Cfa Notes.docx

Ethics o In order to be a CFA candidate you must be registered for the next exam. o Must receive WRITTEN consent for performance based benefits from cients that affects future performance o A firm must issue a BUY recommendation to all relevant clients before buying the stock. Dont have to make it public. o Tbills arent really risk free because they still have interest rate risk. Still guaranteed o Youre allowed to share client's medical issues with people who work for you (ie advisors). Quant 

Significance level = odds of a rejecting a true null Econ

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100 (JPY/EUR) vs 104.2(JPY/EUR) fair to say Euro has appreciated 4.2% vs the JPY.

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IS-IM curves?? FRA

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Wait, businesses want a single regulatory body? But business groups dont? That makes no sense

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Non-controlling interest is the part of the company you dont own

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FCFF = OCF+ int exp net of tax – net cap ex

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COGS FIFO = COGS LIFO – (ending LIFO reserve – beginning LIFO reserve)

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Journal by dates Ledger by account

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Impairment writedowns are in income from cont ops. Above the line

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GAAP and IFRS, op or financial lease requires min lease payments for next 5 years and sum for more than 5 years into the future Corp Finance

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Business Risk = Sales Risk + Op Risk Portfolio Mgt

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Beta = Cov / o^2 Equity Investments

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PE = dividend rate / k-g

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Management buyout, they buy all the remaining shares and take it private

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SS 14 LOS 51.e Fixed Income

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With an effective duration of 7.5, a 100 basis point change in bond yield results in approximately a 7.5% change in price

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spot rates: 1yr 4% 2 yr 5% 3 yr 6% 4 yr 7% 2 year forward rate = ( (7*4)-(5*2) ) /2 Ethics

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To initially comply with GIPS, show at least 5 years worth of data then add a year until you get to 10

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You only have to disclose conflicts of interest to employers and affected clients

Econ 

Fisher Effect states Nominal Int Rate = Real Int Rate + Exp Int Rate FRA

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Trademarks that can be renewed indefinitely at a min cost are not amortized Equity

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Validity = Good-till-canceled, Execution = limit or market orders, Clearing = how to arrange final settlement of trade

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Sponsored Depository Receipt have the same rights and dividends as a regular owner

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Bond indexices are harder to maintain

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Growth phase will have declining prices Fixed Income

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Full Price = Clean Price + Accrued Interest Alt Inv

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Macro strategy – Global stuff. Quantitative Directional has to do with tech analysis of equities. Event Driven are more one time things

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Hedge Fund trading Nav's will get pushed downward for illiquid securite as opposed to regular nav Ethics

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Incase of difference of opinion, you should document it

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You must get written consent before accepting outlanding performance based gifts Equity

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PE = Div Payout / (k-g)

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Allowed to sell shares to institutions without registering Fixed Income

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Know duration formulas Ethics

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Credit Risk - Risk of credit downgrade. Default Risk - Risk of nonpayments. Shortfall Risk - Risk of portfolio value falling FRA

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Stock dividends count for the whole year for EPS purposes

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Under IFRS, if the out come of a contract is unreliable, then you can count Exp then match Rev to that, and not recognize profit (loss) until it's complete

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Interest and dividends are always classified as income, regardless of stock classification Corp Finance

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You should add a country risk premium in CAPM calculations

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Degree of Op Leverage = Op Income changes as it related to sales. Degree of Finanical Leverage = Net Income changes as it relates to Op Income. Degree of Total Leverage = Net Incomes changes as it relates to sales Port Man

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Market Model is Ri = a + B(Rm) + Ei Equity

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Operational Efficiency = Low transaction Costs. Informational Effieciency = Quick disemination of data

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PE = Div Rate / (k-g)

Fixed Income 

Default Risk = Risk of default. Shortfall Risk = Risk the value falls on a portfolio. Credit Risk = Risk of default. Downgrade Risk = Risk bond gets reclassified down. Credit Spread Risk = Risk that the risk premium increases on a bond

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Covered Bonds = Are bankrupcy remote. Different than securitized, because securitized are issued by a special purpose vehicle Derivatives

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If the margin account falls below the maintenance account, it must be brought up to the INITIAL margin Ethics

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Independence and Objectivity requires disclosure of conflicts and so does Disclosure of Conflicts Equity

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Bond Indeces are harder to maintain that stock indexes Fixed Income

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Shelf Registration is when they create the bonds, but sell them to public over a period of time. Serial bonds is when the bonds have different maturity dates. Ethics

