Does somebody know how to figure out the interest rates on the interest rate tree in Exhibits 12 and 13 (Pages 305 and 306, CFA Text, Vol. 5) . Following the procedure on page 304, it appears what was added/deducted based on Step 2 is 22.69 basis points not 25 points as indicated. Or, is it that the interest rates in the interest rate tree in Exhibit 5 (page 296) were first shifted by 25 points to calculate the market price of 102.218, later the OAS spread of 35bps was then added? Can somebody help, please. Secondly, can somebody help me figure out how the Convertible’s Returns in the last column of page 321, same book as above, were arrived at?

First part, I’m pretty sure we don’t have to know how to construct these mammoths. In Exhibit 12, they shocked rates up by 25bps, to get a value of 101.621, and in Exhibit 13 they shocked rates down 25bps to get a value of 102.765. I believe we would be given these numbers and then asked to plug into ED or EC formula which they do. These formulas are the same as level 1. converts question…this isn’t a typical problem, they are just illustrating how when the stock sucks, the convert has better downside protection, and conversely when the stock jumps the bond lags it. These numbers are GIVEN as far as I can see just to illustrate the point.

It’s all done via bootstrapping, and as AndrewUNH said I’m highly confident we don’t have to know that (if we do, I’m F-d). Just start at the end,work backwards. Beware of calls or puts.

Hi, having the same problem as ADISON2000. So are the yields in the exhibit 12&13 tables indeed calculated outside the book via bootstrapping? Spent some time figuring the numbers because just simply adding/subtracting the yield shocks didn’t give the exact numbers given in the book.