# 2008 CFAI Old Exam Questions

Issue #1:

Q3-D iii: “The early retirement feature increases the present value of TEPP’s benefit payments compared to the airline industry.” “The lump-sum option increases the present value of TEPP’s benefit payments compared to the airline industry.”

Why increase? I think the PV of the early retirement package or the PV of lump-sum payout should be equal to the PV of life annuitiesif the options are not available.

Issue #2:

Q3-G: What is actuarial discount rate? Is it 9.5% or 7.5%?

Issue #3:

Q4-A i: "1. is consistent with Thurlow’s risk tolerance of a maximum portfolio standard deviation of 10%,

1. will result in the highest Sharpe ratio among the all portfolio combinations that meet Thurlow’s return requirement. [Sharpe ratio = (.25 x .46) + (.75 x .51) = .4975]"

How do you know it’s consistent with risk tolerance of a max std of 10% without calculation? How do you know this is the highest Sharpe Ratio?

Issue #4:

Q7-C Swap: “The PV(fixed-leg) = ((1+(0.055*(180/360)*0.9911)+((1+(0.055*(180/360)))*0.9649)=1.0187”

How do you get 1.0187? The calculation seems to be wrong here.

Issue #5:

Q8-B DPF: “Size of trade relative to average daily volume: The size of the order represents a very high percentage of average daily volume and the VWAP algorithm would not have high likelihood of success.”

What is the rule of thumb for “a high pct”?

Much appreciated!!

Any thoughts?

1. early retirement & lump sum option increases the amount they will owe compared to rest of industry

2. don’t have it in front of me but i think it was 7.5%, it was given in the text.

3. you calculate the Sharpe ratio right??

4. Good catch, for the 1st payment you don’t discount the \$1 principal back since that payment happens at 6 months, so thats an error there. 1.0187 is still correct.

5. No rule but it will be pretty clear…

Thanks Andrew