Beruflich Dokumente
Kultur Dokumente
EXAM FM
FINANCIAL MATHEMATICS
Some of the questions in this study note are taken from past SOA/CAS examinations.
FM-09-05
PRINTED IN U.S.A.
Solution: C
Given the same principal invested for the same period of time yields the same accumulated value, the two
measures of interest i(2) and must be equivalent, which means: (1 +
i ( 2) 2
) = e over one interest
2
.04 2
) = e or (1 + .02) 2 = e and = ln(1.02) 2 = 2 ln(1.02) = .0396 or 3.96%.
2
---------------------------2.
Solution: E
Accumulated value end of 40 years =
100 [(1+i)4 + (1+i)8 + ..(1+i)40]= 100 ((1+i)4)[1-((1+i)4)10]/[1 - (1+i)4]
(Sum of finite geometric progression =
1st term times [1 (common ratio) raised to the number of terms] divided by [1 common ratio])
and accumulated value end of 20 years =
100 [(1+i)4 + (1+i)8 + ..(1+i)20]=100 ((1+i)4)[1-((1+i)4)5]/[1 - (1+i)4]
But accumulated value end of 40 years = 5 times accumulated value end of 20 years
Thus, 100 ((1+i)4)[1-((1+i)4)10]/[1 - (1+i)4] = 5 {100 ((1+i)4)[1-((1+i)4)5]/[1 - (1+i)4]}
Or, for i > 0, 1-((1+i)40 = 5 [1-((1+i)20] or [1-((1+i)40]/[1-((1+i)20] = 5
But x2 - y2 = [x-y] [x+y], so [1-((1+i)40]/[1-((1+i)20]= [1+((1+i)20] Thus, [1+((1+i)20] = 5 or (1+i)20 = 4.
So X = Accumulated value at end of 40 years = 100 ((1+i)4)[1-((1+i)4)10]/[1 - (1+i)4]
=100 (41/5)[1-((41/5)10]/[1 41/5] = 6194.72
Alternate solution using annuity symbols: End of year 40, accumulated value = 100( s 40| / a 4| ) , and end of year
20 accumulated value = 100( s 20| / a 4| ) . Given the ratio of the values equals 5, then
5 = ( s 40| / s 20| ) = [(1 + i) 40 1] /[(1 + i ) 20 1] = [(1 + i ) 20 + 1] . Thus, (1+i)20 = 4 and the accumulated value at the
end of 40 years is 100( s 40| / a 4| ) = 100[(1 + i ) 40 1] /[1 (1 + i ) 4 ] = 100[16 1] /[1 4 1 / 5 ] = 6194.72
Note: if i = 0 the conditions of the question are not satisfied because then the accumulated value at the end of
40 years = 40 (100) = 4000, and the accumulated value at the end of 20 years = 20 (100) = 2000 and thus
accumulated value at the end of 40 years is not 5 times the accumulated value at the end of 20 years.
59
Solution: C
i
2
i
2
Erics interest (compound interest), last 6 months of the 8th year: 100(1 + )15 ( )
i
2
i
2
i
2
i
2
Mikes interest (simple interest), last 6 months of the 8th year: 200( ) . Thus, 100(1 + )15 ( ) = 200( )
i
2
total deposits
= 120
total withdrawals = 145
Investment income = 60 + 145 120 75 = 10
10
Rate of return =
11
10
6
2.5
2
1
75 + + " + 10 5 25
80 35
12
12 12
12
12
12
= 10/90.833 = 11%
-------------------------------
60
Solution: C
n v n +1
i
an nv n n v n +1
= v
+
i
i
=
=
an
i
an
nv n +1 nv n +1
+
i
i
Given i = 10.5% ,
an
i
an
0.105
Tips:
Helpful analysis tools for varying annuities: draw picture, identify layers of level payments, and add values of
level layers.
