are true?
1. The payo on a short forward is the spot price at expiration minus
forward price.
2. Zero coupon bonds can be used to shift prot diagrams.
3. For forward contracts, cash settlements often reduce transaction costs.
A. 1 only B. 2 only C. 3 only D. 2 and 3 only
E. The correct answer is not given by A, B, C or D.
28. A $10,000 loan is repaid with level annual payments. The rst payment is
made one year after taking out the loan.
The outstanding balance just after the 8th payment is $7,112.10. The out-
standing balance just after the 16th payment is $2,845.36.
Calculate the outstanding balance just after the 17th payment.
A. $1,185 B. $1,485 C. $1,885 D. $1,985 E. $2,185
29. A 10-year 1000 par value bond pays 4% coupons semiannually and is re-
deemable at 1200. The bond is priced to yield an annual nominal rate of 6%
convertible semiannually.
Calculate the adjustment to the book value during the 6th year.
A. 12.26 write-upB. 24.17 write-downC. 24.17 write-upD. 35.73 write-down
E. 35.73 write-up
c 2009 The Innite Actuary, LLC 11 Joint Exam 2/FM - Sample Exam 1
30. The present value of a 25-year annuity-immediate with a rst payment of
$2500 and decreasing by X each year thereafter is $15,923. The annual
eective rate of interest is 10%.
Determine X.
A. 70 B. 80 C. 90 D. 100 E. 110
31. Which of the following expression does not represent a denition for
m|
a
n
?
A. v
m
a
n
B. a
m+n
a
m
C. v
m+n
s
n
D. v
m
+ v
m+1
+ . . . + v
m+n
E. All of the above represent a denition for
m|
a
n
32. At an annual eective interest rate i:
(i) 1 grows to 5 in x years
(ii) 2 grows to 8 in y years
(iii) 3 grows to 20 in z years
Calculate 12(1 + i)
3x2y+z
.
A. 625 B. 650 C. 675 D. 700 E. 725
33. Jane takes out a $100,000 loan at a nominal annual rate of 12% convertible
monthly. Jane makes monthly interest only payments for the rst 3 years
and then she pays $1500 per month until the loan is paid o. How many
total payments does Jane make including the nal smaller payment?
A. 110 B. 111 C. 142 D. 146 E. 147
c 2009 The Innite Actuary, LLC 12 Joint Exam 2/FM - Sample Exam 1
34. A corporation borrows 10,000 for 25 years, at an annual eective interest
rate of 5%. A sinking fund is used to accumulate the principal by means of
25 annual deposits earning an eective annual interest rate of 4%.
Calculate the sum of the net amount of interest paid in the 12th installment
and the increment in the sinking fund for the 8th year.
A. 676 B. 686 C. 696 D. 706 E. 716
35. You are given the following prices for 6-month options on S&R:
Type Strike Premium
Call 1000 93.809
Put 1000 74.201
The risk-free rate is 4% convertible semiannually. Calculate the six-month
forward price for S&R.
A. 980 B. 1000 C. 1020 D. 1040 E. 1060
c 2009 The Innite Actuary, LLC 13 Joint Exam 2/FM - Sample Exam 1