Week 7

Question 1

Fair Value Hierarchy

Answer 1

Level 1 - Quoted market prices

Level 2 - Observable inputs of similar instruments

Level 3 - Unobservable inputs

Question 2

Quoted Market Prices

Answer 2

Has to be quoted somewhere publically, such as an exchange

Question 3

Observable prices of simular instruments

Answer 3

If you get given some inputs, (such as a bond’s rate, face value, etc.) you can calculate the value of the security

Question 4

Unobservable inputs

Answer 4

Private information (such as in between two private financial firms)

Hard to value, but you do not need to.

Question 5

What do you have to do regarding the fair value hierarchy?

Answer 5

Every financial instrument needs to be classified as somewhere on the fair value hierarchy

Question 6

3 Types of quantitative disclosure on financial risk

Answer 6

Credit risk

Liquidity risk

Market risks

Question 7

Credit risk

Answer 7

The risk of not being paid back

Question 8

Liquidity risk

Answer 8

Risk of not having enough cash in the company

Question 9

Types of market risk

Answer 9

FX currency risk

Interest rate risk

Question 10

Debt investment classification types

Answer 10

Held to maturity

Held for Trading

Available for sale

Question 11

Available-for-sale

Answer 11

“Catch-all,” meaning if a security does not fit in the other categories, it will fit in here

Question 12

Held-to-maturity securities

Answer 12

Purchased to be held until maturity

Question 13

Characteristics of a derivative

Answer 13

(Example: call options)

1. Little or no investment
2. Settled at a future date
3. Tied to an underlying security, commodity, or interest rate

Question 14

Derivative definition*

Answer 14

a contract that derives its value from the performance of another product

Question 15

P&L

Answer 15

Profit and Loss

IFRS way of saying “Income Statement”

Question 16

OCI

Answer 16

Other comprehensive income

Question 17

CECL

Answer 17

Current expected credit losses

Question 18

What are the two credit loss models?

Answer 18

Incurred loss model vs expected loss model

Question 19

Incurred loss model vs expected loss model

Answer 19

Incurred, actually lost

Expected, not lost yet, but can still be booked (such as a loss in an investment that has not been sold yet)

Question 20

Who ran Long term Capital?

Answer 20

Marton Scholes

Question 21

How does time affect expected credit loss schedules?

Answer 21

Percentage of default goes up the longer past due the loan is

Question 22

Current expected credit loss journal entry

Answer 22

DR. Provisions (Credit loss)

CR. Allowance

Question 23

Why is impairment important?

Answer 23

If you do not use impairment, you will overvalue your securities

Question 24

How do you decide where debt goes on the financial statements

Answer 24

If it relates to everyday business operations, put it in the P&L statement

If it does not relate to everyday business operations, you put in in OCI (Other Comprehensive Income)

Question 25

Financial Instrument

Answer 25

Markatable security

Question 26

Types of Financial Instruments

Answer 26

Either asset or Liquidity