Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

CFA-2 > Fixed Derivatives > Flashcards

Fixed Derivatives Flashcards

You may prefer our related Brainscape-certified flashcards:
CFA flashcards
1
Q

Carried Interest

A

When Fund value > Invested Capital

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q
  1. Tag Long - Drag Along (Private Equity)
  2. Ratchet
  3. Distribution Waterfall
A
  1. Tag along: When management has the ability to get equity upon sale of the company
  2. Ratchet: Specifies equity allocation between LPs and Management
  3. Distribution Waterfall: How profits flow to the LPs and whether the GP may receive carried interest
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Calculate % Ownership of Private Equity First Round Investors (F1)

A

F1 = Investment / Post1

    • Investment: amount invested at the beginning (before post1)*
    • Post 1: The present value of the company post the first round of financing*
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Calcuate # of Shares F1 Investors need to get % ownership (Spe1)

A

Spe1 = Se(F1 / 1-f1)

    • Spe1: Shares for Private Equity Investors in round 1*
    • F1: Fractional ownership of first round investors*
    • Se: Number of shares owned by management*
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Determine Stock Price after First Round of Private Equity Financing

A

P1 = Inv1 / Spe1

    • P1: share price post financing first round*
    • Inv1: Initial financing*
    • Spe1: Shares owned by Private Equity investors after round 1*
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Loss Given Default / Recovery Rate

A
  • Loss given default: overall position (remaining coupon + Principle) that would be lost
  • Recovery rate: The remaining amount after LGD is taken out.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Credit Risk: Expected Loss

A

= Probability of Default X Loss Given Default

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

PV of Expected Loss: Credit Risk

A
  • Highest fee holder would pay to remove the risk of the bond
    1. Risk neutral probabilities are used instead of actual probs like expected loss
    1. time value of money is considered*
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Credit Evaluation Models

A
  1. Credit ratings: Consistency over accuracy
  2. Structural models: Options based with unrealistic expectations
  3. Reduced Form Models: Variable Rf%, economic factors, etc.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Yield Curve Shapes (4)

A

Normal: Positive slope

Flat: Horizontal

Inverted: Negative slope

Humped: Positive slope then negative

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Yield Curve Shifts (3)

A
  1. Parallel: All maturies move by same bps
  2. Twist: change in YC slope
  3. Butterfly: + shift YC becomes less humped / - shift YC becomes more humped
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Expectation Theories: Term Structure of Interest Rates

A
  1. Pure expectations: Geometric mean of short term yields
  2. Liquidity preference: Long bond holders require higher premium
  3. Preferred habitat: YC is determined by expectations that can be different for different maturities
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Annualizing the Standard Deviation: Fixed income

A

ASd = Daily Sd X √# of days in year

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Nominal / z-Spread / OAS (fixed income)
Benchmark / Compensation for risk

A
  1. Nominal: T-yield curve / credit, liquidity, option (a one time view on the spread)
  2. z-Spread: T-spot rate curve / credit, liquidity, option (the spread that when added to the treasury spot rate will make the bond’s value equal to the price of the bond)
  3. Option-adjusted: T-spot rate curve / credit, liquidity
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Price of Callable Bond
Price of a Putable Bond

A

Callable Price = Price of Option Free Bond - Price of embedded call

Putable Price = Price of option free bond + price of embedded put

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Effective Bond Duration

A

Duration = (V₋ - V₊) / [2V₀(Δy)]

- used to value bonds with or without an option

- This models a change in price if the yield shifts by 100 bps regardless of the amount of change used to calculate V- and V+

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Effective Bond Convexity

A

Convexity = [V₋ + V₊ - 2V₀] / [2V₀(Δy)²]

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Most Appropriate Model for Valuing Models on Mortgage Backed Securities

A

Monte Carlo for bonds with options

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Bond Equivalent Yield

A

BEY = 2[(1+i)^n -1]

- i: interest rate per period… monthly would lead to an exponent of 6

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Appropriate Spread Measure for…

  1. Callable corporate bonds and MBS
  2. Credit card or autoloan ABS
  3. Option free corporate bonds
A
  1. Callable = Option adjusted/removed spread
  2. Credit card or auto loan ABS = Z-spread
  3. Option free corporate bonds = Z-spread
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Market Conversion Premium Per Share (convertible bond)

