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Hi there,
I can’t speak from experience because I haven’t taken the Level 3 exam yet (I just registered), but I personally like paper better. I ended up getting the CFAI paper books and I find them practical for situations where I can’t bring a laptop with me. I think it is a matter of your preferred studying style.
Hi there! Sorry for not replying earlier. I’m going to try to answer your question, and if my answer is not related to what you are asking, please let me know.
Question: “Just a quick question as per the title, whether for call or put bonds, do we exercise the option if calculated price is equal to exercise price?”
Answer: I assume you are talking about backward induction and the bond prices calculated at each node. For a call option, if your exercise price is $95 and you calculate at any given node a price = or greater to $95, then you exercise it! For a put option, if your exercise price is $95 and you calculate at any give node a price = or less than $95, then you exercise it as well.Question: “On the same topic of binomial tree of interest rates and backward induction, do we discount bond at t=maturity given the respective interest rates at each note or do the values are merely based on par rate + coupon?”
Answer: Well, it depends. For a straight bond, the price at each node is based on the respective interest rate. For a callable bond, if the bond price is equal or above the strike price, then it is based on the par rate + coupon. For a putable bond, if the bond price is equal or below the strike price, then it is based on the par rate + coupon.Let me know if it is clear or if you have any more questions.
Hi cbil31!
I’m a bank regulator and my answer may be a little biased since I work in the industry, so be critical of my opinion. I would be inclined to take the credit analyst job over the Prudential sales job. First, the banking industry has a lot of opportunities for upper mobility. If you learn the nuts and bolts of credit analysis, you can move up the ladder throughout your career. Second, if you want to get a job in equity/fixed income, the credit analysis job would be a good start. It’ll give you enough analytical skills to become an equity/fixed income analyst down the road. Most bankers I know start their careers at small community banks, which are the ones I happen to visit more frequently, and move to larger banks later in their careers. You could also stay within community banks throughout your career and have a very decent salary if you ever reach an executive management position.
On the other hand, if you want a equity/fixed income research role, you may want to start in that industry from the beginning. If you end up stuck too long in community banking, a transition may turn challenging. That’s my two cents!
Good luck with your job hunting!
Hi @rogileiza,
I understand that the formulas to get the justified trailing and leading multiples are counter intuitive. You’d think that the leading multiples would have the (1+g) and the trailing would not have the growth factor. However, it is backwards. Below are the derivations using the GGM:
justified trailing P0/E0=(1-b)(1+g)/(r-g)
justified leading P0/E1=(1-b)/(r-g)Using the Gordon Growth Model:
justified trailing
P0=D0(1+g)/(r-g) using the GGM – then divide everything by E0P0/E0=(D0/E0)(1+g)/(r-g) – D0/E0 = Dividend payout = (1-b) at time=0
Then – P0/E0=(1-b)(1+g)/(r-g)
leading trailing
P0=D1/(r-g) using the GGM – then divide everything by E1P0/E1= (D1/E1)/(r-g) – D1/E1 = dividend payout at time=1
Then – P0/E1=(1-b)/(r-g)
Hi there!
They are different models:
1. Binomial model – Uses up and down risk-adjusted probabilities
Up probability = 1+Rf-D/U-D2. When you say the “no-arbitrage,” model I’m assuming you mean the European Put-Call Parity equation from which you could derive the price of a call or a put.
C0 + PV(Bond)=P0 + Long Stock
3. Expectation approach – It is the Black-Scholes-Merton Model
Yes, they are different models and the vignettes will generally tell you which model to use to calculate the value of the call or put.
Hi! @wannabe1988,
The reason is that if you were counting the dead companies, you would add a zero and divide by such company. For example,
Stock Company #1 Return – 5%
Stock Company #2 Return – 7%
Stock Company #3 Return – 9%
Stock Company #4 Return – 0% (dead company)Average return with dead company (5+7+9+0)/4=5.25%
Average return without dead company (5+7+9)/3=7.00% – This one is biased upward.Hope it helps! 😀
Hi there,
Here is the answer to your first question: “Can someone help to verify if my understanding on the revaluation model is correct? When an asset is revalued higher than its historical cost, the gain is recorded on both the OCI (under revaluation surplus) and Balance Sheet (under shareholders’ equity in the revaluation surplus), correct?”
You are correct. However, in other problems there will be no account called Revaluation Surplus, it may go straight to Retained Earnings.
If the asset value (revaluation) > asset historical cost:
Assets increase by revaluation amount minus the extra accumulated depreciation
Equity increases by revaluation amount minus the extra accumulated depreciation
Net Income remains unchanged
OCI increases by the revaluation amount minus the extra accumulated depreciationHowever, keep in mind that if asset value revaluation < asset historical cost (impairment) it will flow through the income statement.
Hi there,
I don’t count hours, but I spent all September and October ( a long time) going over the Derivatives section. The numerous steps one has to take to get the questions solved are ridiculous. My only advice (for me and you) is to revisit this topic at a later time by doing a run of the formulas and redoing the problems. Also, I don’t know if you noticed that the CFAI posted new problems for the Derivatives section of the test. I downloaded the problems two days ago and I’m planning doing them in the next couple of days to review what I learned.
If you are studying let’s say Econ, take a break from that for a day and solve one Derivatives problem or maybe two. Intermittent studying helps retain what you learned.
Good luck!
Hello there!
An AR(1) model equation should be Xt=b0 + b1 X(t-1) + Et
For an AR(1) to have an adequate forecasting utility, b1 < 1
A unit root means that the coefficient (b1) of the AR(1) model is equal to 1
In other words, the slope of the coefficient is one (b1=1). Picture a perfectly straight line in a 45 degree angle in an X and Y graph.
