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CFA Level II Updated
How is a collateralized loan obligation (CLO) structured?
A CLO pools 150-300 leveraged loans and issues tranches of securities backed by the loan portfolio cash flows in a senior-to-subordinate waterfall.
What does 'crystallization' of a performance fee mean and why does frequency matter?
Crystallization is the moment when accrued performance fees become realized. Between crystallizations, fees accrue as a liability that can still reverse.
What's the difference between a soft hurdle and a hard hurdle rate?
A hurdle rate is a minimum return the fund must deliver before the manager earns any incentive fee. The 'soft vs hard' distinction is about what the incentive fee applies to.
How do I assess industry risk in corporate credit analysis?
Industry risk dimensions: cyclicality, competition, barriers, capital intensity, regulation, technology, ESG, macro. Use S&P's 1-6 IRA scale. Same Ba2 rating differs for Ridgeline Steel (weak industry) vs Riverside Food Services (stable) — industry drives bias direction...
How is free cash flow valuation different from general DCF?
DCF is the general framework; FCF valuation specifically discounts FCFF at WACC or FCFE at cost of equity. FCFF is capital-structure-neutral and preferred for changing capital structures.
How do I value a putable bond and why is it worth more than a straight bond?
Putable bond: V_putable = V_straight + V_put_option. Backward induction with floor at put price. At nodes where backward value is below 100, floor to 100 — holder will put. Put option more valuable when rates rise and volatility is high...
How do I value a callable bond using backward induction on a binomial tree?
Backward induction starts from maturity and works back node-by-node: V_t = [0.5*(V_up + C) + 0.5*(V_down + C)] / (1 + r_t). At callable nodes, cap the value at the call price. V_callable = V_straight - V_call_option...
How do I adjust Z-spread to OAS for a callable bond?
Z-spread minus OAS equals option cost. OAS strips the embedded option value to show the credit/liquidity spread cleanly for relative value.
How do I assess sustainable growth rate from operating and financing capacity?
SGR = ROE x (1-payout); Vantage's 12% SGR vs 25% growth target creates 13pt gap requiring debt, equity, efficiency gains, or payout cut. Growth above SGR without clear financing plan often destroys value.
Is there a pricing relationship between knock-in and knock-out barrier options?
Knock-in plus knock-out equals vanilla option with identical parameters and no rebate, because exactly one of the pair is alive at expiry.
What are the main approaches to estimating DCF terminal value?
Terminal value captures cash flows beyond the explicit forecast horizon and often represents 60-80%...
What is a reverse DCF and how do I use it?
A reverse DCF starts with the current market price and solves for the growth rate embedded...
How do I calculate yield to call on a callable bond?
YTC = IRR using call date and call price instead of maturity and par. Compare YTM and all YTC scenarios. When premium bonds are callable, YTC typically falls below YTM, driving yield to worst.
What were Build America Bonds (BABs)?
BABs (2009-2010): taxable munis with 35% federal subsidy. MTA Grand Rivers' $500M BAB at 6.5% = 4.225% net cost. Sequestration triggered ERP call risks.
What is spread duration and how does it differ from interest rate duration in a credit portfolio?
Spread duration isolates sensitivity to credit spread changes; for FRNs it can be large while IR duration is near zero. Essential for attributing P&L in credit portfolios.
How does institutional cryptocurrency custody actually work?
Institutional crypto custody combines cryptographic key management, operational segregation, insurance, and regulatory oversight to meet fiduciary standards.
What are transition bonds and who issues them?
Transition bonds fund hard-to-abate sector decarbonization. Require credible transition strategy, science-based targets, and governance disclosure.
What's the difference between a payer and receiver swaption, and how are they valued?
A payer swaption gives the right to pay fixed (valuable when rates rise); a receiver swaption gives the right to receive fixed (valuable when rates fall).
How does the Black model price options on forward contracts?
The Black-76 model prices European options on forwards or futures using the forward price F(0,T) as the underlying and discounting payoff at the risk-free rate.
When is it better to use real cash flows rather than nominal in NPV?
Both methods yield the same NPV if applied consistently. The choice is practical, not theoretical...
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