Which of the following rates is closest to the two-year forward rate six years from now (i.e. The following details (all annual equivalent) are collected from Treasury securities: Hence our quick “guess” is that the bond should trade at 100 plus a 60 bp premium, or 100.60. Three year maturity means a 60 bp premium. This means that we should pay a 20 bp premium per year. ![]() ![]() In this question, the bond is paying 20 bps per year more than required. quoted margin = required margin) then the bond will trade at par on each coupon date. Quartic shortcut: first note that if a bond is paying exactly what is required (i.e. In other words, we discount what we get (PMT) at the rate that we need (I/Y). However, there is an approximation provided in the CFA curriculum, and a rather neat Quartic short-cut too.Ī floating-rate note can be (roughly) valued on a coupon date by discounting current Libor + quoted margin (think of this as the regular coupon) at current Libor + required margin (think of this as the discount rate). If the required margin is 40 bps and Libor is quoted today at 1.20% then the value of the bond is closest to:įloating rate bonds are pretty difficult to value accurately (in fact we will see this again in Level II Derivatives, as they are an essential component to swaps). A semi-annual pay floating-rate note pays a coupon of Libor + 60 bps, with exactly three years to maturity. Royal’s valuation is $5.10 less that Knight’s valuation."Ģ. Both of these factors will contribute to a lower value using the multistage DDM. Royal is using a shorter period of supernormal growth and a higher required rate of return on the stock. You can select the correct answer without calculating the share values. Royal’s valuation of Bishop stock is approximately:ĪNSWER: Derek Burkett, VP, Advance Designations, Kaplan Professional: Knight estimates that the required return on Bishop stock is 9%, but Royal believes the required return is 10%. ![]() Royal also expects a temporary growth rate of 10% followed by a constant growth rate of 4%, but he expects the supernormal growth to last for only two years. Knight expects the dividend to grow by 10% in each of the next three years, after which it will grow at a constant rate of 4% per year. Beth Knight, CFA, and David Royal, CFA, are independently analyzing the value of Bishop, Inc. Helpfully, they have also provided solutions. These eight questions - in their opinions - are the toughest questions you are likely to encounter on CFA levels I, II, and III. We've spoken to training companies who coach candidates embarking on the CFA exams. You can always follow our guide to prepping for the CFA exams. Even so, the questions have a reputation for being extremely difficult. You need to do at least 300 hours of study to pass each one.
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