Exam FM practice problems: Yield rates, spot and forward rates

10 problems · Untimed · Worked solution after each answer

Net present value and internal rate of return, spot rates, forward rates and yield curves, and pricing cash flows from a yield curve. This drill covers topic 5 of the Exam FM syllabus, General Cash Flows, Portfolios and Asset Liability Management (20–30% of the exam).

5a Yield, spot and forward rate definitions
5b Present values from a yield curve

Line drawing of three savings jars of coins in increasing sizes and a pocket watch

Before you start

Every problem has five options, A to E, and one correct answer, as on the real exam. Every value you need is in the problem, so you can work it with an approved calculator; the worked solution shows each step and names the mistake behind the most tempting wrong answer.
Check each answer to see the explanation before moving on. Checked answers cannot be changed.

Study guide: Yield rates, spot and forward rates

Discount each cash flow at the spot rate for its own time: PV = Σ CFₜ/(1 + sₜ)ᵗ.
The one-year forward rate from t − 1 to t is (1 + sₜ)ᵗ/(1 + sₜ₋₁)^(t − 1) − 1.
A par yield is the coupon rate that prices a bond at par on the current curve.
The internal rate of return makes the net present value zero; with one sign change in the cash flows it is unique.

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Original practice problems written to the published SOA syllabus; not SOA sample questions. Independent preparation, not affiliated with or endorsed by the Society of Actuaries (SOA).