SOA Exam FM Sample Question 390
Study guide: Exam FM-2
Company ABC is considering the following three investments:
- i) Investment X is a 50-year zero-coupon bond
- ii) Investment Y is a perpetuity with annual payments
- iii) Investment Z is a geometrically increasing perpetuity with annual payments that increase at a rate of 3% per year
For both perpetuities, the first payment will occur one year from now.
The convexities of Investments X, Y, and Z are x, y, and z, respectively, based on an annual effective interest rate of 5%.
Determine which expression represents the relationship between the convexity of the three investments.
- A)
x < z < y - B)
y < x < z - C)
y < z < x - D)
z < x < y - E)
z < y < x
Answer this question and see the worked solution