# Couple Q's

I’ve just done Exam 3 (Vol 1) and have 2 Q’s that are bugging me: 1. Q9 asks you to do breakeven spread analysis of Bond Y and X… I know BSA does not take into account curenc returns but does that mean we have to use domestic returns on the bonds t calculate BS or local currency returns? the Q adjusts for forward discount/premium which I’ve never seen before but can only put down to whether you’re meant to use DC returns or LC returns… 2. Q2 does not adjust real annual spending by (1+Rf)^n but in previous practice exam from Vol 2 Exam 1 Q8 we adjust each year’s annual spending so that it grows at Rf…second one makes more sense to me but which is right?? Please help! Thanks

Which year do you have? I could not locate the question 2.

Thanks for replying sparty - Q2-A of this year’s Practice Exams Vol 1 exam 3 AM

grgkir001 Wrote: ------------------------------------------------------- > I’ve just done Exam 3 (Vol 1) and have 2 Q’s that > are bugging me: > > 1. Q9 asks you to do breakeven spread analysis of > Bond Y and X… > I know BSA does not take into account curenc > returns but does that mean we have to use domestic > returns on the bonds t calculate BS or local > currency returns? the Q adjusts for forward > discount/premium which I’ve never seen before but > can only put down to whether you’re meant to use > DC returns or LC returns… > > 2. Q2 does not adjust real annual spending by > (1+Rf)^n but in previous practice exam from Vol 2 > Exam 1 Q8 we adjust each year’s annual spending so > that it grows at Rf…second one makes more sense > to me but which is right?? > > Please help! > > Thanks I had the same issue with the “real spending” calculation and also increased it by the RF rate…marked it wrong, curious to hear what other people say. Bumpitty bump.

just asked Schweser and they say that in Q8 they specified they wanted to increase annual spending by the risk-free rate but in the other one (Vol 1 Exam 3 Q2) they said they want to maintain same level of spending…cheeky… Any ideas on my other query?

grgkir001 Wrote: > 1. Q9 asks you to do breakeven spread analysis of > Bond Y and X… > I know BSA does not take into account curenc > returns but does that mean we have to use domestic > returns on the bonds t calculate BS or local > currency returns? the Q adjusts for forward > discount/premium which I’ve never seen before but > can only put down to whether you’re meant to use > DC returns or LC returns… > Hi grgkir No sure if that’s what you’re asking; let me give a try. In my notes, it states BSA does not account for exchange rate risk. Therefore, ignore currency movement and use local currency returns in normal circumstances. However, this Q states “…Greystone believes that Intl bonds must be evaluated in terms of their potential for excess returns” in the paragraph above Figure 1. So we need to obtain the “excess return” for both Bond X & Y, which is equal to Local nominal return minus local risk-free rate. So I came up with excess returns for Bond X of 1.5% and Bond Y of 1.4%, and the difference of the two divided by 2 was used in the breakeven formula. My steps were slightly different than Schwezer but it is calculating the same thing based on the same concept. This is just my understanding anyway.

Thanks, James. For what it’s worth Schweser’s take was that it’s because they’re international bonds…