SS6 R16 - Question 3

[ilovcfa]

Hello,
for the answer of question 3 of reading 16 EOC :
in the calculation of the expected return of the 10yr MBS, why is the curve spread (1%) ommitted in the answer ?
thanks

 

[cpk123]

read the fine print (Under the question). the 1% is already included in one of the components.
aThis spread implicitly includes a maturity premium in relation to the 1-year T-note as well as compensation for prepayment risk.

 

[ilovcfa]

thanks, i hope the exam is not that tricky

 

[cpk123]

your hope - is only that - a hope. If not in wording, there are many other ways things can be thrown at you.

 

[ilovcfa]

yes i did not mean that. I just wanted to point out it is funny how you can use tricks like that to make people fail. I remember there was also a 10 year corporate bond in that question without that adjustment, so putting this kind of stuff, in fine print moreover, is just a cheeky way to get 60-70% of candidates fail without testing them on knowledge.