This is so frustrating going over CFAI’s rationale for some of these answers. Sutherland says he can’t buy IO strips because he can only purchase securities with principal repayments. CFAI says this is an incorrect statement because IO strips don’t have principal repayments. Is there some piece of the puzzle I’m not getting here?
Another thing I just noticed about the Mock, it’s amateur hour here. On the explanation of answer 51 their formulas are missing several components/symbols. =[1.0-( )]/[( )+( )] I’m pretty sure it’s not supposed to look that way!
If u read carefully what sutherland said was correct - he is saying that IO is not an option for him as he wants securities with repayments - which IO’s don’t have - so his statement is correct.
Right that’s my point. Sutherland’s statement is correct but the answer says he is INCORRECT regarding principal repayment.
If u read CFA’s explanation to the answer it says — Sutherland is incorrect with regard to IO value and correct with regard to principal repayment. Don’t know how u r interpreting that CFA is saying it is incorrect. Also, one of the choice is “… incorrect wrt IO repayments” - and the CFA answer did not chosse that as the correct answer. So what r u reading???
I think you’ve misunderstood the question. Its referring to his statement about IO’s value and how it moves with interest rates. He says that the value of IO’s will always go up if Interest rates do (this is incorrect, the value will go up, peak, and then fall because the cash flows will be discounted at a higher and higher rate). The second part of his statement is just saying that that type of investment (IO’s) won’t work for his portfolio because he needs something that has a principle repayment (thus he implies that IO’s don’t have a principle repayment, which is true, so he is correct here).
It is pretty clear that he is NOT saying IOs “always go up if interest rates do” He specifically says “should go up” which is not an incorrect statement. The net effect is not entirely clear, but he is right in many cases looking at the graph on page 369 (he would be correct up to about 11.5%, so in most cases, he is correct. They “Should” go up with interest rates). I don’t understand why CFAI includes questions like this, that seem arbitrary. The answer could just as easily have been A, and been correct.