Exam FM
ACTEX Learning Formula & Review Sheet
(updated 06/29/2023)
TIME VALUE OF MONEY
Accumulation and Amount Functions: A(t) = Ka(t), A(0) = K, a(0) = 1
a(t) − a(t − 1) A(t) − A(t − 1)
Effective Interest Rate: it = =
a(t − 1) A(t − 1)
i
Simple Interest: a(t) = 1 + it it =
1 + i(t − 1)
Compound Interest: a(t) = (1 + i)t it = i
a(t) − a(t − 1) A(t) − A(t − 1)
Effective Discount Rate: dt = =
a(t) A(t)
i 1 1
Discount Rate: d= = 1 − v = iv v = (1 + i)−1 − =1
1+i d i
m m
i(m) d(m)
Nominal Rates: 1+ =1+i 1− =1−d
m m
h 1
i h 1
i
i(m) = m (1 + i) m − 1 d(m) = m 1 − (1 − d) m
a0 (t) A0 (t) d
Force of Interest: ln a(t)
Rt
δr dr
δt = = = a(t) = e 0
a(t) A(t) dt
Constant Force of Interest: eδ = 1 + i δ = ln(1 + i)
1
PV of $1 Due in t Years: PV = = (1 + i)−t = v t = e−δt = (1 − d)t
a(t)
−mt mt
i(m) d(m)
= 1+ = 1−
m m
mt −mt
i(m) d(m)
AV at time t of $1 invested at time 0: AV = a(t) = (1+i)t = eδt = (1−d)−t = 1 + = 1−
m m
a(t2 ) t
AV at time t2 for $1 Invested at time t1 :
R 2
AV = = e t1 δt dt
a(t1 )
ANNUITIES
Annuity-Immediate: (PV one period before first payment, AV at time of last payment)
1 − vn
P V = an = v + v2 + · · · + vn =
i
(1 + i)n − 1
AV = s n = 1 + (1 + i) + · · · + (1 + i)n−1 = = a n (1 + i)n
i
Annuity-Due: (PV at time of first payment, AV one period after last payment)
1 − vn
i
P V = ä n = 1 + v + · · · + v n−1 = = (1 + i)a n = a n = 1 + a n−1
d d
(1 + i)n − 1
AV = s̈ n = (1 + i) + (1 + i)2 + · · · + (1 + i)n =
d
i
= (1 + i)s n = s n = s n+1 − 1
d
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ACTEX Learning Exam FM Page 2
1 − vn
i
Continuous Annuity:
Rn Rn
P V = ā n = = a n = 0 v t dt = 0 e−δt dt
δ δ
(1 + i)n − 1
i Rn Rn
AV = s̄ n = = s n = 0 (1 + i)n−t dt = 0 eδ(n−t) dt
δ δ
Deferred Annuity: m |a n = m+1 |ä n = v m a n = a m+n − a m
1 1 1
Perpetuity: a∞ = ä ∞ = ā ∞ =
i d δ
Increasing Annuity - Payments in Arithmetic Progression:
ä n − nv n s̈ n − n s n+1 − (n + 1)
(Ia) n = (Is) n = =
i i i
ä n − nv n s̈ n − n s n+1 − (n + 1)
(Iä) n = (I s̈) n = =
d d d
Decreasing Annuity - Payments in Arithmetic Progression:
n − an n(1 + i)n − s n
(Da) n = (Ds) n =
i i
n − an n(1 + i)n − s n
(Dä) n = (Ds̈) n =
d d
Increasing Perpetuity - Payments in Arithmetic Progression:
1 1 1 1
(Ia) ∞ = + 2 = (Iä) ∞ = 2
i i id d
1 − vn 1 − vn
m-thly Annuity:
(m) (m)
a n = (m) ä n = (m)
i d
(m)
(m) ä n − nv n
(m) (m)
ä n − nv n
(Ia) n = (I a) n =
i(m) i(m)
n
Continuously Increasing ¯ n = ā n − nv = n tv t dt = n te−δt dt
R R
(Iā) 0 0
δ
Annuity: ¯ s̄ n − n R n Rn
(I s̄) n = = 0 t(1 + i) dt = 0 teδ(n−t) dt
n−t
δ
Annuity with Varying Payments and Varying Force of Interest:
If force of interest varies:
Rn Rn Rt
PV = 0
f (t)e−δt dt PV = 0
f (t)e− 0
δr dr
dt
If force of interest varies:
Rn Rn Rn
δr dr
AV = 0
f (t)eδ(n−t) dt FV = 0
f (t)e t dt
Geometric Annuity-Immediate: 1st Payment is 1. Subsequent payments increase by a factor of (1 + k).
n
1+k
1−
1+i (1 + i)n − (1 + k)n
PV = FV =
i−k i−k
Geometric Annuity-Due: 1st Payment is 1. Subsequent payments increase by a factor of (1 + k).
