Break-even Analysis: True or False

CFA Level III
#1

Break-even Analysis computes the exact change in yield that would eliminate a bond’s yield advantage over another bond. True or False?

#2

False

#3

I dont get why would you say it is false? Dont tell me they are saying it is due to the convexity factor… I would say it is true… Unless its a wording issue of what exactly “exact” really means?

#4

It’s false. Breakeven analysis is only an approximation.

#5

Ok, so it is an “exact” issue, just like a change in is not exactly approximated by the Mdur but they ask you to compute the exact change without considering convexity…

#6

quorky Wrote: ------------------------------------------------------- > I dont get why would you say it is false? Dont > tell me they are saying it is due to the convexity > factor… > > I would say it is true… > > Unless its a wording issue of what exactly “exact” > really means? whenever you say exact - 99% is false. And yes, that is due to convexity and other stuff

#7

I agree but they dont apply it uniformly across the spectrum of their questions… I consider convexity an important factor that I have accepted to ignore for the exam based on all of their assumptions…

#8

Look out for “extreme” wording - ie, exact, only, always, etc. Most exams like to screw people with stuff like that.

#9

if assumption says “ignore convextiy” or “for very small shifts” then you can ignore it

#10

Yeah, I seem to have fallen for this one… thanks for the refresher

#11

most of the stuff is approximations. There is hardly anything “exact” on this exam

#12

Exactly

#13

I am just so tired, i cant even think straight anymore… I hope logic will kick in after I get some rest and I will not fall for questions like these. On the exam I always look at questions like these with a lot of skepticism due to it being seemingly easy.

#14

quorky you will pass and so will pimp. that is my projections

#15

the average number of bp for breakeven analysis is like 10 - 20 in the examples we have been dealing with. is convexity really that much of an issue? the convexity point is well taken, but this is really splitting hairs.

#16

I appreciate the vote of confidence and dont have a doubt my self that you will pass… I have been waiting for this for a while… If I pass, it will make me more marketable to leave my current position… The plan for tomorrow is to review for a few hours and then just relax and watch some TV…

#17

asdffdsa Wrote: ------------------------------------------------------- > the average number of bp for breakeven analysis is > like 10 - 20 in the examples we have been dealing > with. is convexity really that much of an issue? > the convexity point is well taken, but this is > really splitting hairs. In all honesty, not really… thats why I got thrown off… Most of the problems deal with very small numbers. I don’t think it makes any diff, but technically it is still an approximation… Actually a lot of things are… Return projection, actuarial life expectancy table that feed the liabilities, structured product, risk, this exam is an approximation… etc