ACTUARY Finance and Economics 1 โ Questions and Answers
Question 1: You invest $1,000 at an annual interest rate of 5% compounded annually. What will the investment be worth after 3 years?
- $1,150
- $1,157.63 (Correct answer)
- $1,200
- $1,215.50
Correct answer: $1,157.63
The formula for compound interest is: FV=PVโ (1+r) t Here, PV=1,000, ๐=0.05 and t=3: FV=1,000โ (1+0.05) 3=1,000โ (1.157625)=1,157.63
Question 2: What is the present value of $2,000 to be received 5 years from now if the annual discount rate is 6%?
- $1,400.95
- $1,490.25
- $1,586.87 (Correct answer)
- $1,681.13
Correct answer: $1,586.87
Here, FV=2,000, ๐=0.06, and t=5: PV= 2,000/(1+0.06)5 = 2,000/1.338225 =1,586.87
Question 3: A bond with a face value of $1,000 pays annual coupons of $50 and has 4 years to maturity. If the market interest rate is 6%, what is the bond price?
- $950.00
- $980.20 (Correct answer)
- $1,000.00
- $1,038.45
Correct answer: $980.20
Total bond price: ๐๐total=173.26+792.94=980.20
Question 4: An investor has two assets in a portfolio: Asset A: Expected return = 8%, weight = 60% Asset B: Expected return = 12%, weight = 40% What is the portfolioโs expected return?
- 9.6%
- 10.0%
- 10.4% (Correct answer)
- 11.2%
Correct answer: 10.4%
The portfolio's expected return is a weighted average of the asset returns: E(R pโ )=w Aโ โ R A+w RB E(R p )=(0.6โ 0.08)+(0.4โ 0.12)=0.048+0.048=0.104=10.4%
Question 5: If the demand for a good increases and the supply remains unchanged, what happens to the equilibrium price and quantity?
- Price decreases, quantity decreases
- Price increases, quantity increases (Correct answer)
- Price increases, quantity decreases
- Price remains unchanged, quantity increases
Correct answer: Price increases, quantity increases
When demand increases and supply stays constant, the demand curve shifts to the right. This results in a higher equilibrium price and a larger equilibrium quantity. The market adjusts to the higher willingness of consumers to pay.
ACTUARY Finance and Economics 1
You invest $1,000 at an annual interest rate of 5% compounded annually.
What will the investment be worth after 3 years?