SOA Exam FM Sample Question 460
Study guide: Exam FM-2
A geometric perpetuity-immediate provides annual payments. The first payment is 1, and each subsequent payment is 0.5% less than the previous payment. Let M be the price of this perpetuity using an annual effective interest rate of 6.5%.
The price should have been calculated using an annual effective interest rate of 5.5%. Let P be the correct price of this perpetuity and let E be the estimate of P based on the initial price, M, using the first-order modified approximation.
Calculate \dfrac{E-P}{P}, the percentage error of the estimate.
- A)
-2.78\% - B)
-2.04\% - C)
-1.92\% - D)
-1.24\% - E)
-1.06\%
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