Actuary Certification ACTUARY Finance and Economics 2 — Questions and Answers
Question 1: Which term describes the interest rate at which a central bank lends overnight funds to commercial banks?
- Discount rate (Correct answer)
- Prime rate
- LIBOR
- Federal funds rate
Correct answer: Discount rate
The discount rate is the rate at which the Federal Reserve lends funds directly to depository institutions through its discount window.
Question 2: Under the Gordon Growth Model, if a stock pays a dividend of $3, the required return is 10%, and dividends grow at 4%, what is the stock's intrinsic value?
- $50.00 (Correct answer)
- $30.00
- $75.00
- $60.00
Correct answer: $50.00
The Gordon Growth Model gives P = D1 / (r - g) = 3 / (0.10 - 0.04) = $50.
Question 3: A bond with a 6% coupon rate is trading at a premium. Which statement must be true?
- The yield to maturity is less than 6% (Correct answer)
- The yield to maturity equals 6%
- The yield to maturity exceeds 6%
- The bond has a negative convexity
Correct answer: The yield to maturity is less than 6%
A bond trades at a premium when its coupon rate exceeds the market yield, so the YTM must be below the coupon rate.
Question 4: Which economic indicator is considered a leading indicator of future economic activity?
- Unemployment rate
- Building permits (Correct answer)
- GDP growth
- Consumer Price Index
Correct answer: Building permits
Building permits are a leading indicator because construction activity anticipates near-term economic expansion or contraction.
Question 5: What is the primary purpose of the Efficient Market Hypothesis (EMH) in actuarial finance?
- To guarantee portfolio returns exceed inflation
- To assert that asset prices fully reflect all available information (Correct answer)
- To define optimal rebalancing strategies
- To measure systematic risk in equity portfolios
Correct answer: To assert that asset prices fully reflect all available information
EMH states that market prices incorporate all available information, making it impossible to consistently achieve above-market returns through stock selection.
Question 6: In macroeconomics, what does the multiplier effect describe?
- The amplification of an initial change in spending on total economic output (Correct answer)
- The compounding of interest on government bonds
- The leverage effect in derivatives markets
- The impact of monetary policy on exchange rates
Correct answer: The amplification of an initial change in spending on total economic output
The multiplier effect shows how an initial change in spending (e.g., government expenditure) results in a larger total change in GDP.
Question 7: Which measure of money supply includes currency in circulation plus demand deposits?
- M0
- M1 (Correct answer)
- M2
- M3
Correct answer: M1
M1 is the narrowest measure of money supply that includes physical currency, traveler's checks, and demand deposits.
Actuary Certification ACTUARY Finance and Economics 2
Which term describes the interest rate at which a central bank lends overnight funds to commercial banks?