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

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

 IS-IM curves??

FRA

 Wait, businesses want a single regulatory body? But business groups dont? That

makes no sense

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

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

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

 Journal by dates Ledger by account

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

 Business Risk = Sales Risk + Op Risk

Portfolio Mgt

 Beta = Cov / o^2

Equity Investments

 PE = dividend rate / k-g

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

 SS 14 LOS 51.e

Fixed Income

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

approximately a 7.5% change in price

 spot rates:

1yr 4%

2 yr 5%

3 yr 6%

4 yr 7%

2 year forward rate = ( (7*4)-(5*2) ) /2

Ethics

 To initially comply with GIPS, show at least 5 years worth of data then add a year

until you get to 10

 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

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

Equity

 Validity = Good-till-canceled, Execution = limit or market orders, Clearing = how to

arrange final settlement of trade

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

owner

 Bond indexices are harder to maintain

 Growth phase will have declining prices

Fixed Income

 Full Price = Clean Price + Accrued Interest

Alt Inv

 Macro strategy – Global stuff. Quantitative Directional has to do with tech analysis of

equities. Event Driven are more one time things

 Hedge Fund trading Nav's will get pushed downward for illiquid securite as opposed

to regular nav

Ethics

 Incase of difference of opinion, you should document it

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

Equity

 PE = Div Payout / (k-g)

 Allowed to sell shares to institutions without registering

Fixed Income

 Know duration formulas

Ethics

 Credit Risk - Risk of credit downgrade. Default Risk - Risk of nonpayments. Shortfall

Risk - Risk of portfolio value falling

FRA

 Stock dividends count for the whole year for EPS purposes

 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

 Interest and dividends are always classified as income, regardless of stock

classification

Corp Finance

 You should add a country risk premium in CAPM calculations

 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

 Market Model is Ri = a + B(Rm) + Ei

Equity

 Operational Efficiency = Low transaction Costs. Informational Effieciency = Quick

disemination of data

 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

 Covered Bonds = Are bankrupcy remote. Different than securitized, because

securitized are issued by a special purpose vehicle

Derivatives

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

the INITIAL margin

Ethics

 Independence and Objectivity requires disclosure of conflicts and so does Disclosure

of Conflicts

Equity

 Bond Indeces are harder to maintain that stock indexes

Fixed Income

 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

 Youre allowed to compensate a client in a dispute. Just not to give them a bunch of

oversubscribed IPO shares to do it.

FRA

 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

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

Quant

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

FRA

 Interest would be a operating expense for a financial firm

 IFRS two assumptions are accrual basis and going concern

Equity

 Shakeout- Slowing Growth, increased competition, declining profitablility. Mature -

Industry consildation and little to no growth

Fixed Income

 Matrixing for illquid bonds should be done with similarly rated bonds tht are traded

more often

Ethics

 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

 Private Equity investements are valued according to special guidelines, except

Evergreen and OpenEnded Funds

Econ

 Unstable Demand?
 Slopes in econ are backwards X/Y

Port Man

 Securities above SML are undervalued

Fixed Income

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

 Effective Convexity accounts for options, and Approx doesn’t. Theyre equal when

you have an option free bond

Econ

 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

 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

 NPV assumes reinvestment at Cost of Capital. IRR assumes reinvestment at IRR

PORT MAN
 CAPM assumes no single investor is large enough to alter prices and that everyone is

risk averse and has same time horizon

 Above SML undervalued.

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

Equity

 DJI is price weighted

 Forwards are customizable traded OTC. Futures are standardized and are

obiligatory. Options are standardized, and give you the option.

Fixed

 Structured notes are medium term bonds combined with derivatives

 Corporate bonds are usually on 30/360 dates

Equity

 Must assign portfolios to composites before performance Is known

Quant

 Significance level is the 5% one.

FRA

 Impairment write downs are above the line

Fixed

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

points

Ethics

 You don’t have to disclose another job if it doesn’t interfere with your current one

Must maintain records of investment recommendations

 Checkign references is recommended

 CFA must not have periods.

