Mock Exam A- Q19

[vkichoi]

Please let me know if I should post questions about the mock exam else where.

I don't get how we get the modified duration of 750/50=15 years.

Thanks!

 

[David Harper CFA FRM]

Hi vkichoi

(you make a good point about where to post, cc: Suzanne Evans to see what she thinks we can do ... I think our forum labels are not obvious for the mocks. The source for this question is located here http://forum.bionicturtle.com/threads/bt2012-p1-19-value-at-risk-var-of-inverse-floater.5777 )

The idea we need when tranching bonds is "conservation:" when the bond is split into tranches, neither aggregate cash flows nor risk can be created/destroyed. In the case of risk, dollar duration (aka, value duration) is preserved, such that:

• dollar duration of original bond [must] = dollar duration of FRN + dollar duration of inverse floater; so that:
• ($150 * 5.0 years) = $750 million = ($100 mm * FRN duration in years) + ($50 mm * inverse floater duration in years), but we can assume that dollar duration of FRN is approximately zero:
• $750 mm dollar duration = $50 MM * inverse floater duration; i.e., this tranche absorbs all of the interest rate risk of the bond. I hope that helps!

 

[nahmad]

Hello David, The links from the exam pdf or the one posted in your post here don't take you to the respective location/document. It just errors out. Can you please help?

 

[Nicole Seaman]

Hello @nahmad

Are you referring to this specific question (Mock Exam A - Question 19) being referred to in this thread or another exam/question? I was unable to locate any issues with links in Question 19. If you could be more specific about which links are not working, and which exam they are in, I would be happy to help update any links that are broken.

Thank you,

Nicole

 

[nahmad]

The problem is related to chrome browser. When one visits the forum it logs you out of the session. It is an issue with the website compatibility. Sorry for the troubles. I have started using Internet Explorer. It seems to work fine for the moment.

 

[Nicole Seaman]

@nahmad

If it continues to log you out of the forum, clearing your cache and cookies will get rid of this issue.

Thanks!

Nicole

 

[nahmad]

Works like a charm. Thanks ... apologies for using this thread. Perhaps we can clear these messages out.

 

[Nicole Seaman]

No problem at all! Leaving questions like this in the forum can help others who may encounter the same issue