ACTUARY Finance and Economics Flashcards
7 cards from real Actuary Certification practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 ACTUARY Finance and Economics flashcards as text
A callable bond is most likely to be called by the issuer when:
Answer: Interest rates fall significantly
Issuers call bonds when rates fall so they can refinance at lower rates, which is why callable bonds are typically priced below equivalent non-callable bonds.
The concept of immunization in fixed-income portfolio management aims to:
Answer: Match the duration of assets and liabilities to protect against interest rate risk
Immunization matches asset and liability durations so that changes in interest rates affect both sides equally, protecting the surplus.
Which of the following best describes 'moral hazard' in insurance economics?
Answer: The tendency for insured parties to take greater risks because they bear less of the cost
Moral hazard arises post-contract when insured individuals change behavior because the insurer absorbs the consequences of their risk-taking.
Under the Capital Asset Pricing Model (CAPM), the expected return on an asset with a beta of zero equals:
Answer: The risk-free rate
CAPM states E(R) = Rf + β(Rm - Rf); when β = 0, the risk premium term drops out and only the risk-free rate remains.
In a perfectly competitive market, long-run economic profit equals:
Answer: Zero
In long-run competitive equilibrium, entry of new firms drives economic profit to zero while firms still earn a normal accounting profit.
The Fisher equation relates nominal interest rates, real interest rates, and which other variable?
Answer: Expected inflation
The Fisher equation is: (1 + nominal rate) = (1 + real rate)(1 + expected inflation), linking all three components.
Which option strategy profits when the underlying asset price remains within a narrow range?
Answer: Short straddle
A short straddle (selling both a call and put at the same strike) earns maximum profit if the underlying price stays near the strike at expiration.