This Exam FM sample reference tests Immunization and Asset-Liability Management. Backward cash matching gives faces 1,000 for Bond III, 980.39 for Bond II, and 970.69 for Bond I. Pricing each bond at its own yield gives total 2241.82, so choice D is correct.
These notes identify the calculation error associated with each wrong letter when that error is reproducible.
AChoice A (2182) does not satisfy the backward exact cash-flow match followed by bond-specific yield pricing; no distinct standard one-step error is identifiable.
BChoice B (2202) does not satisfy the backward exact cash-flow match followed by bond-specific yield pricing; no distinct standard one-step error is identifiable.
CChoice C (2222) does not satisfy the backward exact cash-flow match followed by bond-specific yield pricing; no distinct standard one-step error is identifiable.
EChoice E (2283) does not satisfy the backward exact cash-flow match followed by bond-specific yield pricing; no distinct standard one-step error is identifiable.
Original practice · fully worked
Original variant: first-year cash-flow shortfall diagnosed from a bond portfolio
A portfolio holds a one-year bond with face 800 and coupon rate 1%, plus a two-year bond with face 1,000 and annual coupon rate 2%. A liability of 1,000 is due at year 1. Ignoring any year-3 asset, calculate the year-1 cash-flow shortfall.
A 163.40
B 172.00
C 180.60
D 189.20
E 197.80
Variant answer in brief
The one-year bond supplies 808 and the two-year bond supplies its first coupon of 20. Total year-1 assets are 828, leaving shortfall 172, choice B.
Setup
Setup
Compute the one-year bond's coupon-plus-redemption maturity cash flow.
C1=800(1.01)=808
Model
Model
Add the first coupon from the still-outstanding two-year bond.
A1=808+0.02(1000)=828
Compute
Compute
Subtract available year-1 assets from the liability.
The 2210-page Financial Mathematics Proof Manual reorganizes 461 verified Exam FM solutions by syllabus skill and adds formula proofs, error patterns, and original worked practice.
