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IAI Subject CM2 — Financial Engineering and Loss Reserving (Institute of Actuaries of India)

Practice Questions100 questions

Exam Review

Key Facts: IAI SA7 Exam

3h 15m

Exam Duration

IAI examination timetable

₹7,500

Examination Fee

IAI exam fee schedule

50%

Pass Mark

IAI Pass Mark Rule (from November 2025)

Syllabus Topics

IAI SA7 syllabus 2026

100

Practice Questions

OpenExamPrep

IAI Subject SA7 Investment and Finance is a Specialist Advanced subject of the Institute of Actuaries of India. Its stated aim is to apply knowledge of the financial environment in India, the UK and other jurisdictions, together with the principles of actuarial practice, to the selection and management of investments for a range of investors, with relevant aspects of corporate finance. The official examination is a closed-book, centre-based online written paper of 3 hours 15 minutes; the entry fee is ₹7,500 for India and SAARC candidates and the pass mark is 50%. The published syllabus weightings are 30% on the framework for investment management and 35% each on meeting investor requirements and on management and risk control, and this practice set follows those weightings. The official paper is a descriptive written examination, so these independent English-language multiple-choice questions are a study aid for the same body of knowledge rather than a simulation of the official format, and they do not replace practice at writing full examination answers. A Fellow must pass at least one Specialist Advanced subject.

Sample IAI SA7 Practice Questions

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1Under the Reserve Bank of India's (RBI) flexible inflation targeting (FIT) framework, the Monetary Policy Committee (MPC) is statutorily mandated to target headline CPI inflation. Which of the following statements accurately characterizes the operational mechanism and target tolerance band?

A.Target is Core CPI at 5.0% with a +/- 1.0% tolerance band, using the Marginal Standing Facility (MSF) as the sole operating target.

B.Target is Wholesale Price Index (WPI) at 4.0% with a +/- 2.0% tolerance band, with the call money rate maintained within the reverse repo corridor.

C.Target is Consumer Price Index (CPI Combined) at 4.0% with a +/- 2.0% tolerance band (2% to 6%), with the weighted average call rate (WACR) as the operating target.

D.Target is GDP deflator inflation at 3.0% with an asymmetric band (-1% to +3%), with 91-day T-bill yields serving as the operational anchor.

Explanation: Under Section 45ZA of the RBI Act, 1934, the Central Government, in consultation with the RBI, sets the inflation target for Consumer Price Index (CPI Combined) at 4.0% with a tolerance band of +/- 2% (lower tolerance limit of 2% and upper tolerance limit of 6%). The operating target of monetary policy is the Weighted Average Call Rate (WACR), which the RBI steers towards the policy repo rate through Liquidity Adjustment Facility (LAF) operations.

2According to the Liquidity Preference Theory of the term structure of interest rates (originated by Keynes and Hicks), why do sovereign yield curves typically slope upwards even when market participants expect short-term rates to remain unchanged?

A.Because institutional investors prefer long-term bonds to match long liabilities and are willing to accept lower yields for illiquidity.

B.Because investors demand a positive liquidity (term) premium that increases with maturity to compensate for greater price sensitivity to interest rate fluctuations.

C.Because forward rates are purely unbiased estimates of future spot rates, reflecting cyclical monetary tightening expectations.

D.Because commercial banks are legally mandated to hold short-dated instruments, artificially depressing the short end of the curve without any term premium effect.

Explanation: Liquidity Preference Theory posits that lenders prefer short-term liquidity because shorter maturities have lower duration and less price risk. Borrowers, however, prefer long-term financing to lock in funding. Therefore, to induce investors into longer maturities, a positive liquidity or term premium must be offered. This term premium monotonically increases with maturity, causing the yield curve to slope upward even when expected future short rates are flat.

3In the Indian sovereign bond market, the 30-year and 40-year Government of India securities (G-Secs) often trade at relatively low term spreads over the 10-year benchmark, and occasionally the ultra-long curve exhibits flattening or inversion. Which term structure hypothesis best explains this structural compression driven by life insurers and pension funds?

A.Pure Expectations Theory, because markets project inflation to decline to zero over the next 40 years.

B.Liquidity Preference Theory, because 40-year bonds have higher secondary market trading volume and liquidity than 10-year benchmark paper.

C.Uncovered Interest Rate Parity, because foreign institutional investors arbitrage domestic sovereign yields against US Treasuries.

D.Preferred Habitat Theory / Segmented Markets Theory, because domestic life insurers and provident funds face rigid long-duration liability mandates, creating inelastic demand for ultra-long paper that outstrips primary supply.

