Professional Documents
Culture Documents
Practice Exam 1
Answer Key
c
Copyright
2013
Actuarial Investment.
1. A perpetuity makes level payments of 1 at the end of each year. The perpetuitys modified
duration is 25. Calculate the present value of the perpetuity.
(A) 16.67
(B) 22.50
(C) 24.00
(D) 24.33
(E) 25.00
25 =
1
i
Remember that the present value of a perpetuity with level payments of 1 is 1i . Therefore the
present value of this perpetuity is 25.
2. Johnathan buys a 12-year bond with face amount 1000 and annual coupons of 4% priced to
yield i%. Rachel buys a 12-year bond with face amount 1000 and annual coupons of 4%
priced to yield j%.
Rachels bond is bought at a discount. The price of Rachels bond is less than the price of
Johnathans bond.
Which of the following is true?
(A) i < j < .04
(B) j < i < .04
(C) i < .04 < j
(D) .04 < j < i
(E) There is not enough information to determine that any of (A), (B), (C), or (D) is true.
3. An assets price is 81. The price of a put option for the asset that matures in 72 days and has
a strike price of 84 is 3.85. The annual effective rate of interest is 5%. What is the price of
a call option for the asset that matures in 72 days and has a strike price of 84? (Assume a
360-day year.)
(A) 0.85
(B) 1.67
(C) 2.85
(D) 4.85
(E) 6.17
4. A stock pays annual dividends, beginning in one year with a dividend of 134. The stock pays
dividends until the company goes bankrupt n years from now, at which time the stock pays
the final dividend of 248.
The present value of the final dividend is 159.86, and the present value of the stock is 1289.
Dividends increase by r% per year and the annual effective rate of interest is i%. It is known
that i + .03 = r. Calculate n.
(A) 8
(B) 9
(C) 10
(D) 11
(E) 12
1289 = 134
1 (1+i)n
ir
1289 = 134
1289 = 134
1 1.552
.03
(1+r)n1 (1+r)
1.552
.03
From time 1 to time n, the dividend increases by a factor of 1 + r exactly n 1 times. Since
the first dividend is 134 and the last dividend is 248, this means that 134(1 + r)n1 = 248,
or (1 + r)n1 = 248
= 1.851.
134
1289 = 134
1.851(1+r)
1.552
.03
Solve to find r = .08. This means that i = .05. Now we know that (1+i)n = 1.05n = 1.552.
Solve to find n = 9.
5. An asset is currently worth 61. Jack buys a call option for the asset with strike price 62 and
maturity in one year. Robin buys a put option for the asset with strike price 62 and maturity
in one year.
After a year, the price of the underlying asset is 58. Jacks profit is 4.41 and Robins profit
is X. The annual effective rate of interest is 5%. Calculate X.
(A) 1.42
(B) 1.54
(C) 1.64
(D) 1.78
(E) 1.91
10
11
6. A 14-year annuity due makes payments of 100 every year except for year 3. In year 3, the
annuity makes a payment of 500. The effective annual interest rate is 4%. What is the present
value of the annuity?
(A) 1398
(B) 1412
(C) 1433
(D) 1454
(E) 1468
12
13
7. The following table gives one-year forward rates for the next three years.
T (years)
1
2
3
i(T 1, T )
4.6
4.3
3.9
The three-year swap rate for an interest rate swap is r%. Cacluate r.
(A) 4.28
(B) 4.32
(C) 4.38
(D) 4.44
(E) 4.60
14
1000r
(1+.046)
1000.043
(1+.046)(1+.043)
1000r
(1+.046)(1+.043)
15
1000.039
(1+.046)(1+.043)(1+.039)
1000r
(1+.046)(1+.043)(1+.039)
8. A loan of 1000 is repaid with 14 annual payments starting one year after the loan is made.
Each of the first 12 payments is 6% more than the subsequent payment. The eighth payment
is X. The final payment is 2X.
The annual effective rate of interest is 3%. Calculate X.
(A) 72.20
(B) 73.29
(C) 74.78
(D) 76.10
(E) 77.28
16
Therefore the loan amount of 1000 is equal to the present value of the geometric annuity
plus the present value of the balloon payment:
1+(.0566)
1000 = 1.067 X
1( 1+.03 )13
.03(.0566)
17
1
+ 2X( 1+.03
)14
9. Calculate the convexity of a 3-year bond with annual coupons of 10% priced at par.
(A) 3.00
(B) 8.01
(C) 8.76
(D) 9.00
(E) 10.86
18
P 00 (i)
,
P (i)
The present value of the bond is P (i) = .1F v + .1F v 2 + 1.1F v 3 . Then P 0 (i) = .1F v 2
.2F v 3 3.3F v 4 . Also P 00 (i) = .2F v 3 + .6F v 4 + 13.2F v 5 .
