CFAI 6 - Equity & Fixed Income Flashcards

Question

Jim White has sold short 100 shares of Super Stores at a price of $42 per share. He has also simultaneously placed a “good-till-cancelled, stop 50, limit 55 buy” order. Assume that if the stop condition specified by White is satisfied and the order becomes valid, it will get executed. Excluding transaction costs, what is the maximum possible loss that White can have? A.$800. B.$1,300. C.Unlimited.

Answer 1

B is correct. The maximum possible loss is $1,300. If the stock price crosses $50, the stop buy order will become valid and will get executed at a maximum limit price of $55. The maximum loss per share is $13 = $55 – $42, or $1,300 for 100 shares.

Answer 2

B is correct. The most appropriate order is a good-till-cancelled stop sell order. This order will be acted on if the stock price declines below a specified price (in this case, $27.50). This order is sometimes referred to as a good-till-cancelled stop loss sell order. You are generally bullish about the stock, as indicated by no immediate intent to sell, and would expect a loss on short selling the stock. A stop buy order is placed to buy a stock when the stock is going up.

Answer 3

C is correct. A security market index represents the value of a given security market, market segment, or asset class.

Answer 4

A is correct. At inception, the values of the price return and total return versions of an index are equal.

Answer 5

A is correct. In the price weighting method, the divisor must be adjusted so the index value immediately after the split is the same as the index value immediately prior to the split.

Answer 6

C is correct. “Float” is the number of shares available for public trading.

Answer 7

B is correct. Fundamental weighting leads to indices that have a value tilt.

Answer 8

C is correct. Reconstitution is the process by which index providers review the constituent securities, re-apply the initial criteria for inclusion in the index, and select which securities to retain, remove, or add. Constituent securities that no longer meet the criteria are replaced with securities that do. Thus, reconstitution reduces the likelihood that the index includes securities that are not representative of the target market.

Answer 9

C is correct. Security market indices play a critical role as proxies for asset classes in asset allocation models.

Answer 10

C is correct. Style indices represent groups of securities classified according to market capitalization, value, growth, or a combination of these characteristics.

Answer 11

C is correct. An aggregate fixed-income index can be subdivided by market sector (government, government agency, collateralized, corporate), style (maturity, credit quality), economic sector, or some other characteristic to create more narrowly defined indices.

Answer 12

C is correct. Coupon frequency is not a dimension on which fixed-income indices are based.

Answer 13

C is correct. The performance of commodity indices can be quite different from that of the underlying commodities because the indices consist of futures contracts on the commodities rather than the actual commodities.

Answer 14

B is correct. It is not a real estate index category.

Answer 15

B is correct. Hedge funds are not required to report their performance to any party other than their investors. Therefore, each hedge fund decides to which database(s) it will report its performance. Thus, for a hedge fund index, constituents determine the index rather than index providers determining the constituents.

Answer 16

A is correct. Voluntary performance reporting may lead to survivorship bias, and poorer performing hedge funds will be less likely to report their performance.

Answer 17

The two types of costs to consider are transaction costs and information-acquisition costs. In summary, a modern perspective calls for the investor to consider transaction costs and information-acquisition costs when evaluating the efficiency of a market. A price discrepancy must be sufficiently large to leave the investor with a profit (adjusted for risk) after taking account of the transaction costs and information-acquisition costs to reach the conclusion that the discrepancy may represent a market inefficiency. Prices may somewhat less than fully reflect available information without there being a true market opportunity for active investors.

Answer 18

Há países, maioritariamente subdesenvolvidos em que a teoria semi forte não se encontra e por vezes nem a forma fraca de mercados eficientes, o que permite obter retornos anormais com análise técnica visto que os preços passados não estão reflectidos no preço atual.

Answer 19

Os ajustamentos de preço são feitos lentamente, daí que podemos obter retornos anormais a comprar empresas com resultados apresentados muito acima do esperado e vender empresas com resultados apresentados muito abaixo do esperado.

Answer 20

B is correct. The intrinsic value of an undervalued asset is greater than the market value of the asset, where the market value is the transaction price at which an asset can be currently bought or sold.

Answer 21

•A is correct. The weak-form efficient market hypothesis is defined as a market where security prices fully reflect all market data, which refers to all past price and trading volume information.

Answer 22

•B is correct. In semi-strong-form efficient markets, security prices reflect all publicly available information.

Answer 23

•B is correct. Technical analysts use past prices and volume to predict future prices, which is inconsistent with the weakest form of market efficiency (i.e., weak-form market efficiency). Weak-form market efficiency states that investors cannot earn abnormal returns by trading on the basis of past trends in price and volume.

Answer 24

•C is correct. Fundamental analysts use publicly available information to estimate a security’s intrinsic value to determine if the security is mispriced, which is inconsistent with the semi-strong form of market efficiency. Semi-strong-form market efficiency states that investors cannot earn abnormal returns by trading based on publicly available information.

Answer 25

A is correct. Operating inefficiencies reduce market efficiency.

Answer 26

C is correct. If markets are efficient, the information from the annual report is reflected in the stock prices; therefore, the gradual changes must be from the release of additional information.

Answer 27

B is correct. The excess returns in January are not attributed to any new information or news; however, research has found that part of the seasonal pattern can be explained by tax-loss selling and portfolio window dressing.

Answer 28

A is correct. Finding significant abnormal returns does not necessarily indicate that markets are inefficient or that abnormal returns can be realized by applying the strategy to future time periods. Abnormal returns are considered market anomalies because they may be the result of the model used to estimate the expected returns or may be the result of underestimating transaction costs or other expenses associated with implementing the strategy, rather than because of market inefficiency.

Answer 29

•B is correct. Behavioral theories of loss aversion can explain observed overreaction in markets, such that investors dislike losses more than comparable gains (i.e., risk is not symmetrical).

Answer 30

•C is correct. Behavioral theories of loss aversion allow for the possibility that the dislike for risk is not symmetrical, which allows for loss aversion to explain observed overreaction in markets such that investors dislike losses more than they like comparable gains.

Answer 31

Statutory voting 1 share 1 vote Cumulative voting - Permite uma maior representação de pequenos accionistas, se estes aplicarem os seus votodos todos no mesmo candidato. Dão um voto por cada "board director being elected" se forem 2 temos 2 votos por cada ação podendo assim aplicar todos no mesmo.

Answer 32

callable podem ser recomprados pela empresa a um determinado preço. ( aumenta risco para o investidor) putable, podem ser vendidas à empresa a um determinado preço (reduz risco para o investido)

Answer 33

* They allow investors to earn a higher dividend than if they invested in the company’s common shares. * They allow investors the opportunity to share in the profits of the company. * They allow investors to benefit from a rise in the price of the common shares through the conversion option. * Their price is less volatile than the underlying common shares because the dividend payments are known and more stable.

Answer 34

Venture Capital - investimento em negócios embrionários. Capital de risco. Leveraged Buyout - occurs when a group of investors (such as the company’s management or a private equity partnership) uses a large amount of debt to purchase all of the outstanding common shares of a publicly traded company. In cases where the group of investors acquiring the company is primarily comprised of the company’s existing management, the transaction is referred to as a management buyout (MBO). After the shares are purchased, they cease to trade on an exchange and the investor group takes full control of the company. Private investment in public equity - This type of investment is generally sought by a public company that is in need of additional capital quickly and is willing to sell a sizeable ownership position to a private investor or investor group. For example, a company may require a large investment of new equity funds in a short period of time because it has significant expansion opportunities, is facing high levels of indebtedness, or is experiencing a rapid deterioration in its operations. Depending on how urgent the need is and the size of the capital requirement, the private investor may be able to purchase shares in the company at a significant discount to the publicly-quoted market price. O objetivo do investimento privado é melhorar a empresa para a tornar lucrativa numa ótica de longo prazo e posteriormente voltar a turnar a empresa publica, lucrando no processo.

Answer 35

Market Value of Equity - Shares * price Book Value of Equity - Equity/ Shares Price to book - Price / (Book Value of Equity)

Answer 36

B is correct. Statutory voting is the type of equity voting right that grants one vote per share owned.

Answer 37

•C is correct. Participating preference shares entitle shareholders to receive an additional dividend if the company’s profits exceed a pre-determined level.

Answer 38

•B is correct. Private equity securities do not have market-determined quoted prices.

Answer 39

•C is correct. The trends in emerging markets have not led to the stability of foreign exchange markets.

Answer 40

•A is correct. In an unsponsored DR, the depository bank owns the voting rights to the shares. The bank purchases the shares, places them into a trust, and then sells shares in the trust—not the underlying shares—in other markets.

