# Mock PM questions

Reposted b/c skillionare screwed up my other thread hah Would appreciate some help in these areas. Thank you. EQUITY: 41. It seems like justified P/E = intrinsic P/E so I just want to confirm: (1-b)/(r-g) = 1/r + (1/r - 1/ROE)(g/(r-g) = justified P/E = intrinsic P/E. Right? Also, more importantly, why are they saying that American, which has an intrinsic P/E of 8.3 is LESS attractive than Belle which has an intrinsic P/E of 5.7? FIXED INCOME: 44. Solution says “The narrower the PAC window (labeled Expected Principal Repayment Dates), the more likely an MBS will behave like a bullet corporate bond.” Why? Is it just because a shorter time frame means there’s a higher chance for all principal to come back at once? 45. Solution says “If mortgage rates rise above the contract rate, the expected cash flow improves, but the cash flow is discounted at a higher rate.” Is the rationale for this the graph of an IO (page 128, Book 5 Schweser) where the value/price of an IO increases when rates increase and then at a certain point levels off and decreases because it is being overwhelmed by the higher discount rate? DERIVATIVES: 52. Statement 4: A newly entered plain vanilla interest rate swap has no current credit risk, but has potential credit risk that will increase steadily over the life of the swap. Solution: “While there is no credit risk at contract initiation…” Both Schweser and CFAI books say there is “little” credit risk in the beginning. What’s the correct answer?

Yes, my computer went haywire, but all the answers that I gave you are correct.

http://www.analystforum.com/phorums/read.php?12,1000218 44. You said you prefer a lower P/E. But this is INTRINSIC P/E. Don’t you want INTRINSIC i.e. funadmental i.e. justified P/E to be large? 52. You wrote in the other post that credit risk is zero. Schweser Book 5 Page 305: “There is low credit risk at the inception of the swap.” CFAI Volume 5 Page 263: “At the beginning of the swap, the credit risk is usually low”

44 cuz bullet pays all at once, so the less window the shorter the repayment period the closer it is to bullet bond 52 why does it matter if it says little or none B is def wrong, if B is wrong than C is wrong so A is the answer 45. Is BS question, I hope we are not gonna see those, I don’t even understand the statement made by the dude.

Just one thing to keep in mind regarding P/Es - whenever you are comparing P/E of one company to another - always the Company with lower P/E is attarctive to an investor - no matter justified,leading, intrinsic, etc. P/E is after all a P/E - Price to earnings ratio!!! Think from an investor who wants to invest in the Company not from the CEO/Management who wants to maximize the share price.

45 is not BS…they just don’t go into it much in Schweser (they kind of sort of say it). They are saying that when rates rise, IO cash flows rise, but they are discounted to the present value at a larger rate, so the flows are not that big unless they surpass a certain level. Example: If interest rate is at 10% today, and cash flow is 100 to be received next year, then cash flow today is worth 100/1.1=90.9. But if cash flow is 105 next year cause of increase in discount rate, and int rate is 15%, then 105/1.15=86.95 today, which is even less than it was when the discount rate was lower! This is cause the rate increased faster than the cash flow did.