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Corrections:
Chapter 1:
Page 304
For the sentence in Line 3 of the first paragraph under "Broadest Interpretation" that now reads
"For example, consider an investor who has a 6-month investment horizon. According to this theory, it makes no difference if a 5-year, 12-year, or 30-year bond is purchased and held for five years since the investor expects the return from all three bonds to be the same over the 6-month investment horizon."
replace "six-month investment horizon" to "5-year investment horizon" so the sentence reads:
"For example, consider an investor who has a 5-year investment horizon. According to this theory, it makes no difference if a 5-year, 12-year, or 30-year bond is purchased and held for five years since the investor expects the return from all three bonds to be the same over the 5-year investment horizon."
Page 311
Third paragraph that begins with "Let's illustrate how to compute .."
In this paragraph I demonstrate how to compute the total return based on the key rate durations for Scenario 2, not Scenario 1. So, everywhere in the paragraph "Scenario 1 " appears, change to "Scenario 2 ".
Chapter 2:
Pages 341 and 342
There was a switch in notation involving forward rates that has no bearing on the material. However, I thought I should point it out. On page 341, in bottom paragraph I wanted to show how the rates in the binomial interest rate tree are related to forward rates discussed at Level I. At Level I, when discussing forward rates (Chapter 6, page 212), I used the notation whereby the first subscript is the length of the period and the second subscript the period when it begins. On page 341 I reversed this. This was carried over to the four forward rates along the bottom of Exhibit 2 (the rates within the tree do indeed follow the notation used at Level I, but the preceeding suffix was dropped because they are all one-period rates). Please switch around the suffixes on each of the four forward rates along
the bottom of Exhibit 2 (and do not alter any suffixes for the rates within the tree). The four forward rates should then read:
Page 359
Third full paragraph, Line 4 now reads:
"...the value of this note if it noncallable is..."
Add "is" so that it now reads
"...the value of this note if it is noncallable is..."
Page 380:
Solution to 9.f: $126.076 should be replaced with $102.076. (This can be seen in the interest rate tree at the initial node on page 379, 9.d.
Page 382
Typo: Solution to 18.a: "sock" should be replaced with "stock" (Note that the Candidate who pointed this out wrote: "that one made me smile")
Chapter 3:
Page 438:
Question 31. The opening of the question now reads:
"Assume that in FJF-04 in the chapter, ..."
Change to:
"Assume that in FJF-01 in the chapter (page 407, Exhibit 5),"
Chapter 4:
Page 478
Question 11. Change from
"What is a "call on or after specified date" clean-up provision?"
To
"What is a "latter of percent or call date" clean-up provision?"
Page 479
Question 21
change: "single monthly mortgage rate" to "single monthly mortality rate"
Page 483
Solution to Question 11: Eliminate the first sentence.
Chapter 5:
Page 499:
Last two sentences of the second to the last paragraph now reads:
"On the left-hand side of the previous equation is the market's statement: the price of a structured product. The average present value over all the paths on the right-hand side of the equation is the model's output, which we refer to as the theoretical value."
"left" should be replaced with "right" and "right" should be replaced with "left" so that these two sentences now read:
"On the right-hand side of the previous equation is the market's statement: the price of a structured product. The average present value over all the paths on the left-hand side of the equation is the model's output, which we refer to as the theoretical value."
Chapter 8:
Page 606
Replace the sentence in the first full paragraph:
"Instead, when the cash market ... To summarize" THE THE TABLE APPEARS
Substitute the following:
"Instead, when the actual futures price was assumed to be 96, the arbitrage profit resulting from the cheapness of the futures price was captured by the reverse cash and carry trade. To summarize:
Relationship between theoretical futures.............Implement the following trade
price and actual futures price.............................to capture the arbitrage profit
theoretical futures price<actual futures price.......cash and carry trade
theoretical futures price>actual futures price.......reverse cash and carry trade"
Page 611
Corrections are required to the first paragraph. The paragraph is shown below
with the words that are to be replaced.
"We will begin with the next quarterly payment - from April 1 of year 1 to June 30 of year 1. This quarter has 91 days. The floating-rate payment will be determined by 3-month LIBOR on April 1 of year 1 and paid on June 30 of year 1. There is a 3-month Eurodollar CD futures contract for settlement on JUNE 30 of year 1. That futures contract will have the market's expectation of what 3-month LIBOR on April 1 of year 1 is. For example, if the futures price for the 3-month Eurodollar CD futures contract that settles on JUNE 30 of year 1 is 95.85, then as explained above, the 3-month Eurodollar futures rate is 4.15%. We will refer to that rate for 3-month LIBOR as the "forward rate." Therefore, if the fixed-rate payer bought 100 of these 3-month Eurodollar CD futures contracts on January 1 of year 1 (the inception of the swap) that settle on JUNE 30 of year 1, then the payment that will be locked in for the quarter (April 1 to June 30 of year 1) is ..."
The correction involves substituting "March 31" for "June 30". After the substitution the paragraph reads:
"We will begin with the next quarterly payment - from April 1 of year 1 to June 30 of year 1. This quarter has 91 days. The floating-rate payment will be determined by 3-month LIBOR on April 1 of year 1 and paid on June 30 of year 1. There is a 3-month Eurodollar CD futures contract for settlement on March 31 of year 1. That futures contract will have the market's expectation of what 3-month LIBOR on April 1 of year 1 is. For example, if the futures price for the 3-month Eurodollar CD futures contract that settles on March 31 of year 1 is 95.85, then as explained above, the 3-month Eurodollar futures rate is 4.15%. We will refer to that rate for 3-month LIBOR as the "forward rate." Therefore, if the fixed-rate payer bought 100 of these 3-month Eurodollar CD futures contracts on January 1 of year 1 (the inception of the swap) that settle on March 31 of year 1, then the payment that will be locked in for the quarter (April 1 to June 30 of year 1) is ..."
Page 627
Second paragraph, first line that now reads
"To illustrate how this is done, let's consider a 2-year American call option on"
Change "American" to "European", so the first line now reads:
"To illustrate how this is done, let's consider a 2-year European call option on"
Page 641:
Question 8a. In the formula that appears just before "What is the swap rate for this swap?" delete the SR on the left hand side of the equation.
Page 649
Solution to 8a. There is typo error that does not affect the answer. The summation sign in the numerator should be to "10," not "20."
Chapter 9:
Page 680: Under "2. Corporate Bond versus ABS Credit Analysis"
Change the second sentence from: "To understand the difference, it important ... "
To "To understand the difference, it is important ... "
Page 682: The last sentence in the first paragraph
Change: "In such a transaction, it possible .... "
To: "In such a transaction, it is possible .... "
Page 701: Solution to Question 4d.
Second line and fourth lines: Change "S&P" to "Moody's"
Page 702: Solution to Question 5, last line:
Change: "Capable of satisfying its obligations if its there was a decline in business operations." (Delete the second "its".)
To: "Capable of satisfying its obligations if there was a decline in business operations."
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