© 2007 The Infinite Actuary, LLC 1 Joint Exam 2/FM (Sample Exam)
© 2007 The Infinite Actuary, LLC 1 Joint Exam 2/FM (Sample Exam)
© 2007 The Infinite Actuary, LLC 1 Joint Exam 2/FM (Sample Exam)
(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
© 2007 The Infinite Actuary, LLC 1 Joint Exam 2/FM (Sample Exam)
1
2. Let t , 0 t 15
4t
What is the first year for which the effective rate of discount is less than 12.5?
(A) 3
(B) 4
(C) 5
(D) 6
(E) 7
© 2007 The Infinite Actuary, LLC 2 Joint Exam 2/FM (Sample Exam)
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 bond’s modified
Calculate X.
(A) 2.25
(B) 2.61
(C) 2.70
(D) 2.77
(E) 2.89
© 2007 The Infinite Actuary, LLC 3 Joint Exam 2/FM (Sample Exam)
4. You are given the following table of interest rates:
Calendar
Year of Portfolio
Original Rates
Investment Investment Year Rates (in %) (in %)
y i1
y
i2y i3y i4y i5y 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 accumulated
Calculate P + Q.
(A) 2575
(B) 2595
(C) 2610
(D) 2655
(E) 2700
© 2007 The Infinite Actuary, LLC 4 Joint Exam 2/FM (Sample Exam)
5. A loan is repaid with 10 annual payments. The first payment occurs one year after
the loan. The first payment is 100 and each subsequent payment increases by 10.
The annual effective 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
© 2007 The Infinite Actuary, LLC 5 Joint Exam 2/FM (Sample Exam)
6. A 1000 par value 10-year bond that pays 9% coupons semiannually is purchased for
The bond investor’s nominal annual yield rate convertible semiannually over the 10-
Determine X.
(A) 924
(B) 987
(C) 1024
(D) 1386
(E) 1442
© 2007 The Infinite Actuary, LLC 6 Joint Exam 2/FM (Sample Exam)
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 rage
(A) 0 to 92.58
(B) 92.58 to
(C) 0 to 107.42
(D) 107.42 to
(E) 0 to 107.60
© 2007 The Infinite Actuary, LLC 7 Joint Exam 2/FM (Sample Exam)
8. 10 deposits of $2000 are made every other year with the first 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 first perpetuity
payment is made 3 years after the last deposit of $2000. The annual effective rate of
interest is 6%.
Determine X.
(A) 408
(B) 458
(C) 471
(D) 512
(E) 603
© 2007 The Infinite Actuary, LLC 8 Joint Exam 2/FM (Sample Exam)
9. John buys a perpetuity-due with annual payments that are adjusted each year for
inflation. The first payment is 100. Inflation is 3% for years 1-5 and 2% thereafter.
Calculate the price of the perpetuity if the yield rate is an effective 6% per annum.
(A) 2750
(B) 2760
(C) 2770
(D) 2780
(E) 2790
© 2007 The Infinite Actuary, LLC 9 Joint Exam 2/FM (Sample Exam)
10. Given the following information about the treasury market:
Calculate X.
(A) 87.65
(B) 89.70
(C) 92.90
(D) 93.45
(E) 95.50
© 2007 The Infinite Actuary, LLC 10 Joint Exam 2/FM (Sample Exam)
11. A 20-year bond is priced at par and pays R% coupons semiannually. The bond’s
Determine R.
(A) 2
(B) 3
(C) 4
(D) 5
(E) 6
© 2007 The Infinite Actuary, LLC 11 Joint Exam 2/FM (Sample Exam)
12. Which of the following is not true?
(A) An asset insured with a floor is equivalent to investing in a zero-coupon bond and
(B) A short position insured with a cap is equivalent to writing a zero-coupon bond
(D) A covered written put is equivalent to writing a zero-coupon bond and writing a
© 2007 The Infinite Actuary, LLC 12 Joint Exam 2/FM (Sample Exam)
13. A fairly smart actuary (also know as an FSA) is offered the following rates on a loan:
(A) I
(B) II
(C) III
(D) IV
(E) V
© 2007 The Infinite Actuary, LLC 13 Joint Exam 2/FM (Sample Exam)
14. An annuity pays 1 at the beginning of each year for n years. Using an annual
effective interest rate of i, the present value of the annuity at time 0 is 8.55948. It is
Find the accumulated value of the annuity immediately after the last payment.
(A) 27.152
(B) 28.456
(C) 29.513
(D) 30.765
(E) 31.973
© 2007 The Infinite Actuary, LLC 14 Joint Exam 2/FM (Sample Exam)
15. Deposits are made at the beginning of every month into a fund earning a nominal
annual rate of 6% convertible monthly. The first 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 1.022 104.04 , and so on.
(A) 16,569
(B) 16,893
(C) 17,257
(D) 17,770
(E) 17,859
© 2007 The Infinite Actuary, LLC 15 Joint Exam 2/FM (Sample Exam)
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
If the time weighted and dollar weighted rates for the year are equal, then in what
(A) June
(B) July
(C) August
(D) September
(E) October
© 2007 The Infinite Actuary, LLC 16 Joint Exam 2/FM (Sample Exam)
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
Calculate the theoretical price of the stock to yield the investor 21%.
