FM Se4 1pp

The Infinite Actuary’s
Exam FM
Sample Exam 4
by James Washer, FSA, MAAA
last updated - October 9, 2018
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 rates (rounded to the 4th decimal place) is not equivalent to a nominal
annual rate of 12% convertible monthly?
A. i(4) = 12.12%
B. i = 12.68%
C. d(4) = 11.76%
D. d = 11.56%
E. δ = 11.94%
2018
c The Infinite Actuary, LLC 2 TIA FM Sample Exam #4
2. Juliet takes out a loan of 20,000 at a nominal rate of 9% convertible monthly. She repays the loan
over the course of 5 years using monthly level amortizing payments, with the first payment one
month after the loan is made.
Find the amount of interest paid in the first two years.
A. 2860 B. 3020 C. 3450 D. 3770 E. 3930
2018
3. Walter takes out a loan of 50,000. He will repay the loan with 86 monthly payments of 700, with
the first payment one month after the loan, plus a single additional payment of X at the end of
the first year. The loan accrues interest at 6% convertible monthly.
Find X.
A. 1241 B. 1441 C. 1641 D. 1841 E. 2041
2018
4. The yield on a U.S. Treasury bill with 91 days to maturity is quoted as 2.800%, and the yield on
a similar Canadian Treasury bill is quoted as 3.000%.
Find the difference in the effective annual rates of these investments.
A. 0.00144 B. 0.00168 C. 0.00200 D. 0.00224 E. 0.00251
2018
5. A hedge fund manager invests in stock XYZ for one year. The following is a summary of his
activity:
Date Activity Share Price

January 1 Buy N shares $75
July 1 Sell 20 shares $85
December 31 Sell N − 20 shares $X
The hedge fund manager’s time-weighted return for the year is 4% and his dollar-weighted return
for the year is 10%. Calculate N .
A. 50 B. 55 C. 60 D. 65 E. 70
2018
6. You are given the following annual effective yield rates for zero-coupon bonds:
Maturity (in Years) Yield Rate

0.5 0.040
1.0 0.040
1.5 0.045
2.0 0.050
2.5 0.050
3.0 0.055
Calculate the one-year forward rate starting in one year.
A. 0.040 B. 0.045 C. 0.050 D. 0.055 E. 0.060
2018
7. An annuity has continuous payments from time 0 to time 10. The annual rate of payment (f (t))
takes two values during this time:
(
2, 0 ≤ t < 5
f (t) =
5, 5 ≤ t ≤ 10
The force of interest is given by δ = 0.06.
Find the present value of the annuity.
A. 23.9 B. 24.3 C. 24.6 D. 25.0 E. 25.4
2018
8. Party Hardy LLC has a single liability cashflow of 2000 due in 3 years. PH wants to immunize
their liability by purchasing some zero-coupon bonds.
The effective annual rate is 6%.
Which of the following sets of asset cashflows achieves full immunization?
A. 1000 at time 1, 984.72 at time 5

B. 1000 at time 1, 1000 at time 5.264
C. 1000 at time 1, 1017.63 at time 5.564
D. 1000 at time 1, 1035.56 at time 5.864
E. None of the above
2018
9. 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 also known that (1 + i)n = 3.172169.
Find the accumulated value of the annuity immediately after the last payment.
A. 27.152 B. 28.456 C. 29.324 D. 30.765 E. 31.973
2018
10. John Doe leaves an estate of $100,000. Interest on the estate is paid to his son for the first 10
years, to his daughter for the second 10 years, and to a charity thereafter. Find the present value
of the charity’s share of the estate, if it is assumed the estate will earn a 7% annual effective rate
of interest.
A. 24,993 B. 25,842 C. 30,741 D. 35,402 E. 49,165
2018
11. A $10,000 loan is repaid with level annual payments. The first payment is made one year after
taking out the loan.
The outstanding balance just after the 8th payment is $7,112.10. The outstanding 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
2018
12. Which economic theory regarding yield curves says that interest rates at different terms can be
different because the pool of borrowers and lenders at one term is a separate population from the
pool of borrowers and lenders at a different term, and the equilibrium rate found in the first pool
can be different from the equilibrium rate found in the second pool?
A. Market Segmentation Theory