Since P (i) = F , the convexity is equal to
13.2v 5 = 8.76.
19
P 00 (i)
P (i)
= .2v 3 + .6v 4 +
10. Mark takes out a 10-year loan worth 1000 with payments of 120 at the end of every year.
After 4 years, he extends the loan by an additional 5 years. How much additional interest
will Mark pay by extending the loan?
(A) 52
(B) 61
(C) 69
(D) 73
(E) 82
20
21
11. Abigail takes out a 48-month loan worth 132,000 with payments of 3100 at the end of each
month. In order to pay off the loan early, Abigail instead makes payments of 3800 at the end
of each month for n months, plus a final payment of X at the end of the n + 1st month such
that X < 3800.
Calculate X.
(A) 893
(B) 904
(C) 918
(D) 950
(E) 954
22
23
12. A 3-year annuity immediate with monthly payments makes its first payment on January 31.
In each July and in each December, the payment is 30. In all other months, the payment
is 10. The annual effective rate of interest is 7%. Calculate the accumulated value of the
annuity immediately after the final payment.
(A) 529
(B) 541
(C) 594
(D) 604
(E) 613
24
Solution: The monthly rate of interest is (1 + .07) 12 1 = .005654 and the 6-month rate
1
of interest is (1 + .07) 2 1 = .03441. Now break the annuity into two separate annuities.
The first has 36 monthly payments of 10. Its accumulated value is 10s36.005654 = 398. The
second has 6 semi-annual payments of 20. Its accumulated value is 20s6.03441 = 131. The
total accumulated value is 398 + 131 = 529.
25
13. A stock currently pays no dividends, but will begin paying annual dividends in n years. The
first years dividend will be 18 and subsequent dividends will increase by 2% per year. At a
price of 288.61, the stock is priced to yield 5%.
Calculate n.
(A) 12
(B) 13
(C) 14
(D) 15
(E) 16
26
27
14. An n-year bond has annual coupons of 5%. The bond is bought to yield 6.89%. The accumulated value of the coupons is equal to the face amount of the bond. Calculate n.
(A) 10
(B) 11
(C) 12
(D) 13
(E) 14
28
29
30
31
16. An investor sells 1000 barrels of oil at a forward price of 60 per barrel with maturity in six
months. At expiration, the price of oil is 52 per barrel. There is a 3% commission on the
futures contract. Calculate the investors net gain from the futures contract.
(A) -9800
(B) -9560
(C) -8240
(D) 6200
(E) 7760
32
33
17. Tabitha buys a 20-year bond purchased to yield 8% convertible semiannually with semiannual coupons at a rate of 4% convertible semiannually. Coupons are reinvested into an
account earning interest at a nominal rate of 6% convertible semiannually.
John buys a 20-year bond purchased to yield j% convertible semiannually with semiannual
coupons at a rate of 12% convertible semiannually. Coupons are reinvested into an account
earning interest at a nominal rate of 6% convertible semiannually.
The rate of return of Johns investment is the same as the rate of return of Tabithas investment. Calculate j.
(A) 8.29
(B) 8.42
(C) 8.53
(D) 8.69
(E) 8.98
34
35
18. The six-month forward price for a stock is 35.94. The prepaid six-month forward price for
the stock is 34.05. Assume that the stock pays no dividends and that there are no opportunities for arbitrage. The implied annual effective rate of interest is i%. Calculate i.
(A) 2.7
(B) 5.3
(C) 5.6
(D) 11.1
(E) 11.4
36
37
19. The current price of a stock is 55 and the annual effective rate of interest is 8%. The profit
earned by a call option with maturity in one year and strike price of 62 is 5.48. The profit
earned by a put option with maturity in one year and strike price of 62 is -3.80. What is the
price of the stock one year from now?
(A) 67.01
(B) 67.80
(C) 68.68
(D) 68.87
(E) 69.31
38
39
20. Rons account earns interest at a force of interest of 1+kt. Money deposited into the account
will double after n years.
Janes account earns interest at a force of interest of kt + t2 . Money deposited into the
account will double after n years.
Calculate k.
(A) -0.69
(B) -0.39
(C) 0.26
(D) 0.84
(E) 1.21
40
41
21. At time 0, Sally deposits $100 into an account bearing an annual rate of discount of 4.77%,
and Alan deposits $88 into an account bearing a nominal rate of interest convertible monthly
of 6.5%. At time t, the values of the accounts are equal.
Find t.
(A) 6
(B) 7
(C) 8
(D) 9
(E) 10
42
43
.065 12t
)
12
22. The annual effective rate of interest is i. It is known that (Is)15i = 136 and s15i = 18.
Calculate (Ds)15i .
(A) 134
(B) 140
(C) 144
(D) 149
(E) 152
44
45
23. A company has provided Redington immunization for its liability of L in 1 year. The company has two assets: a five-year zero-coupon bond with face amount of L, and current cash
on hand of X.
