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Financial Mathematics Old FM Forum

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  #1  
Old 05-08-2018, 04:51 PM
WinePusher WinePusher is offline
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Default ASM Practice Exam 2 Question 7 Help

Hi all, I am new to this forum so thanks for having me! I have a question about the following question in ASM Practice Exam 2, question 7 for exam FM. The question is:

A perpetuity-immediate pays $50 per quarter, and has a PV of $2000 at an annual effective interest rate of i. A 30-year annuity pays $10,000 at the end of every two years. Using interest rate i, calculate the PV of the 30 year annuity three years prior to the first payment.

The solution gives the effective 2 year rate as .218403 however I don't understand this. My method to arrive at the effective two year rate is as follows:

From the perpetuity, the nominal rate convertible quarterly and the effective quarterly rate are, respectively, .025 and 0.00625.

Thus, the effective annual rate is .025235353.

Finding the effective two year rate using the effective annual rate: (1+i)^(.5)=(1.025235353) => the two year effective rate is .051107529.

Or using the effective quarterly rate, (1+i)^(.5)=(1.00625^4) also gives the two year effective rate as .051107529.

In the solution, Cherry derives the two year effective rate as follows:

(1+i)^(.5)=(1+.025)^4 however in this case .025 is the nominal rate convertible quarterly. Could someone please clarify? Thanks a lot!
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Old 05-09-2018, 06:32 PM
WinePusher WinePusher is offline
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Hey, would anyone be able to assist? Thanks!!
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Old 05-14-2018, 04:17 PM
Chappe Chappe is offline
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From the perpetuity present value equation, 50/(i(4)⁄4)=2000, the nominal interest rate convertible quarterly is 10%. i(4)/4 is 2.5%.
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Old 05-14-2018, 07:38 PM
WinePusher WinePusher is offline
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Thanks a lot Chappe! Stupid mistake on my part.
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Old 05-14-2018, 07:40 PM
WinePusher WinePusher is offline
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Could I also ask, I know FM has 35 questions and the pass rate is 70% correct? Is it true that 5 of the questions are not included in the score?

So to actually pass you would need at least 21 correct questions (.7*30)?
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Old 05-17-2018, 06:02 PM
LilliedActuary LilliedActuary is offline
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Quote:
Originally Posted by WinePusher View Post
Could I also ask, I know FM has 35 questions and the pass rate is 70% correct? Is it true that 5 of the questions are not included in the score?

So to actually pass you would need at least 21 correct questions (.7*30)?
WinePusher;

It is true that there are some "pilot" questions that will not be scored. It would be wisest to head in trying to get all 35 questions right and not necessarily focus on beating the 70% mark.

However with that being said, yes your math would be correct.
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