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When does empirical duration diverge from effective duration, and which should I use?
Effective = model-based parallel shift. Empirical = regression vs yields. HY/MBS empirical is 30-60% lower due to spread-rate negative correlation.
How does a TAC (Targeted Amortization Class) tranche differ from a PAC tranche?
A TAC tranche provides one-sided prepayment protection, shielding against faster-than-expected prepayments but not against extension risk from slower prepayments. It offers higher yield than a PAC tranche in exchange for accepting extension risk.
What is the difference between going concern value and liquidation value, and when does each matter?
Going concern value assumes continued operations and is based on future cash flows, while liquidation value assumes all assets are sold and liabilities paid. Liquidation value serves as a floor valuation and is relevant for distressed companies or asset-heavy businesses.
What are the basics of hedge accounting, and how do fair value hedges differ from cash flow hedges?
Fair value hedges protect against changes in the fair value of recognized items, with both the hedged item and hedge instrument gains/losses in P&L. Cash flow hedges protect against variability in future cash flows, with the effective portion of hedge gains/losses in OCI until the hedged transaction affects P&L. Net investment hedges protect foreign currency exposure on foreign operations, with effective portions in OCI.
How are discontinued operations presented on the income statement?
Discontinued operations are presented as a separate section below income from continuing operations, shown as a single line item net of tax. A component qualifies when it has been disposed of or classified as held for sale and represents a major line of business or geographical area. Analysts focus on continuing operations for forecasting.
How does a change in the discount rate affect both the PBO and pension expense, and why is sensitivity analysis important?
A decrease in the discount rate increases the PBO, typically increases service cost, and deteriorates funded status. The relationship is convex, meaning rate decreases have a larger impact than equivalent increases. Sensitivity disclosures help analysts stress-test pension risk.
How do you calculate the right-of-use asset at lease inception under IFRS 16?
The right-of-use asset under IFRS 16 equals the lease liability plus prepayments plus initial direct costs plus estimated restoration costs minus any lease incentives received. It is not simply the present value of lease payments.
What is RAROC and how do banks use it for performance measurement and capital allocation?
RAROC evaluates the return a business line generates relative to its economic capital. Unlike ROE, which uses accounting equity, RAROC uses a risk-based capital measure. A business line creates value only when its RAROC exceeds the hurdle rate (cost of equity).
What are the three types of multifactor models and how do they differ?
Multifactor models explain asset returns using multiple systematic risk factors. The three types — macroeconomic, fundamental, and statistical — differ in how factors are identified: from economic variables, company attributes, or statistical extraction from return data.
How does the SREP aggregate risk and assign a supervisory score?
SREP is a holistic supervisory assessment across four blocks resulting in capital and liquidity decisions.
What does ILAAP cover and how does it differ from ICAAP?
ILAAP documents how banks identify, measure, and manage liquidity risk including intraday needs and stress scenarios.
How does the Bloomberg Commodity Index (BCOM) differ from the GSCI?
The Bloomberg Commodity Index (BCOM), formerly Dow Jones-UBS Commodity Index, uses liquidity-plus-production weighting combined with strict diversification caps...
How does quota share reinsurance work and when is it used?
Quota share cedes a fixed percentage of every risk in a portfolio, returning a ceding commission and sharing losses pro-rata.
What is a blended rate swaption and when would a corporate treasurer use one?
Blended rate swaption gives exercise over a window, not a single date. Tradewind locks 4.65% across a 6-18 month bond issuance window for 200M notional...
How do threshold and MTA combine to affect collateralized exposure?
Threshold creates uncollateralized buffer; MTA delays small calls. For a 500K MTA CSA with Orion Fairbank, residual peak PFE roughly equals threshold plus MTA plus MPR-diffusion — about 2M.
How does collateral change the exposure profile of a trade?
Collateral with daily exchange compresses exposure dramatically, but the margin period of risk (10 days bilateral, 5 days cleared) sets a floor. For Cascadia, uncollateralized PFE of 9M with zero-threshold daily CSA.
How do I construct and interpret confidence intervals for CFA Level I?
A confidence interval = Point Estimate ± Critical Value x Standard Error. The correct interpretation is that 95% of similarly constructed intervals would contain the true population mean — not that there's a 95% probability the mean is in this specific interval.
If governments can print money, why does sovereign debt ever default?
This is one of the most insightful questions in fixed income. Governments default despite monetary sovereignty because of foreign-currency debt, currency union membership, inflation spiral risk, and political unwillingness to pay.
What techniques do companies use to manipulate cash flow statements and how can analysts detect them?
Companies manipulate CFO by stretching payables, selling receivables, capitalizing operating costs, and using supply chain financing. Analysts detect manipulation by tracking CFO/NI ratios, DPO trends, capex-to-depreciation ratios, and reviewing footnotes for factoring and securitization programs.
What are the key indicators of cash flow quality and what red flags should I look for?
Cash flow quality analysis examines whether CFO is sustainable and reflects core operations. Key indicators include the CFO-to-net income ratio, free cash flow trends, and working capital stability. Red flags include diverging CFO and earnings, sudden receivable spikes, and reclassification of operating costs to investing.
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