A

MCPPS = (Market price of bond / Conversion factor) - Market price of stock

  • Bond = 950 / converts to 10 shares / stock trading at 50*
  • MCPPS = (950/10) - 50 = $45*
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Steps to Value Bond (1 year) with %r Tree

A

1: Value of bond with up and down change in interest rate one period forward.
2. If value of bond in one branch is greater than callable value… use that
3. Add coupon payment(s) in branches
4. Discount at one-year treasury rate

[(V1+C$)/(1+%r) + (V2+C$)/(1+%r)] / 2

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Use OAS spread to determine of callable bond is over, under or fairly valued.

A
  1. OAS is negative compared to corp spot rate curve = overvalued
  2. OAS is zero compared to corp spot rate curve = Fairly valued
  3. OAS is positive compared to corp spot rate curve = undervalued
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

Delta Hedging

A

Number of shares in contract = Investment / Delta

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

Gamma is Greatest for…

A

At the money options

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

Put-Call Parity

A

Po = Co - So + x/e^(r)(t)

    • t should be in decimal form (90 days = .25)*
    • this formula assumes continuous compounding*
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

Put-Call Parity for Futures and Forwards

A

P0 = Co + [(X - F(0,T) / 1+r^t]

    1. F(0,T) = value of future now that expires in time T*
    1. The numerator could be negative*
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

Value of Call Option for one period (Binomial Model) including probability calculation

A

Step 1: Calculate max gain for up and down move

Step 2: prob = (1 + Rf% - d) / u - d

Step 3: Co = [prob(call+) + 1-prob(call-)] / (1 + Rf%)

    • d = 1 - the likely decline in value in percentage terms*
    • u = 1+ the likely rise in value in percentage terms*
    • call+ = The maximum value of the call assuming the positive forecast comes true at expiration*
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

Value of Call (binomial model) - Two Periods

A

Step 1: Calculate max gain for up, down, and up/down-down/up moves - up and down move must be squared

Step 2: prob = (1 + Rf% - d⁻) / u⁺ - d⁻

Step 3a: C⁺⁺ = [prob(call⁺⁺) + 1-prob(call⁺⁻)] / (1 + Rf%)

Step 3b: C⁻⁻ = [prob(call⁺⁻) + 1-prob(call⁻⁻)] / (1 + Rf%)

Step 4: C = [prob(C⁺⁺) + 1-prob(C⁻⁻)] / (1 + Rf%)

  • d = 1 - the down move (or 1/1+upmove if no down move given)
  • u = 1+ the up move
  • call+ = The maximum value of the call assuming the positive forecast comes true at expiration
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q

Assumptions about Black Scholes Merton (BSM) Formula

A
  1. Volatility of the return on the underlying stock is known and constant
  2. Stock prices are lognormally distributed
  3. Continuous Rf% is known and constant
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
31
Q

Fixed Rate for Swap Contract

A

Fixed Rate = DFn / (DF1 + DF2 + DF3… + DFn)

    • DF: Discount Factor*
    • If annualized then Fixed rate must multiplied by the appropriate factor - semi-annual x2. *
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
32
Q

No arbitrage price on forward contract on treasury bond

A

Step one: NPV of next coupon payment PMT/1+r^t

Step two: (Vo - NPVcoupon) X 1+r^t’

  • t = time to next coupon/365*
  • t’ = forward length/365*
  • Vo = price of bond now*
  • r = effective rf%*
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
33
Q

Loss (or value of short position) on no arbitrage forward contract treasury bond

A

Step one: Current NPV of next coupon payment PMT/1+r^t*

Step two: V1 - NPVcoupon - (Original forward value) / 1+r^t*’

t* = Current time to coupon payment / 365

t*’ = Current time to expiration / 365

  • Original calculation to determin forward’s first price…*
  • Step one: NPV of next coupon payment PMT/1+r^t*
  • Step two: (Vo - NPVcoupon) X 1+r^t’*
  • t = time to next coupon/365*
  • t’ = forward length/365*
  • Vo = price of bond now*
  • r = effective rf%*
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
34
Q

Determine Forward Rate Agreement rate from Spot Rate Curve (2X5)