Answer 41

•A is correct. The listing fees on Level III sponsored ADRs are high.

Answer 42

C is correct. Capital is raised to ensure the company’s existence only when it is required. It is not a typical goal of raising capital.

Answer 43

C is correct. A company’s ROE will increase if it issues debt to repurchase outstanding shares of equity.

Answer 44

B is correct. Companies try to raise funds at the lowest possible cost. Therefore, cost of equity is used as a proxy for the minimum required rate of return.

Answer 45

Solution to 1: C is correct. Solution to 2: B is correct. A producer of staple foods such as cereals is a classic example of a non-cyclical company. Demand for automobiles is cyclical—that is, relatively high during economic expansions and relatively low during economic contractions. Also, demand for teenage fashions is likely to be more sensitive to the business cycle than demand for standard food items such as breakfast cereals. When budgets have been reduced, families may try to avoid expensive clothing or extend the life of existing wardrobes. Solution to 3: A is correct.

Answer 46

* products and/or services supplied; * business-cycle sensitivities; and * statistical similarities.

Answer 47

* technology; * demographics; * government; and * social factors.

Answer 48

C is correct. Tactical asset allocation involves timing investments in asset classes and does not make use of industry analysis.

Answer 49

A is correct. The Russell system uses three tiers, whereas the other two systems are based on four tiers or levels.

Answer 50

C is correct. Commercial systems are generally updated more frequently than government systems, and include only publicly traded for-profit companies.

Answer 51

B is correct. Business-cycle sensitivity falls on a continuum and is not a discrete “either–or” phenomenon.

Answer 52

C is correct. Customers’ flexibility as to when they purchase the product makes the product more sensitive to the business cycle.

Answer 53

C is correct. Varying conditions of recession or expansion around the world would affect the comparisons of companies with sales in different regions of the world.

Answer 54

B is correct. Constructing a peer group is a subjective process, and a logical starting point is to begin with a commercially available classification system. This system will identify a group of companies that may have properties comparable to the business activity of interest.

Answer 55

C is correct. The embryonic stage is characterized by slow growth and high prices.

Answer 56

B is correct. The industry life-cycle model shows how demand evolves through time as an industry passes from the embryonic stage through the stage of decline.

Answer 57

C is correct. The relatively few members of the industry generally try to avoid price competition.

Answer 58

A is correct. An industry that has high barriers to entry generally requires substantial physical capital and/or financial investment. With weak pricing power in the industry, finding a buyer for excess capacity (i.e., to exit the industry) may be difficult.

Answer 59

C is correct. Although the threat of government intervention may be considered an element of some of Porter’s five forces, it is not one of the listed forces.

Answer 60

B is correct. As displayed in Exhibit 4, the alcoholic beverage industry is concentrated and possesses strong pricing power.

Answer 61

A is correct. The oil services industry has medium barriers to entry because a company with a high level of technological innovation could obtain a niche market in a specific area of expertise.

Answer 62

A is correct. The cost structure is an appropriate element when analyzing the supply of the product, but analysis of demand relies on the product’s differentiating characteristics and the customers’ needs and wants.

Answer 63

•Present value models (synonym: discounted cash flow models). These models estimate the intrinsic value of a security as the present value of the future benefits expected to be received from the security. In present value models, benefits are often defined in terms of cash expected to be distributed to shareholders (dividend discount models) or in terms of cash flows available to be distributed to shareholders after meeting capital expenditure and working capital needs (free-cash-flow-to-equity models). Many models fall within this category, ranging from the relatively simple to the very complex. In Section 4, we discuss in detail two of the simpler models, the Gordon (constant) growth model and the two-stage dividend discount models. ``` Multiplier models (synonym: market multiple models). These models are based chiefly on share price multiples or enterprise value multiples. The former model estimates intrinsic value of a common share from a price multiple for some fundamental variable, such as revenues, earnings, cash flows, or book value. Examples of the multiples include price to earnings (P/E, share price divided by earnings per share) and price to sales (P/S, share price divided by sales per share). The fundamental variable may be stated on a forward basis (e.g., forecasted EPS for the next year) or a trailing basis (e.g., EPS for the past year), as long as the usage is consistent across companies being examined. Price multiples are also used to compare relative values. The use of the ratio of share price to EPS—that is, the P/E multiple—to judge relative value is an example of this approach to equity valuation. Enterprise value (EV) multiples have the form (Enterprise value)/(Value of a fundamental variable). Two possible choices for the denominator are earnings before interest, taxes, depreciation, and amortization (EBITDA) and total revenue. Enterprise value, the numerator, is a measure of a company’s total market value from which cash and short-term investments have been subtracted (because an acquirer could use those assets to pay for acquiring the company). An estimate of common share value can be calculated indirectly from the EV multiple; the value of liabilities and preferred shares can be subtracted from the EV to arrive at the value of common equity. ``` •Asset-based valuation models. These models estimate intrinsic value of a common share from the estimated value of the assets of a corporation minus the estimated value of its liabilities and preferred shares. The estimated market value of the assets is often determined by making adjustments to the book value (synonym: carrying value) of assets and liabilities. The theory underlying the asset-based approach is that the value of a business is equal to the sum of the value of the business’s assets.

Answer 64

CF Operacional+ net borrowing - Fixed Cash flow Invested

Answer 65

C is correct. The intrinsic value of a security is independent of the investor’s holding period.