In this question, first layer gives a value of 1/i (=PV of level perpetuity of 1 = sum of an infinite geometric
progression with common ratio v, which reduces to 1/i) at 1, or v (1/i) at 0
2nd layer gives a value of 1/i at 2, or v2 (1/i) at 0
.
nth layer gives a value of 1/i at n, or vn (1/i) at 0
Thus 77.1 = PV = (1/i) (v + v2 + . vn) = (1/.105) a n.|105
n can be easily solved for using BA II Plus or BA 35 Solar calculator
61
Solution: C
10 0.09
+ 100 (15.19293)
6
0.09
565.38 + 1519.29
2084.67
Helpful general result for obtaining PV or Accumulated Value (AV) of arithmetically varying sequence of
payments with interest conversion period (ICP) equal to payment period (PP):
Given: Initial payment P at end of 1st PP; increase per PP = Q (could be negative); number of payments = n;
effective rate per PP = i (in decimal form). Then
PV = P a n.| + Q [( a n.| n vn)/i] (if first payment is at beginning of first PP, just multiply this result by (1+i))
i
To efficiently use special calculator keys, simplify to: (P + Q/i) a n.| n Q vn/ i = (P + Q/i) a n.| n (Q/i) vn.
i
Then for BA II Plus: select 2nd FV, enter value of n select N, enter value of 100i select I/Y, enter value of
(P+(Q/i)) select PMT, enter value of (n (Q/i)) select FV, CPT PV +/For accumulated value: select 2nd FV, enter value of n select N, enter value of 100i select I/Y, enter value of
(P+(Q/i)), select PMT, CPT FV select +/- select enter value of (n (Q/i)) =
For this question: Initial payment into Fund Y is 160, increase per PP = - 6
BA II Plus: 2nd FV, 10 N, 9 I/Y, (160 (6/.09)) PMT, CPT FV +/- + (60/.09) = yields 2084.67344
(For BA 35 Solar: AC/ON, 10 N, 9 %i, (6/.09 = +/- + 160 =) PMT, CPT FV +/- STO, 60/.09 + RCL (MEM) =)
-------------------------8.
Solution: D
62
Thus, the equation of value for the last 10 years using a comparison date of the end of year 10 is
598.74 = X a10|10% . So X =
598.74
= 97.4417
a10 10%
i = 6%
63
10 1 d
4)
40
(1.03)
10 1 d
40
4)
+ 20 (1.03) = 100
30
40
= 15.77
1 d
= 0.98867052
4
d = 0.0453
-------------------------13.
Solution: E
t2
t3
100 dt = 300
So accumulated value at time 3 of deposit of 100 at time 0 is:
100e
3
t 3 / 300
0
= 109.41743
The amount of interest earned from time 3 to time 6 equals the accumulated value at time 6 minus the
accumulated value at time 3. Thus
(109.41743 + X ) e
t 3 / 300
3
(109.41743 + X ) = X
------------------------14.
Solution: A
167.50 = Present value = 10a 5|9.2 + 10v95.2
= 38.70 + 10v95.2
1+ k
(
1.092
(1 + k )
[ 1.092 ]
t =1
1
) because the summation is an infinite geometric progression, which simplifies
1+ k
1
1.092
to (1/(1-common ratio)) as long as the absolute value of the common ratio is less than 1 (i.e. in this case
common ratio is (1+k)/1.092 and so k must be less than .092)
So 167.50 = 38.70 +
( 6.44 )(1 + k )
0.092 k
or 128.80 =
( 6.44 )(1 + k )
0.092 k
or 20 = (1+k)/(0.092-k)
Answer is 4.0.
64
Solution: B
65
98 S3n + 98 S2 n = 8000
(1 + i )3n 1 (1 + i ) 2 n 1
+
= 81.63
i
i
(1 + i )
=2
8 1 4 1
+
= 81.63
i
i
10
= 81.63
i
i = 12.25%
--------------------------18.
Solution: B
Convert 9% convertible quarterly to an effective rate per month, the payment period. That is, solve for j such
that (1 + j ) 3 = (1 +
.09
) or j = .00744 or .744%
4
Then
..
2( Ia) 60|0.00744
a 60|0.00744 60v 60
= 2[
] = 2729.7
.00744
Alternatively, use result listed in solution to question 7 above with P = Q = 2, i = 0.00744 and n = 60.
