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SOA FM Exam | Questions with 100% Correct Answers| Verified
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SOA FM Exam | Questions with 100% Correct Answers| Verified
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SOA FM Exam | Questions with 100% CorrectAnswers| Verified
First Order Modified Approximation - ✔✔P*(in)=P(i0)[1-(in-i0)(ModD)]
P*(in)= Estimated Price
P(i0)= Initial Market Value
(in-i0)= Change in interest rate
Immunization Shortcut - ✔✔Great for full immunization problems
w=(t2-tL)/(t2-t1)
t1= shorter bond duration
t2= longer bond duration
tL= liability duration
w= shorter bond's weight (the bonds payout brought to the time of the liability payout and
divided by the liability)
1-w= longer bond's weight
Market Segmentation Theory - ✔✔The market has different reasons for lending and
borrowing. Therefore, interest rates are different depending on the loan type
Preferred Habit Theory - ✔✔If given enough incentive in terms of interest, individuals may
move outside of their preferred terms
Liquidity Preference Theory - ✔✔To persuade lenders to lend for longer terms, there needs
to be a higher interest rate
Expectations Theory - ✔✔Longer term investments provide future expectations for interest
on shorter term investments
, Comparing P and C to determine premium and discount - ✔✔P<C then bond is discount
P>C then bond is premium
Min yield rate for bonds depending on prem/disc for callable bonds - ✔✔Discount - when
the period is longest
Premium - when the period is shortest
Macaulay Duration Formula - ✔✔-P'(δ)/P(δ)=sum(0,n)((t*v^t*CF)/(v^t*CF)
Duration is just a manipulated time. Therefore if you are moving MacD through time without
cashflows just +/- the number of years
Duration also doesn't count cashflows from the past
Modified Duration Formula - ✔✔-P'(i)/P(i)=sum(0,n)((t*v^(t+1)*CF)/(v^t*CF)
When dealing with reinvest problems... - ✔✔look at all the cash flows as one single flow for
a period and then use the reinvestment rate to determine values
Increasing Annuity Immediate - ✔✔(Ia)(n,i)=(adoubledot-nv^n)/i
Decreasing Annuity Immediate - ✔✔(Da)(n,i)=(n-a(n,i))/i
Price of Increasing Dividend-Paying Stock - ✔✔D/(i-k)
where D=amount of first expected dividend
and k = growth rate
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