5J
(A)
1.1
4
5J
(B)
1.1
5
5J
(C)
1.1
6
10 J
(D)
1.1
5
10 J
(E)
1.1
6
© 2007 The Infinite Actuary, LLC 17 Joint Exam 2/FM (Sample Exam)
18. You are the CFO of Infinite Life. Infinite Life only has one liability of $5000 due in
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
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 first two
conditions of immunization?
(A) 777
(B) 888
(C) 999
(D) 1111
(E) 2222
© 2007 The Infinite Actuary, LLC 18 Joint Exam 2/FM (Sample Exam)
19. You are given the following prices for $100 zero-coupon bonds:
Term Price
1 95.24
2 89.00
3 81.63
Determine R.
(A) 5.7%
(B) 6.1%
(C) 6.5%
(D) 6.9%
(E) 7.2%
© 2007 The Infinite Actuary, LLC 19 Joint Exam 2/FM (Sample Exam)
20. A fund earns simple interest of i. Which of the following are true?
(A) I only
(B) II only
(E) The correct answer is not given by (A), (B), (C) or (D).
© 2007 The Infinite Actuary, LLC 20 Joint Exam 2/FM (Sample Exam)
21. If t
t
1 t2
, t 0 and Ia n
13.03567.
Determine n.
(A) 10
(B) 11
(C) 12
(D) 13
(E) 14
© 2007 The Infinite Actuary, LLC 21 Joint Exam 2/FM (Sample Exam)
22. You are given the following information about 3 funds:
Effective Rate
Fund 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 A’s interest payments
into fund B. He reinvests fund B’s interest payments into fund C. The total value of
Determine j.
(A) 6
(B) 7
(C) 8
(D) 9
(E) 10
© 2007 The Infinite Actuary, LLC 22 Joint Exam 2/FM (Sample Exam)
23. Which of the following are true?
III. The modified duration of a single cash flow is the time remaining until the cash
flow.
(A) I only
(B) II only
(E) The correct answer is not given by (A), (B), (C) or (D).
© 2007 The Infinite Actuary, LLC 23 Joint Exam 2/FM (Sample Exam)
24. An annuity-immediate has the following payments:
Which of the following expressions represents the present value of the annuity?
(A) 10a5 a5
(C) 10a5 a4
(E) 10 Ia 5 10 Da 4
© 2007 The Infinite Actuary, LLC 24 Joint Exam 2/FM (Sample Exam)
25. You are given the following term structure of interest rates.
Term
(in years) Spot Rate
1 5.00%
2 5.75%
3 6.25%
4 6.50%
(A) 8700
(B) 8800
(C) 8900
(D) 9000
(E) 9100
© 2007 The Infinite Actuary, LLC 25 Joint Exam 2/FM (Sample Exam)
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% convertible continuously and the
(A) 595.60
(B) 608.13
(C) 652.33
(D) 671.50
(E) 684.12
© 2007 The Infinite Actuary, LLC 26 Joint Exam 2/FM (Sample Exam)
27. Which of the following are true?
I. The payoff on a short forward is the spot price at expiration minus forward price.
III. For forward contacts, cash settlements often reduce transaction costs.
(A) I only
(B) II only
(E) The correct answer is not given by (A), (B), (C) or (D).
© 2007 The Infinite Actuary, LLC 27 Joint Exam 2/FM (Sample Exam)
28. A $10,000 loan is repaid with level annual payments. The first payment is made one
The outstanding balance just after the 8th payment is $7,112.10. The outstanding
(A) 1185
(B) 1485
(C) 1885
(D) 1985
(E) 2185
© 2007 The Infinite Actuary, LLC 28 Joint Exam 2/FM (Sample Exam)
29. A 10-year 1000 par value bond pays 4% coupons semiannually and is redeemable at
semiannually.
Calculate the adjustment to the book value during the 6th year.
© 2007 The Infinite Actuary, LLC 29 Joint Exam 2/FM (Sample Exam)
30. The present value of a 25-year annuity-immediate with a first payment of $2500 and
decreasing by X each year thereafter is $15,923. The annual effective rate of interest
is 10%.
Determine X.
(A) 70
(B) 80
(C) 90
(D) 100
(E) 110
© 2007 The Infinite Actuary, LLC 30 Joint Exam 2/FM (Sample Exam)
31. Which of the following expression does not represent a definition for m| an ?
(A) v m an
(B) am n am
(C) v m n sn
(D) v m v m 1 v m n
© 2007 The Infinite Actuary, LLC 31 Joint Exam 2/FM (Sample Exam)
FM Sample Exam #1 Solutions
Last updated December 7, 2009
32.
(1 + i)x = 5
2(1 + i)y = 8
(1 + i)y = 4
3(1 + i)z = 20
20
(1 + i)z =
3
33. After the 3 years of interest only payments the balance is still 100,000 so we
solve
100,000 = 1500an 0.01
Using the calculator we get 111 payments plus the 3 years of interest only payments
equals 111 + 3(12) = 147 payments.
2008
c The Infinite Actuary, LLC FM Sample Exam #1 Solutions
So the interest earned on the sinking fund during the 12th year is
2008
c The Infinite Actuary, LLC FM Sample Exam #1 Solutions