Actuary Certification ACTUARY Finance and Economics 3

Question 1

A callable bond is most likely to be called by the issuer when:

Accepted Answer

Interest rates fall significantly

Answer

Interest rates rise significantly

Answer

The bond approaches its maturity date

Answer

Credit spreads widen

Question 2

The concept of immunization in fixed-income portfolio management aims to:

Accepted Answer

Match the duration of assets and liabilities to protect against interest rate risk

Answer

Maximize coupon income regardless of rate changes

Answer

Eliminate credit risk through diversification

Answer

Maximize convexity to benefit from rate volatility

Question 3

Which of the following best describes 'moral hazard' in insurance economics?

Accepted Answer

The tendency for insured parties to take greater risks because they bear less of the cost

Answer

Adverse selection before the insurance contract is written

Answer

The risk that an insurer becomes insolvent

Answer

Systematic underpricing of catastrophic events

Question 4

Under the Capital Asset Pricing Model (CAPM), the expected return on an asset with a beta of zero equals:

Accepted Answer

The risk-free rate

Answer

The market return

Answer

Zero

Answer

The asset's historical average return

Question 5

In a perfectly competitive market, long-run economic profit equals:

Accepted Answer

Zero

Answer

A normal rate of return

Answer

The accounting profit

Answer

The marginal revenue

Question 6

The Fisher equation relates nominal interest rates, real interest rates, and which other variable?

Accepted Answer

Expected inflation

Answer

GDP growth rate

Answer

Currency exchange rate

Answer

Default risk premium

Question 7

Which option strategy profits when the underlying asset price remains within a narrow range?

Accepted Answer

Short straddle

Answer

Long straddle

Answer

Long call

Answer

Protective put