ASM_Exam FM - Errata List for 10th Edition (Autosaved)

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errata for asm fm manual for the 10th edition soa exam financial mathematics
  Errata for 10 th  Edition of Exam FM/2 Manual(Last updated 5/21/14)[8//1! #ote on $han%es in Learnin% &'e$ties for &$to'er 201!* Starting with the October 2013 exam, some topics were removed and some were added to the list of Learning Objectives. owever, there were no changes in the !ext eferences. #$or example, altho%gh the topic of &investment 'ear allocation methods( was removed, the !ext eferences still cover this topic.) *e emailed the $+2 exam committee in earl' -%l' 2013 to tr' to clarif' this sit%ation, b%t we have not heard bac from them. /nless we receive information to the contrar', the a%thors of S+s xam $+2 man%al s%ggest that 'o% contin%e to learn certain topics that are no longer specificall' listed on the Learning Objectives. *e have noted what thesetopics are in the %pdates below dated 413. #Other topics that were added to the Learning Objectives are alread' covered b' the man%al or b' the %pdates below.) [/1/11 +mportant note on immuni,ation- .tudents hae reported thatthere hae 'een a surprisin% num'er of uestions on immuni,ation(in$ludin% the topi$s of duration and $onexit) on re$ent exams he5 pra$ti$e exams in this manual $ontain er3 er fe uestions onthese topi$s e su%%est that ou thorou%hl reie .e$tions 6$ to 6n'efore ou ta7e the exam 51120126 7age 21, 8. 9. nswer choice #:) sho%ld be 1;1;.5;2106 7age 21, 8. 4. !his problem sho%ld act%all' appear after Sections 1a#vi) to 1a#ix).51120126 7age 2. !he &<ote( at the end sho%ld refer to #1 = i) 2n .51120126 7age ;0, sol%tion to 8. >. <ote that there is act%all' no need to explicitl' calc%late i2.$rom1000#1 = i2) 2 ? 1,@0, we have #1 = i2) 10  ? 1.@ 102 , A ? 1000#1 = i2) 10  ? 1000#1.@ 102 ) ?1,24>.5329126 7age 94, sol%tion to 8. 1. dd the following note after the sol%tionB &Some st%dents interpretBCis acco%nt is credited with interest at a nominal rate of i convertible semiann%all' to mean that:r%ces acco%nt earns interest onl' at the end of each >Dmonth period. !herefore, the' reasonthat after 4.29 'ears, :r%ce has onl' 100#1 = i2) 1;  in his acco%nt. owever, it is ver' importantto note that in xam $+2, an acco%nt is alwa's ass%med to grow with interest contin%o%sl', nomatter how the interest rate is stated #e.g., as an ann%al effective rate, as a nominal ratecompo%nded mDthl', as a force of interest, etc.). Ef there is an exception to this ass%mption, itsho%ld be clearl' stated in the F%estion.(5414116 7age >9, 3 rd  line from bottom, parenthetical remar. Sho%ld be &#e.g., when #delta) t ? .02t, as inthe above example).(  54136 7age 41, sol%tion to 8. . dd the following note at the beginning of the sol%tionB <oteB Occasionall', 'o% ma' see the term &c%rrent val%e(, as in this F%estion. !his simpl' meansthe val%e of a series of pa'ments on a specified date, some of which are made before that dateand some after that date. !h%s, &c%rrent val%e( is the s%m of the G and 7G of the pa'ments onthe specified date.5921136 7age >, diagram in the middle of the page. 3H applies to a period of I of a 'ear. #!he arrowsmae it appear as if 3H applies to I of a period, which is J of a 'ear.)5>29126 7age @@, sol%tion to 8. 1>, 2 nd  line. 100 v  sho%ld be 100v. !he sol%tion %ses the correctval%e.5414116 7age 11@, sol%tion to 8. 9. !he first line of the sol%tion was omittedB 1;,113 ? 1,000#aDangleD;<)at >.3H, ;< ? 3>, < ? @.5414116 7age 11@, sol%tion to 8. 4, 2 nd  line. ? 