Answer 66

b*ROE b- dividend retention rate

Answer 67

``` D1 = $5.00(1 + 0.10) = $5.50 D2 = $5.00(1 + 0.10)2 = $6.05 D3 = $5.00(1 + 0.10)3 = $6.655 D4 = $5.00(1 + 0.10)3 (1 + 0.05) = $6.98775 ``` V3=$6.987750.15−0.05=$69.8775 V0=$5.50(1+0.15)+$6.05(1+0.15)2+$6.655(1+0.15)3+$69.8775(1+0.15)3≈$59.68

Answer 68

3 fases, crescimento, shakeout e maturity, para essas fazes usamos g's diferentes. sendo que usamos Gordon para a maturity

Answer 69

market cap + market value of preferred stock+ market value of debt - Cash & Investments

Answer 70

C is correct. Asset-based valuation models calculate the intrinsic value of equity by subtracting liabilities from the market value of assets.

Answer 71

C is correct. It is a form of present value, or discounted cash flow, model. Both EV and FCFE are forms of multiplier models.

Answer 72

•B is correct. To use a discounted cash flow model, the analyst will require FCFE or dividend data. In addition, the analyst will need data to calculate an appropriate discount rate.

Answer 73

•B is correct. The FCFE model assumes that dividend-paying capacity is reflected in FCFE.

Answer 74

A is correct. In the FCFE model, the intrinsic value of stock is calculated by discounting expected future FCFE to present value. No further adjustments are required.

Answer 75

B is correct. The expected annual dividend is 4.80% × $25 = $1.20. The value of a preferred share is $1.20/0.0449 = $26.73.

Answer 76

C is correct. P0 = D1/(r – g) = 1.75(1.092)/(0.123 – 0.092) = $61.65.

Answer 77

C is correct. According to the Gordon growth model, V0 = D1/(r – g). In this case, D1 = $2.00 × 1.04 = $2.08, so V0 = $2.08/(0.07 – 0.04) = $69.3333 = $69.33.

Answer 78

A is correct. The current price of €22.56 is less than the intrinsic value (V0) of €24.64; therefore, the stock appears to be currently undervalued. According to the two-stage dividend discount model: V0=∑t=1nD0(1+gS)t(1+r)t+Vn(1+r)n and Vn=Dn+1r−gL Dn+1 = D0(1 + gS)n(1 + gL) D1 = €1.60 × 1.09 = €1.744 D2 = €1.60 × (1.09)2 = €1.901 D3 = €1.60 × (1.09)3 = €2.072 D4 = €1.60 × (1.09)4 = €2.259 D5 = [€1.60 × (1.09)4](1.04) = €2.349 V4 = €2.349/(0.12 – 0.04) = €29.363 V0=1.744(1.12)1+1.901(1.12)2+2.072(1.12)3+2.259(1.12)4+29.363(1.12)4=1.557+1.515+1.475+1.436+18.661=€24.64(whichisgreaterthanthecurrentpriceof€22.56).

Answer 79

C is correct. V0=D1(1+r)+D2(1+r)2+P2(1+r)2=0.70(1.083)+0.80(1.083)2+31.29(1.083)2=$28.01 Note that D1 = 0.58(1.20) = 0.70, D2 = 0.58(1.20)(1.15) = 0.80, and P2 = D3/(k – g) = 0.80(1.056)/(0.083 – 0.056) = 31.29

Answer 80

B is correct. V0=D1(1+r)+ D2(1+r)2+D3(1+r)3+D4(1+r)4+ P4(1+r)4=468(1.12)+486.72(1.12)2+ 506.19(1.12)3+526.44(1.12)4+9000 (1.12)4=¥7,220

Answer 81

B is correct. The Gordon growth model (also known as the constant growth model) can be used to value dividend-paying companies in a mature phase of growth. A stable dividend growth rate is often a plausible assumption for such companies.

Answer 82

C is correct. The Gordon growth model is best suited to valuing mature companies. The two-stage model is best for companies that are transitioning from a growth stage to a mature stage. The three-stage model is appropriate for young companies just entering the growth phase.

Answer 83

C is correct. The justified forward P/E is calculated as follows: P0E1=D1E1r−g P/E is inversely related to the required rate of return, r, and directly related to the growth rate, g, and the dividend payout ratio, D/E.

Answer 84

A is correct. The statement is inaccurate in both respects. Although multiples can be calculated from historical data, forecasted values can be used as well. For companies without accounting earnings, several other multiples can be used. These multiples are often specific to a company’s industry or sector and include price-to-sales and price-to-cash flow.

Answer 85

B is correct. P0E1=D1E1r−g=2.75.70.0835−0.0275=8.5

Answer 86

•C is correct. Enterprise value is calculated as the market value of equity plus the market value of debt and preferred stock minus short-term investments. Therefore, the market value of equity is enterprise value minus the market value of debt and preferred stock plus short-term investments.

Answer 87

•A is correct. Operating income may be used in place of EBITDA when calculating the enterprise value multiple. EBITDA may be used when company earnings are negative because EBITDA is usually positive. The book value of debt cannot be used in place of market value of debt.

Answer 88

•A is correct. EV = 10.2 × 22,000,000 = $224,400,000 Equity value = EV – Debt + Cash = 224,400,000 – 56,000,000 + 1,500,000 = $169,900,000

Answer 89

•B is correct. Intangible assets are hard to value. Therefore, asset-based valuation models work best for companies that do not have a high proportion of intangible assets.

Answer 90

•A is correct. Asset-based valuations are most often used when an analyst is valuing private enterprises. Both B and C are considerations in asset-based valuations but are more likely to be reasons to avoid that valuation model rather than reasons to use it.

Answer 91

B is correct. Very small changes in inputs, such as required rate of return or dividend growth rate, can result in large changes to the valuation model output. Some present value models, such as FCFE models, can be used to value companies without dividends. Also, the intrinsic value of a security is independent of the investor’s holding period.

Answer 92

coupon/preço ytm é a taxa que se irá obter com a atualizaçao dos CF da obrigação até à maturidade

Answer 93

A is correct. The contract between a bond issuer and the bondholders is very often called an indenture or deed trust. The indenture documents the terms of the issue, including the principal amount, the coupon rate, and the payments schedule. It also provides information about the funding sources for the contractual payments and specifies whether there are any collateral, credit enhancement, or covenants. B is incorrect because a debenture is a type of bond. C is incorrect because a letter of credit is an external credit enhancement.

Answer 94

A is correct. The issuer chooses a financial institution with trust powers, such as the trust department of a bank or a trust company, to act as a trustee for the bond issue.

Answer 95

A is correct. Although the issuer is ultimately the source of the contractual payments, it is the trustee that ensures timely payments. Doing so is accomplished by invoicing the issuer for interest payments and principal repayments and holding the funds until they are paid.

Answer 96

A is correct. A SPV is a bankruptcy-remote vehicle. Bankruptcy remoteness is achieved by transferring the assets from the sponsor to the SPV. Once this transfer is completed, the sponsor no longer has ownership rights. If the sponsor defaults, no claims can be made to recover the assets that were transferred or the proceeds from the transfer to the SPV.

Answer 97

B is correct. The source of payment for bonds issued by supranational organizations is either the repayment of previous loans made by the organization or the paid-in capital of its member states. A is incorrect because national governments rely on their taxing authority and money creation to repay their debt. C is incorrect because non-sovereign bonds are typically repaid from the issuer’s taxing authority or the cash flows of the project being financed.

Answer 98

A is correct. Collateral trust bonds are secured by securities, such as common shares, other bonds, or other financial assets. B is incorrect because mortgage-backed securities are secured by mortgages. C is incorrect because equipment trust certificates are backed by physical assets such as aircraft, railroad cars, shipping containers, or oil rigs.

Answer 99

C is correct. The third-party (or counterparty) risk for a surety bond and a letter of credit arises from both being future promises to pay. In contrast, a cash collateral account allows the issuer to immediately borrow the credit-enhancement amount and then invest it.

Answer 100

B is correct. Affirmative covenants indicate what the issuer “must do” and are administrative in nature. A covenant requiring the issuer to insure and perform periodic maintenance on financed assets is an example of affirmative covenant. A and C are incorrect because they are negative covenants; they indicate what the issuer cannot do.

Answer 101

A is correct. A restriction on debt typically takes the form of a maximum acceptable debt usage ratio or a minimum acceptable interest coverage ratio. Thus, it limits the issuer’s ability to issue new debt that would dilute the bondholders’ claims. B and C are incorrect because they are covenants that restrict the issuer’s business activities by preventing the company from making investments or being taken over, respectively.

Answer 102

Solution to 1: B is correct. A domestic bond is issued by a local issuer, denominated in local currency, and sold in the domestic market. Gilts are British pound–denominated bonds issued by the UK Debt Management Office in the United Kingdom. Thus, they are UK domestic bonds. A is incorrect because a bond issued by LG Group from South Korea, denominated in British pounds, and sold in the United Kingdom, is an example of a foreign bond (bulldog bond). C is incorrect because a bond issued by Wal-Mart from the United States, denominated in US dollars, and sold in various countries in North America, Europe, the Middle East, and Asia Pacific is most likely an example of a global bond, particularly if it is also sold in the Eurobond market. Solution to 2: A is correct. A Eurobond is a bond that is issued internationally, outside the jurisdiction of any single country. Thus, a bond issued by Sony from Japan, denominated in US dollars but not registered with the SEC, is an example of a Eurobond. B is incorrect because global bonds are bonds that are issued simultaneously in the Eurobond market and in at least one domestic bond market. C is incorrect because if Sony’s bond issue were a foreign bond (Yankee bond), it would be registered with the SEC.

Answer 103

B is correct. Most FRNs pay interest quarterly and are tied to a three-month reference rate such as Libor.

Answer 104

C is correct. Because interest is effectively deferred until maturity, a zero-coupon bond can be thought of as a deferred coupon bond. A and B are incorrect because both step-up bonds and credit-linked bonds pay regular coupons. For a step-up bond, the coupon increases by specified margins at specified dates. For a credit-linked bond, the coupon changes when the bond’s credit rating changes.

Answer 105

