I never had trouble on the actual exam questions for L1 and L2, but i was never comfortable with the durations readings. Anyone else had a tough time with Readings 28-30?
PErsonally… I left reading 29 with the most uneasy feeling of any reading thus far.
I am still at SS8. I browse through SS 9 and 10 and thought they are pretty similar to FI we studied in L2. Will let you know how I feel this weekend. God - I already hate Level 3.
Fortunately after having just taken the FRM, a lot of this is just review 
Focus on understanding duration at a high level first. It will make everything in the FI world relatively less confusing.
FI on last year’s exam in the afternoon was tough. I had myself convinced that they forgot to put in a key piece of information in the test paper. When I walked out of the exam, I was sure I failed. You need to have a good handle on when cash flow matching vs. classic immunization makes sense.
Agreed. Started yesterday and have no idea what I studied yesterday.
probably one of the very few areas where i thought the CFAI text was much, much better to use.
I think the FI portion on last year’s exam in the afternoon was most tricky and the statements in the readings are most vague.
Don’t get bogged down on the details. Once you have read all the different types of immunization strategies, things should began to make sense.
phBOOM Wrote: ------------------------------------------------------- > Don’t get bogged down on the details. Once you > have read all the different types of immunization > strategies, things should began to make sense. great advise!
The reading on Currency risk management has got to be the worst reading in all of the study sessions, or at least I hope it is
I also find this study session slow and tough to go through. The CFAi reading seems to explain it better than Schweser though, but it is a lot longer.
Reading 28~31 in Volume 4 are really tough to me ! 1. Reading 28 : Dedication Strategies" (P25~44) A. P 26 : under 4.1.1 Immunization Strtegies Does the term “Guaranteed rate of return” has same meaning as “Assured rate of return” (both terms are used in the same paragraph) ? B. P27 : Example 5, Exhibit 8 Why the par value purchased and purchase price are $9,642,899.- given both the coupon rate and YTM are 7.5% ? and the price is 100.00000 ? C. P29 : under 4.1.1.3 Determining the Target return The second paragraph : [In general, ……………………. the higher reinvestment return] Why the immunization target return rate of return will be less than the YTM for an upward-sloping yield curve ? And why the immunization target return rate of return will be greater than the YTM for an downward-sloping yield curve ? D. P31 : Example 7, Exhibit 10 What does the statement of “We choose to rebalance using the existing security of “one-third each” mean ? 2. Reading 30 (P109) Is it that the duration of 4.00 shall be the “leveraged” duration ? Since among the 140M bond portfolio, 100M is borrowed the bond portfolio. That is to say, the bond portfolio shall be a “leveraged” portfolio. On the other hand, D(equity) of 11.50 shall be “un-leveraged” duration, right ? Anyone can help ? Your advice will be much appreciated !
somewhat repetitive with earlier comment, but probably the only substantive area where i realized 10 days before the exam that “i don’t understand this at all”
Further to my previous questions, I am confused by the following too : Reading 28 : Dedication Strategies" (P25~44) 1 P29 : under 4.1.1.2 Rebalancing an Immunized Portfolio P30 : under 4.1.1.5 Dollar Duration and Controlling Position Is it that the “duration” shall be rebalanced or the “dollar duration” shall be rebalanced ? If the “duration” shall be rebalanced, how to rebalance ? It seems that only the "dollar duration"can be rebalanced and "duration"can not be rebalanced. 2. P33 : under 4.1.2 Extensions of Classical Immunization Theory Classical immunization theory is based on several assumptions : [2. The portfolio is valued at a fixed horizon date, and there are no interim cash inflows or out flows before horizon date.] What does this statement means ? Unless all the bonds in the portfolio are zero-coupon bonds and have same maturity, there will be interim cash inflows or out flows before horizon date. Looking at those statements and the raised examples, all the bonds are coupon bonds. Is it discrepant ? 3. P42 : under 4.1.4 Immunization for General Cash Flows P44 : under 4.2 Cash Flow Matching Strategies What are the differences between these two ? Anyone can help ?
AMC, I looked at this post as per your request. I have written my responses below your q, hope it helps!! Reading 28~31 in Volume 4 are really tough to me ! 1. Reading 28 : Dedication Strategies" (P25~44) A. P 26 : under 4.1.1 Immunization Strtegies Does the term “Guaranteed rate of return” has same meaning as “Assured rate of return” (both terms are used in the same paragraph) ? Both of these terms mean the same thing. B. P27 : Example 5, Exhibit 8 Why the par value purchased and purchase price are $9,642,899.- given both the coupon rate and YTM are 7.5% ? and the price is 100.00000 ? I already answered this q C. P29 : under 4.1.1.3 Determining the Target return The second paragraph : [In general, ……………………. the higher reinvestment return] Why the immunization target return rate of return will be less than the YTM for an upward-sloping yield curve ? And why the immunization target return rate of return will be greater than the YTM for an downward-sloping yield curve ? Here all they want to say is that the reinvestment return differs from the YTM. Remember here that the immunization target return is the total return on the bond. When the yield curve slopes upward, the reinvestment retrun will be higher but the horizon price will be lower, making the total rate of target return lower because the price impact will be higher than reinvestment rate. Same applied the other way around. D. P31 : Example 7, Exhibit 10 What does the statement of “We choose to rebalance using the existing security of “one-third each” mean ? I already answered this one. 2. Reading 30 (P109) Is it that the duration of 4.00 shall be the “leveraged” duration ? Since among the 140M bond portfolio, 100M is borrowed the bond portfolio. That is to say, the bond portfolio shall be a “leveraged” portfolio. On the other hand, D(equity) of 11.50 shall be “un-leveraged” duration, right ? Well, let’s see here. Leveraged portfolio means that the portfolio which is partly borrowed. In this example, out of 140 MM, 100MM is borrowed. The leveraged portfolio ( including borrowed) has a duration of 11.50 as shown. Usually the borrowing has a lower duration because it’s for the short term, so here the liability(money borrowed) has duration of 1. Unleveraged duration will be 4. If there is no borrowing, the duration would have been 4. Anyone can help ? Your advice will be much appreciated !