A

= ({[(1+150d%)^150/360] / [(1+60d%)^60/360]} - 1) / 360/90

- curve moves in 30 day increments

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
35
Q

Loss (or gain) on short position on 2x5 FRA 30 days later

A

Step one expected Payoff = (FRAo - FRA1)(notional value)(90/360)

Step two PV of expected Payoff = payoff/1+120day%^(120/360)

- note: the PV is probably not going to be much less than step 1.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
36
Q

Calculate the payoff on an interest rate floor

A

Floor Payoff = Principle X (Floor rate - Market rate)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
37
Q

Definition of a Swaption

A

The option to enter into an interest rate swap

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
38
Q

Payer Swaption definition

A

Allows buyer to enter into a swap as the fixed rate payer/ variable rate reciever

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
39
Q

Receiver Swaption definition

A

Allows buyer to enter into swap as fixed rate receiver and floating rate payer

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
40
Q

Interest Only Strips (MBS)

A
  1. Collect only interest payments from mortgage pool
  2. If rates rise, prepayments drop and interest payments stay high for a longer period
  3. Worried about contraction risk
41
Q

Principle Only Strips (MBS)

A
  1. Collect only principle payments from mortgage pool
  2. Discount security so falling interest rates = quicker return of capital
  3. Worried about extention risk
42
Q

Single Month Mortality Rate/ Conditional Prepayment Rate / Estimated Monthly Prepayment

A
  1. SMM = 1 - (1 - CPR)^1/12
  2. CPR = 1 - (1 - SMM)^12
  3. EMP = SMM X (MBSo - Principle)
43
Q

PSA (Has to do with )

A

PSA benchmark for conditional prepayment rate (CPR)

  1. Assumed to be .02% in month one and increases .02% per month until month 30.
  2. Remains at 6% after month 30 until 100% PSA
44
Q

PAC Tranche vs. Support Tranche

A

Planned Amortization Class

  • They have priority on principle payments over other classes
  • The non PAC classes are “support” tranches with uncertain paybacks
45
Q

Effective Collar on PAC Tranche

A

The PSA speeds within which the PAC tranche has protection from the support tranches.

46
Q

Direct Capitalization Method (real estate valuation)

A
  1. Calculate average cap rates from recent sales (Price/NOI)
  2. Apply average cap rate to expected NOI
47
Q

Direct Sales Valuation Method (real estate)

A

Step 1: Calculate Price per SqFoot for each comparable

Step 2: Multiply step 1 by 1+(age of building (depreciation), location, condition, age of transaction (appreciation))

Step 3: Apply average of step 2 to investment

48
Q

Equity Dividend Rate (real estate investment)

A
  1. Equity (use LTV to calculate)
  2. Annual debt service costs (12 X Monthly service costs)
  3. Net operating income
  4. EDR = (NOI - ADSC) / Equity
49
Q

Levered Rate of Return (real estate)

A

PMT = NOI - Debt Service

PV = - Equity (use LTV to calculate)

FV = Expected Sale price - Loan payoff

N = Expected holding period

CPT I/Y = Levered IRR

50
Q

Value of Property Cost Approach (real estate)

A

Replacement cost (include builder profit)
- Curable deterioration
- Incurable deterioration (Vo X (age/total age))
- Total Obsolescence
Building value
+ Land value
Total cost estimate

51
Q

Incurable / Curable Deterioration (real estate)

A
  • Curable: Deferred maintenance that is curable
  • Incurable: Depreciation of the building.
52
Q

Appraisal Lag

A

Appraisal values lag changing transaction values. If prices are rising, they rise first and then appraisals come up. Combat appraisal lag by unsmoothing the index or relying on transaction indexes.

53
Q

Assets included in CDO’s

A
  1. HY Corp bonds
  2. Structured products (MBS, ABS)
  3. Emerging Market bonds
  4. Bank loans
  5. Special situation and distressed debt
54
Q

Most appropriate spread measure for home equity loan ABS

A

OAS spread with monte carlo simulation

55
Q

Gains/Losses on bonds held that are available for sale are reported where on financial statements?

A

On the BS in other comprehensive income. Versus held for trading where gains/losses are shown on income statement. Or held to maturity where amortized cost and interest income is only thing reported on BS and IS respectively.