Then (P + Q/i) = (2 + 2/.00744) = 270.8172043 and n Q/i = - 16129.03226
Using BA II Plus calculator: select 2nd FV, enter 60 select N, enter .744 select I/Y, enter 270.8172043 select
PMT, enter -16129.03226 select FV, CPT PV +/- yields 2729.68
----------------------------
66
25 x
= (25 x)/100; or (1 + i)K = (125 x)/100
1
1
100 x + 2 x
2
4
(1 + i )
10 n
1
dt
8+ t
10
( 8k + t k ) (1 + i )
10
=e
20, 000 =
=e
ln ( 8 + t ) 10
n
18
(8 + n)
10 t
= 18k t 10
0 = 180 k k =
10
dt = k ( 8 + t )
0
18
dt
8+t
20, 000
= 111
180
22.
Solution: D
Price for any bond is the present value at the yield rate of the coupons plus the present value at the yield rate
of the redemption value. Given r = semi-annual coupon rate and i = the semi-annual yield rate. Let C =
redemption value.
Then Price for bond X = PX = 1000 r a 2 n|i + C v2n (using a semi-annual yield rate throughout)
1 v 2n
r
2n
= 1000 (1 v ) + 381.50 because a 2 n|i =
and the present value of the redemption value, C v2n, is
i
i
given as 381.50.
We are also given
r
r
= 1.03125 so 1000 = 1031.25. Thus, PX = 1031.25 (1 v2n) + 381.50.
i
i
67
= 6000 +
1.1
1.21
x = 5460
---------------------------24.
Solution: E
For the amortization method, payment P is determined by 20000 = X a 20|0.065 , which yields (using calculator)
X = 1815.13.
For the sinking fund method, interest is .08 (2000) = 1600 and total payment is given as X, the same as for the
amortization method. Thus the sinking fund deposit = X 1600 = 1815.13 1600 = 215.13.
The sinking fund, at rate j, must accumulate to 20000 in 20 years. Thus, 215.13 s 20| j = 20000. which yields
(using calculator) j = 14.18.
68
Solution: D
The present value of the perpetuity = X/i. Thus, the given information yields:
B = X an = 0.4
X
i
C = v n Xan
X
i
0.4
an =
v n = 0.6
i
X
J = 0.36
i
J = v2n
0.12 10
Seth = 5000 1 +
1 = 8954.24 5000 = 3954.24
5000
= 679.35
a10 6%
69
1 (1.07v) 20
)
1 (1.07v)
70
Discount
Factor
Initial
Investment
Investment
Returns
Reinvestment
Returns
Total amount
to be
discounted
0
-100,000
1 2 3
60,000
-100,000
0 0 0
698.72
-100,000 0 0
--------------------------33.
Solution: B.
Using spot rates, the value of the bond is:
60/(1.07) + 60/((1.08)2) + 1060/((1.09)3) = 926.03
--------------------------34.
Solution: E.
Using spot rates, the value of the bond is:
60/(1.07) + 60/((1.08)2) + 1060/((1.09)3) = 926.03.
4
60,000
60,000*.04 =
2400
60000+
62400
=122400
1/(1.05)^4
= .822702
100,698.72
Thus, the annual effective yield rate, i, for the bond is such that 926.03 = 60a
3|
easily calculated using one of the calculators allowed on the actuarial exam. For example, using the BA II
PLUS the keystrokes are: 3 N, 926.03 PV, 60 +/- PMT, 1000 +/- FV, CPT I/Y = and the result is 8.9% (rounded
to one decimal place).
-------------------------------------------
71
Solution: C.
n
Duration is defined as
tv R
t =1
n
v R
t =1
(Note: There is a minor but important error on page 228 of the second edition of Brovermans text. The
reference "The quantity in brackets in Equation (4.11) is called the duration of the investment or cash flow" is
not correct because of the minus sign in the brackets. There is an errata list for the second edition. Check
http://www.actexmadriver.com/client/client_images/pdfs/Math_Inv_Credit_2ED.pdf if you do not have a copy).
n
v R
t =1
tv
t +1
t =1
expression. Thus, the numerator of the duration expression is - (1.08) times the derivative. But the derivative is
given as -700. So the numerator of the duration expression is 756. Thus, the duration = 756/100 = 7.56.
