CFA Mock 2012 Afternoon Session Q. 13

I have some problems to understand why they use N = 9.

With my mathematicial knowledge this are 10 years from 01.01.2011 to 31.12.2020.

Or I am wrong. What do you think?


One one did the mock?

Make it easy for people to help you, and post the problem. Nobody wants to waste time trying to go back and search for the specific example

There is another post on this question and nobody answered that one either, so bump. I’ll do the legwork as curiosity is killing me. I’m pretty sure it’s an error.

#13. The contribution from the investment in Alme to Dagmar’s net earnings ('000s) for 2011 is closest to: A) 200 B) 224 C) 234

Relevant info from exhibit 1 (for the year ended 12/31/2011, all figures in '000):

Company name: Alme Security Description: bonds maturing 31 dec 2020, 5% cpn annual, 6% effective market rate when issued on 1/1/2010 Classification: HTM Amount owned by Dagmar (investor): face value 4,000 Market value 1/1/2011: 3,600.60 Market value 12/31/2011: 3,634.76

I understand you need to calculate the interest revenue portion that will contribute to Dagmar (investor)'s net income, but the answer book uses n=9 instead of n=10 when computing for PV of remaining CF on the bond at 1/1/2011 or 12/31/2011, is what is confusing both Patrick and me. Thank you.

Figures I am using:

N=10 I/Y = 6% PV = CPT PMT = 200 (4000*0.05) FV = 4000 Solve for PV, you get 3,705.60. A 6% interest will be 222 instead of what is listed as the correct answer (choice B: 224), so I ended up choosing the right answer, but the answer key explanation of using N=9 in the TVM calculation is still puzzling.

OK, i have the same question

because the bonds were issued on 1st of january 2010?

I see now -

HTM securities are held at amortized cost on the reporting date - which is PV of future cash flow disct’d at market rate in effect when issued.

At the reporting date, there are 9 years left until the bond matures. You are are the end of 2011, so end of 2012 is 1 year (receive interest), end of 2013 is 2… end of 2020 would be 9 years from the end of 2011. You’ve received the cash flow at the end of the year, so its not a “future” cash flow anymore.

Solving for PV = 3723, * .06 = 223.68

Oh damn, is so easy thank u very much.

Shall we use beginning of year balance to calculate interest? So although you are at the end of 2011, you should still use Jan 2011 balance to do calculation? Am I wrong?

Oh, i see what you’re saying now. Yea, that’s weird.

it is weird. anyone could explain this?

anyone??? is it a mistake?

Here’s the thing: If you do the math, the Interest expense wont be materially different even if you use really large numbers. For instance, even if you only use N = 5, the interest only changes by $5 (the interest amount is only changing by the difference in PV between N= 9 and N=10 * the interest rate). If you stretch it out to N = 17, the interest is still $214

So, I doubt the difference in PV periods will lead you that far astray