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CAA Module 1 Finance and Financial Mathematics

2014 Edition V2

Certified Actuarial Analyst


Resource Guide
Module 1
2014/2015

May 2014

Disclaimer: This Module 1 Resource Guide has been prepared by and/or on behalf of the Institute
and Faculty of Actuaries (IFoA). The IFoA does not accept any responsibility and/or liability
whatsoever for the content or use of this resource guide. This resource guide does not constitute
advice and should not be relied upon as such. The IFoA does not guarantee any outcome or result
from the application of this resource guide and no warranty as to the accuracy or correctness of this
resource guide is provided.
Copyright: All material in this resource guide is the copyright material of the IFoA, unless otherwise
stated. Use may be made of these pages for non-commercial and study/research purposes without
permission from the IFoA. Commercial use of this material may only be made with the express, prior
written permission of the IFoA. Material provided by any third party and incorporated into this resource
guide, is likely to be the copyright material of that author. Permission to copy or otherwise use such
material must be obtained from the author.
Institute and Faculty of Actuaries (RC 000243)

CAA Module 1 Finance and Financial Mathematics

2014 Edition V2

Module 1
Finance and Financial Mathematics
Certified Actuarial Analyst
Resource Guide
Version 2 updated 30 May 2014

Institute and Faculty of Actuaries

CAA Module 1 Finance and Financial Mathematics

2014 Edition V2

Welcome to the Resource Guide for Module 1 Finance and Financial


Mathematics the entry test module for the Institute and Faculty of Actuaries
Certified Actuarial Analyst qualfication launched in 2014. The purpose of this
Resource Guide is to provide you with a one stop shop virtual guide to all there is
to know about this module: registration, contact us details; the syllabus,
assessment, learning resources, and questions and answers.
1.0

Entering for the Exams and IFoA Student Membership


Guidance on how to register for the Module 1exam, what to expect at the exam
centre and how to register as an Analyst Student Member of the Institute and Faculty
of Actuaries (IFoA) along with contact details for inquiries can be found in the Guide
to Module 1 available on our website (http://www.actuaries.org.uk/becomingactuary/caa) .
For information on what it means to be an Analyst Student Member of the IFoA,
including membership requirements and the IFoA Ethical Code can be found here in
the Student Actuarial Analyst Handbook available on our website
(http://www.actuaries.org.uk/becoming-actuary/caa).

2.0

CAA Course and Qualification Structure:


The CAA Qualification Structure
Module Title

Module Reference

Assessment

Fundamental
Mathematics & Statistics

CAA (0)

2 hour minute Computer


Based Assessment

Finance and Financial


Mathematics

CAA (1)

2* hour Computer Based


Assessment

Statistics and Models

CAA (2)

2 hour minute Computer


Based Assessment

Long Term Actuarial


Mathematics

CAA (3)

2 hour minute Computer


Based Assessment

Short Term Actuarial


Mathematics

CAA (4)

2 hour minute Computer


Based Assessment

Models and Audit Trails

CAA (5)

3 hour examination.

Online Professional
Awareness Test (OPAT)

OPAT

90 minute examination

*An additional 15 minutes will be allowed before the start of the exam for administrative
purposes which include agreeing to a statement of confidentiality, reading instructions and
working through basic sample questions which will enable you to become familiar with the
format of the exam.

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CAA Module 1 Finance and Financial Mathematics

2014 Edition V2

In addition, students must complete at least one year of relevant work experience (Work
Based Skills), comply with the IFoAs ethical code and adhere to the IFoAs Continuing
Professional Development (CPD) requirements.

3.0

The Syllabus
The Module 1 syllabus can found in Appendix 1 attached to this Resource Guide

4.0

Exam Preparation Recommended Study Hours


The actual amount of time each student needs to spend on a particular subject will
vary from student to student. Quality of study time is far more important than quantity
of study time. However, the following guidelines are suggested:

Module 0 - 4

Between 125 and 150 hours depending on


subject and an individual students past
educational background in the subject

Module 5

5.0

Key Learning Resources

5.1

Face to face tuition

50 hours

At the present time, there is no face to face tuition of which the IFoA is aware. Please
see Section 5.2 for online tuition provision.
5.2

Online Learning
There is one learning provider based in the UK that will be offering online learning
resources for the CAA qualification.
BPP Actuarial Education
www.bppacted.com
Email: ActEd@bpp.com
Tel: +44 (0)1235 550005

5.3

Additional Resources for Purchase


x

5.4

An Introduction to the Mathematics of Finance: A Deterministic Approach,


Stephen Garrett, 2nd Edition, 2013, Butterworth-Heineman.