C is correct. The coupon rate on an inverse FRN has an inverse relationship to the reference rate. Thus, an inverse FRN does not offer protection to the investor when market interest rates increase but when they decrease. A and B are incorrect because step-up bonds and FRNs both offer protection against increases in market interest rates.

Answer 106

A is correct. TIPS have a fixed coupon rate, and the principal is adjusted based on changes in the CPI. Thus, TIPS are an example of capital-indexed bonds. B is incorrect because with an interest-index bond, it is the principal repayment at maturity that is fixed and the coupon that is linked to an index. C is incorrect because indexed-annuity bonds are fully amortized bonds, not bullet bonds. The annuity payment (interest payment and principal repayment) is adjusted based on changes in an index.

Answer 107

B is correct. Following an increase in inflation, the coupon rate of a capital-indexed bond remains unchanged, but the principal amount is adjusted upward for inflation. Thus, the coupon payment, which is equal to the fixed coupon rate multiplied by the inflation-adjusted principal amount, increases.

Answer 108

The conversion ratio is the number of common shares that each bond can be converted into. The indenture sometimes does not stipulate the conversion ratio but only mentions the conversion price. The conversion ratio is equal to the par value divided by the conversion price. For example, if the par value is 1,000€ and the conversion price is 20€, the conversion ratio is 1,000€ ÷ 20€ = 50:1, or 50 common shares per bond. The conversion value, sometimes called the parity value, is the current share price multiplied by the conversion ratio. For example, if the current share price is 33€ and the conversion ratio is 30:1, the conversion value is 33€ × 30 = 990€.

Answer 109

Two main features distinguish bonds with contingent write-down provisions from the traditional convertible bonds just described. A traditional convertible bond is convertible at the option of the bondholder, and conversion occurs on the upside—that is, if the issuer’s share price increases. In contrast, bonds with contingent write-down provisions are convertible on the downside. In the case of CoCos, conversion is automatic if a specified event occurs—for example, if the bank’s core Tier 1 capital ratio (a measure of the bank’s proportion of core equity capital available to absorb losses) falls below the minimum requirement set by the regulators. Thus, in the event that the bank experiences losses that reduce its equity capital below the minimum requirement, CoCos are a way to reduce the bank’s likelihood of default and, therefore, systemic risk—that is, the risk of failure of the financial system. When the bank’s core Tier 1 capital falls below the minimum requirement, the CoCos immediately convert into equity, automatically recapitalizing the bank, lightening the debt burden, and reducing the risk of default. Because the conversion is not at the option of the bondholders but automatic, CoCos force bondholders to take losses. For this reason, CoCos must offer a higher yield than otherwise similar bonds.

Answer 110

C is correct. The conversion value of the bond is ₩40,000 × 25 = ₩1,000,000. The price of the convertible bond is ₩1,100,000. Thus, the conversion value of the bond is less than the bond’s price, and this condition is referred to as below parity.

Answer 111

Amortizing Bond, vai amortizando o principal até à maturidade. Bullet Bond paga a totalidade do principal na maturidade Ballon Payment é um pagamento de parte do principal na maturidade.

Answer 112

A sinking fund arrangement is another approach that can be used to achieve the same goal of periodically retiring the bond’s principal outstanding. The term sinking fund refers to an issuer’s plans to set aside funds over time to retire the bond. Originally, a sinking fund was a specified cash reserve that was segregated from the rest of the issuer’s business for the purpose of repaying the principal. More generally today, a sinking fund arrangement specifies the portion of the bond’s principal outstanding, perhaps 5%, that must be repaid each year throughout the bond’s life or after a specified date. This repayment occurs whether or not an actual segregated cash reserve has been created.

Answer 113

* Zero-coupon-indexed bonds pay no coupon, so the inflation adjustment is made via the principal repayment only: The principal amount to be repaid at maturity increases in line with increases in the price index during the bond’s life. This type of bond has been issued in Sweden. * Interest-indexed bonds pay a fixed nominal principal amount at maturity but an index-linked coupon during the bond’s life. Thus, the inflation adjustment applies to the interest payments only. This type of bond was briefly issued by the Australian government in the late 1980s, but it never became a significant part of the inflation-linked bond market. * Capital-indexed bonds pay a fixed coupon rate but it is applied to a principal amount that increases in line with increases in the index during the bond’s life. Thus, both the interest payments and the principal repayment are adjusted for inflation. Such bonds have been issued by governments in Australia, Canada, New Zealand, the United Kingdom, and the United States. * Indexed-annuity bonds are fully amortized bonds, in contrast to interest-indexed and capital-indexed bonds that are non-amortizing coupon bonds. The annuity payment, which includes both payment of interest and repayment of the principal, increases in line with inflation during the bond’s life. Indexed-annuity bonds linked to a price index have been issued by local governments in Australia, but not by the national government.

Answer 114

A is correct. The tenor of the bond is the time remaining until the bond’s maturity date. Although the bond had a maturity of 10 years at issuance (original maturity), it was issued four years ago. Thus, there are six years remaining until the maturity date. B is incorrect because the nominal rate is the coupon rate, i.e., the interest rate that the issuer agrees to pay each year until the maturity date. Although interest is paid semi-annually, the nominal rate is 10%, not 5%. C is incorrect because it is the bond’s price, not its redemption value (also called principal amount, principal value, par value, face value, nominal value, or maturity value), that is equal to 102% of the par value.

Answer 115

C is correct. The coupon rate that applies to the interest payment due on 30 June is based on the three-month Libor rate prevailing on 31 March. Thus, the coupon rate is 1.55% + 0.65% = 2.20%.

Answer 116

B is correct. A surety bond is an external credit enhancement, i.e., a guarantee received from a third party. If the issuer defaults, the guarantor who provided the surety bond will reimburse investors for any losses, usually up to a maximum amount called the penal sum. A is incorrect because covenants are legally enforceable rules that borrowers and lenders agree upon when the bond is issued. C is incorrect because overcollateralization is an internal, not external, credit enhancement. Collateral is a guarantee underlying the debt above and beyond the issuer’s promise to pay, and overcollateralization refers to the process of posting more collateral than is needed to obtain or secure financing. Collateral, such as assets or securities pledged to ensure debt payments, is not provided by a third party. Thus, overcollateralization is not an external credit enhancement.

Answer 117

B is correct. Affirmative (or positive) covenants enumerate what issuers are required to do and are typically administrative in nature. A common affirmative covenant describes what the issuer intends to do with the proceeds from the bond issue. A and C are incorrect because imposing a limit on the issuer’s leverage ratio or on the percentage of the issuer’s gross assets that can be sold are negative covenants. Negative covenants prevent the issuer from taking actions that could reduce its ability to make interest payments and repay the principal.

Answer 118

•C is correct. Bonds sold in a country and denominated in that country’s currency by an entity from another country are referred to as foreign bonds. A is incorrect because Eurobonds are bonds issued outside the jurisdiction of any single country. B is incorrect because global bonds are bonds issued in the Eurobond market and at least one domestic country simultaneously. greater, regulation than domestic and foreign bonds.

Answer 119

•A is correct. Eurobonds are typically issued as bearer bonds, i.e., bonds for which the trustee does not keep records of ownership. In contrast, domestic and foreign bonds are typically registered bonds for which ownership is recorded by either name or serial number. B is incorrect because Eurobonds are typically issued as bearer bonds, not registered bonds. C is incorrect because Eurobonds are typically subject to lower, not

Answer 120

•C is correct. The original issue discount tax provision requires the investor to include a prorated portion of the original issue discount in his taxable income every tax year until maturity. The original issue discount is equal to the difference between the bond’s par value and its original issue price. A is incorrect because the original issue discount tax provision allows the investor to increase his cost basis in the bond so that when the bond matures, he faces no capital gain or loss. B is incorrect because the original issue discount tax provision does not require any tax deduction in the year the bond is purchased or afterwards.

Answer 121

C is correct. A cap in a floating-rate note (capped FRN) prevents the coupon rate from increasing above a specified maximum rate. This feature benefits the issuer in a rising interest rate environment because it sets a limit to the interest rate paid on the debt. A is incorrect because a bond with a step-up coupon is one in which the coupon, which may be fixed or floating, increases by specified margins at specified dates. This feature benefits the bondholders, not the issuer, in a rising interest rate environment because it allows bondholders to receive a higher coupon in line with the higher market interest rates. B is incorrect because inflation-linked bonds have their coupon payments and/or principal repayment linked to an index of consumer prices. If interest rates increase as a result of inflation, this feature is a benefit for the bondholders, not the issuer.

Answer 122

