Entry 7 – Fixed Income clarified and Capital Budgeting challenges

Hello all,

Since the last post I have been through the problems I encountered in the wordy stuff in fixed income with the tutor helpdesk, finished portal questions on Corporate Finance, and got a to a nice situation where I’m slightly ahead in the classroom recordings by now being up to Alternative Investments, compared to my question attempting.

However this is slight reflection on the lack of achievement this weekend in terms of workload. I’d hoped to quickly finish off Corporate Governance (the particularly wordy section in Corporate Finance), study session 14 Alternative Investments, attempt associated hurdle tests, attempt the associated workshop, and sit the 2 hour 7city Progress Test (a Mock exam on every topic covered so far up to and including Alternative Investments).

Sadly, I didn’t even start the portal questions on Alternatives due to quite the watchable weekend of football.

Following tutor helpdesk review on SS15:

Reading 66: Introduction to the Measurement of Interest Rate Risk – 81%
I don’t know how likely it will be that I’ll be examined on Floating Rate Notes, hence getting the question wrong, but it’s important to realise that its duration is simply equal to the time until it’s next coupon payment, expressed as a fraction of a year. So if coupon payments are semi-annual then it’s 0.5.

Macaulay’s duration came up. I don’t think it’s likely to be tested but given the formula’s simplicity, it’s probably worth learning just I case. [Modified Duration = Macaulay duration / (1 + (yield / k)), where k = number of coupon paying periods].

Reading 60: Features of Debt Securities – 100%

Clarified that if a bond is in default, it means they don’t pay a coupon (break a positive covenant).

Reading 62: Overview of Bond Sectors and Instruments – 62%

As discussed last post, the value add from the tutor helpdesk and getting through the classroom recordings is gaining as much logic to help distinguish between the different features that categorise the various debt instruments. Starting with Mortgage Passthrough securities as a ‘simple’ instrument helps when asking well when does that become a more complex CMO.

Reading 63: Understanding Yield Spreads – 90%

Important to see the logic through the investor’s eyes when asking about ‘biased’ expectation theory. Liquidity as they’ll want some more return for longer dated bonds, despite interest rate expectations, and they’ll want some extra return for investing outside their comfort zoneof ‘preferred habitat’.

First attempt at portal questions for SS11

Reading 44: Capital Budgeting – 53%

It’s very important to use a debt:equity RATIO properly in terms of your WACC weightings. 33.33% for every $1 of debt there is $3 of equity, hence debt weighting = ¼ and equity weighting = ¾.

Correct application is required of opportunity costs and repair costs. Average Accounting Rate of Return wasn’t covered in Schweser, but was eventually in the classroom recordings. I didn’t understand the implications of cash flow direction before the classroom recording and how that related to the IRR for non-mutually exclusive projects. Had to go back into Schweser to check how NPVs of projects affect the stock price.

Reading 45: Cost of Capital – 90%

Pretty solid here due to previous study of the DDM and the CAPM, however struggled on Break Points.

Reading 46: Working Capital Management – 92%

Nice, comfortable repetition of liquidity ratios from FR&A. Couple of complications in Money Market Yield calculations based on previous understanding in SS2 (quants).

Reading 47: Financial Statement Analysis – 88%

Some confusion here about the various compositions of the DuPont model, such as the ‘two step’ model. But apart from that another nice repetition of FR&A.

Reading 48: The Corporate Governance of Listed Companies: A Manual for Investors – 86%

This is quite a wordy section but I think game for a fair few questions. I adopted a question based approach, whereby I must admit, I wasn’t sure of quite a lot of the answer, which resulted in quite a purposeful reading of the Schweser text.