AMC, I will try to answer your q here too my responses are below your q: Further to my previous questions, I am confused by the following too : Reading 28 : Dedication Strategies" (P25~44) 1 P29 : under 4.1.1.2 Rebalancing an Immunized Portfolio P30 : under 4.1.1.5 Dollar Duration and Controlling Position Is it that the “duration” shall be rebalanced or the “dollar duration” shall be rebalanced ? If the “duration” shall be rebalanced, how to rebalance ? It seems that only the "dollar duration"can be rebalanced and "duration"can not be rebalanced. Here we are talking about a bond portfolio which has 3 bonds in it. Each one has a set duration. We cannot change that without adding a derivative position or replacing the bond. We do not want to do that. We want to keep those baonds in our portfolio. Now, with passage of time / change in rates will result in change of duration of each bond. We want to keep the duration of the portfolio ( that’s why it’s dollar duration which comes into picture) the same. The way to do it is to rebalnce the portfolio in such a way that resulting DD will still be the same. 2. P33 : under 4.1.2 Extensions of Classical Immunization Theory Classical immunization theory is based on several assumptions : [2. The portfolio is valued at a fixed horizon date, and there are no interim cash inflows or out flows before horizon date.] What does this statement means ? Unless all the bonds in the portfolio are zero-coupon bonds and have same maturity, there will be interim cash inflows or out flows before horizon date. Looking at those statements and the raised examples, all the bonds are coupon bonds. Is it discrepant ? When they talk about interim cash inflow/outflow they mean that nothing more is invested or withdrawn. They are not talking about coupon. 3. P42 : under 4.1.4 Immunization for General Cash Flows P44 : under 4.2 Cash Flow Matching Strategies What are the differences between these two ? General immunization is applicable to the arbitary cash flows over a period of time. The portfolio manager does not have enough cash to start with. In cash flow matching, it’s the liabilities which are matched against bonds. Hope this clarifies the confusion.
derswap07, Thank so much for your help. For your response regarding Reading 28~31: 1. Reading 28, P29 : under 4.1.1.3 Determining the Target return I agreed that [when the yield curve slopes upward, the reinvestment retrun will be “higher”], and I think that ITRR (immunization target return rate of return, ie., the total return) will be greater than the YTM because the horizon price will be lower if you mean “market price at the inception” by horizon price. But CFAI text stated that ITRR will be less than the YTM because of the “lower” reinvestment retrun (and vice versa) in the statement (whole paragraph) of : [In general, …………………… reinvestment return]. This is what confused me ! 2. Reading 30, P109 Can I say that the “unleveraged duration” of the “equity” is 4.0 and the “leveraged duration” of the “equity” is 11.50 ? On the other hand, would you response to my questions posted on February 13, 2010 09:35PM under this same message title ?
derswap07, Thank so much for your response to my questions posted on February 13, 2010 09:35PM. It seems that we response to each other at the same time. Reading 28 : Dedication Strategies" (P25~44) P29 : under 4.1.1.2 Rebalancing an Immunized Portfolio P30 : under 4.1.1.5 Dollar Duration and Controlling Position Do you mean that we cannot change or rebalance the “duration” of each bond without adding a derivative position or replacing the bond ? But with the passage of time / change in rates, the duration of each bond will change accordingly and to keep those bonds in our portfolio, the DD of the asset (i.e., the bond portfolio) shall be rebanced so that the portfolio’s DD can be kept synchronized (with the DD of some iabilities) ? Your response to my other questions are very helpful ! Thank you so much !
derswap07, Reading 28, P29 : under 4.1.1.3 Determining the Target return I think it over again and I think that you shall mean “the price at the end of the investment horizon” by “horizon price” in your previous response to my question posted on February 15, 2010 11:47PM. I can not understand why [the reinvestment retrun will be higher but the horizon price will be “lower”, making the total rate of target return “lower”]. CFAI text stated that "for an upward-slopping yield curve, the ITRR will be less than the YTM because of the “lower” reinvestment retrun (and vice versa) in the statement (whole paragraph) of : [In general, …………………… reinvestment return]. This confused me much !