All of these are from the PM tests 8 - Doesnt the collateral of a non-amortizing ABS change but not for an amortizing ABS thus making C correct? Furthermore the reasoning they give for B seems to contradict itself. It says the following statement is correct - “All principal repayments from the collateral are distributed as received to the security holders for amortizing assets, but only after the lockout period for non-amortizing assets” Then it goes on to say " Non-amortizing assets prior to lockout or revolving period principal repayments can be either paid out to security holders or reinvested in additional loans" What gives 53 - Why is a receiver swaption equivilant to a call? Aren’t you essentially short the interest rate? If rates go down you win, making it more like a put. General Question - What is the formula for tax burden?
Receiver swaption is equivalent to a call option on a bond. Collateral on an amortizing ABS can change due to prepayments.
They should be more specific. I mean if you are trying to hedge interest rates, my assumption is that they are talking about options on interest rates not bonds.
I got those same ones wrong.
I’m stuck on #8 as well. I’m wondering if they meant to say which is “incorrect”. Their explanation for why it should be B - principal repayments, seems to suggest that the description of principal repayments in the vignette was false, not true. I went with C as well. Really confused on this one.
jankynoname Wrote: ------------------------------------------------------- > I’m stuck on #8 as well. I’m wondering if they > meant to say which is “incorrect”. Their > explanation for why it should be B - principal > repayments, seems to suggest that the description > of principal repayments in the vignette was false, > not true. > > I went with C as well. Really confused on this > one. same here, i think they meant to say “incorrect”. they explanation specifically states that principal prepayments could be made either after lock out period or before, but the statement says only after lock out. that said, the collateral comp can change in amortizing structure if there are defaults or prepayments, so that answer is a little shaky but still principal payments is not right.
So on the test if the question says “Johnny Touchmyself buys a bond and wants to hedge against a rise in interest rates. What does he buy?” You would say he buys a payer swaption, which is a put option for a bond?
rellison Wrote: ------------------------------------------------------- > So on the test if the question says “Johnny > Touchmyself buys a bond and wants to hedge against > a rise in interest rates. What does he buy?” You > would say he buys a payer swaption, which is a put > option for a bond? LOL, yes he would.
Tax burden is NI/EBT Part of Dupont ROE = Tax Burden x Interest Burdin X operating margin X asset turnover X leverage NI/EBT x EBT/EBIT X EBIT/Sales x Sales/Avg Assets x Avg Assets/avg equity
Page 261 of CFAI book explains why payer swaption is put option and receiver option is call option. It is a call option on a bond not on a rate (bond option and rate option have inverse realtionship just as price and rates.)
I took the collateral changing to mean that the value of the collateral changes, which can be the cas for both amortizing and non amortizing. The fact that principal is being paid makes it changing, causing the current face of the asset to change.
So if you expect interest rates to go up, you buy a payer swaption regardless if it’s on a bond or a stock, you just call it a “put” if it’s on a bond and you call it a “call” if it’s on a stock or on LIBOR?
Can you confirm that “if you expect interest rates to go up, you buy a payer swaption regardless if it’s on a bond or a stock, you just call it a “put” if it’s on a bond and you call it a “call” if it’s on a stock or on LIBOR?”
Yeah, 53 needs to be more clear on whether it’s equivalent to a put on bond or interest rates. It would be equivalent a put on interest rates (my logic on test). But it’s also equivalent to a call on a bond. Rates up, bond prices down, value of receiver swap down (pay LIBOR will exceed receive fixed).