A finance-LLM diagnostic. Built by a finance director, not a benchmark.

What the model producedAsked to value a bond on which the issuer has defaulted, the model computed a yield to maturity from the bond's scheduled coupons and par — treating the promised cash flows as the cash flows the holder will receive.

Why this is wrongOnce default has occurred, the promised coupons and par are not the expected cash flows. A defaulted bond is valued on its expected recovery — estimated workout or liquidation proceeds and their timing, discounted to present value — not on a yield to maturity computed from cash flows that will not be paid.

Downstream impactThe figure looks quantitatively coherent and would survive a typical citation/extraction review. Used as an input to a pricing or workout decision, it systematically overstates value, because it prices in coupons the holder will never collect.

What the model producedAllocating purchase price in a stock deal with a non-deductible step-up, the model wrote fixed assets and intangibles up to fair value and plugged the residual to goodwill — with no deferred tax liability recognised.

Why this is wrongA step-up taken for book but not for tax creates a taxable temporary difference, and so a deferred tax liability equal to the step-up times the tax rate. That liability is itself a component of the allocation, and recognising it increases goodwill.

Downstream impactGoodwill is understated and net identifiable assets overstated, which overstates impairment headroom. And because the omitted liability never unwinds, deferred tax expense and net income are misstated across the asset lives.

What the model producedIn an exit waterfall, the model paid the preferred holder its 1× liquidation preference and then also credited the full as-converted common value on the same shares.

Why this is wrongA non-participating preferred receives the greater of its liquidation preference or its as-converted value — not the sum. At any given exit value the holder elects whichever is larger; the two are mutually exclusive.

Downstream impactThe preferred claim is overstated and common proceeds understated across a band of exit values. Any return-to-common or management-incentive analysis built on the waterfall is distorted.