Explanation: Under the Preferred Habitat / Segmented Markets Theory, institutional market participants have preferred maturity sectors dictated by their liability structures. In India, life insurance companies (especially non-par annuity books) and provident/pension funds (such as EPFO and PFRDA) have very long liability durations and strict regulatory matching mandates. Their structural, price-inelastic demand for 30-year to 50-year G-Secs creates a supply-demand imbalance at the ultra-long end, depressing ultra-long yields and flattening the spread over 10-year paper.

4State Development Loans (SDLs) are issued by State Governments in India to fund budgetary requirements. When evaluating an investment in SDLs compared to Central Government Securities (G-Secs), which of the following statements is TRUE regarding their credit risk, yields, and liquidity?

A.SDLs carry the same zero-risk weighting for domestic capital adequacy and sovereign credit backing via automatic RBI debit mechanisms, yet trade at an illiquidity spread of roughly 30 to 70 basis points above central G-Secs.

B.SDLs carry substantial default risk because individual Indian states can declare bankruptcy under the Insolvency and Bankruptcy Code (IBC).

C.SDLs are completely ineligible for the Reserve Bank of India's Statutory Liquidity Ratio (SLR) requirements for scheduled commercial banks.

D.SDL yields are uniformly identical across all states regardless of their fiscal deficit, market borrowing size, or secondary market liquidity.

Explanation: SDLs are sovereign-backed debt securities issued through RBI auctions. They qualify as SLR securities and carry a 0% risk weight under RBI Basel III norms for banks. The RBI has a statutory mechanism to directly debit the state's account with the RBI (or central devolution share) to service SDL debt. Because SDLs have significantly lower secondary market trading liquidity compared to benchmark Central G-Secs, they offer an illiquidity spread (typically 30-70 bps), making them attractive for buy-and-hold institutional liability matchers like insurers.

5Under the IRDAI (Investment) Regulations for a Life Insurance company writing traditional business (non-linked life funds), what are the statutory MINIMUM allocation requirements for Central Government Securities and total Sovereign / Approved Securities?

A.Minimum 10% in Central Government Securities, and minimum 25% in Central and State Government Securities combined.

B.Minimum 25% in Central Government Securities, and minimum 50% in Central Government Securities, State Government Securities, and other Approved Securities combined.

C.Minimum 40% in Central Government Securities, and minimum 75% in Central and State Government Securities combined.

D.Minimum 20% in Central Government Securities, with no aggregate sovereign floor provided the solvency ratio exceeds 2.0.

Explanation: Under the IRDAI (Investment) Regulations governing traditional life insurance funds (life, general annuity, and other non-linked business), the statutory pattern of investment mandates: (i) Central Government Securities: not less than 25%; (ii) Central Government Securities, State Government Securities, or other Approved Securities: not less than 50% (inclusive of the 25% Central G-Secs).

6Under the IRDAI (Investment) Regulations, life insurers are required to allocate a specific minimum percentage of their total non-linked investment assets to the Housing and Infrastructure sectors. What is the mandatory minimum allocation, and which condition applies to eligible infrastructure debt?

A.Minimum 5% allocation, and debt securities can be unrated provided they are backed by tangible project assets.

B.Minimum 25% allocation, restricted entirely to listed equities of Nifty Infrastructure index constituents.

C.Minimum 15% allocation to Housing and Infrastructure combined, where debt instruments must generally carry an investment grade rating of not less than AA (or A with specific committee approval).

D.Minimum 30% allocation, but only direct mortgage loans to individual retail borrowers count toward the quota.

Explanation: IRDAI Investment Regulations require life insurers to allocate not less than 15% of their controlled fund (traditional non-linked funds) to Housing and Infrastructure investments. Debt instruments in this category must generally carry high investment grade credit ratings (typically AA or higher, though single-A rated debt may be permitted subject to investment committee approval and exposure caps).

7An Indian life insurer's Chief Investment Officer is reviewing single-investee and group exposure limits under IRDAI regulations. For a single corporate issuer, what is the standard maximum exposure limit as a percentage of the insurer's total investment assets (or fund size) for an infrastructure/housing finance company versus an industrial corporate?

A.10% for a standard corporate issuer, which may be extended up to 15% (with prior board approval) for infrastructure and housing finance companies.

B.25% across all sectors uniformly, with no distinction between industrial corporates and housing finance entities.

C.5% for all corporates, with no board discretion to increase exposure under any circumstances.

D.Exposure is unlimited provided the corporate issuer maintains a AAA credit rating from at least two SEBI-registered rating agencies.