56
Q

Economic Factors that Affect REIT investments

  1. Industrial Properties
  2. Apartments
  3. Office properties
A
  1. Industrial - Retail Sales
  2. Apartments - Population and job growth
  3. Office - job growth
57
Q

Value of REIT (Asset Value Approach)

A

NOI
- Non-cash Rents
+ Acquisition Adjustment
Proforma NOI

PFNOI (1+g) = Projectied NOI

PrNOI / cap rate = estimated value of assets
+ other assets
- Liabilities
NAV

58
Q

Reason to choose investing in real estate directly versus REIT, or REOC

A

Avoid structural conflicts of interest that may exist in REOC and REIT

59
Q

Value of REOC using Discounted Cash Flows Approach

A
  1. Determine present value of dividends over forecasting period.
  2. Determine terminal value (look at instructions)
  3. Discount rate = Cap rate + Expected growth rate
60
Q

Effect of a negative butterfly shift in yield curves on a short term callable bond

A
  1. It would experience price compression
  2. Short term rates are likely falling more than intermediate or long term rates
  3. However, prices of callable bonds are capped. - limiting the upside.
61
Q

Calculate the effect of a change in yield on a portfolio duration

A
  1. Durations of different maturities are negative - multiply them by the interest rate increase (+) or decrease (-).
  2. Add the changes determined in step 1 to find change in portfolio duration.
62
Q

Determine the fixed rate for a semi-annual swap

A
  1. Calculate discount factors for each semi-annual period
    ie 1 / 1 + (.0245 x 180/360) = .9879 for the first 6 months or 180 days.
  2. Determine fixed rate using annualized interest rates (assume this is a 2-year swap)

[(1 - 720discount) / (180discount + 360discount + 540discount + 720discount)] X 2 = fixed rate

63
Q

Payoff for Quarterly Interest Rate Cap

A
  1. Doesn’t matter how long cap has been in place.
  2. (Current R% - Cap R%) X 90/360 X Notional = Payoff
64
Q

Calculate Futures Price

A

FP = So X [e^(r-d)(t)]

  1. e = ln or 2.71818
  2. the exponent is the Rf% - Dividend rate times time
  3. t = days to expiration / 360
65
Q

Convenience Yield Definition

A

Is the non-monetary benefits of holding an asset that is in short supply. if there is a shortage of a commodity, your storage costs as the holder may be less than the costs of the future’s price.

66
Q

Price of Futures vs. Forward in flat (constant) interest rate environment

A

If the interest rate is constant then there will be no difference between futures and forward price.

67
Q

OAS provides insight into what?

A
  1. the liquidity risk of the bond with options when compared to similar bonds with options.
  2. Different volatility assumptions will affect OAS
68
Q

Post money VC valuation using single period NPV

A

= Expected future value / 1+r^n

  • Don’t worry about initial investment since this is post money.
69
Q

Calculate carried interest at the end of a series of years

A
  1. called down capital - management fees + performance for each year = end of year NAV
  2. Difference between total NAV
70
Q

CMBS’s are riskier than MBS’s because…

A

They tend to be non-recourse and are only supported by the value of the property and its cash flows. The lender cannot generally go after the company’s other assets like you can with a residential MBS.

71
Q

Calculate Fixed Payment in Fixed for Fixed Currency Swap

A
  1. Derive PV Factors (example of a 2-year swap)
    * a. Z360 = 1/[1+360Rf%(360/360)] = 360PV Factor
    b. Z720 = 1/[1+720Rf%(720/360)] = 720PV Factor*
  • 2*. Fixed payment in “pesos”
  • a. (1-720PV)/(720PV + 360PV) = Fixed payment per peso*
  1. Annual fixed payment
    * Fixed payment per peso X $Notional / Current exchange rate*
72
Q

Currency Swap Rate Spreads Reflect the risk of What?

A
  • Global credit risk not the credit risk of the counterparties
73
Q

Credit Risk peaks at what point for currency and interest rate swaps?