C is correct. Capital-indexed bonds pay a fixed coupon rate that is applied to a principal amount that increases in line with increases in the index during the bond’s life. If the consumer price index increases by 2%, the coupon rate remains unchanged at 6%, but the principal amount increases by 2% and the coupon payment is based on the inflation-adjusted principal amount. On the first coupon payment date, the inflation-adjusted principal amount is 1,000 × (1 + 0.02) = 1,020 and the semi-annual coupon payment is equal to (0.06 × 1,020) ÷ 2 = 30.60.

Answer 123

It is more common for larger bond issues, however, to be underwritten by a group, or syndicate, of investment banks. In this case, the bond issue is referred to as a syndicated offering.

Answer 124

When an investment bank underwrites a bond issue, it buys the entire issue and takes the risk of reselling it to investors or dealers. In contrast, in a best efforts offering, the investment bank serves only as a broker and sells the bond issue only if it is able to do so. Underwritten and best effort offerings are frequently used in the issuance of corporate bonds. * A shelf registration is a method for issuing securities in which the issuer files a single document with regulators that describes a range of future issuances. * An auction is a public offering method that involves bidding, and that is helpful in providing price discovery and in allocating securities. It is frequently used in the issuance of sovereign bonds.

Answer 125

C is correct. Corporate bonds typically settle on a T + 3 basis—that is, three days after the transaction date. A is incorrect because cash settlement occurs for some government and quasi-government bonds and for many money market trades. B is incorrect because settlement on a T + 1 basis is typical for government, not corporate, bonds.

Answer 126

The US commercial paper (USCP) market is the largest commercial paper market in the world, although there are other active commercial paper markets in other countries. Commercial paper issued in the international market is known as Eurocommercial paper (ECP). Although ECP is a similar instrument to USCP, there are some differences between the two. USCP ECP Currency: US Dollar Any currency Maturity : Overnight->270d Overnight->364d Interest: Discount basis Interest Bearing basis Settlement: T+0 T+2

Answer 127

non sovereign bond - municipal bonds, por vezes oferecem vantagens fiscais. Quasi government bond- empresas detidas pelo estado p.e. O pagamento das obrigações vem dos cash flow das empresas.

Answer 128

B is correct. A loan from a group of lenders to a single borrower is a syndicated loan. A is incorrect because a bilateral loan is a loan from a single lender to a single borrower. C is incorrect because a private placement involves placing the debt issued by a borrower directly with a lender or a group of lenders. The fact that the borrower is a private company is irrelevant.

Answer 129

B is correct. With a serial maturity structure, a stated number of bonds mature and are paid off each year before final maturity. A is incorrect because a bond issue with a term maturity structure is paid off in one lump sum at maturity. C is incorrect because a sinking fund arrangement, like a serial maturity structure, results in a portion of the bond issue being paid off every year. However, with a serial maturity structure, the bonds are paid off because the maturity dates are spread out during the life of the bond and the bonds that are retired are maturing; the bondholders know in advance which bonds will be retired. In contrast, the bonds retired annually with a sinking fund arrangement are designated by a random drawing.

Answer 130

pedir emprestada uma securitie e dar como colateral o dinheiro ( short selling)?

Answer 131

Solution to 3: A is correct. Large-denomination negotiable certificates of deposit (CDs) can be traded in the open market. B is incorrect because it is small-denomination, not large-denomination, negotiable CDs that are primarily purchased by retail investors. C is incorrect because it is non-negotiable, not negotiable, CDs that have a penalty for early withdrawal of funds. Solution to 4: B is correct. In a repurchase agreement, a security is sold with a simultaneous agreement by the seller to buy the same security back from the purchaser later at a higher price. Thus, a repurchase agreement is similar to a collateralized short-term borrowing in which the security sold and subsequently repurchased represents the collateral posted. A is incorrect because collateralized short-term lending is a description of a reverse repurchase agreement. C is incorrect because a repurchase agreement involves collateral. Thus, it is a collateralized, not uncollateralized, short-term borrowing.

Answer 132

Based on where the bonds are issued and traded, a distinction is made between domestic and international bond markets. The latter includes the Eurobond market, which falls outside the jurisdiction of any single country and is characterized by less reporting, regulatory and tax constraints. Investors also make a distinction between developed and emerging bond markets.

Answer 133

Medium-term notes are securities that are offered continuously to investors by an agent of the issuer. They can have short-term or long-term maturities.

Answer 134

For each bond, the percentage price increases are greater in absolute value than the percentage price decreases. This implies that the relationship between bond prices and the market discount rate is not linear; instead, it is curved. It is described as being “convex.” The convexity effect is shown in Exhibit 2 for a 10%, 10-year bond. Quando a yield sobe o preço baixa, contudo o preço é mais sensível quanto mais baixa for a yield, daí que se a yield subir de 2% para 3% o efeito no preço é menor do que se a yield baixar de 2% para 1%. - maturidade - cupões mais baixos têm maior volatilidade

Answer 135

Spot rates are yields-to-maturity on zero-coupon bonds maturing at the date of each cash flow You can use spot rates to precification of bonds

Answer 136

AAAAAA The yield-to-maturity is 3.516%. BBBBBBBBB Given spot rates B, the four-year, 3% bond is again priced at 98.104 to yield 3.516%. This example demonstrates that two very different sequences of spot rates can result in the same bond price and yield-to-maturity. Spot rates A are increasing for longer maturities, whereas spot rates B are decreasing.

Answer 137

para avaliar obrigações iliquidas ou por imitir. Para as obrigações seleccionadas para o calculo calculamos as yield médias por ano, yield média para 2 anos para 3, 4, etc.. posteriormente calculamos os anos que desejamos por intermpolação linear.

Answer 138

It is a yield per semiannual period times two.

Answer 139

quando tempos uma callable bond podemos ser conservadores e assumir a yield to worst, esta é a pior yield entre todos os anos em que a obrigação poderia ser called e a maturidade.

Answer 140

Add On Rate PV= 100 paga cupão na maturidade AOR= (diasAno/diasprod)*(FV-PV/PV) discount rate A obrigação é emitida a desconto sendo que o FV é 100. Para compararmos diferentes emissões temos que usar o mesmo método ou calcular a AOR para todas as emissões.

Answer 141

equal to the lenght of the instrument =t/365 , u need to transform this periodicity to compare with others.

Answer 142

* A G-spread is the spread over or under a government bond rate, and an I-spread is the spread over or under an interest rate swap rate. * A G-spread or an I-spread can be based on a specific benchmark rate or on a rate interpolated from the benchmark yield curve. * A Z-spread (zero-volatility spread) is based on the entire benchmark spot curve. It is the constant spread that is added to each spot rate such that the present value of the cash flows matches the price of the bond.

Answer 143

Prepayment risk is the uncertainty that the cash flows will be different from the scheduled cash flows as set forth in the loan agreement due to the borrowers’ ability to alter payments, usually to take advantage of interest rate movements. Time tranching é a criação de diferentes tranches de ABS/MBS com diferentes maturidades. credit tranching é a criação de diferentes tranches sendo que uma é subordinada e outra é sénior, as subordinadas assumem primeiro as perdas.

Answer 144

loan-to-value ratio (LTV). The higher the LTV, the lower the borrower’s equity; the lower the LTV, the greater the borrower’s equity. From the lender’s perspective, the more equity the borrower has (i.e., the lower the LTV), the less likely the borrower is to default. Moreover, the lower the LTV, the more protection the lender has for recovering the amount loaned if the borrower does default and the lender repossesses and sells the property.

Answer 145

In a recourse loan, the lender has a claim against the borrower for the shortfall between the amount of the mortgage balance outstanding and the proceeds received from the sale of the property. In a non-recourse loan, the lender does not have such a claim, so the lender can look only to the property to recover the outstanding mortgage balance. In the United States, residential mortgages are typically non-recourse loans. Residential mortgages in most European countries are recourse loans.

Answer 146

The cash flow is unknown because the prepayment rate over the life of the mortgages in the mortgage pool is unknown and can only be projected on the basis of an assumed prepayment rate.

Answer 147

Contraction risk is the risk that when interest rates decline, the security will have a shorter maturity than was anticipated at the time of purchase because homeowners refinance at now-available lower interest rates. A security becoming shorter in maturity when interest rates decline has two adverse consequences. First, the proceeds received must now be reinvested at lower interest rates. Second, if the bond is prepayable or callable, its price appreciation is not as great as that of an otherwise identical bond that does not have a prepayment or call option. In contrast, extension risk is the risk that when interest rates rise, fewer prepayments will occur because homeowners are reluctant to give up the benefits of a contractual interest rate that now looks low. As a result, the security becomes longer in maturity than anticipated at the time of purchase. From the investors’ perspective, the value of the security has fallen because interest rates are higher whereas the income they receive (and can potentially reinvest) is typically limited to the interest payment and scheduled principal repayments.

Answer 148