190.0 #based on the n%mber of decimal places %sed),not 190.0. !he sol%tion is based on the correct val%e.513106 7age 13>, sol%tion to 8. 4. On the last line, the denominator sho%ld be 1 D .491319. !heanswer is based on the correct denominator.513106 7age 13, sol%tion to 8. 1@. !he first line sho%ld sa'B &/sing time 39  as the comparisondate(.!he sol%tion is based on time 3@.513106 7age 223, sol%tion to 8. 11. !he wa' the F%estion is worded, the correct answer is #), not #:).s noted in the sol%tion, the acco%nt balance at the end of the  th  'ear is K;>,@21.>>. -%st after the 14 th  f%ll scholarship of K9,000 is awarded, the acco%nt balance is eF%al to #;>,@21.>>)#1.0) 14 D 9,000#s angle 14) at H ? K;,9@.>. ccording to the F%estion, if there is less than K9,000 inthe acco%nt at the end of an' 'ear, the remaining amo%nt #K;,9@.>) is immediatel' awarded asa smaller scholarship. !h%s, onl' 14 f%ll scholarships of K9,000 are awarded. <ote that theacco%nt balance of K;,9@.> at the end of the 14 th  'ear wo%ld have grown to K9,2;.>9 at theend of the 1 th  'ear at H. !his wo%ld have permitted an 1 th  f%ll scholarship to have beenawarded, b%t this wo%ld not follow the reF%irements of the F%estion.54136 7age 2. <ote that the October 2013 Learning Objectives removed &investment 'ear allocationmethods( as an explicit learning objective. owever, this topic has often appeared on past $+2exams. lso, F%estion  of the 94 sample F%estions on www.:enct%ar'.org covers this topic.ccordingl', the a%thors advise 'o% to learn the concepts in Section 9f.5414116 7age 302, first line %nder &b. /sing the !G+ registers(. ;,32@.; sho%ld be ;,32@.3.  5329126 7age 3@4, sol%tion to 8. @, last line. 1,0.24 sho%ld be 1,0@@.;.54136 7age ;1. dd the following paragraph at the end of Section aB convertible bond   is a bond that the holder can convert into a predetermined n%mber of shares of common stoc at mat%rit', instead of receiving the mat%rit' val%e in cash.  mandatorily convertible bond   is a bond that a%tomaticall' converts to common stoc atmat%rit'.  convertible bond is often called a &h'brid sec%rit'(, since it has both debt andeF%it' feat%res.5>29126 7age ;2;, sol%tion to 8. 2, 1 st  line. !he reference sho%ld be to Section #b), not Section4#g).59211;6 7ages ;33D;34. Since the 10 th  edition of this man%al was p%blished, the $+2 exam committeehas adopted standard terminolog' for forward rates for exam p%rposes. #s noted on page ;3>%nder &!rap lert *arning on !erminolog' for $orward ates(, the vario%s S%ggested!extboos %se man' different wa's of describing the same forward rate. !h%s, its a good moveon the part of the exam committee to finall' specif' standard terminolog'.)!his is how a forward rate is defined in &<otation and terminolog' %sed for xam $+2(#available on www.:enct%ar'.org   )B  Forward rate: An m-year spot rate that comes into effect t years in the future will bereferred to as the “m-year forward rate, deferred t years” or as the “m-year forward rate, starting in t years”. Lets tae an example. S%ppose we are told that the &3D'ear forward rate, deferred 2 'ears, is>H( #or that the &3D'ear forward rate, starting in 2 'ears, is >H(). *hat this means is that weco%ld mae an investment 2 'ears from now that wo%ld earn >H per ann%m over the next 3'ears #i.e., over the period from time 2 to time 9. !h%s, if we were to invest, sa', K10,900 attime 2, we wo%ld have an acc%m%lated val%e of 10,900#1.0>) 3  at time 9.Lets tae another example. ow wo%ld 'o% explain the following forward rateM !he 2D'ear forward rate, deferred 3 'ears is ;H #or the 