6/4 Ask Me Anything with Marc LeFebvre of LevelUp Bootcamps

Ah great question. Its new material thus likely to show up. I’d definitely make sure you understand Bluebox 4 and why a 2 yr Greek and a ten yr Greek bond has its trade offs and then why you enter a euro swap to reduce the duration once you bought the 10 yr Greek. All of that carry (pun intended) intBluebox 5. Now in the BB5 the most important thing is (1) be able to calculate the return on that 5 yr US Treasury. It has three elements…pull to par + couponrolldown/aging and change in price based on a constant maturity change in rates. That is part A of BB5. Be able to do part B. Now beyond that I’d stretch and say being able to identify the best pairwise trade would be a really good skill set and be able to justify based on the IPS constraints such as no short selling, dollar neutral trade.
 
Hi Marc, I was in the San Fran bootcamp. Thanks for all your wisdom. Do we have to know the Effective annual yield calculation in the fixed income section? Thanks
 
Hi Marc,
In regard to blue box 5, I remember you saying in the video that the local return for US 6 month local return was calculable. However, I’m not too sure how the other percentages were calculated the 0.28 percent, -0.05 percent and - 1.37 percent.
Other than the 0.52 percent I don’t know how they got the bond price numbers.
I have a feeling it won’t get tested but it’s just been bugging me since you said you could calculated it out similar to the 5 year US local 6 month return.
Thanks.
 
Yeah…first believe in yourself. You have done the work for three years, that has a whole lot of value and sometimes it takes a few trys to get this right. They didn’t send a man to the moon on the first attempt and that was easier than the CFA Level III exam. There are small points to pick up along the way (1) answer the question being asked. Don’t answer how you think it should be answered but answer the question they ask. In otherwords apply the solution you provide to the case, client or portfolio attribute as well. Many times candidates miss that subtle element of answering the essay questions. The justification is the application of the concept being tested. Label your solutions if they ask for a label. Details matter in the afternoon item sets. Don’t forget detailed last steps in finishing your solutions. Remember if you forget a step that wrong answer will be there. Study how the old essay CFA exams provide the solutions and learn to mirror that approach with less words but same completeness. You will do great. The 4th time is the charm.
 
I will agree it is tricky and when I asked the Institute about it they agreed it was not presented well. First step is the pull to par is the price of the bond going from a premium (1.90% yield vs 2% coupon bond) to par. The second step is related to riding the yield curve, in this case the bond “ages” from 5 years to 4.5 years and as yields fall the price rises and lastly the CM yield change basically says that the new yield is 1.75& and yields rise to 2.0% and the price moves from premium back to par. All three summed is the 0.52%. hey don’t provide those detauls for any other bond.
 
The effective annual yield in the fixed income section…help me a bit further. I am drawing a blank. Can you point me to the reading or example? If it is in the CFA curriculum yes you would need to know it.
 
Choosing between ABO then PBO then finding the effective duration –> then finding how many number of future contracts, forward contracts or doing a reciver swaption..I think that’s what he was talking about…I hope it doesn’t get tested…but man with how much detail they went into it with calling the guy a DB hero…you’d think it’s bound to show up…
 
Absolutely…happy to help everyone pass…!
Can I ask for a little more clarification on your first question?
Yes on the CFA institute web site under candidate resources exam details is a list of key words used and what they mean.
 
Hey Marc
When using swap duration e.g. -2 to reduce the duration on a portfolio of corporate bonds e.g. 5 with a target of 3, can you simply add them? 5-2 = 3 so target duration met?
Ive worked a question in the TT where they select the cheapest of the 3 swap duration options given to reduce the bond portfolio duration and not the swap that gives you the target duration. Would we always default to selecting the cheaper option?
 
Well the focus in the curriculum is the PBO and since we don’t know the timing and amount of final benefit payments the effective duration should be used since pension payments are type IV liabilities. Knowing how to use derivative overlays to bridge the duration gap is key for reading 23 whether the liability is a pension (section 5) or a corporate debt liability (section 4). The use of futures, adding a positive duration swap or hedging IR with a swaption would be something I’d spend some time on. See Reading 23 pages 81-84 and example 7.
 
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