…the true cost of the pension. If the firm’s contributions exceed its true pension expense, the difference can be viewed as a reduction in the overall pension obligation similar to an excess principal payments on a loan.

CFO increases by contributions – TPPC

CFF decreases by contributions – TPPC

- Given assumptions about benchmark interest rates, interest rate volatility, and call or put rule, calculate OAS using binomial model.
- Impose a small shift in the on-the-run yield curve +Δy
- Build a new binomial tree using the new yield curve
- Add OAS to each 1-year forward rate to get a “modified” tree.
- Compute BV+Δy using modified tree
- Repeat steps 2 through 5 using a parallel rate shift of -Δy to estimate value of BV-Δy

**ex-ante IR** is anticipated residual return adjusted for risk. It is always positive.

**ex-post IR** is realized past residual return adjusted for risk.

**ex-post IR** = tα/√n = t-stat of intercept / square root of # of observations

**Selling Insurance**

The investor makes a small profit if the merger is successful but may incur a large loss if it fails.

- Adjust the coefficient standard errors to account for serial correlation using Hansen’s Method which will also correct for heteroskedasticity.
- Modify the regression equation to eliminate serial correlation.

**Yes, both.**

Increasing invested capital to take advantage of positive NPV projects will increase NOPAT and the dollar cost of capital $WACC. Because NPV is positive the increase in NOPAT will be larger than the increase in $WACC so EVA will increase.

**A score below 1.8** implies the company is headed for bankruptcy.

**A score above 3.0** implies the company is not likely to go bankrupt.

A score between 1.8 and 3.0 is inconclusive but traders may purchase a stock when its Altman Z-score approaches 3.0 and short a stock when its Altman Z-score approaches 1.8

A mathematical model that uses 8 variables to identify whether a company has manipulated earnings.

The 8 variables are:

- Day’s Sales in Receivable Index
- Gross Margin Index
- Asset Qualities Index
- Sales Growth Index
- Depreciation Index
- SG&A Index
- Leverage Index
- Total Accruals to Total Assets

M-Score > -2.22 implies manipulation.

### Internal Credit Enhancements

- Cash Reserve Account
- Excess Servicing Spread Accounts
- Overcollateralization
- Senior/Subordinate Structure

### External Credit Enhancements

- Letters of Credit
- Bond Insurance