2D'ear forward rate, starting in 3 'ears is ;H). !hismeans that we co%ld mae an investment 3 'ears from now that wo%ld earn ;H per ann%m over the next 2 'ears, i.e., over the period from time 3 to time 9.On pages ;33 and s%bseF%ent in the man%al, nat%rall' we dont %se the official terminolog' for forward rates, since the 10 th  edition was p%blished before this terminolog' was adopted. <owthat the exam committee has spoen, 'o% sho%ld expect to see the new terminolog' on f%t%reexams.Ger' often, 'o% will deal with forward rates that are in effect for onl' one 'ear #i.e., forward ratesfor which the &m( in the definition of a forward rate is eF%al to 1). $or example, if 9H is theoneD'ear forward rate deferred 9 'ears, it means that we co%ld mae an investment at time 9 thatwo%ld earn 9H over the oneD'ear period r%nning from time 9 to time >. #<ote that this is the  same forward rate described in the third paragraph %nder &$orward ates( on page ;33, whichdoes not %se the official terminolog'.)No% sho%ld learn how to determine forward rates from spot rates b' reading pages ;33D;3> anddoing examples >, 4 and  on pages ;39D;3>. ltho%gh the official terminolog' is not %sed onthese pages, 'o% sho%ld not have a problem %nderstanding the concepts.eep in mind that 'o% ma' have to modif' F%estions on forward rates in the S+ man%al interms of the official terminolog'. $or example, see F%estion 2 on page ;3@. !he F%estion ass'o% to &Palc%late the oneD'ear forward rate for 'ear 2 #i.e., the oneD'ear effective rate d%ring 'ear 2)(. *hile this is prett' clear, it wo%ld have been worded as follows %sing the officialterminolog'B &Palc%late the oneD'ear forward rate, deferred one 'ear.( #or &Palc%late the oneD'ear forward rate, starting in one 'ear.().5414116 7age ;;,  lines from the bottom. dd the following sentence to the parenthesisB En fact,in &<otation and terminolog' %sed for xam $+xam 2(, which 'o% can find onwww.:enct%ar'.org, the SOPS sa's that, %nless otherwise stated, &d%ration( means+aca%la' d%ration.5414116 7age ;90, sol%tion to #c), 3 rd  line. !he reference to footnote 2 sho%ld be to footnote 3.5414116 7age ;>2, footnote 9. Ensert the following sentence j%st after the 2 nd  sentence of the footnoteBEn fact, in &<otation and terminolog' %sed for xam $+xam 2(, which 'o% can find onwww.:enct%ar'.org, the SOPS sa's that, %nless otherwise stated, &convexit'( meansmodified convexit'.5921136 7age ;9;, sol%tion to xample 1. !he 2 nd  sentence sho%ld refer to xample 2, not xample 3.54136 7age ;4;, Sections @n#ii) and @n#iii). <ote that the October 2013 Learning Objectives removed&effective d%ration( as an explicit learning objective. *e have not seen an' reports fromst%dents that this topic has appeared on past exams.54136 7age ;>. <ote that the October 2013 Learning Objectives removed &as price(, &bid  price( and&bidDas spread( as explicit learning objectives. owever, these terms are basic to the process of  b%'ing and selling assets. ccordingl', the a%thors advise 'o% to learn the concepts in Section10c.5414116 7ages ;D;@, &*hat abo%t interestM( <ote that the F%estion of interest on the  proceeds of ashort sale is still not covered b' the St%d' <otes. owever, in a repl' to an email sent b' ast%dent in 2010, the d%cation Staff noted that new exam F%estions will be based on +cQonald,which ass%mes that this interest is paid.  n%mber of F%estions on the 9 practice exams in thisman%al are based on the &noDinterest( ass%mption. See the errata list below for pages >0 ands%bseF%ent.
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