Quant

 Nonparametric tests often transform data into ranks or signs

Econ

 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

 LIFO liquidation means old inventory gets sold

 Cash flow to revenue = CFO / Rev

Portman

 Steep indifference curves mean greater risk aversion

Fixed Income

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

 Increasing duration can increase or decrease Mac Dur

 To value a bond using spot rates, add the Zspread to the Government rates and

discount them from the cash flows

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

Derv

 Daily settlement price is the average last few trades of the day or the bid of the long

and ask of the short

Alt

 Contago = Futures Prices > Spot rates

 In a management buy in, LBO, the current management is replaced. A Management

Buy Out, the management would stay

Ethics

 Be fair! Even if disclosing

 Two primary principles of CFA Instutute Rules of Procedure for Pro Conduct? Fair

process and Confidentiality of proceedings

Quant

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

 Investors prefer positively skewed results

Econ

 HHI read about

 Veblen goods violate the fundamental axioms of demand theory

FRA

 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

 Run an impairment test. Carrying Value - Undiscounted Expected Future Cash

Flows. If impaired, then use Fair Value going forward

 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.

 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

 Disposition Effect - you take wins but not losses

 Dealer provide liquidity

 Y=C+I+G

 Unemployment numbers are a leading indicator

 The payment date can occur on the weekend

 Float factor = Average daily float/Average daily deposit

 Unsposored DRs, the bank owns the voting rights

Bonds

 Eurobonds - Issued outside any country

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

 Foreign Bonds - Issued by French in US in USD

 Bearer Bonds - Trustee doesn’t keep ownership

 Registered Bonds - Ownership recorded

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

performing ones

 Collateral Trust Bonds -

 Bullet Bonds -

 Payment inlend?? Coupon Bond

Indentures

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

exchange

 Open Market Operations - FED

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

 Sinking Fund - Lets issuer pay off faster

 Demand Deposits - Checking accounts

 Negotiable CODS -

 New issues go thru auctions in developed countries

 Negotiable means sells on 2ndary market

 Wholesale accounts != retail accounts

 Repurchase agreements are collateralized loans

 Forward Rate is marginal return for extending TYM

 FRN is a premium if Margin Account > Discount Account

 I Spread

 G Spread

 Z Spread

 SPE- Issue asset backed securities

 Lockout Period - When you only collect fees

 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

 Duration Gap = Mac Dur - Investment Horizon

 Mac = Mod (1+YTM)

 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 Fin

Dividends Paid 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-

 Letter of Credit?

 FAIRly RELEtives all COMPAREd their VERy TIMELy UNDERwear.

 Fundamental Characteristics: Fair Representation, Relevance

 Enhancing Characteristics: Comparability, Verifiability, Timeliness, and

Understandability
 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.

 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.

 Third lien debt is secured debt. It has a secured interest in the pledged assets and

ranks higher than all other unsecured debts.

 Equipment trust certificates are bonds secured by specific types of equipment or

physical assets, such as shipping containers.

 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.

 Whats an SPE then?

 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.

 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.

 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.

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

Formula

 Cash to Income means Operating Cash flow to Operating Income

 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.

 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

 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.

 Other comprehensive income includes gains or losses on available-for-sale (AFS)

securities and translation adjustments on foreign subsidiaries.

 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.

 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.

 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.

 The market approach to valuing portfolio companies uses multiples of different

measures that are compared with similar companies.

 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.

 A capital allocation line shows possible combinations of a risky portfolio and the

risk-free asset.
 As a country opens up to trade, the benefit accrues to the abundant factor which is

labor in Country A.

 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.

 DCF uses after tax cash flows

 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

 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.

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

underlying

 Futures > Spot = Contango

 Futures < Spot = Backwardation … makes sense cuz if futures are more than spot,

then its backwards.

 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

 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

 IRR is the discount rate that makes NPV = 0

 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

 Derviatives have low capital requirements

 Forwards: At intiation they have a value of 0

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

 The price of a forward is constant

Econ

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

 Dealers provide liduiity

FRA

 GAAP only allows software development to be capitalized under certain conditions.

IFRS allows other things to be capitalized too.

 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.

 Goodwill is checked for impairment, not capitalized

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

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

statement.