Question Bank 3

Question 1

sources of short term funding:
commercial paper (lowest cost) for high credit worthiness
bank lines of credit
collateralized borrowing (e.g banks acceptance)
nonbank finance companies (lower credit rating)
factoring=sell AR to fund

Question 2

Tail risk is the risk that extreme events are MORE LIKELY than estimated, that is the returns distribution has “fat tails.”

Question 3

industry analysis:
define industry=classification system from third party by sector
survey the industry=growth rate, size, trends, market shares
analyze the industry=porters five forces
examine external influences=PESTLE
analyze competitive strategies

Answer 3

capital allocation process are:
Idea generation
Analyzing project proposals
Creating the firm-wide capital budget
Monitoring decisions and conducting a post-audit

Question 4

portfiio management steps:
planning=IPS specifies benchmark
execution=analysis of asset classes for portfolio allocation, analysis of individual securities
-strategic asset allocation=asset allocation between E D, biggest impact on return, LT
-tactical asset allocation=ST, deviated from target weights to profit from ST opportunities
-rissk budgetingset risk limit by IPS
feedback=evaluation against benchmark, rebalance

Answer 4

-

Question 5

one-month Value at Risk (VaR) of $10 million with a probability of 2.5%=one-month loss of at least $10 million is expected to occur 2.5% of the time. It does not represent a maximum loss.

Question 6

increase vol increase option value for both call and put bonds
callable bond=recall if IR falls too low, price ceiling, value increase when IR fall

Question 7

RMBS: recourse
CMBA: nonrecourse, partially amorting with balloon payment, debt service coverage, LTV ratio,
loan level call protection: prepayment lockout, defeasance, prepayment penalty
call protection CMBS level: sequental tranches

Question 8

LTV 80% loan 80%

Question 9

Separately managed accounts (SMAs) are much more appropriate for larger investors who may want customized portfolios that align with their needs and preferences.

Question 10

limit price=sell at limit price or higher, buy at limit price or lower

Question 11

stock div and stock split do not change value of stock outstanding, do not raise capital, only change EPS

Question 12

analytical duration=formula based on change in benchmark yield, rf rate decrease, assume cs unchanges, will increase price
emipirical duration=actual price change given change in yield, rf goes down but cuz of economic contraction, credit spread goes up, overall yield effect offset, smaller increase in price

Question 13

Direct lending by venture capital funds typically takes the form of senior secured debt.

Question 14

Dealers maintain an inventory of securities and profit from a bid-ask spread. Brokers locate counterparties for buyers and sellers.

Question 14

full price with acrrued interest:
PV price*(1+yield/2)^(days/180)
50,000(1.035)^120/180 = 51,159.96.

Question 14

borrower of a loan=long FRA (pay fixed get floating), lock in fixed IR hedging against the risk of LIBOR rates going up

Question 15

cds is contingent claim, interst rate swap is fwd commitments; both have payments based on notional principal

Question 16

HF strategies
fundamental growth=high growth in future and price appreciation; dont care about value (not undervalue)
fundamental value=undervalues firms
market neutral=equal values in long and short
short bias=net short
quantitative directional=have long or short exposure

Question 17

efficency frontier is a curve, add a straight line so borrowing at a rf rate. tangent point is 100% invested in market portfolio. selcect 1 single portfolio

Capital market theory = all investors will invest in some combination of the risk-free asset and the market portfolio (along the capital market line). Except for a 100% allocation to the market portfolio, tagent to efficient frontier and any point on the CML lies above the Markowitz efficient frontier (borrowed at rf to invest more than 100% in market portfolio).

Question 18

approximate modified duration* change in yield*pv bond price=change in bond price

Answer 18

Modified duration measures the change in the value of a bond in response to a 100-basis-point (1%) change in interest rates.

Question 19

underwritten offer gurantees sale vs best offer

Question 20

If semi-strong-form market efficiency holds, investors should invest passively in a market index portfolio as active management based on public information will not outperform the market consistently on a risk-adjusted basis. If only weak-form market efficiency holds, investors can earn abnormal profits over time using active management based on fundamental analysis.

Question 21

price and spread(expected loss) adjust faster than credit ratings(default risk)

Answer 21

Loss severity, also known as loss given default (LGD)LGD = 1 - Recovery Rate

Question 22

payments on forward rate agreements are discounted to the beginning of period at the realized rate, they exhibit convexity, whereas payments on interest rate futures are linear (no convexity) cuz MTM daily and no discount is done payoff linear to MRR.

Question 22

spv=issuer

Question 23

option value(market value/option premium)=intrinsic value(exercise value)+time value

Question 24

put option expiry value only affects by max(0, X-St) rf and volaility's effect on option value is 0 at expiration

Question 25

futures settlement price is calculated as the average trade price over a specific closing period at the end of the trading day. The length of the closing period is set by the exchange.

Answer 25

The mark to market adjustment to futures contracts resets the price of the futures contract to the new settlement price, which returns the value of the contract to zero each day.

Question 26

Holding costs and benefits have no effect on the value of a forward contract at expiration but initiation and during its life

Question 27

The value of a long position in a forward contract prior to settlement (expiration) is: Vt = St − F0(T)(1 + Rf)^–(T – t)

Answer 27

During the life of a forward contract on an underlying asset with no holding costs or benefits, the value to the long equals the spot price minus the present value of the forward price: Vt(T) = St – F0(T) (1 + Rf)^–(T–t).

