Actuary Certification ACTUARY Finance and Economics 2

Question 1

Which term describes the interest rate at which a central bank lends overnight funds to commercial banks?

Accepted Answer

Discount rate

Answer

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?

Accepted Answer

$50.00

Answer

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?

Accepted Answer

The yield to maturity is less than 6%

Answer

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?

Accepted Answer

Building permits

Answer

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?

Accepted Answer

To assert that asset prices fully reflect all available information

Answer

EMH states that market prices incorporate all available information, making it impossible to consistently achieve above-market returns through stock selection.

Actuary Certification Practice Test

Actuary Certification Practice Test

Actuary Certification ACTUARY Finance and Economics 2