Punting certain topics

CFA Level III
#21

I should know these as concepts or know how to calculate them? How is this tested?

#22

Check out questions 5 A and B on the 2015 AM exam krok. If this is going to be tested, it will probably be this way. I doubt we’d be asked to make calculations based on actual and benchmark returns like we would in Micro, but it’s possible I guess.

#23

x3 here on Surrender calcs. Think this will be the most puntable topic I have come across.

#24

Could be tested a variety of ways. What would they get if they just invested passively (trick, because the uniformed will think Benchmark). Could be asked “what is the benefit of the manager” which is a trick, because IIRC the Bench + Manager performance is the active management component. Could be asked “Did the fund follow it’s policy allocation”…if Allocation effect is not 0, then they deviated slightly I believe.

All in all, I feel this is low hanging fruit because the NRA goes Bowling Mid August is hilarious and simple to remember. The components aren’t difficult, and their is overlap in some of the other curriculum. Unlike Fixed income attribution that has all those stupid Expect - Unexpected blah blah blah.

#25

The surrender calcs are quite simple if. There is only a slight difference between the two so if you can remember one you can remember both and snag a few extra points if it shows up.

Net Payment Cost Index

  1. Calculate the FV of the premium payments in BGN MODE.

  2. Calculate the FV of the Anticipated Dividends in END MODE.

  3. Subtract step 2 as from step 1 and this is the cost of insurance.

  4. Switch back to BGN Mode and plug the answer from step 3 (the cost of insurance) in as FV and calculate PMT (this is the interest adjusted cost of insurance per year).

  5. Divide the PMT calculated in step 4 by Face Value/1000 and you have your answer.

Surrender Cost Index

  1. Calculate the FV of the premium payments in BGN MODE.

  2. Calculate the FV of the Anticipated Dividends in END MODE.

  3. Subtract step 2 as well as the the projected cash value (which will be given) from step 1 and this is the cost of insurance.

  4. Switch back to BGN Mode and plug the answer from step 3 (the cost of insurance) in as FV and calculate PMT (this is the interest adjusted cost of insurance per year).

  5. Divide the PMT calculated in step 4 by Face Value/1000 and you have your answer.

#26

Agreed, except I don’t use BNG and END modes. I just multiply and divide the annuities by (1+r). Much faster and easier.

#27

That’s cool whatever works for you. I just think that these are relatively easy points to scoop up if they are on the test. - my two cents

#28

Deleted

#29

Can you explain this? If you’re in END mode, then just divide by (1+r) to get to BGN?

#30

rwmiscik wrote:

Dude, you rock. THANKS. I was worried about it this morning and just walked through your example.

It’s quite simple.

#31

You got it man, glad I could help

#32

For step (1), multiply by (1+r). The logic is that these payments come at the beginning of the year but you’re calculating as if they came at the end, so theres an extra year of growth missing.

For step (4), divide by (1+r). The logic here is that the future value you used to calculate the annual payments is a beginning of the year figure, rather than end of the year. Thus there is an extra year of growth that needs to be removed.

#33

Thanks, this is more efficient than switching between BGN and END.

I guess if you have two calculators, set one up as BGN and the other as END, lol

#34

GREAT idea!!! Thanks!

:wink:

#35

What I do is calculate FV on an END calculator using N+1 and then subtract PMT.

#36

ethics

#37

LOL nice one! Punting quite a few topics, but mainly Interest Rate Options, and anything that seems ridiculously pointless and requires way too much effort that might not even come up on exam day!

#38

IR options was 8 points last year

#39

If you think logically in the sense that insurance companies want the payments upfront but we get dividends on the back end, it makes sense that any benefit to buyer is calculated with END, and payments with BEG. Easier for me that way, but whatever works.

#40

If this helps, the formula for a credit spread option is the exact same as for a credit spread forward but as an OPTION you don’t have to execute as the buyer. So you add in Max (0, +other formula) which effectively sets a floor at 0. For in interest rate option, same idea but it’s LIBOR (or current/at maturity) - Strike (contract) initiation, which is the same as the spread formulas but instead of multiplying by the risk factor you do (t/360). Maybe that helps. They are all very similar so you can quickly learn 5 formulas if you get the key differences.