I(C) Misrepresentation

Mr Honda recently moved his portfolio to XYZ bank. the portfolio contains an illiquid $500k par value bond in a private railroad. Working on the XZY year end statements, Ms Porsche is correcting the pricing data and sees there is no price available for the bond from any of the usual pricing services. She calls three brokers who might normally be able to deal in such securities. Prices quoted to sell are 88,95 and 75, no offers could be given.

  1. bond should be reported at par since Mr Honda intends to hold the stock until maturity.

  2. Use 95 since this is the best price available.

  3. Use the average of $86, valuing the holding at $430k

(I’m reading the bottom of page 44 book 1 and don’t really understand the “shopping values” part,) thanks

The shoppong for values part says that it’s improper (i.e., a violation) to look around for other brokers who might quote you a higher price than your normal broker does. This would seem to eliminate answer 2.

As we have no information that Mr. Honda intends to hold the bond to maturity, it would seem to eliminate answer 1.

Thus, simple set theory leaves us with answer 3.

We are not sanguine about this, however.

The best answer would be that Ms. Porsche use the price quoted from her normal broker, but the question gives us no information on that. And the curriculum does not specifically advocate using an average price.

All in all, a poor question.

(It is interesting, however, that the two cars I’ve owned that have been far and away the most fun to drive were my '77 Porsche 911S and my (current) '01 Honda S2000. Coincidence? I think not.)

thanks for your input s2000.

performance reporting, social media and ommissions are new for 2015 as you well know.

After rereading it a few times I think the “shopping” process is what CFAI want to prevent. therefore provided that there is a written policy, all is ok.

last place I worked with a human bond desk, the “call for three prices” was always used. probably more correct would be to use an internal pricing model together with a footnote.

My pleasure.

What’d the question’s author claim is the correct answer?

I don’t see anything wrong with calling for three prices, and using either the mean or the median (the median’s probably better). There’s simply nothing in the curriculum to support that approach.

it’s a question I made up since there is no guidance, or example questions on this topic.

Got it.

As you say: no guidance or examples.