Question 28

Dividends or interest paid by the underlying asset decrease the value of call options cuz price drop ex div; put vice versa

Question 29

Capitalizing an expenditure changes its cash flow classification from an operating cash outflow to an investing cash outflow. so cfo higher and cfi lower

Question 29

moniness does not include premium

Question 30

tax is CFO in gaap, anything in ifrs bank OD cff in gaap, cash and cash equivalent in ifrs

Question 31

Decreasing the bad debt provision will increase net receivables and decrease the expense on the income statement, therefore increasing reported earnings and financial position.

Answer 31

Decreasing the valuation allowance will increase the net deferred tax asset and decrease income tax expense.

Question 31

DTL=pretax income (book income) is should pay>taxable income (paid), leading to a situation where the company owes less in taxes currently but will owe more in the future

Question 31

Nondurable goods are goods which only have value for relatively short periods of time (such as food and gasoline). They are needed regardless of what happens in the economy, so their usage will be relatively uncorrelated to changes in business cycles. Durable goods tend to be higher value, longer lasting items with cyclical demand.

Question 32

In the foreign exchange market, the "sell side" refers to the large multinational banks that act as dealers in currencies.

Question 32

supplementary schedules to the financial statements typically detail a company's various business segments.

Question 33

start-up stage of a company's life cycle, the receivables and fixed assets that are often used as collateral for debt issuances are not available yet. This makes it harder to issue debt. While operating earnings may very well be negative, sales cannot be negativ

Question 33

Capital adequacy=monetary measure of a firm's risk as a percentage of its equity capital.

Question 34

cross-sectional anomalies size effect and the value effect

Question 35

contango scenario generally reduces the return of the long-only investor, and a backwardation scenario enhances it.

Question 36

callable bonds do not have well-defined internal rates of return and yield duration statistics, such as modified and Macaulay durations, do not apply. Effective duration is the appropriate duration measure.

Answer 36

decision to call the bond depends on the ability to refinance the debt at a lower cost of funds.

Question 37

Markowitz efficient frontier and the capital allocation line=optimal risky portfolio B.capital allocation line and the investor's indifference curve=optimal investor portfolio

Question 38

liquidity constraints section the IPS should state what the likely requirements are to withdraw funds from the portfolio

Question 39

initial margim=amount paid in margin return calc

Question 40

empirical duration uses statistical methods and historical bond prices; analytical uses formula

Answer 40

Empirical duration:lower than analytical duration for high-yield bonds under market stress scenarios. Analytical duration, =government bond yields and spreads are independent variables

Question 41

Cryptocurrency exchange-traded funds do not typically invest directly in cryptocurrencies.

Answer 41

trusts trade shares in trusts holding large pools of a cryptocurrency

Question 42

% change in full price of a bond=multiply annual modified duration by the change in yield.

Question 43

Hard commodities are raw materials that are mined or extracted from the Earth, as opposed to soft commodities, which are agricultural products or livestock.

Question 44

expected value of a derivative differs unexpectedly from that of the underlying, in what is known as basis risk. Basis risk may arise if a derivative instrument references a price or index that is similar to, but does not exactly matc

Question 45

objectives of the GIPS standards includes promoting investor interests and instilling investor confidence.

Question 46

covered bonds usually consist of one bond class per cover pool. no tranching

Answer 46

cover pool sponsors must replace any prepaid or non-performing assets (i.e., assets that do not generate the promised cash flows) in the cover pool to ensure sufficient cash flows until the maturity of the covered bond.

Question 47

current capital structure weight on debt (wd) is based on the market value of capital

Answer 47

wd = Debt/(Debt + Common Stock + Preferred Stock).

Question 48

big data Volume, Velocity, Variety, i.e., visibility is not on

Question 49

reversal of any write-down of inventories is recognized as a reduction in cost of sales (reduction in the amount of inventories recognized as an expense)

Answer 49

no oci impact, but cogs

Question 50

money neutrality holds, only prices would increase, whereas employment and output would not change.

Answer 50

monetary transmission mechanism. implementation of monetary policy may work through the economy via four interrelated channels: lending rates, asset prices, agents’ expectations, and exchange rates.

Question 51

Cash flow per share = (CFO – Preferred dividends) / Number of common shares outstanding.

Question 52

ideal currency regime

Answer 52

exchange rate between any two currencies would be credibly fixed. All currencies would be fully convertible. Each country would be able to undertake fully independent monetary policy in pursuit of domestic objectives, such as growth and inflation targets.

Question 53

Jensen's free cash flow hypothesis:

Answer 53

higher debt levels discipline managers by forcing them to manage the company efficiently so the company can make its interest and principal payments and by reducing the company's free cash flow and thus management's opportunities to misuse cash.

Question 54

Amortization of bond premium subtracted from indirect method NI cfo

Question 55

“stranded assets,” which are carbon-intensive assets at risk of no longer being economically viable because of changes in regulation or investor sentiment.

Question 56

abandonment option is a type of sizing option, not timing option

Question 57

continuously compounded return to time T is the sum of the one-period continuously compounded returns.

Answer 57

continuously compounded return is less than the holding period return

Question 58

formula for the position (or location) of a percentile in an array with n entries sorted in ascending order is: Ly = (n + 1) × (y / 100), where y is the percentage point at which we are dividing the distribution, and Ly is the location (L) of the percentile (Py) in the array sorted in ascending order. Therefore, the location of the second decile is (12 + 1) × (20 / 100) = 13 × 0.2 = 2.6 ≈ 3.

Question 59

money weighted average IRR

Answer 59

time weighted average geomatric return