Explanation: IRDAI Investment Regulations establish single-investee exposure limits to manage credit concentration. For a single corporate investee company, the limit is typically 10% of the insurer's investment assets (or 10% of the investee's paid-up equity/debt, whichever is lower). However, for infrastructure companies and housing finance companies, the limit can be relaxed up to 15% with prior approval from the insurer's Board of Directors.

8In corporate credit analysis, when an investment-grade bond is downgraded to sub-investment grade (high yield), it is termed a 'fallen angel'. What structural market dynamic frequently creates an acute price dislocation and temporary yield overshoot for fallen angels in institutional bond markets?

A.Automatic conversion into preferred equity under standard indenture clauses.

B.An immediate cash tender offer by the issuer at par value mandated by SEBI guidelines.

C.The complete cancellation of accrued interest obligations by operation of law.

D.Forced selling by benchmark-constrained institutional investors (such as insurers and pension funds) whose mandates or regulatory regimes prohibit holding sub-investment grade debt.

Explanation: Institutional investors such as life insurers, pension funds, and investment-grade bond funds operate under strict regulatory and mandate constraints that prohibit or severely penalise holding bonds rated below BBB- (sub-investment grade). When an issuer is downgraded across the investment-grade boundary, these institutional funds are forced to liquidate their holdings simultaneously, creating sudden massive supply in a relatively illiquid market. This forced selling depresses prices well below fundamental intrinsic value, creating a yield overshoot.

9Under SEBI regulations and IRDAI investment guidelines, how are Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) structured in terms of cash distribution mandates and borrowing limits?

A.They are prohibited from distributing cash dividends for the first 5 years and can borrow up to 90% of total asset value without credit ratings.

B.They must distribute at least 50% of Net Distributable Cash Flows (NDCF) annually and cannot incur any aggregate leverage.

C.They must distribute at least 90% of their Net Distributable Cash Flows (NDCF) to unitholders at least semi-annually, and aggregate consolidated debt cannot exceed 70% of asset value (subject to credit rating and unitholder approval thresholds beyond 49%).

D.They are treated as pure private equity vehicles with ten-year lock-in periods and capital distributions restricted to liquidation events.

Explanation: Under SEBI (REIT) and (InvIT) Regulations, at least 90% of the Net Distributable Cash Flows (NDCF) of the SPVs must be distributed to the trust, and at least 90% of the NDCF of the trust must be distributed to unitholders (at least semi-annually for InvITs, and quarterly or semi-annually for REITs). Furthermore, aggregate consolidated net debt is capped at 49% of the value of the trust assets; it can be increased up to 70% only if the trust secures a minimum credit rating (typically AAA/AA+) and obtains super-majority unitholder approval.

10An institutional investor commits capital to a closed-end private equity fund structured with an 'American' (deal-by-deal) waterfall versus a 'European' (whole-fund) waterfall. What is the fundamental difference in carried interest timing and LP risk between these two structures?

A.The American waterfall requires all capital contributions plus the preferred return across the entire fund to be returned before the GP receives any carried interest.

B.The American waterfall allows the GP to receive carried interest on profitable deals before the LP has received full return of capital across all funded investments, increasing the risk of a clawback compared to the European waterfall.

C.The European waterfall allows the GP to take 50% carried interest on unrealised gains at each quarterly valuation.

D.The American waterfall completely eliminates clawback provisions, transferring all loss burden permanently to the Limited Partners.

Explanation: In an American (deal-by-deal) waterfall, carried interest is calculated and distributed on each individual portfolio exit. If early deals are profitable, the GP receives carry immediately, even if subsequent deals incur heavy losses. This exposes LPs to clawback risk (having to recover excess carry paid to the GP at the end of fund life). In contrast, a European (whole-fund) waterfall requires all drawn capital and preferred returns across all fund investments to be returned to LPs first before the GP participates in carried interest, making it far more LP-friendly.

About the IAI SA7 Exam

IAI Subject SA7 Investment and Finance is a Specialist Advanced subject of the Institute of Actuaries of India. It applies knowledge of the financial environment in India, the UK and other jurisdictions, together with the principles of actuarial practice, to the selection and management of investments for a range of investors, and covers relevant aspects of corporate finance.

Exam sponsor: Institute of Actuaries of India (IAI). The requirements and fees below concern the certification or admission exam, separate from our free practice resources.

Assessment

3 hour 15 minute closed-book centre-based online written paper; answers are typed into the examination platform's text editor and there is no negative marking.

Time Limit

3 hours 15 minutes

Passing Score

50% of total marks under the IAI Pass Mark Rule applicable from the November 2025 session; marks are rounded up to the next whole number and the final pass mark for each subject is confirmed with the results

Exam / Certification Fees

₹7,500 (INR) for India and SAARC candidates

Exam sponsor website

Fees, eligibility, and exam policies can change. Confirm them with the exam sponsor before applying or paying.

