Qualitative Stuff

This is the content that always kills me. Post here if you have any good, testable qualitative material. Combining all five international parity relationships indicates that exchange rate risk is really just inflation risk. There are five practical implications from this framework: 1. risk free return is the same in all countries 2. investing in countries with high nominal interest rates will not generate excess returns because the high nominal interest rates will be accompanied by local currency depreciation. 3. all investors will earn the same real return in their own currency on foreign investments. 4. exchange rate risk is simply inflation risk. 5. foreign currency risk can be hedged without cost b/c there is no foreign currency risk premium.

How bout this one? I saw this in my notes and was like …huh?: HEL Floater - HEL backed securities collateralized with variable rate HELs - Securities use 1 month LIBOR as reference rate, whereas the underlying securities use 6-month LIBOR -This difference in rates creates a mismatch between the reference rate and the underlying loans and there must bea cap on the coupon for a HEL Floater (called an available funds cap)

Or Limitations of Using the Cash Flow Yield: 1. Reinvestment Risk - payments are assumed to be reinvested at the CFY and this may not be possible 2. Price Risk - If sold prior to maturity, then is uncertainty of terminal cash flows 3. Can the Cash Flows be Realized? If prepayment and default are different from what is assumed, CFY will not be realized.

nice one. Here’s another: GDP + Net property income from abroad = GNI - Depreciation = NNI

Good one, How bout: Swap Curve (LIBOR Curve) is preferred over Gov’t Bond Yield Curve because: 1. Swap market is not regulated by any government 2. Supply of swaps is not affected by technical market factors that affect govt bonds (eg repos) 3. Swap curves across countries more comparable 4. Swap curve reflects similar levels of credit risk whereas govt bonds reflect sovereign risk 5. More maturity points on swap curve.

Accelerated depreciation will lead to higher NPV compared against using straight-lined depreciation

One more: The effects of inflation: 1). Cash flow need to be discounted correctly 2). Inflation reduces real tax savings from depreciation 3). Inflation decreases the value of fixed payment to bondholders 4). Inflation effects COGS & revenue differently (i.e. inflation passthrough rate)

ph …good one…that screwed me up before… corporate bond with a bullet payment is similar to a PAC tranche with a narrow PAC Window

Non-Accelerating Senior Tranche (NAS) in a HEL; recieves no prepayments in early years, and thus this reduces contraction risk. In later years, the NAS recieves a relatively high % of prepayments, thus reducing extension risk.

When adding a new investment to a portfolio, the Sharpe ratio of the new investment must be greater then the product of the Sharpe Ratio on the exitsting portfolio and the correlation between the new asset and the existing portfolio.

You cannot use the equity method regardless of % ownership if any of the following apply: -pending litigation prevents investor from exercising control -investor is unable to vote its shares or otherwise influence managemetn because of restrictions such as a standstill agreement. -a majority shareholder controls the investee’s operations -other factors that indicate lack of influence, such as lack of seats on the board of directors.

When analyzing the credit worthiness of a company, it is best to use Funds from Operations for a more established issuer with long term viability. For a weaker issuer you should look at the Free Operating Cash Flow.

Rationale for Share Repurchases: 1. Prevents EPS Dilliution from exercise of employee options 2. To Distribute Cash 3. Good Investment 4. Change Capital Structure - (eg Too much equity, borrow money and buyback shares)

A reportable segment has at least 10% of one of the following: 1. revenues 2. operating profit or loss 3. combined identifiable assets of the enterprise as a whole. companies must disclose the following for all reportable segments: 1. some measure of profitability 2. identifiable assets.

Why is it difficult to compare a hedge fund to a typical benchmark? 1. Changes in Leverage 2. Changes in Hedging Techniques 3. Style Drift 4. Portfolio Turnover

if current stock price is greater than book value per share, a buyback will decrease BV per share. if after-tax cost of debt is greater than earnings yield, borrowing funds for a share buyback will decrease EPS.

Three Major Factors that cause a country’s currency to Appreciate/Depreciate 1. Income Growth - Higher Growth, leads to increased demand for imports, leading to Depreciation 2. Inflation Rate- Higher Inflation, leads to higher demand for cheaper (imports) and currency will depreciate 3. Real Interest Rate- Higher Rate, leads to increased demand for the currency, leading to appreciation.

Shifting Interest Mechanism - To keep the % of the subordinate bond class to the total mortgage balance at an appropriate rate, then prepayments are allocated so that the Senior tranche recieves a higher amt of the prepayments. This in turn creates more contraction risk, yet this reduces the credit risk of the Senior tranche.

Differences from analyzing corporate credit on: ABS -cash flows are more certain due to non-operating nature of SPV -role of servicer is more important Muni -unique covenants & priority of revenue covenants Sovereign -must analyze qualitative and quantitative info as well as standard credit analysis