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CFA Updated
How is required probability of success used in asset allocation?
Required POS (95% needs, 70-85% wants, 50-65% wishes) determines risk level. Computed via GBM formula or Monte Carlo; higher POS demands lower volatility or longer horizon.
How do I calculate yield to call on a callable bond?
YTC = IRR using call date and call price instead of maturity and par. Compare YTM and all YTC scenarios. When premium bonds are callable, YTC typically falls below YTM, driving yield to worst.
What is myopic loss aversion and how does it affect equity allocation?
Myopic loss aversion combines loss aversion with frequent evaluation, producing chronic under-allocation to equity. Lengthening reporting horizons restores appropriate risk-taking.
What were Build America Bonds (BABs)?
BABs (2009-2010): taxable munis with 35% federal subsidy. MTA Grand Rivers' $500M BAB at 6.5% = 4.225% net cost. Sequestration triggered ERP call risks.
How does a Roth conversion ladder work for early retirees?
A Roth conversion ladder converts traditional IRA/401k balances to Roth IRA in sequential years, creating penalty-free income bridge for early retirees...
What is spread duration and how does it differ from interest rate duration in a credit portfolio?
Spread duration isolates sensitivity to credit spread changes; for FRNs it can be large while IR duration is near zero. Essential for attributing P&L in credit portfolios.
How does institutional cryptocurrency custody actually work?
Institutional crypto custody combines cryptographic key management, operational segregation, insurance, and regulatory oversight to meet fiduciary standards.
How does a pension glidepath work and when do de-risking triggers activate?
A glidepath automatically shifts RS to LDI as funded status improves, locking in gains. For Wethergate starting 60/40 at 80% funded: 55/45 at 85%, 45/55 at 90%, up to 20/80 at 100%. Reduces contribution volatility 40-60% vs static allocation.
What drives funded ratio volatility and how can sponsors manage it?
Funded ratio volatility comes from asset returns, rate-driven liability moves, and cross-correlations. For Lindmere Everest with 14y vs 6y duration gap, 100bp rate drop hurts FR significantly. Duration matching and glidepaths cut FR vol from 8-12% to 2-4%.
What are transition bonds and who issues them?
Transition bonds fund hard-to-abate sector decarbonization. Require credible transition strategy, science-based targets, and governance disclosure.
How do you replicate a barrier option and what's the replication cost?
A down-and-out call is replicated using a vanilla call minus a scaled 'reflection' call, based on the Carr-Ellis-Gupta static replication formula.
What's the difference between a payer and receiver swaption, and how are they valued?
A payer swaption gives the right to pay fixed (valuable when rates rise); a receiver swaption gives the right to receive fixed (valuable when rates fall).
How does the Black model price options on forward contracts?
The Black-76 model prices European options on forwards or futures using the forward price F(0,T) as the underlying and discounting payoff at the risk-free rate.
How often should an IPS be monitored and reviewed?
IPS review: annual minimum, event-driven (life changes, wealth shifts, regulation), market-driven rebalancing, strategic 3-5 year deep review. Monitoring is continuous.
When is it better to use real cash flows rather than nominal in NPV?
Both methods yield the same NPV if applied consistently. The choice is practical, not theoretical...
Why is beneficiary designation review critical in estate planning?
Beneficiary designations override wills for retirement accounts, life insurance, and TOD/POD assets - must be reviewed regularly...
How do I manage a floating-rate note portfolio for interest rate and credit risk?
FRN rate duration 0.1-0.3 years but spread duration = maturity. Diversify issuers, cap names, hedge tail credit with CDX, monitor liquidity.
What is a Pfandbrief and why is the German covered bond model considered the gold standard?
The Pfandbrief is Germany's covered bond, established in 1769 and considered the gold standard due to dedicated legislation, strict 60% LTV limits, mandatory independent trustees, and robust bankruptcy remoteness. The market exceeds EUR 400 billion and trades at extremely tight spreads.
What is stub value in a spin-off situation and how can it signal a mispricing opportunity?
Stub value analysis identifies mispriced parent companies by subtracting the market value of their observable subsidiaries from the parent's market cap. A negative or unreasonably low stub signals potential mispricing, often occurring around spin-offs due to forced selling and investor confusion.
What is the difference between an assurance warranty and a service-type warranty under IFRS 15?
An assurance warranty guarantees the product meets agreed-upon specifications and is not a separate performance obligation — it is accounted for as a provision. A service-type warranty provides additional service beyond basic assurance and is a separate performance obligation requiring allocation of the transaction price and revenue recognition over the service period.
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