Mixed Deck — All FM Topics Flashcards

What continuing education requirement supports portfolio management competence?

Answer: Ongoing education in regulatory changes, market developments, and best practices

Financial markets, regulations, and best practices evolve constantly, requiring ongoing education for competent practice.

A portfolio holds 1,000 options with a delta of 0.6. How many shares of the underlying stock are required to delta-hedge the portfolio?

Answer: 1,200

Formula: Hedge Shares = Delta × Number of Options Calculation: Hedge Shares = 0.6 × 1,000 = 1,200

An arithmetic increasing annuity-immediate has payments of $100, $200, $300, $400, $500 at the end of years 1 through 5. Which expression gives its present value at 5% annual interest?

Answer: 100 × (Ia)(5, 5%)

An arithmetic increasing annuity with first payment P and common difference P uses (Ia)(n,i), so PV = P × (Ia)(5,5%) = 100 × (Ia)(5, 5%).

Which statement about the amortization method for a level-payment loan is CORRECT?

Answer: Early payments consist mostly of interest

In early periods the outstanding balance is large, so interest charges are high and only a small portion of the fixed payment reduces principal.

The no-arbitrage forward price F₀ for a non-dividend-paying stock with current price S₀ at effective annual rate i over T years is:

Answer: F₀ = S₀ × (1 + i)^T

The no-arbitrage forward price equals the future value of the current spot price: F₀ = S₀(1 + i)^T.

An annuity-due differs from an ordinary annuity (annuity-immediate) in that its payments occur at:

Answer: The beginning of each period

An annuity-due (denoted with a double-dot) makes payments at the start of each period, while an ordinary annuity pays at the end.

For a level annuity-due with n payments of 1 at effective rate i, the present value ä_{n|} equals:

Answer: (1 + i) × a_{n|}

An annuity-due has payments at the beginning of each period, so ä_{n|} = (1 + i) × a_{n|}.

For a continuously varying interest rate, the present value factor v(t) is:

Answer: exp(−∫₀ᵗ δ(s) ds)

The present value factor is the reciprocal of the accumulation factor: v(t) = exp(−∫₀ᵗ δ(s) ds).

How should client relations performance be reported to clients?

Answer: Provide accurate, complete, and timely performance reporting with appropriate benchmarks

Accurate, complete, and timely reporting with appropriate benchmarks enables informed decision-making by clients.

A collar strategy involves:

Answer: Buying a put at a lower strike and selling a call at a higher strike to hedge an asset

A collar limits an asset's downside by buying a put and finances part of the cost by selling a call, capping upside.

What fiduciary duty applies to financial planning?

Answer: Act in the client's best interest with loyalty, care, and full disclosure

Fiduciary duty requires acting in the client's best interest with loyalty, care, and full disclosure of all material facts.

A $100,000 loan at 6% annual interest is amortized over 20 years with level annual payments. After 10 payments, approximately what percentage of the original balance remains outstanding?

Answer: 64%

Payment = 100,000/a(20,6%) ≈ $8,718; balance after 10 = 8,718 × a(10,6%) ≈ $64,162, which is about 64% of $100,000.

What continuing education requirement supports financial planning competence?

Answer: Ongoing education in regulatory changes, market developments, and best practices

Financial markets, regulations, and best practices evolve constantly, requiring ongoing education for competent practice.

A forward contract on the FM exam obligates the buyer to:

Answer: Purchase an asset at a predetermined price on a specified future date

A forward contract locks in a purchase price (the forward price) for delivery of the asset at a future date.

The net present value (NPV) of a project is positive when:

Answer: The yield rate exceeds the required rate of return

NPV > 0 when the project's IRR (yield rate) is greater than the investor's required (hurdle) rate of return.

In the context of the FM exam, 'hedging' with derivatives means:

Answer: Reducing or eliminating price risk by taking an offsetting position

Hedging uses derivatives to offset existing price exposures, reducing financial risk rather than seeking profit.

How should conflicts of interest be managed in financial planning?

Answer: Identify, disclose, and mitigate all actual and potential conflicts of interest

All actual and potential conflicts of interest must be identified, disclosed to clients, and mitigated to maintain trust and compliance.

What is the future value of an annuity that pays $2,000 annually for 10 years at an interest rate of 8%?

Answer: $28,973.00

The future value of an ordinary annuity is calculated using the formula FV = PMT * [((1 + r)^n - 1) / r]. Here, PMT is $2,000, r is 8% (0.08), and n is 10 years. Plugging these values into the formula yields $2,000 * [((1.08)^10 - 1) / 0.08], which calculates to approximately $28,973.12. This closely matches option A.

What regulatory compliance requirement applies to risk assessment?

Answer: Full compliance with all applicable federal, state, and industry regulations

Full regulatory compliance is mandatory regardless of practice size, ensuring market integrity and client protection.

How should conflicts of interest be managed in client relations?

Answer: Identify, disclose, and mitigate all actual and potential conflicts of interest

All actual and potential conflicts of interest must be identified, disclosed to clients, and mitigated to maintain trust and compliance.