CFA Level 2 Flashcards - 2
Financial contagion
A situation in which financial shocks spread from their place of origin to other locales. In essence, a faltering economy infects other, healthier economies.
Independent regulators
Regulators recognized and granted authority by a government body or agency. They are not government agencies per se and typically do not rely on government funding.
Informational frictions
Forces that restrict availability, quality, and/or flow of information and its use.
Judicial law
Interpretations of courts.
Net regulatory burden
The private costs of regulation less the private benefits of regulation.
Procedural law
The body of law that focuses on the protection and enforcement of the substantive laws.
Prudential supervision
Regulation and monitoring of the safety and soundness of financial institutions to promote financial stability, reduce system-wide risks, and protect customers of financial institutions.
Regulatory arbitrage
Entities identify and use some aspect of regulations that allows them to exploit differences in economic substance and regulatory interpretation or in foreign and domestic regulatory regimes to their (the entities’) advantage.
Regulatory burden
The costs of regulation for the regulated entity.
Regulatory capture
Theory that regulation often arises to enhance the interests of the regulated.
Regulatory competition
Regulators may compete to provide a regulatory environment designed to attract certain entities.
Self-regulating organizations (SROs)
Self-regulating bodies that are given recognition and authority, including enforcement power, by a government body or agency.
Self-regulatory bodies
Private, non-governmental organizations that both represent and regulate their members. Some self-regulating organizations are also independent regulators.
Statutes
Laws enacted by legislative bodies.
Substantive law
The body of law that focuses on the rights and responsibilities of entities and relationships among entities.
Systemic risk
Refers to risks supervisory authorities believe are likely to have broad impact across the financial market infrastructure and affect a wide swath of market participants.
Downstream
A transaction between two related companies, an investor company (or a parent company) and an associate company (or a subsidiary) such that the investor company records a profit on its income statement. An example is a sale of inventory by the investor company to the associate or by a parent to a subsidiary company.
Upstream
A transaction between two related companies, an investor company (or a parent company) and an associate company (or a subsidiary company) such that the associate company records a profit on its income statement. An example is a sale of inventory by the associate to the investor company or by a subsidiary to a parent company.
Defined benefit pension plans
Plans in which the company promises to pay a certain annual amount (defined benefit) to the employee after retirement. The company bears the investment risk of the plan assets.
Defined contribution pension plans
Individual accounts to which an employee and typically the employer makes contributions during their working years and expect to draw on the accumulated funds at retirement. The employee bears the investment and inflation risk of the plan assets.
Exercise date
The date when employees actually exercise stock options and convert them to stock.
Grant date
The day that stock options are granted to employees.
Other post-employment benefits
Promises by the company to pay benefits in the future, such as life insurance premiums and all or part of health care insurance for its retirees.
Pension obligation
The present value of future benefits earned by employees for service provided to date.
Service period
For employee stock options, usually the period between the grant date and the vesting date.
Vesting date
The date that employees can first exercise stock options.
Current exchange rate
For accounting purposes, the spot exchange rate on the balance sheet date.
Current rate method
Approach to translating foreign currency financial statements for consolidation in which all assets and liabilities are translated at the current exchange rate. The current rate method is the prevalent method of translation.
Exposure to foreign exchange risk
The risk of a change in value of an asset or liability denominated in a foreign currency due to a change in exchange rates.
Foreign currency transactions
Transactions that are denominated in a currency other than a company’s functional currency.
Functional currency
The currency of the primary economic environment in which an entity operates.
Historical exchange rates
For accounting purposes, the exchange rates that existed when the assets and liabilities were initially recorded.
Local currency
The currency of the country where a company is located.
Monetary assets and liabilities
Assets and liabilities with value equal to the amount of currency contracted for, a fixed amount of currency. Examples are cash, accounts receivable, accounts payable, bonds payable, and mortgages payable. Inventory is not a monetary asset. Most liabilities are monetary.
Monetary/non-monetary method
Approach to translating foreign currency financial statements for consolidation in which monetary assets and liabilities are translated at the current exchange rate. Non-monetary assets and liabilities are translated at historical exchange rates (the exchange rates that existed when the assets and liabilities were acquired).
Net asset balance sheet exposure
When assets translated at the current exchange rate are greater in amount than liabilities translated at the current exchange rate. Assets exposed to translation gains or losses exceed the exposed liabilities.
Net liability balance sheet exposure
When liabilities translated at the current exchange rate are greater assets translated at the current exchange rate. Liabilities exposed to translation gains or losses exceed the exposed assets.
Non-monetary assets and liabilities
Assets and liabilities that are not monetary assets and liabilities. Non-monetary assets include inventory, fixed assets, and intangibles, and non-monetary liabilities include deferred revenue.