Free Online Resources

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CAA Module 1 Finance and Financial Mathematics

2014 Edition V2

Listed below are samples of free web-based resources in which free learning support
links for most, but not all, of the topics in Module 1 have been identified. To access
these materials, cut and paste the http links listed below into your browser.
Please note that the content of these links has not been quality assured by the IFoA.
These materials should not be used as your primary learning resource but may
re-enforce and/or supplement other sources.
5.4.0 TOPIC 1 The key principles of finance
http://en.wikibooks.org/wiki/Principles_of_Finance
https://faculty.unlv.edu/pthistle/FIN301-London/Chapter01.pdf
5.4.

TOPIC 2 Cash flow models


http://www.ftadviser.com/2012/09/20/training/adviser-guides/guide-tocash-flow-modelling-wOtRUYN32o2i948eSNsl0L/article.html

5.4.2

TOPIC 3 The time value of money using the concepts of compound


interest and discounting
http://en.wikibooks.org/wiki/Principles_of_Finance - Chapter 2

5.4.3 TOPIC 4 Loan repayments by regular instalments of interest


http://en.wikipedia.org/wiki/Flat_rate_(finance)
http://en.wikipedia.org/wiki/Effective_interest_rate

5.4.4 TOPIC 5 The use of discounted cash flow techniques in investment


project appraisal
http://en.wikibooks.org/wiki/Principles_of_Finance - Chapters 2 and 4.
5.4.5

TOPIC 6 Investment and risk characteristics


http://njaes.rutgers.edu/money/investmentrisk.asp
http://en.wikipedia.org/wiki/Financial_risk
http://www.fcac-acfc.gc.ca/Eng/resources/educationalPrograms/ftof/Pages/invest-2-3.aspx
http://www.wikijob.co.uk/wiki/risk-characteristics-investments
http://en.wikipedia.org/wiki/Derivative_(finance)

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CAA Module 1 Finance and Financial Mathematics

5.4.6

2014 Edition V2

TOPIC 7 Elementary compound interest problems assuming a taxfree investor


http://www.mathsisfun.com/money/compound-interest.html

5.4.7

TOPIC 8 The term structure of interest rates


http://www.investopedia.com/terms/t/termstructure.asp
http://en.wikipedia.org/wiki/Yield_to_maturity

6.0

Assessment for this module


x

x
x

This module is assessed by means of a 2 hour computer based examination


(with an additional 15 minutes before the start of the exam for administrative
purposes).
Information about the number of questions in the assessment will be provided
in due course.
Pass standards Pass standards are set by the IFoA Examinations Board.
Details of pass standards for CAA Exams will be published as soon as
possible.
All exams will be administered through Pearson VUE test centres located in
regions across the globe. Please visit http://www.pearsonvue.com/ifoa/ and
click on Locate a test centre to find your nearest Pearson VUE testing centre.

7.0

Exam Centre Resources

7.1

Approved Calculator
The IFoA approved calculator for the Certified Actuarial Analyst exams is the Texas
Instruments TI-30 Multiview (with or without suffix). An example of this model is
shown below:

Institute and Faculty of Actuaries

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CAA Module 1 Finance and Financial Mathematics

2014 Edition V2

This will be the only physical calculator allowed into the exam. Please expect your
calculator to be checked by the proctors at the exam centre. This process will include
deleting any information stored on the memory of your calculator.
Please note: Pearson VUE staff will not be issuing physical calculators should you
fail to bring your own IFoA approved calculator to the examination. In the instance
that you fail to bring your own IFoA approved calculator, an on-screen scientific
calculator will be available during the exam [see 7.2 below for details].
The approved Certified Actuarial Analyst calculator is available to purchase from our
eShop.

7.2

On-screen Calculator
An on-screen scientific calculator will be accessible from all examination screens
during the entirety of the examination. Please find an example below of an on-screen
scientific calculator.

7.3

Formulae and Tables


An on-screen PDF of the Formulae and Tables will be available to access from
examination screens during the entirety of the examination.

