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CLN are def a tough subject, one in which I don't fully understand either. For the CDS, there are a few layers of credit risk. The CDS seller(insurer) has credit risk that the underlying will trigger a credit event. The CDS buyer(insured) has credit risk that the seller(insurer) will be able...

Without referencing any text, the relationship to me requires additional input. What type of industry does the business operate in? Holding PD constant, a company with more tangible assets would likely have a higher recovery rate and lower LGD vs. a service based company. Intuitively, the PD...

No this wasn't one of yours. It was a Schweser question on one of their mock exams. Their material is rife with errors. Thank you for clearing this up! For what its worth, you've been a great resource for me (am I'm sure many others on this forum) in preparing for this exam. I will...

Hi David, When calculating the expected payment to investors of a CMO, given; The $MV of the CMO, time period (months), pass-through coupon and the weighted average coupons of the underlying ---which coupon figure should be used to calculate the payment? My notes on this are unclear to me...

Shannon, I just had the same issue. Liquidation Value - MV should be a negative value (Schweser Practice Exam 1, question 48. However, they note that since it is a net loss of value, the answer is quoted as a positive figure. Since its Schweser, I take it with a grain of salt and although...

Glen - great question. David thank you for the Relative and Absolute VaR explanations. I do not recalling seeing this in any of the textbooks. May 1 - crunch time!

I called GARP about this when I was studying for the November 2011 Lev1 exam using the GARP issued handbook. The questions at the end of each section are plucked straight from the text from the assigned readings. GARP advised me that they did not have the proper licensing to publish the...

They have 20/32 = .625, so bond price 100.625. I was missing the step of 100.625/100 = 1.00625. This number times the principal value of 8,894,900 gives me the proceeds of $8,950,493 I am looking for. Thanks!

David, Quick question that you'll be explain to very easily I imagine. When I'm calculating the purchase price and subsequent sale, I'm getting wrong numbers.For example (taken from a Schweser question): Assume I'm selling my position; if the principal balance is $8,894,900 and the bond...

Well - I guess I'll study both of them! The calculated nominal spread should come within a few basis points of each other with either formula correct? Hopefully they don't try and trip us up with choices that are very close to each other (but I'm sure they will!) Schweser does not, however...

David, thank you for this explanation and practice question. The Schweser material implies that on the exam, the maturity/life span of the MBS will equal that of the comparable treasury and we can simply calculate nominal spread = BEY - Yield of Comparable Treasury. This seems far too...

Great, thanks for the insight.

Hi David, In your opinion, what has been the 'testability' of this topic on previous exams for Lev2? I don't remember seeing many questions on this for Lev1 related to options, was just wondering if it is a crucial to know this in detail for Lev2 in relation to bond valuation? Thanks, Chad

Shannon, I have seen numerous variations as well. Including (Assets PLUS Liabilities - Default Theshold) in the numerator. David, can you clarify why the first term would be Assets plus Liabilities would be the term used for Assets in the numerator? I am unclear as to the proper formula, but...

Please disregard....order of operations problem. Time for a break!!!

This formula seems to be pretty straightforward, but I'm not getting the correct answer (this is a practice question from Schweser) Asumming l/t to s/t debt ratio is less than 1.5. Have assets of $700mm, s/t liabilities of $120mm and l/t liabilities of $300m. The standard deviation of asset...

Hi David, A member of my study group pointed out the following question that I was hoping you could help with. Regarding the Merton Model formula used by Hull vs. de Servigny. Hull uses the formula that I am familiar with from FRM lev 1: d1= [ln(V/D)+(r+0.5*sigma^2)*T]/[sigma*sqrt(T)] which...

David, Thanks for this answer. I understand. Thanks, Chad

The material states the value of the basket CDS decreases as the correlation of the underlying references increases. This seems counterintuitive to me. If the probability of default increases as a result of increased correlation among references, wouldn't the basket CDS be MORE valuable? The...

David - thank you for such a quick response. One other question, and this may be the incorrect place for it, but it seems that GARP was late in getting the AIMs out this year? Is it typical for them to wait until January to put out AIMs for an exam 4 months later? Seems everyone is scrambling...