Presentation currency
The currency in which financial statement amounts are presented.
Purchasing power gain
A gain in value caused by changes in price levels. Monetary liabilities experience purchasing power gains during periods of inflation.
Purchasing power loss
A loss in value caused by changes in price levels. Monetary assets experience purchasing power loss during periods of inflation.
Temporal method
A variation of the monetary/non-monetary translation method that requires not only monetary assets and liabilities, but also non-monetary assets and liabilities that are measured at their current value on the balance sheet date to be translated at the current exchange rate. Assets and liabilities are translated at rates consistent with the timing of their measurement value. This method is typically used when the functional currency is other than the local currency.
Transaction exposure
The risk of a change in value between the transaction date and the settlement date of an asset of liability denominated in a foreign currency.
Allowance for loan losses
A balance sheet account; it is a contra asset account to loans.
Float
Amounts collected as premium and not yet paid out as benefits.
Premiums
Amounts paid by the purchaser of insurance products.
Provision for loan losses
An income statement expense account that increases the amount of the allowance for loan losses.
Bottom-up approach
With respect to forecasting, an approach that usually begins at the level of the individual company or a unit within the company.
Economies of scale
A situation in which average costs per unit of good or service produced fall as volume rises. In reference to mergers, the savings achieved through the consolidation of operations and elimination of duplicate resources.
Growth capital expenditures
Capital expenditures needed for expansion.
Hybrid approach
With respect to forecasting, an approach that combines elements of both top-down and bottom-up analyses.
Maintenance capital expenditures
Capital expenditures needed to maintain operations at the current level.
Scenario analysis
A technique for exploring the performance and risk of investment strategies in different structural regimes.
Top-down approach
With respect to forecasting, an approach that usually begins at the level of the overall economy. Forecasts are then made at more narrowly defined levels, such as sector, industry, and market for a specific product.
Bonus issue of shares
A type of dividend in which a company distributes additional shares of its common stock to shareholders instead of cash.
Buyback
A transaction in which a company buys back its own shares. Unlike stock dividends and stock splits, share repurchases use corporate cash.
Canceled shares
Shares that were issued, subsequently repurchased by the company, and then retired (cannot be reissued).
Constant dividend payout ratio policy
A policy in which a constant percentage of net income is paid out in dividends.
Dividend
A distribution paid to shareholders based on the number of shares owned.
Dividend coverage ratio
The ratio of net income to dividends.
Dividend imputation tax system
A taxation system that effectively assures corporate profits distributed as dividends are taxed just once and at the shareholder’s tax rate.
Dividend payout ratio
The ratio of cash dividends paid to earnings for a period.
Dividend policy
The strategy a company follows with regard to the amount and timing of dividend payments.
Dividend yield
Annual dividends per share divided by share price.
Double taxation system
Corporate earnings are taxed twice when paid out as dividends. First, corporate pretax earnings are taxed regardless of whether they will be distributed as dividends or retained at the corporate level. Second, dividends are taxed again at the individual shareholder level
Ex-dividend
Trading ex-dividend refers to shares that no longer carry the right to the next dividend payment.
Ex-dividend date
The first date that a share trades without (i.e., “ex”) the right to receive the declared dividend for the period.
Extra dividend
A dividend paid by a company that does not pay dividends on a regular schedule, or a dividend that supplements regular cash dividends with an extra payment.
Fixed price tender offer
Offer made by a company to repurchase a specific number of shares at a fixed price that is typically at a premium to the current market price.
Flotation cost
Fees charged to companies by investment bankers and other costs associated with raising new capital.
Franking credit
A tax credit received by shareholders for the taxes that a corporation paid on its distributed earnings.
Greenmail
The purchase of the accumulated shares of a hostile investor by a company that is targeted for takeover by that investor, usually at a substantial premium over market price.
Impairment of capital rule
A legal restriction that dividends cannot exceed retained earnings.
Indenture
A written contract between a lender and borrower that specifies the terms of the loan, such as interest rate, interest payment schedule, or maturity.
Liquidating dividend
A dividend that is a return of capital rather than a distribution from earnings or retained earnings.
Payout policy
The principles by which a company distributes cash to common shareholders by means of cash dividends and/or share repurchases.
Payouts
Cash dividends and the value of shares repurchased in any given year.
Perfect capital markets
Markets in which, by assumption, there are no taxes, transaction costs, or bankruptcy costs and in which all investors have equal (“symmetric”) information.
Price-to-earnings ratio
(P/E) The ratio of share price to earnings per share.
Reverse stock split
A reduction in the number of shares outstanding with a corresponding increase in share price, but no change to the company’s underlying fundamentals.