The values of X and L are related such that X = rL. Calculate r.
(A) .298
(B) .376
(C) .432
(D) .457
(E) .535
46
47
24. Andrew takes out a 5-year loan worth 10,000 with payments of 197 at the end of each month.
After 2 years, Andrew decides to pay the loan off faster by paying an additional P per month.
This allows him to pay the loan off 8 months early.
Calculate P .
(A) 20
(B) 31
(C) 34
(D) 40
(E) 51
48
49
25. A 20-year loan has level annual payments of 500 at the end of each year. The interest paid
in the 6th year is 150. Calculate the total amount of interest paid during the loan.
(A) 2136
(B) 2394
(C) 2610
(D) 2871
(E) 3109
50
51
26. A perpetuity due has a payment of P at time 0. Payments are annual and increase by 3% per
year. The annual effective rate of interest is 5%. The present value of the perpetuity is 4000.
Calculate P .
(A) 72
(B) 74
(C) 76
(D) 78
(E) 80
52
53
27. A 30-year bond has a face value of 50,000 with semiannual coupons at a rate of 8% convertible semiannually and a price of 48,936. What is the adjustment to book value in the 16th
year?
(A) Write-down of 25.19
(B) Write-down of 27.05
(C) Write-down of 27.30
(D) Write-up of 27.30
(E) Write-up of 29.31
54
55
28. It is known that K1 < K2 < K3 . Let X be the premium paid for a straddle around K2 , Y
be the premium paid for a K1 -K2 strangle, and Z be the premium paid for a call option with
strike price K2 . What is the relationship between X, Y , and Z?
(A) X > Y > Z
(B) Y > X > Z
(C) Y > Z > X
(D) Z > X > Y
(E) Z > Y > X
56
57
29. An investor purchases a call ratio spread. The strike price of the purchased call option is
230 and the strike price of the written call options is 245. The following table shows the
investors profit for several spot prices of the underlying asset at maturity.
Spot price at maturity
220
240
260
280
Calculate X.
(A) -20
(B) -30
(C) -40
(D) -50
(E) -60
58
Profit
5
5
20
X
59
30. It is known that the interest rate i is equal to the present value factor v. Calculate the discount
rate d.
(A) .089
(B) .244
(C) .382
(D) .618
(E) .733
60
61
31. Option X is an out-of-the-money put option. Option Y is a call option for the same asset
with the same strike price as option X. Under which of the following conditions will option
Ys payoff be positive?
(I) A large decrease in the price of the underlying asset
(II) No change in the price of the underlying asset
(III) A large increase in the price of the underlying asset
(A) (I) only
(B) (I) and (II)
(C) (II) only
(D) (II) and (III)
(E) (III) only
62
63
32. The annual effective interest rate is 8%. A 36-month annuity due makes monthly payments
of 50. Calculate the accumulated value of the annuity immediately after the final payment.
(A) 1992
(B) 2005
(C) 2018
(D) 2031
(E) 2042
64
Solution: The monthly rate of interest is (1 + .08) 12 1 = .006434. Then calculate the
accumulated value of the annuity after 36 months: 50
s36.006434 = 2031. However, since this
is an annuity due, the final payment occurs at the end of the 35th month. Thus we need to
2031
discount this result by one month, so the answer is 1+.006434
= 2018.
65
33. A company has liabilities of L in 1 year and 1000 in 2 years. Bond X is a one-year bond
with annual coupons of 4% and is priced at par. Bond Y is a two-year bond with annual
coupons of 8% and is priced at par.
The company has created a portfolio using bond X and bond Y that exactly matches its
liabilities. The present value of this portfolio is 2000. Calculate L.
(A) 1080
(B) 1120
(C) 1191
(D) 1220
(E) 1278
66
67
34. An investor wants to buy 20-year bonds. Current interest rates are 8%, but the investor
believes that interest rates will rise within the next 10 years. The following 20-year bonds
are available in any face amount. Which type of bond should the investor choose?
(I) Zero-coupon bond
(II) Bond with a coupon rate of 5%
(III) Bond with a coupon rate of 10%
(A) The investor should invest solely in bond (I)
(B) The investor should invest solely in bond (II)
(C) The investor should invest solely in bond (III)
(D) The investor should invest in a combination of bond (I) and bond (II)
(E) The investor should invest in a combination of bond (I) and bond (III)
68
69
35. On January 1, a fund has a balance of 1000. On March 31, a withdrawal is made of 200.
On June 30, a deposit is made of X. On December 31, the fund has a balance of 1400. The
dollar-weighted rate of return is 25%. Calculate X.
(A) 322
(B) 344
(C) 349
(D) 362
(E) 390
70
.25 =
1400X+2001000
9
6
1000 12
200 12
+X 12
12
71