Well, I am off from work the next few days. Usually I just lurk the forum, but being that there isn’t much activity here (especially with only 3 days to the exam), I’ll lead the discussion. ________________________________________________________________________ GARP Full practice exam, page 108, question 23 The answer states that choice III is a true statement: “Firms whose capital exceeds their required regulatory capital are firms that employ their capital inefficiently and their shareholders would benefit if they used some of their capital to repurchase shares or increase dividends.” I thought this was a false statement. If the firms internal ecocap model suggests a risker book than what the local regulation suggests, it would make sense for the firm to hold more capital to ensure solvency. Can’t there be situations where the regcap is too conservative compared to what the bank’s internal models suggest?
LEVEL TWO topic GARP Full practice exam, page 110, question 29. Which of the following could result in liability to your bank through its role as trustee? The correct answer was: “The SPE controls were unable to determine whether its investors used funds derived from legitimate business opportunities” Really? Can anyone provide some reasoning for why this is true?
LEVEL TWO topic GARP Full practice exam, page 111, question 33 I am not clear on the explanation provided by GARP on why choice c is incorrect. “To evaluate exposure to high-severity operational risk events, banks using the AMA approach may use either scenario analysis of expert opinion, or VaR model estimates based on internal data using extreme value theory”
Yep these were all BS questions, particularly the first one. I for sure thought that statement was true, and still think it is.
LEVEL ONE topic GARP Full practice exam, page 112, question 36 The answer states that a callable corporate bond can lose value as yields decline. I was under the impression that as yields decline, the price of a callable bond will increase, just not as quickly as a non-callable. With low enough yields, and an absolute guarantee that the call option will be exercised, the price would plateau at the call price. Can the callable actually ‘lose’ value in this case?
I think they meant “lose value” relatively, as in it will lose value relative to an otherwise identical non-callable bond.
Schweser Full Practice Exam 2 Morning session, question 28 The key rate shifts used are the 10 and 20 year yields. There is a 10bps shock to the 10 year point. What is the effect on the yield to maturity of a 14-year bond? The answer says 6bps, but I am not sure why it isn’t 4bps.
This is the part where I get flipped around, too, but just take an extra second to think through linear interpolation problems, and you’ll probably save yourself a question or two. Since only the 10-year yield is shocked (by 10bp), you can think of the effect between the 10 & 20-yr yields as a diagonal line on axes, where “bp shock” is on the y-axis and “length of yield is on the x-axis”. (For this problem, I’m ignoring the effect to the left of the 10-yr yield.) The graph should be a straight line between (10, 10) and (20, 0). The greatest effect is exactly on the 10-yr yield - the full 10bp. The smallest effect should be at the 20-yr yield and all yields longer than 20. It would be 0. So, for the 14-yr yield, the coordinate would be (14, 6) - or 6bp effect. If you want to think about it differently, the change from 10-yr to 20-yr is from 10bp to 0bp, and at 14, it’s 40% of the way to the end. So, the decrease is only 40%, which leaves you with 60% of 10bp, or 6bp. On the flip side, going from 20-yr to 10-yr is from 0bp to 10bp and at 14, it’s 60% of the way to 10bp, which is 6bp. Interpolation is fairly simple to imagine, but it’s important you keep your numbers in order. Figure out whether you’re increasing or decreasing, and figure out how far along you are to that final destination.
That makes perfect sense now. Don’t know why I couldn’t wrap my head around that when reading the answer. Cheers
No problem - I had a hard time with interpolation by just memorizing the formulas. Even though it takes longer to process (like trying to think about left and right from the ground up), I’m much more likely to get it right if I just think “first principles” with interpolation. Learned that the hard way studying for actuarial exams. Thanks for the questions! It’s providing me with the selective listening capacity, 'cause it’s just too much to review EVERYTHING before Saturday.
even i was a bit intrigued about the callable bond losing its value as yields decline , shouldnt it increase instead ,because it has higher chance of being called off .
I encourage others to post more of these ‘wtf’ questions. Please reference the source, question #, page #, etc.