B. Expectations Theory
C. Liquidity Preference Theory
D. Preferred Habitat Theory
E. None of the above
2018
13. Robert has an investment which has realized an annualized effective yield of 7% over the past three
years.
Robert’s records are incomplete: he can only find that his nominal rate of return convertible
quarterly was 5.2% for the first year and 6.1% for the third year.
What was the rate of return for the investment during the second year, expressed as a nominal
rate convertible quarterly?
A. 8.4% B. 8.8% C. 9.2% D. 9.6% E. 10.0%
2018
14. A 10-year 1000 par value bond with 5% annual coupons is purchased for 834.51 to yield an annual
effective rate of i.
Find i.
A. 6.6% B. 7.0% C. 7.4% D. 7.8% E. 8.2%
2018
15. 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
E. All of the above represent a definition for m| an
2018
16. Your friend borrowed 10,000 from you at an annual effective rate of 5%.
He made a payment of 2000 after two years, 3000 after one more year, and 4000 two more years
after that.
Find the interest paid by your friend so far.
A. 1940 B. 2040 C. 2140 D. 2240 E. 2340
2018
17. A company is incurring a liability with a present value of $1000, but the company has some
flexibility about when the liability will be due. At the arranged due date — some T years from
now — the liability will be due in a single payment.
Before the due date is decided, the company wants to be sure that assets are available to arrange
Redington immunization for the liability. Here are the available assets:
Asset Amount available

Zero-coupon bond redeeming in 1 year Up to $600 (of present value)
Zero-coupon bond redeeming in 5 years Up to $600 (of present value)
Find the range of T that would permit Redington immunization using these available assets.
A. 2.600 ≤ T ≤ 3.400
B. 3.256 ≤ T ≤ 3.400
C. 2.600 ≤ T ≤ 3.924
D. 3.256 ≤ T ≤ 3.924
E. Redington immunization is not possible with the available assets.
2018
18. A 30-year mortgage loan of 300,000 has an interest rate of 8% convertible monthly. The scheduled
payments are monthly, level and amortizing, and they begin one month after the loan is made.
Immediately after the T -th payment, the outstanding balance on the loan falls below 150,000 for
the first time.
Find T /360, that is, the percentage of payments required to cut the loan balance in half.
A. 73.9% B. 74.2% C. 74.4% D. 74.7% E. 75.0%
2018
19. A 10-year 1000 par value bond with 4% annual coupons was purchased to yield an effective annual
rate of 6%.
Find the flat price at 1 month after the fourth coupon is paid.
A. 903 B. 906 C. 909 D. 912 E. 915
2018
20. Everybody Loves A Clown LLC arranges a deferred swap with annual payments. The swap is
deferred by one year, and three years of swap payments will be exchanged. The notional amount
of the swap is 100,000.
Term Spot rate

1 4.0%
2 4.6%
3 4.9%
4 5.1%
5 5.2%
Find the fair swap rate.
A. 4.86% B. 5.06% C. 5.26% D. 5.46% E. 5.66%
2018
21. Ralph makes annual deposits into a retirement account, starting on January 1, 2017. His first
deposit is $2000, and each year his deposit increases by 1%. His final deposit — in the amount of
X — occurs on January 1, 2047.
Starting on January 1, 2048, Ralph withdraws 1.10X, and each year after that, on January 1,
Ralph will withdraw an amount 10% larger than the year before. How many full withdrawals will
be made, assuming that the retirement account earns an effective annual yield of 6% throughout
its existence?
A. 20 B. 26 C. 31 D. 34 E. 40
2018
22. You are given the following portfolio of assets:
Asset Market Value Modified Duration Convexity