The statement is incorrect. There are various types of agency CMOs—such as sequential-pay bond classes, PAC bond classes, and support bond classes. The fact that the cash flows from the collateral are allocated to different bond classes does not make them riskier. Indeed, the purpose of creating different bond classes in a CMO is to provide a risk−return profile that is more suitable to investors that the risk-return profile of the mortgage pass-through securities. For example, a mortgage pass-through security has considerably more variability in average life than does a PAC bond created from that mortgage pass-through security. In contrast, a support bond has greater average-life variability than a mortgage pass-through security has. Therefore, bond classes in a CMO may be more or less risky than a mortgage pass-through security with respect to prepayment risk. A blanket statement about relative riskiness, such as the one made in the meeting, is incorrect.

Answer 149

First, the collateral for credit card receivable-backed securities are non-amortizing loans, whereas the collateral for auto loan-backed securities are loans that fully amortize. Second, for auto loan-backed securities, principal is distributed to the bond classes each month, and as a result, the amount of the outstanding pool balance declines over time. For credit card receivable-backed securities, principal received during the lockout period is used to acquire additional credit card receivables. After the lockout period, principal repayments are used to pay off the outstanding principal. .

Answer 150

* Market participants measure the prepayment rate using two measures: the single monthly mortality (SMM) rate and its corresponding annualized rate, namely, the conditional prepayment rate (CPR). For MBS, the measure widely used by market participants to assess the sensitivity of the securitized bonds to interest rate movements is the weighted average life (WAL) or simply average life of the MBS instead of duration. * Market participants use the Public Securities Association (PSA) prepayment benchmark to describe prepayment rates. A PSA assumption greater than 100 PSA means that prepayments are assumed to be faster than the benchmark, whereas a PSA assumption lower than 100 PSA means that prepayments are assumed to be slower than the benchmark.

Answer 151

* The creation of a collateralized mortgage obligation (CMO) can help manage prepayment risk by distributing the various forms of prepayment risk among different classes of bondholders. The CMO’s major financial innovation is that the securities created more closely satisfy the asset/liability needs of institutional investors, thereby broadening the appeal of mortgage-backed products. * The most common types of CMO tranches are sequential-pay tranches, planned amortization class (PAC) tranches, support tranches, and floating-rate tranches.

Answer 152

(CMBS) are securities backed by a pool of commercial mortgage loans on income-producing property. CMBS have considerable call protection, which allows CMBS to trade in the market more like corporate bonds than like RMBS. This call protection comes in two forms: at the structure level and at the loan level. The creation of sequential-pay tranches is an example of call protection at the structure level. At the loan level, four mechanisms offer investors call protection: prepayment lockouts, prepayment penalty points, yield maintenance charges, and defeasance.

Answer 153

* A collateralized debt obligation (CDO) is a generic term used to describe a security backed by a diversified pool of one or more debt obligations (e.g., corporate and emerging market bonds, leveraged bank loans, ABS, RMBS, CMBS or CDO). * Like an ABS, a CDO involves the creation of an SPV. But in contrary to an ABS where the funds necessary to pay the bond classes come from a pool of loans that must be serviced, a CDO requires a collateral manager to buy and sell debt obligations for and from the CDO’s portfolio of assets to generate sufficient cash flows to meet the obligations of the CDO bondholders and to generate a fair return for the equity holders. * The structure of a CDO includes senior, mezzanine, and subordinated/equity bond classes.

Answer 154

•A is correct. Time tranching is the process in which a set of bond classes or tranches is created that allow investors a choice in the type of prepayment risk, extension or contraction, that they prefer to bear. Senior and subordinate bond classes are used in credit tranching structures as a form of credit enhancement. Credit tranching structures allow investors to choose the amount of credit risk that they prefer to bear. B is incorrect because fully and partially amortizing loans are the two types of amortizing loans. Amortization is a loan specification or design and refers to how the principal on a loan is repaid. C is incorrect because senior and subordinate bond classes are used in credit tranching structures as a means of credit enhancement. Credit tranching structures redistribute the credit risk associated with the underlying collateral and allow investors to choose the amount of credit risk that they prefer to bear. •B is correct. Bank Nederlandse has a claim against Marolf for 1.5 million EUR, the shortfall between the amount of the mortgage balance outstanding and the proceeds received from the sale of the property. This indicates that the mortgage loan is a recourse loan. The recourse/non-recourse feature indicates the rights of a lender in foreclosure. If Marolf had a non-recourse loan, the bank would have only been entitled to the proceeds from the sale of the underlying property, or 2.5 million EUR. A is incorrect because a bullet loan is a special type of interest-only mortgage for which there are no scheduled principal payments over the entire term of the loan. Since the unpaid balance is less than the original mortgage loan, it is unlikely that Marolf has an interest only mortgage. C is incorrect because Bank Nederlandse has a claim against Marolf for the shortfall between the amount of the mortgage balance outstanding and the proceeds received from the sale of the property. A non-recourse loan limits the rights of a lender in a foreclosure to the proceeds from the sale of the underlying property.

Answer 155

A is correct. Because the loan has a non-recourse feature, the lender can only look to the underlying property to recover the outstanding mortgage balance and has no further claim against the borrower. The lender is simply entitled to foreclose on the home and sell it. B and C are incorrect because the lender would be entitled to claim the shortfall between the mortgage balance outstanding and the proceeds received from the sale of the property only if the loan was of the recourse (not non-recourse) type.

Answer 156

B is correct. CPR is an annualized rate which indicates the percentage of the mortgage balance at the beginning of the year which is expected to be prepaid by the end of the year. The single monthly mortality rate (SMM) is a monthly measure of the percentage of the mortgage balance available to prepay for a pool of mortgages that is projected to prepay in the given month. The prepayment rate over the life of mortgages in the mortgage pool could only be computed at the end of the life of the mortgages. A is incorrect because the single monthly mortality rate (SMM), not the CPR, is the percentage of the outstanding mortgage balance available to prepay for a pool of mortgages at the beginning of the month that is projected to prepay that month. C is incorrect because the prepayment rate over the life of the mortgages in a mortgage pool could only be computed at the end of the life of the mortgages and therefore can only be projected based on an assumed prepayment rate.

Answer 157

•A is correct. Because commercial mortgage loans are non-recourse loans, the lender can only look to the income-producing property backing the loan for interest and principal repayment. If there is a default, the lender looks to the proceeds from the sale of the property for repayment and has no recourse against the borrower for any unpaid mortgage loan balance. Call protection addresses prepayment risk. Investors have considerable call protection at both the structure and the loan level with CMBS. At the loan level, there are four mechanisms that offer investors call protection: prepayment penalty points, prepayment lockouts, yield maintenance charges, and defeasance. B is incorrect because call protection addresses prepayment risk. Investors have considerable call protection at both the structure and the loan level with CMBS. C is incorrect because at the loan level there are four mechanisms that offer investors call protection: prepayment penalty points, prepayment lockouts, yield maintenance and defeasance. •A is correct. With CMBS, investors have considerable call protection. An investor in a RMBS is exposed to considerable prepayment risk, but with CMBS, call protection is available to the investor at both the structure and the loan level. The call protection results in CMBS trading in the market more like a corporate bond than a RMBS. Both internal credit enhancement and the debt-to-service coverage (DSC) ratio address credit risk, not prepayment risk. Internal credit enhancements are available for CMBS, but are not needed for an agency RMBS which is issued with a guarantee by its respective GSE. The DSC ratio level is used as a key indicator of the potential credit performance of the property underlying a commercial mortgage loan. B is incorrect because an internal credit enhancement mechanism such as “subordination” is used to achieve desired rating levels for a CMBS. An agency RMBS is guaranteed by the respective GSE and does not require a credit enhancement mechanism to reduce credit risk. Both credit enhancement and government guarantees address credit risk, not prepayment risk. C is incorrect because the debt-to-service coverage (DSC) ratio level is used as a key indicator of the potential credit performance of the property underlying a commercial mortgage loan. If certain DSC levels are needed, then an internal credit enhancement mechanism is used to achieve a desired rating level. The loan-to-value ratio is used for residential mortgage loans. Both ratios are indicators of credit performance and do not address prepayment risk.

Answer 158

