FI

CFA Level II
#21

I said steepening. Under a flattening scenario the answer is ambiguous - the short end could be increasing or the long end decreasing.

#22

I thought when the curve steepens short rates go down and long rates go up therefore short prices go up and long prices go down. Short out-performs.

#23

agreed.

#24

what is missing?

#25

i think there was a statement question on the first vignette? not ringing any bells in my mental state however.

#26

I think I put flattening as well…but am starting to think otherwise. What is “LT ability is CFO”? And what is 50% for the first one AM. I’m starting to forget stuff rather quickly…

#27

sorry- just came to me. last AM question was the swap curve vs. treasury curve that was easy. answer was “no” on counterparty risk, its general credit risk.

#28

Got a -1 for short-end wins long-end in a steepening curve. I knew PM was bad. Now I am starting to realize how bad it was quantitatively. So far I have identified around 15 to 20 qns wrong. Revision sucks. Ignorance is bliss.

#29

#5 am i think is downgrade risk, not prepayment risk. the bond in question was a non-callable CORPORATE bond. Prepayment risk applies only to mortgage-backed securities. Recall that in order to have a prepayment, you gotta have amortization of principal. the noncallable part was a trick, though a smart one, one of the many on the exam. that’s my two cents. Review pages 7 and 162 of the cfa book.

#30

Yeah, pretty sure I said downgrade risk.

#31

Why wouldn’t a corporate bond have downgrade risk though? If it its credit rating gets cut, bond price goes down, cost of debt goes up, WACC up, value down. I don’t understand.

#32

that’s exactly the risk it was most exposed to. the question asked for risk exposure. it wasn’t default and it wasn’t credit spread.

#33

hmm… maybe we had a different question? though i don’t remember any reason there wouldn’t be defualt or credit risk on a corp.

#34

My version specifically asked for the risk it was not exposed to. That is clearly prepayment.

#35

PAC tranche payment less than 6 if psa above 250 PO highest if paid off earliest IO goes higher, then flattens CMO definition - yes What was @ of PM as you mention it here? Doesn’t ring a bell.

#36

my version was 5050

#37

Lumiere, if it is a callable bond and if the rate goes down, corporation can call the bond and pay the entire principal amount in full. Then you have to reinvest the entire amount for a lower rate. I don’t remember the question, but how non-callable corporate bond reduces downgrade risk? Probably you are correct, just wanted to know the logic.

#38

the question asked which risk was the bon least exposed to, the only answer was prepayment risk. the other three options were actual risks for a non-callable bond. definitely prepayment

#39

“IO goes higher, then flattens” There wasnt one that said this, I remeber there was A) IO goes higher as rates rise, then rises more B) IO goes higher as rates rise, then falls C)IO goes lower as rates fall, then flattens D) (I dont remember this one) I picked C

#40

richsg21 Wrote: ------------------------------------------------------- > the question asked which risk was the bon least > exposed to, the only answer was prepayment risk. > the other three options were actual risks for a > non-callable bond. definitely prepayment what were the other answers - one was the portfolio with the 50 at the 30yr - ie more sensitive to IR - the 1.5% - was credit analysis correct? - gov does not regulate what else - this is for the first FI item set