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In structural models of credit the probability of default is equal to:

The probability that the company’s asset value falls below the face value of the debt and the loss given default is given by this shortfall.

The equity is viewed as a European call option on the company’s assets.

How to calculate annualized Swap Rate (from quarterly data)

You’ll be most likely given four interest rates or discount factors.

Maturity Annualized Rate Discount Factor
90 R1 1 /(1 + (R1 * (90/360))) = Z1
180 R2 1 /(1 + (R2 * (180/360))) = Z2
270 R3 1 /(1 + (R3 * (270/360))) = Z3
360 R4 1 /(1 + (R4 * (360/360))) = Z4

C = (1 – Z4) / (Z1 + Z2 + Z3 + Z4)

Assuming quarterly date Annualized Swap Rate = 4C or C/(90/360)

In order for a firm to claim compliance with the CFA Institute Code of Ethics and Standards of Professional Conduct they must state:

Firm Name claims compliance with the CFA Institute Code of Ethics and Standards of Professional Conduct. This claim has not been verified by the CFA Institute.

The CFA Institute’s Research Objectivity Standards require analyst compensation not be tied to?

Investment Banking or Financing Activities

It should be based on the accuracy of recommendations over time.

Analyst compensation can also be tied to the performance of the entire group/firm.

The CFA Institute Research Objectivity Standard ____ the accuracy of reports and recommendations.

Cannot Ensure

Actual events will often differ from forecasts on which investment recommendations are made.

Acquirer’s Gain (formula)

Acquirer’s Gain = Synergies – (Price paid for Target – Value of Target)

Acquirer’s Gain = Synergies – Premium Paid

Pension Expense on Income Statement IFRS vs USGAAP

IFRS USGAAP
+ Current Service Cost
+ Past Service Cost
+ Discount Rate * (Beginning PBO – Beginning Plan Assets)
+ Current Service Cost
+ Amortization of Past Service Cost
+ Interest Cost (= Discount Rate * Beginning PBO)
– Expected Return on Plan Assets (= Expected Rate of Return * Beginning Plan Assets)
+/- Amortization of Actuarial Gains / Loses
Pension Expense on Income Statement Pension Expense on Income Statement

Total Periodic Pension Cost

+ Current Service Cost

+ Past Service Cost

+ Interest Cost

– Actual Return on Plan Assets

+/- Actuarial gains / loses


Total Period Pension Cost

When running a simulation, to improve the quality of the probability distribution you should:

Directly estimate the statistical parameters

For most variables the historical or cross-sectional data will be insufficient or unreliable.

If a bond’s OAS is greater than the OAS of bonds with similar characteristics and credit quality then it is most likely:

Underpriced