Official sources

IAI syllabus for the 2026 examinations · Source checked 2026-09-14
IAI exam fees · Source checked 2026-09-14
IAI examination dates · Source checked 2026-09-14
IAI exam policies and guidelines (student guide, pass mark rule, FAQ) · Source checked 2026-09-14

Our practice resources: topics covered

We aim to reflect publicly available exam outlines and topic information in our study resources. Coverage, format, and difficulty may differ from the actual exam, and we cannot guarantee that every detail is accurate or current. Confirm exam requirements, fees, and policies with the official exam sponsor.

30%

The Framework for Investment Management

Financial markets in the main developed and emerging economies, public and private market assets, exchange-traded and OTC derivatives, the historic behaviour of major asset classes, the domestic and global influences on the economic and capital markets environment in India, the UK and other jurisdictions, regulatory capital requirements including the Basel Accords and Solvency II, legislative, taxation and conduct frameworks, and the key principles of corporate finance.

35%

Meeting Investor Requirements

Principles and objectives of investment management and the factors influencing investment strategy, and the liability characteristics, investment requirements and regulatory environment of life and non-life insurers, defined benefit and defined contribution pension funds, endowments and charities, banks, hedge funds and other proprietary investors, and unconstrained investors including sovereign wealth funds.

35%

Management and Risk Control for an Investment Manager

Active, passive and factor-based management across and within asset classes, investment risk control and risk-based portfolio construction, ESG integration, derivative-based strategies for taking or mitigating risk, liability benchmarking and replicating portfolios, behavioural finance, the organisation of a large portfolio and of an institutional investment department, fund-of-funds and outsourced approaches, performance measurement, and the impact of technology on trading and product development.

Preparing for the IAI SA7 Exam

What You Need to Know

Passing score: 50% of total marks under the IAI Pass Mark Rule applicable from the November 2025 session; marks are rounded up to the next whole number and the final pass mark for each subject is confirmed with the results
Assessment: 3 hour 15 minute closed-book centre-based online written paper; answers are typed into the examination platform's text editor and there is no negative marking.
Time limit: 3 hours 15 minutes
Exam / certification fees: ₹7,500 (INR) for India and SAARC candidates Official sources

Using Our Practice Resources

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IAI SA7: Suggested Study Strategy

1Understand the detailed asset-liability profiles of different financial institutions: life insurers with long-term guaranteed annuities versus general insurers with short-tailed, volatile claim liabilities.

2Memorise the core requirements of IRDAI (Investment) Regulations, particularly minimum mandatory allocations to central/state government securities and infrastructure debt.

3Practice multi-step Brinson-Hood-Beebower and Brinson-Fachler performance attribution calculations to distinguish asset allocation effects from stock selection effects.

4Evaluate how interest rate risk affects both assets and liabilities, and calculate effective duration, convexity, and key-rate durations for immunisation.

5Integrate ESG and climate risk considerations into portfolio construction, noting how transition and physical climate risks impact sovereign and corporate debt.

Frequently Asked Questions

What is the format of the IAI SA7 exam?

SA7 is a closed-book, centre-based online written paper of 3 hours 15 minutes, sat in the afternoon session alongside the other Specialist Advanced subjects. Answers are typed into the examination platform and there is no negative marking. An IAI-approved scientific calculator and unannotated actuarial tables are permitted.

What is the pass mark for IAI SA7?

Under the IAI Pass Mark Rule applicable from the November 2025 session, a candidate passes an SP or SA series subject by scoring at least 50%, rounded up to the next whole number. IAI confirms the final pass mark when it publishes the results.

Is SA7 only about the Indian market?

No. The aim of the 2026 SA7 syllabus is to apply knowledge of the financial environment in India, the UK and other jurisdictions. Candidates are expected to understand Indian regulation and market structure alongside international frameworks such as the Basel Accords and Solvency II, and the behaviour of developed and emerging markets more generally.

How does SA7 relate to SP5 and SP6?

The IAI syllabus treats SP5 Investment and Finance, SP6 Financial Derivatives and SA7 as a trio for investment and finance work. Concepts introduced in SP5 are developed in SA7 through more complex real-world problems, while SP6 focuses in detail on the technical aspects of derivatives and their use.

How do these OpenExamPrep questions relate to the official exam?

They are independent practice questions covering the SA7 topics. The official paper is a descriptive, application-style written examination built around case studies, so this set is a study aid for the same body of knowledge rather than a simulation of the official format. OpenExamPrep is not affiliated with the Institute of Actuaries of India.