Rare Topics

I imagine most people have spend the last couple of weeks reviewing various mock exams and are familiar with the topics that are repeatedly tested. I’m wondering if it’d be useful to list some facts or topics from the readings that you’ve not seen, or barely saw, in the mocks/topic tests.

It seems to me like these topics that haven’t been touched upon in practice problems are going to be either (1) really unimportant and inconsequential or (2) the question that’s going to seriously trip us up for our exam next week. I can start:

  • Bubble / Crash : unusual positive/negative returns caused by panic buying/selling - Defined by (+/-) 2 standard deviations from mean or 30% drop in prices over several months
  • Bums Problem (fixed income benchmark problem): If the benchmark is weighted by issuance size, then the companies (bums) that borrow the most are overweighted, which increases the overall credit risk of the index.
  • Symmetric cash flow matching : cash flow matching technique that allows cash flows occurring both before and after the liability date to be used to meet a liability. - Reduces costs of funding a liability
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Thanks for that - especially the symmetric cf; agreed. I’m off to revisit that for a few mins …in a few mins…

  • Straddle Variants: Strap = Straddle + Call, Strip = Straddle + Put
  • Cram Down (Distressed Debt): when a judge forces dissenting creditors to accept a negotiated debt deal.

I have a feeling we will see Life insurance calculation in the AM just because it is a new topic… historically new topics get tested… know the two method of calculating the insurance needs … the two should give you close results but know the differences.

Life Insurance: Human Life Value vs Family Needs

Human Life Value : the amount of life insurance to purchase is the present value of the net future cash flows that Bob could bring to the family.

1) 70,000 ||| Start with post tax income 2) - 20,000 ||| Subtract Bob’s expenses that will cease when he’s dead 3) + 15,000 ||| Add value of nontaxable employee benefits (healthcare, employee contributions to retirement, etc.) 4) = 65,000 ||| Total value of Bob’s contributions to the family annually 5) ÷ (1-20%) ||| Divide by one minus the effective tax rate (of insurance proceeds) to find the pre-tax amount 6) = 81,250 ||| This is the pre-tax amount of money that Bob brought to the family every year 7) Assuming a 3% growth rate and 5% discount rate (I/Y=1.94% net compounded), and 20 years of income (N=20), the present value (CPT PV) is $1,362,203, which is the life insurance Bob should purchase.

Family Needs : the amount of life insurance to purchase is the amount of money the family will need after Bob’s death

1) Estimate the amount of cash needed upon death of Bob. This includes final expenses (funeral and burial) and any taxes payable. Additionally, usually you will pay off any debts, set aside an education fund, and create an emergency fund. Call this Immediate Cash Needs.

2) Estimate the present value of the family’s ongoing living expenses, less the present value of income. Use a relevant growth rate and discount rate. - For example, the surviving spouse may live another 50 years and need 60,000 every year. If her expenses grow at 3% and her discount rate is 5%, then her net I/Y is 1.94% and the PV of her expenses is $1.9 million. - Add the PV of the expenses of the children up until they graduate or can support themselves (usually 22 years old) - Add the PV of transition expenses that may last several years past Bob’s death (eg. car lease) - Subtract the PV of the income of the surviving family members (post-tax) This should add up to the present value of the ongoing living expenses of the family. Call this Capital Needs.

3) Add Immediate Cash Needs to Capital Needs to get Total Financial Needs

4) Add the total assets available to the family (Cash and Savings, PV of retirement accounts, Life insurance, Rental property, etc.). Call this Capital Available

5) Subtract Total Financial Needs - Capital Available = Shortfall in Needs. This shortfall is the amount of life insurance to purchase


Remove call feature from callable bond = short receiver swaption

Add callable exposure = long receiver swaption

Great Summary

Well done :slight_smile:

good 1 - u from D.C.?


Is this in the EOC anywhere or just the one blue box? Nice summary…

Supplemental EOC for Reading 12 on the CFA website

Just think it would be extremely cruel for a calculation in either AM or PM to be based off the supplementary material end of chapter for reading 12.

I was only aware of this by reading forum posts. I had to tell my colleagues who are taking level 3 who were completely oblivious to it. I can imagine there is a huge amount of candidates who havent even seen the EOC questions for 12.

I can see some easy question from behavioral finance (the first reading before you even get to the bias definitions) throwing me off. I made a note to re-read that one on Friday.

The trading reading seems like a prime candidate for some oddball question as well… might as well re-read that one

This is true only from the issuer’s perspective. See V5, R28, S5.3, specifically an example in subsection 5.3.1 (p394) for a complete explanation. I expect on the exam such a question most likely would be from a pm’s perspective.