•A is correct. Because of credit risk, all structures have some form of credit enhancement. An excess spread account is a form of internal credit enhancement which involves the allocation of any amounts into an account resulting from monthly funds remaining after paying out the interest to the bond classes, servicing fees, and administrative fees. The excess spread is a design feature of the structure. Time tranching (not an excess spread account) addresses prepayment risk (extension or contraction) to allow investors a choice in the type of prepayment risk that they prefer to bear. B and C are incorrect because an excess spread account is a form of internal credit enhancement. Time tranching addresses prepayment risk (extension or contraction) to allow investors a choice in the type of prepayment risk that they prefer to bear.

Answer 159

•B is correct. During the lockout period, the cash flow that is paid out to security holders is based only on finance charges collected and fees. After the lockout period, the principal is no longer reinvested but paid to investors. A and C are incorrect because, during the lockout period, the cash flow paid out to credit card receivable-backed security holders is based only on collected finance charges and fees. After the lockout period, the principal is no longer reinvested but paid to investors.

Answer 160

Começamos por calcular o PV com ytm 5%, C= 10 T =4 FV =100 Calculamos o FV dos cash flow reinvestidos à taxa de 3% durante 2 anos . Calculamos o PV daqui a 2 anos e somamos aos cash flow para termos o FV em 2 anos. PV calculado inicialmente = FV/(1+r)^2 e temos o horizon yield para 2 anos.

Answer 161

Quanto maior a duration mais sensível à variação das taxas de juro SUM ((T* Cupão)/(1+r)^T)/PV da obrigação Simplificando é o peso relativo de cada pagamento atualizado * o periodo onde é feito

Answer 162

= MAC Duration / (1+yield for period) se a ytm for de 10% e os periodos forem anuais yfp =10% Se ytm for 6% e os periodos forem semestrais yfp =3% Delta Ytm = 5 bps ((PV-) - (Pv+))/(period*Delta ytm*PV0) PV-= PV0 -Delta ytm PV+ =PV0+Delta ytm

Answer 163

devemos usar effective duration. Effective duration is essential to the measurement of the interest rate risk of a complex bond, such as a bond that contains an embedded call option. The duration of a callable bond is not the sensitivity of the bond price to a change in the yield-to-worst (i.e., the lowest of the yield-to-maturity, yield-to-first-call, yield-to-second-call, and so forth). The problem is that future cash flows are uncertain because they are contingent on future interest rates. The issuer’s decision to call the bond depends on the ability to refinance the debt at a lower cost of funds. In brief, a callable bond does not have a well-defined internal rate of return (yield-to-maturity). Therefore, yield duration statistics, such as modified and Macaulay durations, do not apply; effective duration is the appropriate duration measure.

Answer 164

Negative convexity, which could be called “concavity,” is an important feature of callable bonds. Putable bonds, on the other hand, always have positive convexity. As a second-order effect, effective convexity indicates the change in the first-order effect (i.e., effective duration) as the benchmark yield curve is changed. In Exhibit 8, as the benchmark yield goes down, the slope of the line tangent to the curve for the non-callable bond steepens, which indicates positive convexity. But the slope of the line tangent to the callable bond flattens as the benchmark yield goes down. Technically, it reaches an inflection point, which is when the effective convexity shifts from positive to negative

Answer 165

* When the investment horizon is greater than the Macaulay duration of a bond, coupon reinvestment risk dominates market price risk. The investor’s risk is to lower interest rates. * When the investment horizon is equal to the Macaulay duration of a bond, coupon reinvestment risk offsets market price risk. * When the investment horizon is less than the Macaulay duration of the bond, market price risk dominates coupon reinvestment risk. The investor’s risk is to higher interest rates. The difference between the Macaulay duration of a bond and the investment horizon is called the duration gap.

Answer 166

Given that the price falls from 92.25 to 91.25, the percentage price decrease is 1.084%. 91.25−92.2592.25=−0.01084 Given an annual modified duration of 7.24, the change in the yield-to-maturity is 14.97 bps. –0.01084 ≈ –7.24 × ΔYield, ΔYield = 0.001497 Therefore, the answer is A. The change in price reflects a credit spread increase on the bond of about 15 bps.

Answer 167

The purchase price is 117.729753. (1) Total return: 20.300 + 113.394288 = 133.694288. r=0.065647 (2) Total return: 20.500 + 109.297052 = 129.797052. If interest rates remain 5.00% for reinvested coupons and for the required yield on the bond, the realized rate of return over the two-year investment horizon is equal to the yield-to-maturity of 5.00%. 117.729753=129.797052(1+r)2,r=0.050000 (3) 7.00%: The future value of reinvested coupons is 20.700. (10 × 1.0700) + 10 = 20.700 The bond is sold at 105.424055. 10(1.0700)1+110(1.0700)2=105.424055 Total return: 20.700 + 105.424055 = 126.124055. 117.729753=126.124055(1+r)2,r=0.035037

Answer 168

Aproxx Modified = ((PV-)-(PV+))/(DeltaYield*Pv0*2) Aprox MAC = aproxx modified *(1+r)

Answer 169

Ann Modified Duration*PV full Para calcular a MAc duration de um portfolio ou fazemos os cash flows atualizados de todo o portfolio ou a média ponderada das Mac duration no portfolio.

Answer 170

multiplicar a duration pela variação dos bps

Answer 171

((Pv-)+(PV+)-2Pv0 ) / (Deltayield)^2*Pv0

Answer 172

Delta PV full= - annModDuration*Delta yield + 0,5*Deltayield ^2 *ann Convexity

Answer 173

1. 99.956780 2. aprox modified dur= 8.6907 aprox convexity =107.046 3. The convexity-adjusted percentage price drop resulting from a 100 bp increase in the yield-to-maturity is estimated to be 8.1555%. Modified duration alone estimates the percentage drop to be 8.6907%. The convexity adjustment adds 53.52 bps. 4. The actual percentage change in the bond price is –8.1794%. The convexity-adjusted estimate is –8.1555%, whereas the estimated change using modified duration alone is –8.6907%.

Answer 174

* Market price risk dominates coupon reinvestment risk when the investor has a short-term horizon (relative to the time-to-maturity on the bond). * Coupon reinvestment risk dominates market price risk when the investor has a long-term horizon (relative to the time-to-maturity)—for instance, a buy-and-hold investor. The presence of an embedded call option reduces a bond’s effective duration compared with that of an otherwise comparable non-callable bond. The reduction in the effective duration is greater when interest rates are low and the issuer is more likely to exercise the call option. The presence of an embedded put option reduces a bond’s effective duration compared with that of an otherwise comparable non-putable bond. The reduction in the effective duration is greater when interest rates are high and the investor is more likely to exercise the put option.

Answer 175

Money convexity is convexity times the full price of the bond. Combined with money duration, money convexity estimates the change in the full price of a bond in units of currency given a change in the yield-to-maturity. * Convexity is a positive attribute for a bond. Other things being equal, a more convex bond appreciates in price more than a less convex bond when yields fall and depreciates less when yields rise. * Effective convexity is the second-order effect on a bond price given a change in the benchmark yield curve. It is similar to approximate convexity. The difference is that approximate convexity is based on a yield-to-maturity change and effective convexity is based on a benchmark yield curve change.

Answer 176

When the investment horizon is equal to the Macaulay duration of the bond, coupon reinvestment risk offsets price risk. The duration gap is zero.

Answer 177

A is correct. Capital gains (losses) arise if a bond is sold at a price above (below) its constant-yield price trajectory. A point on the trajectory represents the carrying value of the bond at that time. That is, the capital gain/loss is measured from the bond’s carrying value, the point on the constant-yield price trajectory, and not from the original purchase price. The carrying value is the original purchase price plus the amortized amount of the discount if the bond is purchased at a price below par value. If the bond is purchased at a price above par value, the carrying value is the original purchase price minus (not plus) the amortized amount of the premium. The amortized amount for each year is the change in the price between two points on the trajectory.

Answer 178

•C is correct. The future value of reinvested cash flows at 8% after five years is closest to 41.07per 100 of par value. [7×(1.08)4]+[7×(1.08)3]+[7×(1.08)2]+[7×(1.08)1]+7=41.0662 The 6.07 difference between the sum of the coupon payments over the five-year holding period (35) and the future value of the reinvested coupons (41.07) represents the “interest-on-interest” gain from compounding. •B is correct. The capital loss is closest to 3.31 per 100 of par value. After five years, the bond has four years remaining until maturity and the sale price of the bond is 96.69, calculated as: 7(1.08)1+7(1.08)2+7(1.08)3+107(1.08)4=96.69 The investor purchased the bond at a price equal to par value (100). Because the bond was purchased at a price equal to its par value, the carrying value is par value. Therefore, the investor experienced a capital loss of 96.69 – 100 = –3.31. •B is correct. The investor’s five-year horizon yield is closest to 6.62%. After five years, the sale price of the bond is 96.69 (from problem 5) and the future value of reinvested cash flows at 6% is 41.0662 (from problem 4) per 100 of par value. The total return is 137.76 (= 41.07 + 96.69), resulting in a realized five-year horizon yield of 6.62%: 100.00=137.76(1+r)5,r=0.0662

Answer 179

A is correct. The bond’s approximate modified duration is closest to 2.78.

Answer 180

C is correct. A bond’s modified duration cannot be larger than its Macaulay duration.

Answer 181

C is correct. The bond’s Macaulay duration is closest to 2.83. Macaulay duration (MacDur) is a weighted average of the times to the receipt of cash flow. The weights are the shares of the full price corresponding to each coupon and principal payment.

Answer 182

A is correct. The interest rate risk of a fixed-rate bond with an embedded call option is best measured by effective duration. A callable bond’s future cash flows are uncertain because they are contingent on future interest rates. The issuer’s decision to call the bond depends on future interest rates. Therefore, the yield-to-maturity on a callable bond is not well defined. Only effective duration, which takes into consideration the value of the call option, is the appropriate interest rate risk measure. Yield durations like Macaulay and modified durations are not relevant for a callable bond because they assume no changes in cash flows when interest rates change.

