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

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.

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

Immunization matches asset and liability durations so that changes in interest rates affect both sides equally, protecting the surplus.

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

Moral hazard arises post-contract when insured individuals change behavior because the insurer absorbs the consequences of their risk-taking.

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

CAPM states E(R) = Rf + β(Rm - Rf); when β = 0, the risk premium term drops out and only the risk-free rate remains.

Question 5

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

Accepted Answer

Zero

Answer

In long-run competitive equilibrium, entry of new firms drives economic profit to zero while firms still earn a normal accounting profit.

Actuary Certification Practice Test

Actuary Certification Practice Test

Actuary Certification ACTUARY Finance and Economics 3