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in reply to: Revaluation model (IFRS) #84194::
Also to follow up on the question on revaluation, the second question asks for financial leverage with asset revaluation removed from the calculation. In the answer sheet, the way to compute this is by removing the revaluation surplus and depreciation expense. I can understand how revaluation surplus and depreciation surplus change the value of “Average Total Asset” (numerator) but the solution also deduct the revaluation surplus and add the depreciation expense to the “Average Shareholders’ equity” (denominator). The formula to compute without the revaluation surplus is given as follow:
total asset with revaluation – valuation surplus + depreciation expense (divide by) total shareholders’ equity – valuation surplus + depreciation expense
my question is why do we include valuation surplus and depreciation surplus in computing the denominator?
thank you.
in reply to: Total Cash flow under LIFO and FIFO #84191::Thanks @googs1484
What I wanted to know is why do we need to re-classify the periodic pensions? I understood the mechanism of the re-classification but couldn’t catch the reason why the need to re-classify them. For example, why do we need to re-add the entire amount of pension costs to operating income?
Understood about the points you made about NIE under IFRS. I got the same understanding but was confused by this sentence in the note, “Under IFRS, net interest expense/income on the P&L incorporates a return on plan assets based on the discount rate”. But I think i understood it now – they are referring to the second term of the following formula: NIE = (PO x r) – (Fair value of plan asset x r).
::Thanks for the explanation! Somehow it helps! Apparently from 2015 onward, AFS for debt is not longer permissible – it’s either Held-to-maturity or Held-for-trading. Nevertheless, based on your example, doesn’t seems like it’s going to be a big problem so long we understood how it affects the financial statements.
::@googs1484 haha no problem! we are in the same shoes but good to have someone to discuss about this =)
::Hi thank you @googs1484 for the reply! What happen if for a multi regression, the F-test is significant but on using the t-test to find out the explanatory power of each individual coefficient, at least 1 or 2 are insignificant? do you then still use the model or revamp the model by removing the coefficient which is insignificant?
::Hi Thanks for the clarification. If the null hypothesis is not rejected for a general t-test for the regression coefficients (t-stat < t-critical), does that mean the independent variable doesn’t have the explanatory power on the model and hence it is not appropriate to use the model to draw any conclusion?
::The first formula is the general t-test formula. The second is the correlation t-test formula which is less well-known (at least to me). If i understood it correctly, the second formula’s application is based on a null hypothesis that the correlation between two samples is equal to zero and the alternative hypothesis is there is some forms of correlation.
in reply to: Valuing a Forward Contract Prior to Expiration #83462in reply to: Valuing a Forward Contract Prior to Expiration #83460in reply to: Effective duration for option bond #83213::Thanks for replying. Actually the answer is B. This is EOC from CFAI textbook
B is correct. If the term structure of yield volatility is downward-sloping, then short-term bond yields-to-maturity have greater volatility than for long-term bonds. Therefore, long-term yields are more stable than short-term yields. Higher volatility in short-term rates does not necessarily mean that the level of short-term rates is higher than long-term rates. With a downward-sloping term structure of yield volatility, short-term bonds will not always experience greater price fluctuation than long-term bonds. The estimated percentage change in a bond price depends on the modified duration and convexity as well as on the yield-to-maturity change.
(Institute 287)
Institute, CFA. 2015 CFA Level I Volume 5 Equity and Fixed Income. Wiley Global Finance, 2014-07-14. VitalBook file.
in reply to: Effective duration for option bond #83191::By the way, I am trying to avoid creating too many threads but i hope it’s okay that I ask another question related to bond here.
For the following question, if the yield curve is downward sloping, isn’t that implied that the short-term bond is more volatile thus requires greater interest rate to compensate for the volatility? But according to CFAI answer, for such a yield curve, volatile short-term bond does not necessarily implies higher interest rate than long-term bond but I thought volatility usually implies higher interest rate?
in reply to: Effective duration for option bond #83190::Thanks a lot! @Sophie that makes a lot of sense! 🙂
No apology is needed, @googs1484
Thanks for helping too!in reply to: Effective duration for option bond #83177::I agreed with you. I am pretty sure these are the reasons why effective duration is as such but I cannot put my head around how the capping is affecting the effective duration (formula wise). If the capping decreases YTM, shouldn’t the effective duration increases? if effective duration decreases that means YTM increases greater than under option-free bond?
::Thank you everyone! I was thinking the same thing as Yeshank in that when they say t=4, i usually assume it to be ordinary annuity unless it is stated as annuity due. Hence t=4. I thought when a question does not state the type of annuity, we usually assume ordinary annuity?
thank you again every for your feedback!
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