Okay, not sure if it is just me… so I’ll post these and see what your answers are: Which of the following is least likely a reason why the lattice-based backward induction method cannot be used to value a MBS? A) Prepayments. B) The path dependency of cash flows. C) Default risk. D) Variable interest rates. Carter Schmitz purchased 200 shares of Intelismart at $21 a share in June 2006 and intends to actively trade 80 shares in the near future and hold the remaining 120 shares as available for sale securities. Intelismart’s closing price was $26 on December 31, 2006, and Schmitz did not sell any of its shares. What amount should Schmitz report on this investment under unrealized gain: income on its 2006 annual report? A) $400. B) $0. C) $1,000. D) $600.
B and A?
A1. Least Likely reason for not using backward induction… hmmm… probably D? A2. Beg Val = $21 End Val = $26 TS = 80 AOS = 120 Income Statement ------------------------ For TS RG/RL = 0 (nothing sold as yet) UG = (26-21)*80 = 400 For AOS RG/RL = 0 (nothing sold as yet) Total Income Effect = 400 = A???
For question 2, the total unrealized gain is actuall $5*200= $1000, out of which $400 will be reported in the Income Statement (trading securities) and the remaining $600 will be reported in the OCI under Equity Section (available for sale). So, technically, the answer is C, but the classification of $400 and $600 is different, depending upon the type of security. Question 1: Probably D…did this part such a long time back, don’t remember clearly.
thought the question was asking about the income statement? i suppose it’s vague enough to include the balance sheet as well…
oh does the question mention income statement? didn’t catch that part…
no. it doesn’t. it was one of my awesome oversights. i read “income” and assumed “income statement”.
ok for the first question, schweser says the answer is B, but they are asking which is LEAST likely a reason why the backward induction method cant be used, if they want the answer to be B,shouldn’t it be worded as “the most likely reason for not being able to use backward induction” For question two, I also said 400. This is the answer schweser provided (which I assume now is incorrect since others got 400 as well) Your Answer A) 400 was incorrect. Correct answer is C) 1000 The unrealized gain on the 120 shares available for sale is $1,000 (26 - 21= 5 × 200 shares). There is also a realized gain of $400 (5 * 80) related to the 80 shares that are trading securities.
schweser was right on answer 2, as ruhi explains above. i assumed “income statement” when it said as “income” in the “annual report”. as you know, the annual report also includes the balance sheet, which will have the unrealized gains from available for sale securities under “other comprehensive income” a little tricky, but it’s correct.
What a dirty trick that was, damn you schweser
patkeenan Wrote: ------------------------------------------------------- > ok for the first question, schweser says the > answer is B, but they are asking which is LEAST > likely a reason why the backward induction method > cant be used, if they want the answer to be > B,shouldn’t it be worded as “the most likely > reason for not being able to use backward > induction” > you’re right…I picked B too…but then re -read and it says least likely…i would this it is most likely…which book are you getting this from!??
mumukada Wrote: > > > > > you’re right…I picked B too…but then re -read > and it says least likely…i would this it is most > likely…which book are you getting this from!?? They were both from Q-bank
Yet another guerrilla trick from Schweser. Keep the zingers commin’. It’s better to know them up-front than to get tripped by them come exam day.
“unrealised gain: income” looks suspiciously like they are saying “income statement”. You would report 400 on the income statement and 600 under comprehensive income. However they have proved that by writing the question ambiguously enough, reasonable people will come up with different answers. Dumb question.