n
1+k
1−
1+i (1 + i)n − (1 + k)n
PV = FV =
d − kv d − kv
n
1 − r
Sum of a Geometric Series: a + ar + ar2 + · · · + arn−1 = a
1−r
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ACTEX Learning Exam FM Page 3
LOANS
Amortization Method: Level payment P , Outstanding Balance Bt , Principal Repayment P rint
L = B0 = P a n P = P rint + It It = iBt−1
P rint = P − It = P v n−t+1 P rint+s = P rint (1 + i)s It = P − P rint = P (1 − v n−t+1 )
n
P n
P
It = nP − L P rint = L Bt = Bt−1 − P rint
t=1 t=1
Bt = P a n−t (Prospective) Bt = L(1 + i)t − P s t (Retrospective)
BONDS
Price Formulas: Number of coupon payments n, Coupon rate r, Face amount F , Maturity value C
P = F ra n + Cv n P = C + (F r − Ci)a n
g Fr
P = K + (C − K), where K = Cv n and g =
i C
Callable Bonds: To calculate appropriate price:
If Bond is sold at a Premium, assume Earliest Redemption date
If Bond is sold at a Discount, assume Latest Redemption date
Exception: If a premium bond has a call premium, calculate price both ways
(using Earliest Redemption date and using Latest Redemption date).
Use the smaller of the 2 calculated values.
If g > i, then P > C, and Premium = P − C = (F r − Ci)a n = (Cg − Ci)a n
If g < i, then P < C, and Discount = C − P = (Ci − F r)a n = (Ci − Cg)a n
Book Value at time t: Bt = F ra n−t + Cv n−t
Interest Earned: It = iBt−1
If g > i, Premium Amortized at time t = F r − It = Bt−1 − Bt = (F r − Ci)v n−t+1
If g < i, Discount Accumulated/Accrued at time t = It − F r = Bt − Bt−1 = (Ci − F r)v n−t+1
GENERAL CASH FLOW
Reinvestment Rates: Interest rate i, Reinvestment rate i0
A single deposit of $1, AV = 1 + is n i0
Deposits of $1 at beginning of each year, AV = n + i(Is) n i0
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ACTEX Learning Exam FM Page 4
Spot Rates: Effective annual rate on investment for t years: rt
Price of a t-year zero-coupon Bond: Pt = (1 + rt )−t
(1 + rt+1 )t+1 Pt
Forward Rates: Forward rate for the period (t, t + 1): f[t,t+1] = −1= −1
(1 + rt )t Pt+1
(Annual Effective)
Forward rate for the period (t, t + m): (1 + rt )t (1 + f[t,t+m] )m = (1 + rt+m )t+m
1
(1 + rt+1 )t+m m
f[t,t+m] = −1
(1 + rt )t
Inflation Rate: Real rate of interest i0 , Inflation rate r
1 + i = (1 + i0 )(1 + r) i = i0 + r + i0 r
d d
P
tAt v t P P
tAt v t+1 P Dmac
Duration: Dmac (i) = P t
=− dδ Dmod (i) = P t
=− di =
At v P At v P 1+i
1+i 1 (Ia) n
Perpetuity: Dmac = = Mortgage or Level Annuity: Dmac =
i d an
F r(Ia) n + nCv n
Bond: Dmac = Bond Sold at Par: Dmac = ä n
P
P 2 d2 d2
t At v t t(t + 1)At v t+2
P
dδ 2 P di2 P Cmac + Dmac
Convexity: Cmac = P = Cmod = P = =
At v t P At v t P (1 + i)2
Duration of a Portfolio: Dt and Pt are duration and price of tth components of Portfolio
D1 P1 + D2 P2 + · · · + Dn Pn
D(Portfolio) =
P1 + P2 + · · · + Pn
First-Order Modified Price Approximation: P (i) ≈ P (i0 ) − Dmod (i0 )P (i0 )(i − i0 )
Dmac (i0 )
1 + i0
First-Order Macaulay Price Approximation: P (i) ≈ P (i0 )
1+i
(i − i0 )2
Second-Order Modified Price Approximation: P (i) ≈ P (i0 )−Dmod (i0 )P (i0 )(i−i0 )+Cmod (i0 )P (i0 )
2
IMMUNIZATION
Requirements for Redington Immunization: If same interest rate applies to all CF’s
(i) PV(Assets) = PV(Liabilities) (i) (i) At v t = Lt v t
P P
PA = PL
(ii) Dmod (Assets) = Dmod (Liabilities) (ii) PA0 = PL0 (ii) tAt v t = tLt v t
P P
(iii) Cmod (Assets) > Cmod (Liabilities) (iii) PA00 > PL00 (iii) t 2 At v t > t2 Lt v t
P P
Full Immunization: (i) and (ii) as above, (iii) There is a single liability CF that is matched (in PV and
Dmod ) with 2 or more asset CFs, including at least one that occurs before and at least
one that occurs after the liability CF.
Exact Matching or Dedication: Match both the amount and the time of Asset Cash Flows and Liability Cash Flows.
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