Q7 D: I had the same doubt, so I go ahead and checked the cirriculum, it states: Yield income = coupon payments AND REINVESTMENT INCOME, however, the formula it gives is annual coupon payment/current bond price. So it is confusing since in this question they give out a “yield” that’s different from coupon payment.
No idea why it is calculated with a deferred capital gain formula myself. It is a tax deferred with cost-basis of 1, and thus the return should be calculated with (1+r)^n(1-t).
I cannot fully answer the first half, but for the bold part, they assume that out of the 3M portfolio, 2M of which will be given as a gift. The other, remaining 1M is reserved as a fund to pay the tax of the 2M gift. Recall that the tax rate is 50%, and thus the tax of the 2M gift will be 1M = the fund reserved. She receives 2M, vs bequeathing 3M (of which 50% will have to be paid as tax), leaving her with only 1.5M.
That said, when I calculate using the relative value formula, we can cancel the first part (after-tax return on the asset), leaving us with (1-Tg+TeTg)/(1-Tg) = (1-0.5+0.5*0.5)/(1-0.5) = 1.5, implying that the niece will receive 1.5 times more gift from gifting as opposed to bequeathing. Since she receives 1.5M through bequeathing, she should have received 1.5M * 1.5 = 2.25M (750k incremental, as opposed to 500k). The method described in the paragraph above makes intuitive sense, but I cannot seem to reconcile the differences when using the formula, so perhaps there is something inherent in the formula that works weirdly when you start canceling terms… or I fail basic algebra.
I think inherent in their assumption (which is not explained) is that Franco wants to maximize his return, and that Franco sees this as a more important objective than risk reduction, and that risk reduction is a “bonus” point. Return on fund 2 is lower than current return, and therefore should not be selected. The (implied) assumption of Franco wanting to maximize his return, however, contrasts to the second paragraph, where he is interested in EMN strategy. If I recall properly, EMN’s main selling point is risk-reduction through diversification and lower volatility, so I guess we (or at least I) implied that risk-reduction is the goal here, and not so much return maximization.
Because they did not read what they wrote. It should be 4.5% per the question.
In my opinion (and I answered buy and hold strategy as well), it is appropriate. It does not use foreign currency, relies on coupon and roll-down yield (income), does not rely on price appreciation, and does not use derivatives.
In fact, one (read: I) can take it one step further and argue that buy and hold is more suitable than selling convexity. Recall that “NorthWake prefers to keep their investment strategies simple.” I don’t know about you, but implementing buy-and-hold strategy sounds a lot simpler to me than buying (and managing) bonds with embedded options. In addition, we are not given any indication if these embedded option securities are suitable for the company. Recall that the client is an insurance company, and thus may have reservations on holding these bonds as it has downstream ramifications to their equity duration (and thus equity volatility).
I give myself a full mark for choosing buy-and-hold. Change my mind. 
Agreed. This should be 2% and not 2.5%
Note: Will add more thoughts as I go through this messy mock.
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Thanks! And please feel free to add other contributions!
Can someone please direct me where to find 2020 mock exam? I was searching of the official website, but the only thing I managed to find were the old ones from 2016-2018.
What about the Tax-exempt account? Should we deduct tax from tax-exempt account in the first year as it is not deductible at the beginning of the investment period?
The case does not write how the funds came to be into the TEA. All we know is that he has $1m, already in the TEA, on which we need to calculate its after-tax return and volatility. I would tend to agree with you if the question is worded such that he is to receive some money before tax (call it “award X”), which he wants to place into his TEA, and we need to calculate the return on award X.
Hi Toto_11,
Did you manage to find it?
Yes i did… Actually, I couldn’t believe I didn’t see the message right in front of my eyes.
Not entirely your fault. I find them difficult to find as well. At times, it is very obvious where they are, and another, I physically couldn’t find it. it’s as if they would arbitrarily hide it from me…
Q5C part 2- the textbook literally states: “Because the returns on assets held in TDAs and tax-exempt accounts are not currently taxed investors bear all of the risk associated with returns in these accounts. Even in the case of TDAs in which the government effectively owns Tn of the principal, the variability of an investor’s return in relation to the current after-tax principal value is unaffected by the tax on withdrawals.”
Therefore, it should be that the only account that shares investment risk with the government is the taxable account, bringing its standard deviation to 9.1%, making it the lowest risk account. The other two standard deviations shouldn’t change, and the TDA would have the highest risk at 12%.
Am I missing something? They have TDA with lowest risk and tax exempt as highest risk.
7F iv is also wrong , expected annual credit loss should be 0.35% not 35%
Just did the CFA Boston mock, here my questions if someone wants to discuss:
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Q.4C: Shouldn’t a negative factor risk contribution for Quality be a negative feature for a manager that claims to invest in high quality stocks? Or we should read it just as high exposure to Quality factor?
I know real world does not really count for the CFA exam, but a flat contribution to risk does not mean the manager has not a high exposure to the factor (which may have just a flat performance during the period). -
Q.4D: I don’t fully understand the answer, even though I agree statement is incorrect.
Why is the focus is on short side, when the added fund would be market neutral (so both long/short)? I said we just can’t determine if diversification and tracking will increase / decrease with the information provided. -
Q.5A: Why is life insurance relevant in this case? His personal situation has not changed (he was a widower with no charitable or bequest reasons before retirement as well), so he was holding life insurance for some other reason (that we don’t know). Only thing changed is working status, so now he does not need disability.
If someone can shed some light on this, I would appreciate. -
Q.5B: As others in these thread have already pointed out, why selling stock forward would not trigger tax, when this is clearly a removal of all market risk?
On the contrary, a TRS would allow him to temporarly remove equity risk, while not triggering any sale tax, keeping the shares, very low cost, no borrow needed. -
Q.7Ci : I answered with domestic carry trade. Vignette is saying stable, not flat yield curve.
If income is preferred to price appreciation, invest long term rate, borrow short term rate would provide income differential. As already pointed out, they want simple strategy, so my second option was buy and hold, definitely not sell convexity (but it’s true they generally provide higher yield than vanilla bond). - Q.7E: I don’t understand the answer. Nothing is said about perception of credit risk, just that the markets are not well developed, which I understood it as the curves are not sufficiently accurate along all points, which (in my opinion) it’s the reason for I-spread and G-spread not being appropriate for measuring credit risk.
All questions that are clearly wrong:
- Q.7Bii: collateral rate
- Q.7Di: coupon rate
- Q.7Fiv: 0.35% instead of 35%
- Q.8G: Var calculation only
- Q40 in PM section: vignette says table is related to bond futures, there BPV should not be divided by CF
On Q.7D the book “Yield income is the income that an investor receives from coupon payments relative to the bond’s price as well as interest on reinvestment income. Assuming there is no reinvestment income, yield income equals a bond’s annual current yield.” It might be that here the assumptions was that there was a reinvestment income and when the table provide the Yield we should take that one?
P.s. did anyone get any feedback from CFAI around the several issues in the 2020 mock? Thx!!
The mock exam this year is unbelievable in terms of time for each question. For example, how can you type answer for question 3C or 5F in the AM exam within 6min @@
Hi, in Q26 of the PM mock exam, there are answers for both arithmetic and geometric calculation. The correct answer is geometric calculation. I though both answers are accepted?
what about Q5 E? to me it looks completely wrong.
Where can I find the Boston 2020 exam? I only see the 2021 in the website. Thanks!
i saw from the past real AM exam, both method were allowed.