A
  1. Currency swaps: peaks at the end because notional amounts must be exchanged.
  2. Interest rate swaps: peaks at the middle and then declines as swap payments are made and fewer are due.
74
Q

Present value of currency swap payments and notional principle

A
  1. Calculate the Annual Fixed Payment from original rate structure
  2. Use the new rate structure to find PV factors (adjust for time passing)
  3. Present Value
    * Annual fixed payment X (new360PVF + new 720PVF) + Notional X new 720PVF = PV *
75
Q

Collateral Changes in an ABS

A
  1. Amortizing ABS collateral is not changed after creation (home loans, auto loans, etc)
  2. Non amortizing (revolving) collateral may change during lockup period. Principle payments are used to buy more collateral
76
Q

Clean up call provision in ABS

A

Triggers a provision where cash flows are used to pay down principle if the value of the ABS has been impaired. This applies to credit card ABS in the lockup period.

77
Q

Excess Servicing Spread (ABS)

A

Issuer pays a lower coupon than the coupon on underlying collateral. The excess cash is used to pay for losses on the colateral. Internal credit enhancement.

78
Q

Letter of credit

A

An agreement from a bank to cover losses on an ABS up to a certain amount. This can be affected by the credit of the bank and is an external credit enhancement.

This is an example of the weak link philosophy.

79
Q

Overcollateralization (ABS or MBS)

A
  1. Internal credit enhancement
  2. Principle of collateral is greater than principle of tranches
  3. Absorbes losses before junior traunches
80
Q

Determine which tranche has best OAS value

A
  1. OAS value per Option cost
    a. 36 bp OAS for 15bp option cost
    b. 36 bp OAC for 19bp option cost

A is the better choice in terms of OAS value.

81
Q

Trick to determine whether to convert currency transaction at bid or ask.

A

For triangular arbitrage or covered interest rate parity or whatever, just convert at the bid or ask for the worst deal.

82
Q

Calculate Cap Rate (real estate)

A

= Required Return - Growth Rate

83
Q

Venture Capital Method to Determine Percentage Ownership

A

Investment(1+r^n) / Expected Vo in future

84
Q

Value of Equity Forward at Point in Time

A

Vt = St - F(0,T)/(1+r)^T-t

  • Vt = value now*
  • St = Spot price now*
  • F(0,T) = Forward value at expiration*
  • T-t = Time to expiration at the beginning and t is time to expire now. ie 90/360*
85
Q

Forward Contract Price on Equity Index

A

F(0,T) = [Soe^-(δc)T] X [e^(rc)T]

δc = Continuously compounded dividend rate

rc = Continuously compounded interest rate

86
Q

Calculate Forward Price on Currency Rate

A

= So X (1+rD)^T / (1+rF)^T

  • MAKE SURE YOU CHECK FOR 360 vs 365 YEAR
87
Q

Calculate forward price on dividend paying stock

A

= So(1+r)T - (div/1+r^t + div/1+r^t…

  • *The t in the dividends needs to be time to dividend divided by the time to expiration. *
88
Q

Synthetic stock

A

So = C - P + Long bond/(1+r^t)

89
Q

Accrual Tranche

A

receives principle and interest after PAC and sequential pay tranches have been paid. Interest owed to accrual tranche will be added to principle.

90
Q

Sequential Pay Tranche

A

Each SPT recieves principle payments after the tranches in front of it have been paid off.

91
Q

Common source of value creation from a leveraged buyout…

A

Reduction of debt by the time the company is sold.

92
Q

Total Value to Paid in Capital (private equity)

A
  1. Total value = NAV after distributions (last year) + total distributions
  2. TVPiC = TV/Paid in capital in last year (the sum)
93
Q

Find market value of equity swap

A

Step one=1+gain on equity - 360df - (.XX)(Df+Df+df+df)

Step two = Notional x Step one = value

94
Q

Market Value of a Receiver Swaption

A

= Max (0), (fR% - Market rate)X(Dfn+Dfn+Dfn…)XNotional

- Remember to use 360 not 720 in your Df calculations

- the market rate needs to be calculated from the rate structure

95
Q

Spot price versus Futures price

A

EXPECTED Spot price = Futures price + Risk premium

96
Q

Based on sharpe ratio which asset should be added to portfolio to achieve greatest mean-variance improvement?

A

Max of: Sharp of potential asset > Sharpe port X correlation between port and new

97
Q

Standard Deviation of a Portfolio of two Assets

A

= √(w1² X σ1²) + (w1² X σ1²) + 2(w1,w2r1) X σ1σ2

98
Q

Value of Swaption

A

Max (0, (r-M%) X (DF1 + DF2…)xNP

CFA-2 (6 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions