- When calculating FCFE, if net borrowing is not given and must be pulled from the B/S, do you take the difference in LT debt only? Current liabilities only? Total Debt? What about A/P (current) and N/P (long term)? 2. In GAAP, unusual or infrequent items go before NI, while unusual and infrequent items and extraordinary items goes after NI. Is IFRS the same? 3. OAS for a callable bond = Zspread - option cost. Is it the same for putable or is it zspread + option cost? 4. You must get permission from your employer to engage in competing work, even if payment is nonmonetary (i.e. getting paid via tickets from a symphony you advise financially). But do you have to get employer permission if it’s the other way around–if it’s paid but unrelated work (i.e. working as a violinist for the symphony and getting paid?) Does it then matter then what the job is (i.e. waitress once a week doesn’t need permission but a mayor of a small town does)?
You only count interest bearing ST & LT debt. So AP etc is not included.
- In GAAP, unusual or infrequent items go before NI, while unusual and infrequent items and extraordinary items goes after NI. Is IFRS the same? IFRS does not allow extraordinary items. 4. You must get permission from your employer to engage in competing work, even if payment is nonmonetary (i.e. getting paid via tickets from a symphony you advise financially). But do you have to get employer permission if it’s the other way around–if it’s paid but unrelated work (i.e. working as a violinist for the symphony and getting paid?) Does it then matter then what the job is (i.e. waitress once a week doesn’t need permission but a mayor of a small town does)? I’ll need to review myself, but I THINK any competing consulting type of work to your employer needs prior approval. My pt job hustling tips behind a bar does not.
nirjraina Wrote: ------------------------------------------------------- > You only count interest bearing ST & LT debt. So > AP etc is not included. So if given A/P, NP, ST debt and then the summation as CL. And given LT. Net borrowing is change in ST debt plus change in LT debt?
any takers for question 3 (oas for putable bonds?)
Notes Payable are counted as interest bearing debt also, otherwise you are correct.
ok thanks. why is A/P not interest bearing? dont u have to pay interest on borrowings for things like inventory or whatever else A/P cash is used for?
OAS = Z spread + option cost for putable bonds This can be understood by keeping the relations mentioned in below in mind option cost > o for callable bonds and option cost < 0 for putable bonds
- I think it is Z Spread plus option cost but am not positive
so it really is OAS = z - option cost for both. its just that option cost is negative for putable bonds, so you have OAS = z - (- option cost) = z + OAS. cant really understand intuitvely how option cost can be negative but i can live with this explanation
But isn’t OAS smaller for callable bonds, so that would mean: Z-spread+option cost must be lower for callable bonds for the OAS to be lower, meaning that the option cost<0. Is this right? Why is this thinking not right?
You need to look at the diagram depicting the relation between the 3 in the text book 1. OAS 2. Option Cost 3. Z spread to understand better how OAS = Z spread + option cost option cost can be negative if though from the perspective of the issues
a put has value to an issuee–so he has a cost, the option cost. but the issuer (the borrower) finds no value in the put and thus it has negative option cost. is that right?
I will try and explain it once again Callable Bonds - The OAS ( option removed spread ) is less than Z spread because if the call option is removed (call option is good for the borrower and bad for the lender), the lender would lend out the money at lower interest but if the option is present he would demand higher interest as the call option favours the borrower and not the lender. Thus when a call option is removed OAS (option removed spread) < Z spread. i.e. Z = OAS + option cost (for callable bonds) Putable Bonds - The OAS (option removed spread ) is greater than the Z spread because if the put option is removed (put option is good for the lender and bad for the borrower) the lender suffers and hence yield required goes up, thus OAS (option removed spread) is higher than Z spread i.e OAS = Z + option cost (for putable bonds)
just remember that OAS = Z - option cost ALWAYS, and option cost < 0 for a callable bond and > 0 for a putable bond based on whether or not the investor benefits from the option.
ridgefield Wrote: ------------------------------------------------------- > just remember that OAS = Z - option cost ALWAYS, > and option cost < 0 for a callable bond and > 0 > for a putable bond based on whether or not the > investor benefits from the option. Ridgefield, following your method, should’t the equation be OAS = Z + option cost ALWAYS?
Z spread = OAS + option cost If the bond is callable the investor will want a higher spread for taking the risk. Which is why option cost is positive. And If the bond is putable you will require a smaller spread. Hence the option cost is negative. Hopefully that helps.