A 1000 5 27.2
B 900 6 38.1
C 1100 4 18.1
The yield curve is currently flat at 5%.
Your boss recommends that you use the portfolio’s modified duration and convexity to estimate
changes in the market value of the portfolio.
Calculate the estimated market value of the portfolio if the yield curve shifts to 5.5%.
A. 2925 B. 2926 C. 2927 D. 2928 E. 2929
2018
23. Tobias purchases a putable 10-year bond for 854.
• The bond pays semi-annual coupons.
• The bond can be redeemed at its par value of 1000 by the bondholder on any coupon date
starting with the 10th coupon.
If, at the price Tobias paid, he can achieve a maximum yield of 8% convertible semi-annually, what
is the annual coupon rate of this bond?
A. 4.40% B. 4.45% C. 5.10% D. 5.85% E. 5.95%
2018
1
24. Let δt = , 0 ≤ t ≤ 15.
4+t
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
2018
25. For a special annual perpetuity-due:
(i) The first payment is 500.
(ii) Each subsequent year payments decrease by 20 until a payment of 300 is paid.
(iii) Payments remain level at 300 thereafter.
Calculate the present value of this perpetuity at an annual effective interest rate of 6%.
A. 5730 B. 5880 C. 6030 D. 6180 E. 6230
2018
26. A company has a coupon bond as a liability. The bond has a par value of 1000, pays 8% coupons
annually, and redeems at par in three years.
The company wants to immunize their liability through dedication. The company can purchase
from a collection of zero-coupon 100 par value bonds:
Term
(in years) Price
1 96.15
2 90.36
3 83.96
Note that the company can purchase fractional shares of any bond.
Find the current cost for the company to exactly match their liabilities.
A. 1026 B. 1036 C. 1046 D. 1056 E. 1066
2018
27. An investor buys a 20-year $10,000 par bond on January 1, 2013. You are given:
(i) The purchase price is $8,800.
(ii) The coupon rate is 4% payable semiannually.
(iii) Coupons are reinvested at a nominal annual rate of 5% convertible semiannually.
On July 1, 2014 the investor sells the bond for $9,000. Calculate the annual effective yield rate
earned by the investor.
A. 0.060 B. 0.061 C. 0.062 D. 0.063 E. 0.064
2018
28. There are three bonds, all exactly the same except:
• Bond A is callable and has price X
• Bond B is putable and has price Y
• Bond C has no call or put provision and has price Z
Find the correct inequalities involving the bond prices.
A. X ≤ Y ≤ Z
B. X ≤ Z ≤ Y
C. Y ≤ Z ≤ X
D. Z ≤ X ≤ Y
E. Not enough information given
2018
29. An actuary has 25,000 in student loans which are entering their repayment period. The actuary
just passed another exam and received a bonus of 2000 from her company. She decided to apply
the bonus money to her loan balance.
• The student loans started accruing interest at 5% convertible monthly beginning on Decem-
ber 1.
• She paid her first monthly payment one month later, on January 1, and applied the bonus
money toward her principal on that same day.
• Her original payment schedule had her repaying the loan after 6 years.
• This early repayment of part of the principal did not affect her usual repayment amount —
the loan will simply be paid off sooner.
Find the interest portion of her payment on the 30th payment date.
A. 55.55 B. 56.56 C. 57.57 D. 58.58 E. 59.59
2018
30. A bond will pay a coupon of 50 at the end of every 6 months for the next 10 years and will pay
the face value of 1000 at the end of the 10-year period. The bond’s duration when valued using a
nominal interest rate of 10% convertible semiannually is X.
Calculate X.
A. 6.23 B. 6.54 C. 7.23 D. 7.56 E. 8.11
2018
31. Frank invests $1820 into a 10-year annuity that will pay him $50 at the end of the first year,
$50 + K at the end of the second year, $50 + 2K at the end of the third year, and so on. (That
is, each year the payment increases by K.)
If his investment earns 7% effective annual interest, find K.
A. $41 B. $44 C. $47 D. $50 E. $53
2018
32. Dewey deposits 1000 into an account paying 6% annual simple interest. The interest is paid at the
end of each year.
When the interest is paid, Dewey moves the accrued interest into another account. This second
account earns an annual effective rate of i, payable as an annual dividend at the end of each year.
Upon receipt, Dewey deposits each of these dividends into a third account. The third account
pays an annual effective rate of 4%. The interest payments made into this account are left in the
account to continue growing.
After 10 years, the sum of the balances in Dewey’s three accounts is 1762.50. Find i.
A. 4.8% B. 5.0% C. 5.2% D. 5.4% E. 5.6%
2018
33. $100 is deposited into each of three different accounts:
• Account #1 earns 8% annual effective compound interest
• Account #2 earns 10% simple interest
• Account #3 earns interest according to the following accumulation function:

1 2
a(t) = 27
t +1
Rank the balance of the accounts from smallest to largest as of time 3.
A. 1, 2, 3 B. 1, 3, 2 C. 2, 1, 3 D. 2, 3, 1 E. 3, 2, 1
2018
34. ABC Financial has a single liability: a 1000 par value bond with 5% annual coupons maturing in
18 years.
The zero-coupon yield curve is level: an effective annual rate of 5% for all terms. This is also the
rate used to value the liabilities.
ABC wants to use a single zero-coupon bond as an immunizing asset for their liability. Find the
par value and term of the zero-coupon bond that satisfies the present value and duration conditions
of Redington immunization.
A. Par value 2110, term 15.30 years

B. Par value 2090, term 15.30 years
C. Par value 1920, term 13.37 years
D. Par value 1820, term 12.27 years
E. Par value 1780, term 12.27 years
2018
35. A 10-year 1000 par value bond pays 4% coupons semiannually and is redeemable 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-up
B. 24.17 write-down
C. 24.17 write-up
D. 35.73 write-down
E. 35.73 write-up
2018

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The Infinite Actuary’s

by James Washer, FSA, MAAA

last updated - October 9, 2018

Find the amount of interest paid in the first two years.

A. 2860 B. 3020 C. 3450 D. 3770 E. 3930

A. 1241 B. 1441 C. 1641 D. 1841 E. 2041

Find the difference in the effective annual rates of these investments.

A. 0.00144 B. 0.00168 C. 0.00200 D. 0.00224 E. 0.00251

Date Activity Share Price

Maturity (in Years) Yield Rate

Calculate the one-year forward rate starting in one year.

A. 0.040 B. 0.045 C. 0.050 D. 0.055 E. 0.060

The force of interest is given by δ = 0.06.

Find the present value of the annuity.

A. 23.9 B. 24.3 C. 24.6 D. 25.0 E. 25.4

The effective annual rate is 6%.

Which of the following sets of asset cashflows achieves full immunization?

A. 1000 at time 1, 984.72 at time 5

A. 27.152 B. 28.456 C. 29.324 D. 30.765 E. 31.973

A. 24,993 B. 25,842 C. 30,741 D. 35,402 E. 49,165

Calculate the outstanding balance just after the 17th payment.

A. $1,185 B. $1,485 C. $1,885 D. $1,985 E. $2,185

A. Market Segmentation Theory

A. 8.4% B. 8.8% C. 9.2% D. 9.6% E. 10.0%

A. 6.6% B. 7.0% C. 7.4% D. 7.8% E. 8.2%

Find the interest paid by your friend so far.

A. 1940 B. 2040 C. 2140 D. 2240 E. 2340

Asset Amount available

A. 73.9% B. 74.2% C. 74.4% D. 74.7% E. 75.0%

A. 903 B. 906 C. 909 D. 912 E. 915

Term Spot rate

Find the fair swap rate.

A. 4.86% B. 5.06% C. 5.26% D. 5.46% E. 5.66%

Asset Market Value Modified Duration Convexity

The yield curve is currently flat at 5%.

A. 2925 B. 2926 C. 2927 D. 2928 E. 2929

• The bond pays semi-annual coupons.

A. 4.40% B. 4.45% C. 5.10% D. 5.85% E. 5.95%

(i) The first payment is 500.

(iii) Payments remain level at 300 thereafter.

A. 5730 B. 5880 C. 6030 D. 6180 E. 6230

A. 1026 B. 1036 C. 1046 D. 1056 E. 1066

(i) The purchase price is $8,800.

(ii) The coupon rate is 4% payable semiannually.

(iii) Coupons are reinvested at a nominal annual rate of 5% convertible semiannually.

A. 0.060 B. 0.061 C. 0.062 D. 0.063 E. 0.064

• Bond A is callable and has price X

• Bond B is putable and has price Y

• Bond C has no call or put provision and has price Z

Find the correct inequalities involving the bond prices.

A. 55.55 B. 56.56 C. 57.57 D. 58.58 E. 59.59

A. 6.23 B. 6.54 C. 7.23 D. 7.56 E. 8.11

If his investment earns 7% effective annual interest, find K.

A. $41 B. $44 C. $47 D. $50 E. $53

A. 4.8% B. 5.0% C. 5.2% D. 5.4% E. 5.6%

• Account #1 earns 8% annual effective compound interest

• Account #2 earns 10% simple interest