Financial Exam Help 123

Author: Bill Campbell

  • Valuing Equity Swaps

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    Bill Campbell
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    Equity swaps are just as easy to value as plain vanilla interest rate swaps; once again, as with all derivatives, the formula for the value is: \[Value\ =\ PV(what\ you\ will\ receive)\ –\ PV(what\ you\ will\ pay)\] If one leg is a fixed or floating rate, it is valued exactly as described for plain vanilla…

  • Pricing Equity Swaps

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    Bill Campbell
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    Remember that the price of a swap is the fixed rate on the swap.  An equity swap can take many forms: The equity side can pay the return on a single stock, on a portfolio of stocks, or on an equity index. The equity side can pay only the price appreciation on the stock, portfolio,…

  • Valuing Currency Swaps

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    Bill Campbell
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    Currency swaps are only slightly more difficult to value than plain vanilla interest rate swaps; once again, as with all derivatives, the formula for the value is: \[Value\ =\ PV(what\ you\ will\ receive)\ –\ PV(what\ you\ will\ pay)\] Because the swap is equivalent to two bonds (one long, one short, one in one currency, one…

  • Pricing Currency Swaps

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    by

    Bill Campbell
    in

    Remember that the price of a swap is the fixed rate on the swap.  A currency swap can take one of three forms: Each side pays a fixed rate: one in one currency, the other in a different currency.  In this case, there are two prices for the currency swap: the two fixed rates (which…

  • Choice of Calculator

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    Bill Campbell
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    Lots of Level I candidates agonize over the choice of calculator: Should I choose the HP 12C or should I choose the TI BA II Plus? The answer to this question used to boil down to whether you prefer algebraic notation or reverse Polish notation (RPN): the TI used the former while the HP used…

  • Risks in Fixed Income Investing

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    Bill Campbell
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    There are quite a few risks inherent in investing in fixed income securities / portfolios.  Amongst them are these that I’ll discuss in this article: Interest rate risk Yield curve risk Call/prepayment risk Reinvestment risk Credit risk Liquidity risk Currency exchange rate risk Inflation risk Volatility risk Event risk Sovereign risk I’ll cover each of…

  • Venture Capital Method (Funding)

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    Bill Campbell
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    The venture capital  (VC) method is an idea with which candidates often struggle, but it’s not nearly as difficult as some people would have you believe.  (I know: I say that a lot.  This time, however, it’s true).  I’ll cover a single round of funding, then multiple rounds of funding, and will include the IRR…

  • CPR vs. SMM vs. PSA

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    Bill Campbell
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    All of these TLAs (Three-Letter Abbreviations) refer to measurements of the amount of prepayment on a mortgage-backed security (MBS, yet another TLA): CPR abbreviates Conditional Prepayment Rate, an annual measure of the prepayments on an MBS SMM abbreviates Single-Month Mortality, a monthly (duh!) measure of the prepayments on an MBS PSA abbreviates Public Securities Association,…

  • Current Rate vs. Temporal: Why Two Methods?

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    Bill Campbell
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    Truth be told, I have no idea what the exact reasons are that we use two strikingly different methods – the current rate method and the temporal method – for changing the values from those in one currency (the local currency) to those in another currency (the presentation currency).  However, I have developed (i.e., stumbled…

  • Amortization Tables

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    Bill Campbell
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    Although you are not allowed to use Excel (or any other spreadsheet program) on the exam – you have to survive with your lowly financial calculator – it’s still useful to be able to create amortization tables in a spreadsheet, to help you visualize the cash flows and account balances in a variety of financial…