Answer 183

MacDur = 13.50 −10.67 = 2.83

Answer 184

A is correct. The interest rate risk of a fixed-rate bond with an embedded call option is best measured by effective duration. A callable bond’s future cash flows are uncertain because they are contingent on future interest rates. The issuer’s decision to call the bond depends on future interest rates. Therefore, the yield-to-maturity on a callable bond is not well defined. Only effective duration, which takes into consideration the value of the call option, is the appropriate interest rate risk measure. Yield durations like Macaulay and modified durations are not relevant for a callable bond because they assume no changes in cash flows when interest rates change.

Answer 185

A is correct. Key rate duration is used to measure a bond’s sensitivity to a shift at one or more maturity segments of the yield curve which result in a change to yield curve shape. Modified and effective duration measure a bond’s sensitivity to parallel shifts in the entire curve.

Answer 186

B is correct. A bond’s yield-to-maturity is inversely related to its Macaulay duration: The higher the yield-to-maturity, the lower its Macaulay duration and the lower the interest rate risk. A higher yield-to-maturity decreases the weighted average of the times to the receipt of cash flow, and thus decreases the Macaulay duration. A bond’s coupon rate is inversely related to its Macaulay duration: The lower the coupon, the greater the weight of the payment of principal at maturity. This results in a higher Macaulay duration. Zero-coupon bonds do not pay periodic coupon payments; therefore, the Macaulay duration of a zero-coupon bond is its time-to-maturity.

Answer 187

A is correct. A limitation of calculating a bond portfolio’s duration as the weighted average of the yield durations of the individual bonds is that this measure implicitly assumes a parallel shift to the yield curve (all rates change by the same amount in the same direction). In reality, interest rate changes frequently result in a steeper or flatter yield curve. This approximation of the “theoretically correct” portfolio duration is more accurate when the yield curve is flatter (less steeply sloped). An advantage of this approach is that it can be used with portfolios that include bonds with embedded options. Bonds with embedded options can be included in the weighted average using the effective durations for these securities.

Answer 188

B is correct. The PVBP is closest to 0.0648.

Answer 189

B is correct. The bond’s approximate convexity is closest to 70.906

Answer 190

C is correct. The expected percentage price change is closest to 1.78%.

Answer 191

B is correct. If the term structure of yield volatility is downward-sloping, then short-term bond yields-to-maturity have greater volatility than for long-term bonds. Therefore, long-term yields are more stable than short-term yields. Higher volatility in short-term rates does not necessarily mean that the level of short-term rates is higher than long-term rates. With a downward-sloping term structure of yield volatility, short-term bonds will not always experience greater price fluctuation than long-term bonds. The estimated percentage change in a bond price depends on the modified duration and convexity as well as on the yield-to-maturity change.

Answer 192

C is correct. When the holder of a bond experiences a one-time parallel shift in the yield curve, the Macaulay duration statistic identifies the number of years necessary to hold the bond so that the losses (or gains) from coupon reinvestment offset the gains (or losses) from market price changes. The duration gap is the difference between the Macaulay duration and the investment horizon. Modified duration approximates the percentage price change of a bond given a change in its yield-to-maturity.

Answer 193

C is correct. The duration gap is equal to the bond’s Macaulay duration minus the investment horizon. In this case, the duration gap is positive, and price risk dominates coupon reinvestment risk. The investor risk is to higher rates. The investor is hedged against interest rate risk if the duration gap is zero; that is, the investor’s investment horizon is equal to the bond’s Macaulay duration. The investor is at risk of lower rates only if the duration gap is negative; that is, the investor’s investment horizon is greater than the bond’s Macaulay duration. In this case, coupon reinvestment risk dominates market price risk.

Answer 194

* Cash on the balance sheet * Working capital * Operating cash flow * Bank credit facilities * Equity issuance * Asset sales

Answer 195

Debt leverage= Debt/EBITDA Net debt leverage = (Debt-Cash)/EBITDA

Answer 196

A dívida subordinada é a dívida das filhas visto que os resultados da mãe dependem dos resultados das filhas. Also important is that although the debt of an operating subsidiary may be “closer to” and better secured by particular assets of the subsidiary, the credit quality of a parent company might still be superior. The parent company could, while being less directly secured by any particular assets, still benefit from the diversity and availability of all the cash flows in the consolidated system. In short, credit quality is not simply an automatic analysis of debt provisions and liens.

Answer 197

2) its willingness to pay. Willingness to pay is important because, due to the principle of sovereign immunity, investors are generally unable to force a sovereign to pay its debts.

Answer 198

Revenue bonds are issued for specific project financing (e.g., financing for a new sewer system, a toll road, bridge, hospital, a sports arena, etc.). Revenue bonds have a higher degree of risk than GO bonds because they are dependent on a single source of revenue. The analysis of these bonds is a combination of an analysis of the project and the finances around the particular project. The project analysis focuses on the need and projected utilization of the project, as well as on the economic base supporting the project. The financial analysis has some similarities to the analysis of a corporate bond in that it is focused on operating results, cash flow, liquidity, capital structure, and the ability to service and repay the debt. A key credit metric for revenue-backed municipal bonds is the debt service coverage ratio (DSCR), which measures how much revenue is available to cover debt payments (principal and interest) after operating expenses. Many revenue bonds have a minimum DSCR covenant; the higher the DSCR, the stronger the creditworthiness. * General obligation (GO) bonds are backed by the taxing authority of the issuing municipality (e.g., state or city). The credit analysis of GO bonds has some similarities to sovereign analysis—debt burden per capita versus income per capita, tax burden, demographics, and economic diversity. Underfunded and “off-balance-sheet” liabilities, such as pensions for public employees and retirees, are debt-like in nature. * Revenue-backed bonds support specific projects, such as toll roads, bridges, airports, and other infrastructure. The creditworthiness comes from the revenues generated by usage fees and tolls levied.

Answer 199

A is correct. The expected loss captures both of the key components of credit risk: (the product of) the likelihood of default and the loss severity in the event of default. Neither component alone fully reflects the risk.

Answer 200

Second lien debt ranks higher, by virtue of its secured position.

Answer 201

A is correct. All claims at the same level of the capital structure are pari passu (on an equal footing).

Answer 202

Solution to 3: C is correct. Solution to 4: A is correct. The subordinated bond would have its rating notched lower than the company’s BB rating, probably by two notches, reflecting the higher weight given to loss severity for below-investment-grade credits.

Answer 203

A is correct. Widget’s credit ratings are probably lagging behind the market’s assessment of its deteriorating creditworthiness. Answers B and C both state the situation backwards. If the market believed that the Amalgamated bond had a higher expected loss given default, then that bond would be trading at a lower, not a higher, price. Similarly, if the market believed that the Widget bond had a higher expected recovery rate in the event of default, then that bond would be trading at a higher, not a lower, price.

Answer 204

1- credit ratings podem ser muito dinâmicos 2- as empresas de rating enganam-se 3- risco sistémico é dificil de quantificar 4-os rating são lagging indicator, o preço das obrigações reflete mais rápido a qualidade creditícia

Answer 205

1- capacity ( capacidade de pagar em tempo útil) 2- collateral 3-covenants 4-character (qualidade da gestão)

Answer 206

yield corporate components - rf+ E(inflation)+yield spread yield spread - liquidity premium + credit spread

Answer 207

•B is correct. Secured debt holders have a direct claim on certain assets and their associated cash flows whereas unsecured debt holders only have a general claim on the issuer’s assets and cash flow.

Answer 208

•A is correct. First mortgage debt is the highest ranked debt in terms of priority of claims and is considered secured debt. First mortgage debt will also have the expected highest recovery rate. First mortgage debt refers to the pledge of specific property. Neither senior unsecured nor junior subordinate debt has any claims on specific assets.

Answer 209

•B is correct. Whether or not secured assets are sufficient for the claims, this would not influence priority of claims. The difference between pledge assets and the claim becomes senior unsecured debt and still adheres to the guidelines of priority of claims.

Answer 210

•C is correct. Neither an analyst nor ratings agencies can anticipate unexpected events.

Answer 211

•B is correct. An analysis of the human capital of a company is the purpose of assessing the strength of its balance sheets or, stated differently, the value and quality of assets supporting the issuer’s indebtedness (i.e., collateral).

Answer 212

•C is correct. Goodwill is viewed as a lower quality asset compared with tangible assets that can be sold and more easily converted into cash.

Answer 213

B is correct. The growth prospects of the industry provide the analyst insight regarding the capacity of the company