---------------------36.
Solution: C
Duration is defined as
tv R
t =1
v R
t =1
tv t D
t =1
tv
t =1
v D v
t =1
t =1
Using the mathematics of infinite geometric progressions (or just remembering the present value for a 1 unit
perpetuity immediate), the denominator = v (1/(1-v)) (first term times 1 divided by the quantity 1 minus the
common ratio; converges as long as the absolute value of the common ratio, v in this case, is less than 1). This
simplifies to 1/i because 1- v = d = i v.
The numerator may be remembered as the present value of an increasing perpetuity immediate beginning at 1
unit and increasing by I unit each payment period, which equals
SNum/denominator =((1+i)/i2 )/(1/i) = (1+i)/i = 1.1/.1 = 11
---------------------------------------------
1 1
1+ i
+ 2 = 2 . So duration =
i i
i
72
Solution: B
Duration is defined as
tv R
t =1
v R
t =1
tv t D(1.02) t 1
t =1
v D(1.02)
t
t =1
t 1
tv (1.02)
t =1
v (1.02)
t
t 1
t 1
t =1
Using the mathematics of infinite geometric progressions (or just remembering the present value for a 1 unit
geometrically increasing perpetuity immediate), the denominator = v
can be shown* that the numerator simplifies to
=
1
1
, which simplifies to
. It
(1 v(1.02))
i .02
1+ i
. So duration = numerator/denominator
(i .02) 2
1
1+ i
1+ i
.
/
=
2
(i .02) i .02 i .02
t =1
t =1
1
and
i .02
1
) . Thus, the duration = (1 + i )
(i .02) 2
1+ i
, yielding the same result as above.
i .02
1
)
(i .02) 2
=
1
D
i .02
D(
---------------------------*Note: The process for obtaining the value for the numerator using the mathematics of series simplification is:
Let SNum denote the sum in the numerator.
Then SNum = 1 v + 2 (1.02) v2 + 3 (1.02)2 v3 + ..... + n (1.02)n-1 vn + .. and
(1.02)v
SNum =
1 (1.02)v2 + 2 (1.02)2 v3 + ... + (n-1) (1.02)n-1vn + ..
Thus, (1-(1.02)v) SNum = 1 v + 1 (1.02)v2 + 1 (1.02)2 v3 + . + 1 (1.02)n-1vn + ..= v
and SNum =
1
1
=
(1 v(1.02)) (i .02)
1
1
1 + i 1.02
1
1+ i
i .02
/(1 (1.02)v) =
/
/
=
=
.
(i .02)
1+ i
i .02
i .02 1 + i
(i .02) 2
73
76
77
58. Solution: E
The transaction costs are 2 (1 for the forward and 1 for the stock)
The price of the forward is therefore: (50 + 2) * (1.06) = 55.12
-----------------------------------------------------------------------------------------------59. Solution: C
First, the PV of the liability is:
d =
tv t Rt
v t Rt
X
X
(5) + (1
)10 = 6.89214 => X = 208,556
335,530.30
335,530.30
---------------------------------------------------------------------------------------60. Solution: A
The present value of the first eight payments is:
PV
= 2000v + 2000(1.03)v 2 + ... + 2000(1.03)7=
v8
2000v 2000*1.038 * v 9
= 13,136.41
1 1.03v
61.
Solution: E
Since the 2-year forward price is higher than the 1-year forward price, the buyer, relative
to the forward prices, overall pays more at the end of the first year but less at the end of
the second year. So this means that the buyer pays the swap counterparty at the end of
the first year but receives money back from the swap counterparty at the end of the
second year. So the buyer lends to the swap counterparty at the 1-year effective forward
interest rate, from the end of the first year to the end of the second year, namely 6%.