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Youre allowed to compensate a client in a dispute. Just not to give them a bunch of oversubscribed IPO shares to do it. FRA

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IOSCO wants to Protect Investors, Reduce System Risk, and ensure Fariness, Transparency, and Efficiency. Wants uniform compliance of global markets

Fixed Income 

Govt bonds typically settle in 1 day, while corporate take 3 days Ethics

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Record retention : Recommended for 7 years, but not required. Quant

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Normal distributions are complely described by their mean and standard deviation FRA

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Interest would be a operating expense for a financial firm

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IFRS two assumptions are accrual basis and going concern Equity

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Shakeout- Slowing Growth, increased competition, declining profitablility. Mature Industry consildation and little to no growth Fixed Income

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Matrixing for illquid bonds should be done with similarly rated bonds tht are traded more often Ethics

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GIPS compliant results can be presented with non-compliant historical performance added for earlier periods, btu no non-complient results can be presented for any time period after January 1, 2000

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Private Equity investements are valued according to special guidelines, except Evergreen and OpenEnded Funds Econ

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Unstable Demand?

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Slopes in econ are backwards X/Y Port Man

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Securities above SML are undervalued Fixed Income

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Only discount bonds can have a yield that can be interpretted as a spot rate

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Effective Convexity accounts for options, and Approx doesn’t. Theyre equal when you have an option free bond Econ

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At a base period, nominal exchange rate for PTR and BAL is 2.5 PTR/BAL. Two years later, if the nom rate is 3.0PTR/BAL, the PTR CPI is 120 and the BAL CPI is 110, then we calculate it as 3.0(PTR/BAL)(1.1/1.2) FRA

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Dividends paid to shareholders is financing cash flow

Available for Sale

Trading Securities

Held for Maturity

Unrealized Gains

Other comp Income

Net Income

------------------

Realized Gains

Net Income

Net Income

Other comp Income

Dividends received

Net Income

Net Income

Net Income

FCFE = CFO - Cap Ex + Net Borrowing CORP FIN

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NPV assumes reinvestment at Cost of Capital. IRR assumes reinvestment at IRR PORT MAN

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CAPM assumes no single investor is large enough to alter prices and that everyone is risk averse and has same time horizon

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Above SML undervalued. 

Major asset classes returns have been negatively skewed with positive kurtosis Equity

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DJI is price weighted

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Forwards are customizable traded OTC. Futures are standardized and are obiligatory. Options are standardized, and give you the option. Fixed

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Structured notes are medium term bonds combined with derivatives

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Corporate bonds are usually on 30/360 dates Equity

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Must assign portfolios to composites before performance Is known Quant

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Significance level is the 5% one. FRA

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Impairment write downs are above the line Fixed

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A 7.5 effective duration means the bond price will move 7.5% for every 100 basis points Ethics

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You don’t have to disclose another job if it doesn’t interfere with your current one Must maintain records of investment recommendations

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Checkign references is recommended

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CFA must not have periods. Quant

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Nonparametric tests often transform data into ranks or signs Econ

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A higher interest rate means the currency is expected to depreciation faster. If a currency is trading at a premium, then it will have a lower interest rate FRA

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LIFO liquidation means old inventory gets sold

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Cash flow to revenue = CFO / Rev Portman

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Steep indifference curves mean greater risk aversion Fixed Income

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For the same credit rating, municipal bonds have lower default risk

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Increasing duration can increase or decrease Mac Dur

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To value a bond using spot rates, add the Zspread to the Government rates and discount them from the cash flows

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Sinking Fund means higher interest rate, cuz issuer can close it out sooner Derv

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Daily settlement price is the average last few trades of the day or the bid of the long and ask of the short Alt

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Contago = Futures Prices > Spot rates

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In a management buy in, LBO, the current management is replaced. A Management Buy Out, the management would stay Ethics

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Be fair! Even if disclosing

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Two primary principles of CFA Instutute Rules of Procedure for Pro Conduct? Fair process and Confidentiality of proceedings Quant

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Power of the Test is probability of correctly rejecting the null hypothesis

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Investors prefer positively skewed results Econ

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HHI read about

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Veblen goods violate the fundamental axioms of demand theory FRA

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GAAP requires that construction contracts that have reliable costs use the percent of completion method. If costs cannot be determined, must use the complete contract method

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Run an impairment test. Carrying Value - Undiscounted Expected Future Cash Flows. If impaired, then use Fair Value going forward

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The costs to include in inventories are all costs of purchase, costs of conversion, and other costs incurred in bringing the inventories to their present location and condition. It does not include abnormal waste costs or storage of finished product.

