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Exam Feedback FRM Part 1 (May 2014) Exam Feedback

amresh

Member
Subscriber
I remember faintly the question read " Both the bonds are equally probable to default".
But anyways......either ways 0.75 is not correct, which was my answer.

In that case also probability of defaulting will be .1 + .1 - .05 =.15
Hence probability of not defaulting = 1-.15 = .85..;)
 
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hoang.vu90

New Member
Agreed. Preparing Financials would be the responsibilities of Corporate officers, monitoring Financials would be done by analysts and potential bond holders due diligence, but trustees have fiduciary responsibility to the issuer to keep them in compliance with the indenture. Good example of GARP confusing a pretty simple question though.
I chose fiduciary as well but now read BT note again about this and it says: The trustee acts in a fiduciary capacity on behalf of the investors. i.e. bond holders I guess. And The trustee must ensure that the bond issuer is in compliance with the covenants of the indenture at all times..So it seems very confusing now what the correct answer is since the balance sheet choice reads something like "ensure ratios is as agreed in the indenture" ?
 
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plulutes

New Member
I chose fiduciary as well but now read BT note again about this and it says: The trustee acts in a fiduciary capacity on behalf of the investors. i.e. bond holders I guess. And The trustee must ensure that the bond issuer is in compliance with the covenants of the indenture at all times..So it seems very confusing now what the correct answer is since the balance sheet choice reads something like "ensure ratios is as agreed in the indenture" ?

Well, then maybe I got it wrong but then it doesn't make sense to me. For that matter financial ratios and monitoring the balance sheet are really one in the same because you cant do one and not the other. Great example though of how tricky a really, seemingly, concrete idea in my own head, could be wrong now. I guess I'd need to see the exact question again since the language is needing to be so precise.

Well just found out what I could find. Material clearly states fiduciary on behalf of bond holders, so I'm very possibly wrong. Just never heard of financial ratios and balance sheet monitoring other than sinking fund type provisions spelled out in the contract, but maybe thats what was meant.
 
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Roshan Ramdas

Active Member
Agreed. Preparing Financials would be the responsibilities of Corporate officers, monitoring Financials would be done by analysts and potential bond holders due diligence, but trustees have fiduciary responsibility to the issuer to keep them in compliance with the indenture. Good example of GARP confusing a pretty simple question though.
There are 2 parts to this -
I completely agree with the Investopedia quote that the fiduciary powers are conferred to the trustee by the issuer.
However,....the trustee acts in a fiduciary capacity for the bond holders or the investors,.....i.e., if there is a default on any of the bond obligations, the legal actions that are pursued by the trustee are going to be on behalf of the bond holders or the investors.

At this point of time,...my memory with regards to how some of these questions appeared in the exam is highly unreliable.:)

If the answer option was something like,....fiduciary powers conferred to the trustee by the bond issuer -> then this would be the right option to select.
If the answer option was something like,....trustee acting in a fiduciary capacity on behalf of the bond issuer -> then this would be the wrong option to select.
 

amresh

Member
Subscriber
but probably it was framed as "fiduciary by corporate"
There are 2 parts to this -
I completely agree with the Investopedia quote that the fiduciary powers are conferred to the trustee by the issuer.
However,....the trustee acts in a fiduciary capacity for the bond holders or the investors,.....i.e., if there is a default on any of the bond obligations, the legal actions that are pursued by the trustee are going to be on behalf of the bond holders or the investors.

At this point of time,...my memory with regards to how some of these questions appeared in the exam is highly unreliable.:)

If the answer option was something like,....fiduciary powers conferred to the trustee by the bond issuer -> then this would be the right option to select.
If the answer option was something like,....trustee acting in a fiduciary capacity on behalf of the bond issuer -> then this would be the wrong option to select.
 

Roshan Ramdas

Active Member
btw - the forward rate question had answers in EUR/USD ...some of you did convert although I dont see why this is needed here. the foreign currency from this perspective is the USD..an views?
I didn't resort to any conversion either & just used the direct formula,....nonetheless, some of our forum members seemed to have identified an issue with the manner in which the rates were quoted which gets me really worried.
Surely did get a match using the direct formulae,.....but in hindsight, I am not sure if I actually overlooked any glaring issues with respect to the manner in which the rates were quoted.
 

plulutes

New Member
I didn't resort to any conversion either & just used the direct formula,....nonetheless, some of our forum members seemed to have identified an issue with the manner in which the rates were quoted which gets me really worried.
Surely did get a match using the direct formulae,.....but in hindsight, I am not sure if I actually overlooked any glaring issues with respect to the manner in which the rates were quoted.

I did the conversion, just to have the rates straight. It was just a precaution and a quick 1/x calculator button push.
 

