Question 6 for Rioja - why is Putables not correct? Don’t putable provide protection in high interest rate enviornments only if the credit quality of the issuer isn’t an issue?
do you haev the year right? i don’t see it as # 6 on 2012
i think it’s beause the put can protect the hedger from credit risk.
Sorry this should read 2012 PM. My mistake
Actually both. When credit condition of issuer gets worse, bond prices are likely to deline thus put can be exercised. So not only movements in interes rates but changes in credit quality may trigger exercising the put option.
Wait can I ask you guys where is the 2012 mock pm available?
The old pm mocks are just shuffled around and are found in those 3 pm mocks on the CFAI website.
I’m still confused on why the putable piece is not right. Rates rise, price falls but you’re able to put the bond back to the issuer close to par value (as long as the issuer doesn’t have crappy credit). What’s incorrect about that?
The old pm mocks are just shuffled around and are found in those 3 pm mocks on the CFAI website.
I’m still confused on why the putable piece is not right. Rates rise, price falls but you’re able to put the bond back to the issuer close to par value (as long as the issuer doesn’t have crappy credit). What’s incorrect about that?
Okay I remember doing a similar question, not exactly sure if it the same one. The PM was worried about the decline in credit rating only. She didn’t care if the price fell (not MAIN Concern).
She knew she couldn’t keep the bond (force selling due to IPS), so the best/most direct way to migate the risk is to do a binary option.
Some put options include the option of putting back the bond to the issuer if the issuer defaults/credit downd¡grade, etc… Not all putable bonds have this feature but they are implicitly assuming this in the question.
They should have given more info…
What you described is a binary option… An event occur (default/down grade) amd the put is put into effect.
I’m assuming its because if an unexpected credit even happens the company might just go bankrupt and will not have the funds availble to buy the putable bonds back
Hey, I don’t have that mock, but did the question ask what the best answer is? If given a choice between puttable and binary option, binary would be best if concern is about a rating downgrade (or put another way-the issuer’s creditworthiness). Sorry if this is irrelevant…don’t see the whole question