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Inventory costs include all direct costs of acquisition including import taxes, transportation costs and transportation insurance costs, but not storage costs of

finished goods or warehouse administrative costs. Volume rebates, and similar items reduce the price paid and the costs of purchase. 

GAAP allows foreignerrs to report under GAAP or IFRS

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Disposition Effect - you take wins but not losses

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Dealer provide liquidity

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Y=C+I+G

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Unemployment numbers are a leading indicator

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The payment date can occur on the weekend

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Float factor = Average daily float/Average daily deposit

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Unsposored DRs, the bank owns the voting rights Bonds

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Eurobonds - Issued outside any country

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Global Bonds - Issued in Eurobond and domestic country(s)

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Foreign Bonds - Issued by French in US in USD

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Bearer Bonds - Trustee doesn’t keep ownership

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Registered Bonds - Ownership recorded

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Covered Bonds - Covered by pool. If assets underperform, thyre replaced by performing ones

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Collateral Trust Bonds -

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Bullet Bonds -

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Payment inlend?? Coupon Bond Indentures Covanents

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Organized Exchange - Buy and sell from anywhere, trades have to happen at exchange

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Open Market Operations - FED

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OTC Market - Buy and sell from anywhere, trades happen over com network.

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Sinking Fund - Lets issuer pay off faster

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Demand Deposits - Checking accounts

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Negotiable CODS 

New issues go thru auctions in developed countries

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Negotiable means sells on 2ndary market

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Wholesale accounts != retail accounts

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Repurchase agreements are collateralized loans

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Forward Rate is marginal return for extending TYM

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FRN is a premium if Margin Account > Discount Account

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I Spread

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G Spread

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Z Spread

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SPE- Issue asset backed securities

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Lockout Period - When you only collect fees

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Mac Dur is.. Period

Cash Flow

Weight

Weight x Period

1

x

y

z

2

x

y

z

3

x

y

z Sum(z) = Mac Dur

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Duration Gap = Mac Dur - Investment Horizon

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Mac = Mod (1+YTM)

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Debt Seniority 1. First Lien Loan - Senior Secured 2. Second Lien Loan - Secured 3. Senior Unsecured 4. Senior Subordinated 5. Subordinated 6. Junior Subordinated

GAAP Ops

Inv

Dividends Paid

Fin X

Dividends Received

X

Interest Paid

X

Interest Received

X IFRS Paid

Can be either Ops or Fin

Received Can be either Ops or Inv 

Surety Bond-

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Letter of Credit?

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FAIRly RELEtives all COMPAREd their VERy TIMELy UNDERwear.

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Fundamental Characteristics: Fair Representation, Relevance

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Enhancing Characteristics: Comparability, Verifiability, Timeliness, and Understandability

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Credit card receivable-backed securities are non-amortizing loans. They have a lockout period during which the only cash flows paid to investors are based on finance charges and fees. When the lockout period is over, principal payments are distributed to investors. In contrast, principal is received monthly in automobile loan-backed securities.

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A central bank engaging in expansionary monetary policy might cause the yield curve to steepen by reducing short-term interest rates and thus cause greater volatility in short-term bond yields to maturity than in longer-term bonds.

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Third lien debt is secured debt. It has a secured interest in the pledged assets and ranks higher than all other unsecured debts.

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Equipment trust certificates are bonds secured by specific types of equipment or physical assets, such as shipping containers.

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The collateral in a securitization is the pool of securitized assets from which cash flows will be generated. The seller of the collateral is the depositor, also referred to as the originator.

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Whats an SPE then?

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It is bond convexity that explains the asymmetrical price change. A fall in interest rates will result in a higher percentage rise in the bond's price compared with the percentage fall in the bond's price when interest rates rise by the same amount.

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During the lockout period any principal received is reinvested to acquire additional loans with a principal equal to the total principal received from the cash flow keeping the face value of the issue at €1 billion.

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The difference between the full and flat prices is the accrued interest, which is computed as follows. Based on the Actual/Actual day convention, the number of days between the coupon periods is 183 days. Also, using the Actual/Actual day count convention, the number of days between 15 May 2014 and 15 July 2014 is 16 days remaining in May + 30 days in June + 15 days in July = 61 days. Accrued interest (per $100 par value) = (61/183)(8.00/2) = 1.333.

