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FM Formulas 2.01 PDF
FM Formulas 2.01 PDF
Version 2.01
no driver
11/14/2006
Introduction
Since ASM does not have a formula summary, I decided to compile one to use as I started working on
old test questions. In the interest of other actuarial students, I thought I would share the results.
A few notes:
1. This set of formulas is mostly derived from the 3rd edition of the ASM manual for Exam FM/2.
As a reference, it does not attempt to recreate the methods presented in the ASM manual and
skips many of the necessary techniques for using these formulas to solve certain types of problems.
In particular you will notice that there are no formulas from chapters 2 and 8, and very little from
chapter 5.
2. Since the syllabus for the exam will change after the November 2006 sitting, this compilation will
not be complete for exams given in 2007 and beyond, but it can probably be used as a starting
point for future exam takers.
3. I may have misstated some of the explanations of the formulas either through lack of understanding
or inadequate keyboard/TEX skills. Please let me know if you find errors in this document and I
will attempt to correct them. Also note that some formulas have no explanation, and are intended
to show identities and useful relationships between terms that have been defined previously.
4. This summary is meant as a reference. You dont need to memorize all of these formulas to do well
on the exam. In fact, most of them can be easily derived from one another. As you work problems,
some of these formulas will become second nature. For some of the problems where these formulas
may work, you may prefer working from first principles or an intermediate derivation. Mykenk has
suggested that you only need to know five formulas for the 2006 exam: Arithmetically increasing
& decreasing annuity, geometrically increasing annuity, principle repaid at time t, and the price of
a bond. As you learn the material you will figure out what works for you.
Chapter 1
Basics:
a (t) : accumulation function. Measures the amount in a fund with an investment of 1 at time 0 at the
end of year t.
a (t) a (t 1) : amount of growth in year t.
a(t)a(t1)
a(t1)
it =
: rate of growth in year t, also known as the effective rate of interest in year t.
A (t) = ka (t) : any accumulation function can be multiplied by a constant (usually the principal amount
invested) to obtain a result specific to the amount invested.
t
Y
(1 + ij ) : variable interest.
j=1
t
1
a(t)
1
(1+i)t
a(t)a(t1)
a(t)
= (1 + i)
i
1+i
i=
d
1d
= iv
1
i(m) = m (1 + i) m 1
1d= 1
d(m)
m
m
1
d(m) = m 1 (1 d) m
Force of Interest:
t =
1 d
a(t) dt a (t)
Rt
a (t) = e
d
dt lna (t)
r dr
Chapter 3:
Annuities:
an =
1v n
i
= v + v 2 + + v n : PV of an annuity-immediate.
a
n =
1v n
d
= 1 + v + v 2 + + v n1 : PV of an annuity-due.
a
n = (1 + i) a n = 1 + a n1
sn =
(1+i)n 1
i
n1
= (1 + i)
n2
+ (1 + i)
deposit).
sn =
(1+i)n 1
d
n1
= (1 + i) + (1 + i)
of the last deposit).
sn = (1 + i) s n = s n+1 1
a mn = a n + v n a n + v 2n a n + + v (m1)n a n
Perpetuities:
1 vn
1
= = v + v 2 + = a : PV of a perpetuity-immediate.
n
n
i
i
1
1 vn
lim a
n = lim
= = 1 + v + v2 + = a
: PV of a perpetuity-due.
n
n
d
d
lim a n = lim
a
a =
1
d
1
i
=1
Chapter 4:
m-thly Annuities & Perpetuities:
n
(m)
i
= i(m)
a n = s 1 a n : PV of an n-year annuity-immediate of 1 per year payable in m-thly
= 1v
i(m)
installments.
(m)
= 1v
=
d(m)
ments.
(m)
an
a
n
sn
(m)
sn
(m)
i
a
d(m) n
(1+i)n 1
i(m)
n
(1+i) 1
d(m)
(m)
1 vn
1
(m)
(m)
lim a n = lim (m) = (m) = a : PV of a perpetuity-immediate of 1 per year payable in m-thly
n
n i
i
installments.
1 vn
1
(m)
(m)
lim a
n = lim (m) = (m) = a
: PV of a perpetuity-due of 1 per year payable in m-thly installn
n d
d
ments.
(m)
(m)
a
a =
1
d(m)
1
i(m)
1
m
Continuous Annuities:
Since lim i(m) = lim d(m) = ,
m
1 vn
1 vn
i
(m)
lim a n = lim (m) =
= a n = a n : PV of an annuity (immediate or due) of 1 per year
m
m i
paid continuously.
