FTIP common mistakes
FTIP · Understand the traps and how to avoid them.
Treating a bond's coupon rate as its yield when answering questions about total return or price sensitivity, ignoring that price above or below par changes the yield to maturity.
Candidates memorize the coupon printed on the instrument and default to it as the discount rate, because coupon is the most visible number in a bond description and the exam often supplies it first.
What to do instead
Before any bond calculation, write down three separate numbers: coupon rate, current price relative to par, and time to maturity. Compute YTM from cash flows, then use modified duration (Macaulay duration divided by 1 plus yield per period) for price-change estimates.
Applying a single P/E or EV/EBITDA multiple drawn from a peer set without adjusting for growth, leverage, or accounting differences between the subject and the comparables.
Relative valuation feels fast and the exam supplies tidy peer tables, so candidates grab the median multiple and multiply, skipping the reconciliation step that the question is actually testing.
What to do instead
For every comparables question, state in one line why the peer is comparable (same growth band, similar capital structure, same accounting basis). If any differs, adjust the multiple or switch to a forward multiple or a discounted cash flow cross-check.
Rebalancing a portfolio to target weights without accounting for the correlation and volatility change that the new weights imply, then reporting the old portfolio risk statistics.
Candidates treat rebalancing as pure arithmetic on weights and forget that expected portfolio variance depends on covariances, which change when weights change.
What to do instead
After computing new weights, recompute portfolio standard deviation using the full covariance terms, and explicitly note whether diversification improved or the portfolio became more concentrated in a single factor.
Reporting Value at Risk as a maximum possible loss rather than a loss threshold at a stated confidence level over a stated horizon.
The phrase 'value at risk' invites a intuitive but wrong reading of 'worst case', and many candidates never internalize that VaR says nothing about the size of losses beyond the threshold.
What to do instead
Practice writing the full sentence: 'We are X percent confident losses will not exceed Y over Z days.' When a question asks about tail risk, answer with expected shortfall or stress testing, not VaR.
Resolving an ethics scenario by choosing the action that is legal in the candidate's home jurisdiction rather than the stricter of local law and the professional standard.
Candidates reason from personal or local regulatory experience, and the exam deliberately constructs cases where local law permits conduct the code prohibits.
What to do instead
Apply a fixed test to every ethics item: identify the duty owed (client, employer, market, public), then apply the stricter standard. If local law is stricter, follow local law; if the code is stricter, follow the code.
Recommending an asset allocation before establishing the client's time horizon, liquidity needs, and risk capacity, then defending the recommendation with return figures.
Return maximization is the most concrete part of the case, so candidates jump to products and back-fill the profile instead of building the profile first.
What to do instead
Write the investment policy statement elements in order: objectives, constraints (liquidity, time horizon, taxes, legal, unique), then allocation. Every recommendation must cite a specific stated constraint it satisfies.
Confusing a forward contract's payoff at maturity with its value today, and pricing the forward as if no carry or financing cost existed.
Forward and futures questions mix spot price, forward price, and contract value, and candidates collapse all three into one number.
What to do instead
Separate the three quantities on scratch paper: forward price = spot compounded at the risk-free rate minus carry; value at initiation is zero; value later equals the present value of the difference between current forward price and the locked-in price.
Using accounting earnings or net income as the cash flow in a discounted cash flow model instead of free cash flow to the firm, and discounting at the wrong rate as a result.
Net income is the headline number in financial statements and candidates default to it without matching the cash flow definition to the discount rate.
What to do instead
Match numerator to denominator: FCFF discounted at WACC, FCFE discounted at cost of equity, dividends discounted at cost of equity. Show the reconciliation from net income to the chosen cash flow before discounting.
Ignoring tax drag and turnover costs when comparing a tax-deferred account, a taxable account, and a tax-exempt vehicle in a client planning question.
Candidates compare pre-tax returns because they are the numbers given, and treat account type as a label rather than a return modifier.
What to do instead
Compute after-tax terminal wealth for each wrapper using the client's marginal rate, expected holding period, and turnover. State the assumed tax treatment explicitly so partial credit is available even if arithmetic slips.
Describing a hedging or diversification strategy as eliminating risk when it only transfers or redistributes it, and failing to name the residual exposure.
Textbook language about hedging 'reducing' risk gets compressed into 'removing' risk under time pressure, and candidates miss questions that test the basis risk or counterparty exposure left behind.
What to do instead
For every risk-management answer, name the risk removed, the risk transferred, and the risk that remains (basis risk, counterparty risk, liquidity risk). If the question asks for residual exposure, answer with the specific named risk.