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Careful with what they mean by Tax Burden and Interest Burden. Use the Dupont Formula

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Cash to Income means Operating Cash flow to Operating Income

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Analysts typically adjust for operating leases by treating them as if they were finance leases, including them as a liability measured at present value of future lease payments. In this case, the future lease payments are an annuity due of €15,280 over three years, at 4%. The present value of the annuity is €44,100: 15,280 × PV AADV (three years, 4%) = €44,100.

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A valuation allowance is required under US GAAP if there is doubt about whether a deferred tax asset will be recovered. Under IFRS, the deferred tax asset is written down directly

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An accelerated method of deprecation produces greater expenses in the early years and lowers net income, which in turn lowers the retained earnings resulting in a decrease in shareholders' equity.

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Other comprehensive income includes gains or losses on available-for-sale (AFS) securities and translation adjustments on foreign subsidiaries.

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The IFRS's conditions that must be met include that the costs incurred can be reliably measured, the seller knows what it expects to collect and is reasonably certain of collection, and the significant risks and rewards of ownership have been transferred, which is normally (but not always) when the goods have been delivered.

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Bradovic's boss's insistence that all credit ratings be given an investment-grade rating, irrespective of the analysis undertaken, indicates a systemic disregard for due diligence, reasonable basis, and true representation. This shows a total disregard for the CFA Institute Standards of Professional Conduct, in particular Standard V(A)–Diligence and Reasonable Basis. Bradovic's best course of action consequently is to resign because the company's current practice of giving false credit ratings is likely to continue.

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In backwardation, futures prices are lower than spot prices-that is, the commodity forward curve is downward sloping. This scenario occurs when the convenience yield is high. Futures price ≈ Spot price (1 + r) + Storage costs – Convenience yield.

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The market approach to valuing portfolio companies uses multiples of different measures that are compared with similar companies.

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Money market funds invest in short-term corporate or government debt. The difference between a bond mutual fund and a money market fund is the maturity of the underlying assets. In a money market fund, the maturity is as short as overnight and rarely longer than 90 days.

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A capital allocation line shows possible combinations of a risky portfolio and the risk-free asset.

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As a country opens up to trade, the benefit accrues to the abundant factor which is labor in Country A.

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Assuming appropriate corporate governance measures, the audit, remuneration/compensation, and nominations committees should be composed entirely of independent board members. Other committees, such as environmental health and safety, may have members from executive management.

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DCF uses after tax cash flows

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If the chair of the board is a former chief executive of the company, it may hamper efforts to undo mistakes made by him or her as chief executive. It is not clear whether it is better to have all members elected annually (more flexibility to meet changes in the marketplace) or whether it is better to have staggered board terms (better continuity of board expertise). All members of the audit committee should be independent members of the board. Alt Inv Topic Tests

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Private equity management fees are based on the full amount of committed capital, whether drawn down or not, minus capital that has been returned to investors from investments that have been exited.

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Derivatives do not eliminate the need to understand the supply and demand of the underlying

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Futures > Spot = Contango

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Futures < Spot = Backwardation … makes sense cuz if futures are more than spot, then its backwards.

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A conservative and theoretically accurate approach is to use bid prices for longs and ask prices for shorts as these are the prices at which the positions could be closed. Corp Fin Topic Tests

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Fixed Offer can only be completed if theres enough shares at that price apparently. Dutch Auction will set a price, and anyone who would accept less, gets the full offer price

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IRR is the discount rate that makes NPV = 0

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A “pull” on liquidity occurs when disbursements are made too quickly (e.g., current liabilities are paid instead of being held or when credit availability is reduced or limited). A “drag” on liquidity occurs when receipts lag (i.e., non-cash current assets do not convert to cash quickly). Consequently, a reduction in a credit line is a “pull” on liquidity. Derv Topic Test

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Derviatives have low capital requirements

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Forwards: At intiation they have a value of 0

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The price of a swap is constant, but the value can change

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The price of a forward is constant Econ

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Closely affiliated with The World Bank Group, the International Bank for Reconstruction and Development (IBRD) provides low or no-interest loans and grants to developing countries that have unfavourable credit or no access to international credit markets. Equity

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FCFE is a measure of the firm’s dividend-paying capacity.

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Dealers provide liduiity FRA

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GAAP only allows software development to be capitalized under certain conditions. IFRS allows other things to be capitalized too.

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To assist investors in evaluating operating performance, companies often report non-GAAP earnings by excluding asset impairment charges either for long-lived assets, goodwill or other intangible assets.

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Goodwill is checked for impairment, not capitalized

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Off-balance sheet leases are added to both Assets and Liabilities

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Under IFRS, losses on discontinued operations are shown separately on the income statement.