Similarly:
n
A = P a
n + Q a n nv
d
(Ia) n = a n nv
: PV of an annuity-immediate with first payment 1 and each additional payment ini
creasing by 1; substitute d for i in denominator to get due form.
(Is) n = sn in : AV of an annuity-immediate with first payment 1 and each additional payment increasing
by 1; substitute d for i in denominator to get due form.
n
(Da) n = na
: PV of an annuity-immediate with first payment n and each additional payment dei
creasing by 1; substitute d for i in denominator to get due form.
n
(Ds) n = n(1+i)i s n : AV of an annuity-immediate with first payment n and each additional payment
decreasing by 1; substitute d for i in denominator to get due form.
1
= 1i + i12 : PV of a perpetuity-immediate with first payment 1 and each additional payment
(Ia) = id
increasing by 1.
(I
a) =
1.
1
d2
(Ia) n + (Da) n = (n + 1) a n
Q
i2
(m)
(Ia) n
1
= a ninv
: PV of an annuity-immediate with m-thly payments of m
in the first year and each
(m)
n
additional year increasing until there are m-thly payments of m in the nth year.
nv n
I (m) a n = n i(m)
: PV of an annuity-immediate with payments of m12 at the end of the first mth
of the first year, m22 at the end of the second mth of the first year, and each additional payment
increasing until there is a payment of mn
m2 at the end of the last mth of the nth year.
n
Ia n = a n nv
: PV of an annuity with continuous payments that are continuously increasing. Annual
f (t) v t dt : PV of an annuity with a continuously variable rate of payments and a constant interest
Z
0
rate.
n
f (t) e
Rt
0
r dr
1( 1+k
1+i )
ik
Chapter 5:
Definitions:
Rt : payment at time t. A negative value is an investment and a positive value is a return.
P (i) =
Chapter 6:
General Definitions:
Rt = It + Pt : payment made at the end of year t, split into the interest It and the principle repaid Pt .
It = iBt1 : interest paid at the end of year t.
Pt = Rt It = (1 + i) Pt1 + (Rt Rt1 ) : principle repaid at the end of year t.
Bt = Bt1 Pt : balance remaining at the end of year t, just after payment is made.
L
an
will pay off the loan in n years. In this case, multiply It , Pt , and
Sinking Funds:
P M T = Li + s nL j : total yearly payment with the sinking fund method, where Li is the interest paid
to the lender and s nL j is the deposit into the sinking fund that will accumulate to L in n years. i
is the interest rate for the loan and j is the interest rate that the sinking fund earns.
L = (P M T Li) s n j
Chapter 7:
Definitions:
P : Price paid for a bond.
F : Par/face value of a bond.
C : Redemption value of a bond.
r : coupon rate for a bond.
g=
Fr
C
Fr
i
F r = Cg
Bond Amortization:
When a bond is purchased at a premium or discount the difference between the price paid and the
redemption value can be amortized over the remaining term of the bond. Using the terms from chapter
6:
Rt : coupon payment.
It = iBt1 : interest earned from the coupon payment.
Pt = Rt It = (F r Ci) v nt+1 = (Cg Ci) v nt+1 : adjustment amount for amortization of premium
(write down) or
Pt = It Rt = (Ci F r) v nt+1 = (Ci Cg) v nt+1 : adjustment amount for accumulation of discount
(write up).
Bt = Bt1 Pt : book value of bond after adjustment from the most recent coupon paid.
f
Bt+k
= Bt (1 + i) = (Bt+1 + F r) v 1k : flat price of the bond, ie the money that actually exchanges
hands on the sale of the bond.
k
f
m
Bt+k
= Bt+k
kF r = Bt (1 + i) kF r : market price of the bond, ie the price quoted in a financial
newspaper.
nF r+CP
n
2 (P +C)
Fr
i
P =
D
ik
: theoretical price of a stock that is expected to return a dividend of D with each subsequent
dividend increasing by (1 + k), k < i.
Chapter 9:
Recognition of Inflation:
i0 =
ir
1+r
: real rate of interest, where i is the effective rate of interest and r is the rate of inflation.
t=
tRt
t=1
n
X
t=1
n
X
d=
tv t Rt
t=1
n
X
: (Macauley) duration.
t
v Rt
t=1
(i)
v = PP (i)
= vd =
d
1+i
: volatility/modified duration.
(i)
d = (1 + i) PP (i)
: alternate definition of (Macauley) duration.
P 00 (i)
P (i)
: convexity