7.4

Making notes
Scrap paper, for use in the examinations, will be provided by Pearson VUE staff. This
will consist of an erasable note board and pen with which you can make notes during
the exam. Both the note board and pen will be collected by Pearson VUE staff upon
completion of the exam.

8.0

Sample Questions
A Module 1 Specimen Examination Paper with sample examination questions will be
available in due course.

Institute and Faculty of Actuaries

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CAA Module 1 Finance and Financial Mathematics

Institute and Faculty of Actuaries

2014 Edition V2

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CAA Module 1 Finance and Financial Mathematics

2014 Edition V2

APPENDIX ONE

Module 1
Finance and Financial Mathematics
Certified Actuarial Analyst
Syllabus

Institute and Faculty of Actuaries

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CAA Module 1 Finance and Financial Mathematics

Institute and Faculty of Actuaries

2014 Edition V2

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CAA Module 1 Finance and Financial Mathematics

2014 Edition V2

Aim
The aim of the Finance and Financial Mathematics syllabus is to provide grounding in finance and
financial mathematics with simple applications.

TOPIC 1
The key principles of finance
Indicative study and assessment weighting 5%

Learning Objectives

(i)

Define the principal terms in use in investment and asset management

(ii)

Explain the following key principles of finance:


(a)

the relationship between finance and the real resources and


between finance and the objectives of an organisation

(b)

the relationship between the stakeholders in an organisation


(including lenders and investors)

(c)

the role and effects of the capital markets

(d)

agency theory

(e)

the theory of the maximisation of shareholder wealth

Institute and Faculty of Actuaries

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CAA Module 1 Finance and Financial Mathematics

2014 Edition V2

TOPIC 2
Cashflow models
Indicative study and assessment weighting 5%

Learning Objectives

(i)

Describe how to use a generalised cashflow model to describe financial transactions.

(ii)

For a given cashflow process:

(iii)

(a)

State the inflows and outflows in each future time period

(b)

Explain whether the amount or the timing (or both) is fixed or uncertain

Describe, in the form of a cashflow model, the operation of: a zero-coupon bond; a
fixed-interest security; an index-linked security; cash on deposit; an equity; an
interest-only loan; a repayment loan; a property; and an annuity certain

TOPIC 3
The time value of money using the concepts of compound interest
and discounting
Indicative study and assessment weighting 15%

Learning Objectives

(i)

Accumulate a single investment at a constant rate of interest under the operation of:
x

simple interest

compound interest

(ii)

Define the present value of a future payment

(iii)

Describe how a compound interest model can be used to represent the effect of
investing a sum of money over a period

(iv)

Demonstrate how interest rates or discount rates may be expressed in terms of


different time periods:
(a)

Define the relationship between the rates of interest and discount over one
effective period arithmetically and by general reasoning

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CAA Module 1 Finance and Financial Mathematics

2014 Edition V2

(b)

Define the relationships between the rate of interest payable once per
effective period, the rate of interest payable p times per time period and the
force of interest

(c)

Explain the difference between nominal and effective rates of interest and
derive effective rates from nominal rates

(v)

Explain what is meant by real and money interest rates

(vi)

Calculate the present value and the accumulated value of a stream of payments
using specified rates of interest and the present value at a real rate of interest,
assuming a constant rate of inflation

(vii)

Discount and accumulate a sum of money or a series (possibly infinite) of


cashflows to any point in time where:

(viii)

(ix)

(a)

the rate of interest or discount is constant

(b)

the rate of interest or discount varies with time but is not a continuous
function of time

(c)

the rate of cashflow and/or the force of interest are continuous functions of
time

Calculate the present value and accumulated value of a series of payments made at
regular intervals under the operation of specified rates of interest where the first
payment is:
(a)

deferred for a period of time

(b)

not deferred

Apply the more important compound interest functions including annuities certain:
(a)

Apply formulae in terms of i, v, n, d, G, i(p) and d(p) for a n , s n , a n( p ) , s n( p ) ,

a n , sn , a n( p ) , sn( p ) , a n and s n .

