2007 CFAI Past Paper - Q6C Why is it that if Average Duration of Assets is greater than Average Duration of Liabilities, then this leads to a negative effect on Surplus? Please explain.
most of your assets are in fixed income securities. so if interest rates rise, then the value of your assets go down. interest rates up is going to help you if your liabilities are fixed (where you’re paying a fixed rate). so because A > L here and interest rates are rising, it hurts you because your assets are decreasing in value, your liabilities are decreasing in value, but since you have more assets than liabilities, it’s not a good thing and your surplus goes down.
Okay so there is a larger fall in asset value than the fall in liabilities value, thus reducing the size of the surplus. Cheers.
yep. i’m actually doing the same exam right now. just got to # 9. oh crap. i totally need to learn these formulas already. the amount of actual math stuff i don’t know at all yet and could show up on the AM section terrifies me. if this were my real test in 3 weeks, i would not be happy when i flipped the page and saw this q. so much to learn, 20 days.
Dont do the exam whilst on AF mate! Time yourself seriously. Good luck!
no need right now for me to worry about real simulation- i take tests fast. i’m not worried about time (famous last words). i AM afraid of not knowing the formulas. because i don’t know them yet.
Do you still have 2007 CFA exam paper with you? could you please share it with me? my email id is firstname.lastname@example.org
Wait, I don’t have this in front of me but are you guys talking about the leverage adjust duration gap? ------> DA-[(d/e)*DL] ??
And does the question state rates will increase? Because if they decrease, that would be a positive for surplus as assets will rise more than liabilities.