When there is a “unit root” b1=1 and a random walk occurs.
There are two types of random walks: Without a drift and with a drift
No drift – b0=0 and b1=1 (no intercept)
Xt = b0 + b1 X(t-1) + Et
Xt = 0 + (1) X(t-1) +Et
Xt = X(t-1) + EtWith a drift b0>0 and b1=1(there is an intercept)
Xt = b0 + b1 X(t-1) + Et
Xt = b0 + (1) X(t-1) + Et
Xt = b0 + X(t-1) + EtWhy b1=1 – unit roots a problem? Because the mean reverting level is undefined
Mean Reverting Level = b0/(1-b1), if b1=1, then the Mean Reverting Level is b0/0 which is undefined.
When the Mean Reverting Level is undefined, the time series is non-stationary.I hope this helps!
Hi there,
I failed level 2 last June and I’m retaking the test in June 2017. I highly recommend getting the new notes as items in the curriculum have changed. Major changes are in the derivatives section, alternative investments section, portfolio management, and maybe corporate finance. I just received the new notes, I’m going over the material, and I definitely see changes. For example, there is a brand new chapter on hedging strategies in the derivatives section.
@spatel15- I love love your rant!!! I just finished working on that specific problem you’re talking about and went crazy counting the years and got completely confused between the 5% and 12% growth rate. I was thinking profanity probably as much as you did! LOL! That question tested my ability to find information in a gnarly arranged senseless reading and not so much on Equity. I agree with you 100%!
By reading your question I assume you are talking about Solution 3, Column 2, right? The numbers are the following:
Net income, excluding net asset $800
Subtract additional expenses (solution 2 above) 264
Net income adjusted $536Total assets, beginning, excluding new asset $4,500
Add additional asset (solution to 1 above) 0 – Okay, we understand that.
Total assets, beginning, adjusted $4,500Add additional asset 0
Total assets, end, adjusted $4,500 – Why is this not $4,236? right?Average Total Assets $4,500 – [($4,500+$4,500)/2)]
Return on Average Assets 11.91% – ($536/$4,500)
I honestly wonder why assets didn’t change by the expense amount, but there is a hypothetical scenario in which that is possible:
You incurred the expense, but did not pay it in cash, it is in your accounts payable.
Dr. Operating Expenses $264
Cr. Accounts Payable $264Then your cash (and total assets) would be intact, and your cash wouldn’t change until after you pay Dr. A/P and Cr. Cash. While the question does not specify whether the expense is paid in cash or through an A/P account, we just have to assume that’s the case for the example to make sense. I know, annoying!
Hope this helps!
P.S. Sorry about the formatting, it looks aligned when I type it, but once submitted looks crooked.
“If you go to the Corporate Finance topic exams and take the item set for
ENGLAND; it is question number 1. It is asking for the after tax
operating cash flow, which to me means CFO. Apparently I was mistaken.”I’m sorry I answered the wrong question above. The reason CFO is different from the “after tax operating cash flow” is that the CFO is before taxes and the question asked you to calculate after-tax operating cash flow.
Here is the calculation:
CFO minus Non Cash Items = Earnings Before Taxes (EBT)
Non Cash Items could be Depreciation and/or Amortization.
EBT – Income Taxes + Non Cash Items= After Tax Operating Cash Flow.Hello there,
Cash Flow from Operations (CFO) = Sales- Fixed expenses- Variable Expenses + Depreciation Tax Shield is correct indeed.
The Schweser Books provide the formula in the following ways which could be helpful depending on the information you get in the vignette.
CFO= (Sales – Cash Expenses – Depreciation) x (1-Tax Rate) + Depreciation
or
CFO= (Sales – Cash Expenses) x (1-Tax Rate) + (Depreciation x Tax Rate)Cash Expenses – Include both fixed and variable expenses.
The problem will always tell you whether the fixed and variable expenses were incurred in cash or credit. My perception, out of having done multiple practice problems, is that if the problem does not specify if the fixed and variable expenses were paid in cash, you just assume they were paid in cash.
I hope this helps.
I personally think the value goes way beyond “making more money.” Preparing for the CFA test has taught me to be more focused, more disciplined in other aspects of life (aside work), manage my time wisely, and be better at my job which gives me confidence. I have also interestingly discovered who are my real friends versus the people that were there just for the good times. The CFA test preparation has also taught me a lot of aspects about myself that I previously didn’t know about. I learned that I actually greatly enjoy being by myself. I signed up for the CFA program because I want a higher-paying job – like the great majority of CFA candidates, but I feel the skills, experience, and knowledge I’m gaining by being in the program alone are worth my time even if I end up not getting a higher-paying job. I understand the CFA is not for everybody, but I feel for “finance nerds” like me (and most of 300 Hours Blog subscribers, lol) it is worth the time. It does make me laugh seeing so many articles online questioning the value of the CFA charter when to me the value is very obvious. Just a thought…
@Cdelane1‌ – Retake it. You failed with band 10 which means you were closer to passing than most. I know it may get expensive but if you don’t mind sparing a few dollars, you should take it again in June. I am personally a very stubborn person and try to get what I want even when I fail a few times. I always encourage others to do the same. If the CFA means a lot to you, do it again and again until you pass.
Oh, and by the way, I failed the Dec 2014, and will enroll in the June 2015 test shortly.
@tingwuwang‌ – If I recall correctly, it is like $850 or $1,000 if you want the printed books. You don’t have to pay the first time member fee so it is cheaper.
