Worked solution · Exam FM
This Exam FM sample reference tests Interest Rate Valuation. One quarter contains three monthly payment periods, so the monthly effective factor is the cube root of 1.02; the matching expression is choice A.
Independent solution
Setup
Convert the nominal quarterly quote to its effective rate for one quarter.
Model
A quarter comprises three monthly payment periods, so three monthly accumulation factors must equal the quarterly factor.
Compute
Taking the positive cube root isolates the monthly effective rate.
Answer
The equivalent rate per monthly payment period is the expression in choice A.
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30 original Exam FM questions across the syllabus, to be worked in 150 timed minutes, with a full worked solution for each one. Written for Exam FM, not copied from the SOA set. One-time $39 PDF.
Error diagnosis
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Original practice · fully worked
A savings contract credits 9% nominal interest convertible semiannually, while deposits arrive monthly. Determine the monthly effective rate equivalent to the quoted accumulation.
Six monthly factors must reproduce the 4.5% half-year factor, giving a monthly effective rate of 0.7363%, choice C.
Setup
The nominal quote supplies a 4.5% effective rate over each six-month conversion period.
Model
Equate that half-year factor to six identical monthly accumulation factors.
Compute
The sixth root gives monthly rate 0.00736312.
Answer
The equivalent monthly effective rate is 0.7363%, corresponding to choice C.
Keep practicing
These references share syllabus concepts or sit nearby in the official sequence. All 51 Exam FM time value of money practice problems.
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