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The value of an embedded call on a callable bond ____ as the yield curve flattens.

Increases

In the structural model of credit risk, holding the equity is economically equivalent to a ____ on the company’s assets.

European Call

The reduced form model assumes ____ of the company’s debt is traded.

Some

It does not assume that the company’s assets, equity or ALL of its debt is traded.

The forward rates are _____ the spot rate when the spot curve is downward sloping.

Below

The forward rates are ____ the spot rates when the spot curve is upward sloping.

Above

The strategy of riding the yield curve is one in which a bond trader…

…attempts to generate a total return over a given investment horizon that exceeds the return of a bond with maturity matched to the horizon. The strategy involves buying a bond with maturity more distant then the investment horizon. Assuming an upward sloping yield curve, if the curve does not change shape or level as the bond approaches maturity (rolls down the yield curve) it will be priced lower, and if held to less than maturity it should generate higher returns.

What happens when the foreign currency weakens relative to parent’s presentation currency?

Temporal Method Net Monetary Liability Temporal Method Net Monetary Asset Current Rate Method
Revenues ↓ Revenues ↓ Revenues ↓
Assets ↓ Assets ↓ Assets ↓
Liabilities ↓ Liabilities ↓ Liabilities ↓
Net Income ↑ Net Income ↓ Net Income ↓
Shareholder’s Equity Translation Gain ↑ Shareholder’s Equity Translation Loss ↓ Shareholder’s Equity Negative translation adjustment ↓

What happens when the foreign currency strengthens relative to parent’s presentation currency?

Temporal Method Net Monetary Liability Temporal Method Net Monetary Asset Current Rate Method
Revenues ↑ Revenues ↑ Revenues ↑
Assets ↑ Assets ↑ Assets ↑
Liabilities ↑ Liabilities ↑ Liabilities ↑
Net Income ↓ Net Income ↑ Net Income ↑
Shareholder’s Equity Translation Loss ↓ Shareholder’s Equity Translation Gain ↑ Shareholder’s Equity Positive translation adjustment ↑

A higher dividend yield reduces the value of an option and thus ____ resulting in ____.

  1. Option Expense
  2. The lower expense results in higher earnings for the firm granting the options.

Components of a Company’s Defined Benefit Pension Periodic Cost

IFRS Component Recognition US GAAP Component Recognition
Service Cost P&L
Net Interest Income/Expense P&L as Net Pension Asset or Liabiity X Discount Rate
Remeasurements: Net return on plan assets and actuarial gains & loses OCI not Amortized subsequently in P&L

Net Return = Actual Return – (Plan Assets X Interest Rate)

Current Service Cost P&L
Past Service Cost OCI subsequently amortized in P&L
Interest Expense or Pension Obligation P&L
Expected Return on Plan Assets P&L as Asset X Expected Return
Actuarial Gains and losses including the difference between the actual and expected return on plan assets Either Immediately in P&L or OCI and amortized using corridor or faster method.

Difference = Actual Return – (Plan Assets X Expected Return)