Roshan Ramdas

Active Member
I think contract period was more than two years..
Suppose the first payment date was on 1st march 2014 and last payment was on 1st march 2016. Even with netting minimum 9 payments had to be there as date of Floating payment was semiannual and fixed was quarterly. Which was not there in any of the options, so I went with 14, I.e. Without netting.
Okay,....so I definitely have got this one wrong as I did not pay attention to the payment frequency of the fixed side......I assumed that it was quarterly as well like the floating rate side and landed up selecting the highest option.

Considering that the floating leg was quarterly and fixed was semi-annual, an assuming that the length of the swap was any where in the range of 2 - 2.25 - 2.5 years -

Assuming that we are looking at a 2 year swap -> that would mean 8 floating rate payments + 4 semi annual payments
Assuming that we are looking at a 2.25 year swap -> that would mean 9 floating rate payments + 4 semi annual payments
Assuming that we are looking at a 2.5 year swap -> that would mean 10 floating rate payments + 5 semi annual payments

None of these sum up to 14 ??
 

hoang.vu90

New Member
Okay,....so I definitely have got this one wrong as I did not pay attention to the payment frequency of the fixed side......I assumed that it was quarterly as well like the floating rate side and landed up selecting the highest option.

Considering that the floating leg was quarterly and fixed was semi-annual, an assuming that the length of the swap was any where in the range of 2 - 2.25 - 2.5 years -

Assuming that we are looking at a 2 year swap -> that would mean 8 floating rate payments + 4 semi annual payments
Assuming that we are looking at a 2.25 year swap -> that would mean 9 floating rate payments + 4 semi annual payments
Assuming that we are looking at a 2.5 year swap -> that would mean 10 floating rate payments + 5 semi annual payments

None of these sum up to 14 ??
I dont recall that the question says anything about the floating leg was quarterly and fixed was semi-annual. Instead remember vaguely it said both are quarterly payment. But I am quite sure netting will affect the number of payment since the questions says the swap follows ISDA standard. http://en.wikipedia.org/wiki/International_Swaps_and_Derivatives_Association and netting is said to be "This is very important (especially for regulated financial companies) as it allows the parties to an ISDA Master Agreement to aggregate the amounts owing by each of them under all of the Transactions outstanding under that ISDA Master Agreement and replace them with a single net amount payable by one party to the other"
 

amresh

Member
Subscriber
Okay,....so I definitely have got this one wrong as I did not pay attention to the payment frequency of the fixed side......I assumed that it was quarterly as well like the floating rate side and landed up selecting the highest option.

Considering that the floating leg was quarterly and fixed was semi-annual, an assuming that the length of the swap was any where in the range of 2 - 2.25 - 2.5 years -

Assuming that we are looking at a 2 year swap -> that would mean 8 floating rate payments + 4 semi annual payments
Assuming that we are looking at a 2.25 year swap -> that would mean 9 floating rate payments + 4 semi annual payments
Assuming that we are looking at a 2.5 year swap -> that would mean 10 floating rate payments + 5 semi annual payments

None of these sum up to 14 ??

No.. check this: (assuming 1st payment on Jan 1 2014 and last payment on 1st Jan 2016)
For Half yearly:

Jan1 2014- First Payment
July 1 2014- Second Payment
Jan1 2015- Third Payment
July 1 2015- Fourth Payment
Jan1 2016- Fifth Payment

Similarly 9 for quarterly . Assuming no netting it gives 14 payments. With netting 9.

Hope it is clear now.
 

amresh

Member
Subscriber
I dont recall that the question says anything about the floating leg was quarterly and fixed was semi-annual. Instead remember vaguely it said both are quarterly payment. But I am quite sure netting will affect the number of payment since the questions says the swap follows ISDA standard. http://en.wikipedia.org/wiki/International_Swaps_and_Derivatives_Association and netting is said to be "This is very important (especially for regulated financial companies) as it allows the parties to an ISDA Master Agreement to aggregate the amounts owing by each of them under all of the Transactions outstanding under that ISDA Master Agreement and replace them with a single net amount payable by one party to the other"

There was a row in the table named "Frequency", 3 months and 6 months respectively. hope i remember it correctly.

And regarding ISDA , i would like to duck under it, as it was not part of syllabus.:confused:
 
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an12

New Member
did anyone did tht GARCH question.. n tht graph.. i didnt had time to compute long run vols.. as new garch model is mean reverting .. to determine which graph will adequately represent future vols .. i opted for c just lik tht.. does anyone knws wats the correct answer
 

Adelaide

Member
I was also not sure if fiduciary capacity or financials....will be very happy if it is the "fiduciary capacity"in the end
 

Roshan Ramdas

Active Member
did anyone did tht GARCH question.. n tht graph.. i didnt had time to compute long run vols.. as new garch model is mean reverting .. to determine which graph will adequately represent future vols .. i opted for c just lik tht.. does anyone knws wats the correct answer
The long run average volatility rate was lower than the current volatility estimate,.....I thereby landed up going for the graph which showed a gradual downward sloping line (based on the mean reversion property).
 
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