(x)

(b)

Apply formulae in terms of i, v, n, d, G, i(p) and d(p) for

a ( p )
m~ n

and

a
m~ n

a ( p ) , m~ a n
m~ n

a .
m~ n

Calculate quantities using an equation of value, where payment or receipt is certain

Institute and Faculty of Actuaries

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CAA Module 1 Finance and Financial Mathematics

2014 Edition V2

TOPIC 4
Loan repayments by regular instalments of interest
Indicative study and assessment weighting 20%

Learning Objectives

(i)

Describe how a loan may be repaid by regular instalments of interest and capital

(ii)

Describe flat rates and annual effective rates of interest

(iii)

Calculate a schedule of repayments under a loan and identify the interest and capital
components of annuity payments where the annuity is used to repay a loan for the
case where annuity payments are made once per effective time period or p times per
effective time period/ and identify the capital outstanding at any time

TOPIC 5
The use of discounted cashflow techniques in investment
project appraisal
Indicative study and assessment weighting 20%

Learning Objectives

(i)

Calculate the net present value and accumulated profit of the receipts and payments
from an investment project at given rates of interest

(ii)

Calculate the internal rate of return implied by the receipts and payments from an
investment project

(iii)

Calculate the money-weighted rate of return, the time-weighted rate of return and the
linked internal rate of return on an investment or a fund

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CAA Module 1 Finance and Financial Mathematics

2014 Edition V2

TOPIC 6
Investment and risk characteristics
Indicative study and assessment weighting 5%

Learning Objectives

(i)

Describe the investment and risk characteristics of the following types of asset
available for investment purposes:
(a)

fixed interest government borrowings

(b)

fixed interest borrowing by other bodies

(c)

shares and other equity-type finance

(d)

derivatives

TOPIC 7
Elementary compound interest problems assuming a tax-free investor
Indicative study and assessment weighting 25%

Learning Objectives

(i)

Calculate the present value of payments from a fixed interest security where the
coupon rate is constant and the security is redeemed in one Instalment

(ii)

Calculate the running yield and the redemption yield from a fixed
interest security [as in 7 (i)], given the price

(iii)

Calculate the present value or yield from an ordinary share and a property, given
simple (but not necessarily constant) assumptions about the growth of dividends
and rents

(iv)

Calculate the present value of an index-linked bond, given assumptions about the
rate of inflation

Institute and Faculty of Actuaries

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CAA Module 1 Finance and Financial Mathematics

2014 Edition V2

TOPIC 8
The term structure of interest rates
Indicative study and assessment weighting 5%

Learning Objectives

(i)

Describe the main factors influencing the term structure of interest rates

(ii)

Explain what is meant by the par yield and the yield to maturity

(iii)

Explain what is meant by discrete spot rates and forward rates

(iv)

Define the relationships between discrete spot rates and forward rates

(v)

Calculate discrete spot rates and forward rates

END OF SYLLABUS

Disclaimer: This syllabus has been prepared by and/or on behalf of the Institute and Faculty of
Actuaries (IFoA). The IFoA does not accept any responsibility and/or liability whatsoever for the
content or use of this syllabus. This syllabus does not constitute advice and should not be relied upon
as such. The IFoA does not guarantee any outcome or result from the application of this syllabus and
no warranty as to the accuracy or correctness of this syllabus is provided.
Copyright: All material in this syllabus is the copyright material of the IFoA, unless otherwise stated.
Use may be made of these pages for non-commercial and study/research purposes without
permission from the IFoA. Commercial use of this material may only be made with the express, prior
written permission of the IFoA. Material provided by any third party and incorporated into this syllabus,
is likely to be the copyright material of that author. Permission to copy or otherwise use such material
must be obtained from the author.
Institute and Faculty of Actuaries (RC 000243)

Institute and Faculty of Actuaries

Page 9

DISCLAIMER The views expressed in this publication are those of invited contributors and not necessarily those
of the Institute and Faculty of Actuaries. The Institute and Faculty of Actuaries do not endorse any of the views
stated, nor any claims or representations made in this publication and accept no responsibility or liability to any
person for loss or damage suffered as a consequence of their placing reliance upon any view, claim or
representation made in this publication. The information and expressions of opinion contained in this publication
are not intended to be a comprehensive study, nor to provide actuarial advice or advice of any nature and
should not be treated as a substitute for specific advice concerning individual situations. On no account may any
part of this publication be reproduced without the written permission of the Institute and Faculty of Actuaries.

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