Concept 5

Question 1

If an analyst who have big influence on a stock, change his recommendation to “sell” and only inform his clients, does he violate standard?

Answer 1

No, Material information applies to the issuer of the security, the analyst who covers the security is free to issue recommendation only to his clients

Question 2

If the analyst receives an recommendation, can he act on his own account and on his client’s account at the same time?

Answer 2

No
Standard VI(B) Priority of Transactions. Client transactions must take precedence over members’ or candidates’ trades.

Question 3

One stock grows from 4000 to 6520 in 4 years with monthly compounding, what is the effective annual interest rate?

Answer 3

(6520/4000)^(1/4) -1 = 12/99%

Since it is asked about the effective annual interest rate, the monthly compounding is not relevant

Question 4

Central Limit theorem, what is the sample mean distribution?

Answer 4

Normal distribution with mean = population mean , variance = population variance / n

Question 5

Does Central Limit theorem apply to skewed distributions?

Answer 5

Yes

Question 6

Crowding out effect

Answer 6

An economic concept where increased public sector spending replaces, or drives down, private sector spending.

Question 7

What happens to the interest rate and corporate investment project profitability if government borrows lots of money?

Answer 7

Borrow money -> interest rate increase -> decrease profitability (since increased required rate of return

Question 8

Tariff

Answer 8

A tariff placed on an imported good increases the domestic price, decrease quantity imported and increases quantity supplied domestically.
Domestic government collect all the tariff revenue

Question 9

Quota

Answer 9

Restriction of the quantity of a good imported to the quota amount. Import license are gained by domestic government

Question 10

Voluntary export restraint

Answer 10

Voluntary agreement by a government to limit the quantity of a good that can be exported

Question 11

Forward discount/premium

Answer 11

if (Forward/spot -1 )
> 0 it’s forward discount
< 0, it’s forward premium

Question 12

Non arbitrage value for forward spot

Answer 12

Forward/spot = (1 + interest rate num)/(1 + interest rate denominator)
If EUR/USD, then EUR int rate in num

Question 13

Given spot rate S, 180 day interest rate of A and B, what’s forward rate?

Answer 13

F = S * (1 + A/2) / ( 1+ B/2)

note it’s 180 day, thus divide by 2

Question 14

Objective of financial market regulation according to International Organization of Securities Commission (IOSCO)

Answer 14

1. Protect investors
2. Ensure the fairness, efficiency, and transparency of markets.
3. Reduce systemic risk

Question 15

What is “prior service costs” in defined benefit pension plan?

Answer 15

present value of the increase in future pension benefits from a change in the terms of the pension plan.

Question 16

How does operating lease affect fixed charge coverage and interest coverage ratio?

Answer 16

Decrease fixed charge coverage, since paying more lease.

Increase interest coverage ratio

Question 17

Accrued wage

Answer 17

It’s a liability, wages payable

Question 18

Given fixed operating expense of 2, break even of 5, what is the operating income when sales = 7

Answer 18

Variable cost at 5 = 5 - 2 =3 = 60% of 5
Thus at 7, variable cost is 4.2
Operating income = 7 - 4.2 - 2 = 0.8

Question 19

What is accounts receivable aging schedule?

Answer 19

A listing of different maturity accounts receivable over time (usually in months)
It identify trends in how well the firm is doing at collecting receivables and converting them to cash

Question 20

Can a board member use the company’s asset, even to align the incentives of the Board members with those of the firm

Answer 20

no, it would compromise the independence of the board member

Question 21

Considering dividend, what’s the effect of share repurchase versus paying dividends?

Answer 21

Assuming the tax treatment of the two alternatives is the same, a share repurchase results in the same shareholder wealth as a cash dividend payment of an equal amount.

Question 22

Profitability index

Answer 22

PI = PV of future cash flows / CF0

Question 23

Strategic asset allocation

Answer 23

Correlations of returns within an asset class should be relatively high, indicating that the assets within the class are similar in their investment performance.
Low correlations between asset classes reduce risk through diversification.

Question 24

Can a firm issue shares to two institutions without registering the shares with its country’s securities regulators

Answer 24

Yes

Question 25

Government bond trade settlement date

Answer 25

T+1

Question 26

Corporate bond trade settlement date

Answer 26

T+3

Question 27

Will government bond have less bid-ask spreads than corporate bonds?

Answer 27

Not necessarily, bid-ask spreads depend on an issue’s liquidity and may be wider for an illiquid government issue than for a liquid corporate issue.

Question 28

Use Macaulay duration to estimate bond return change

Answer 28

Over an investment horizon shorter than the Macaulay duration, market price dominates. Thus, an increase in YTM decreases the bond’s market price by more than it increases reinvestment income.

Question 29

Calculate YTM using Macaulay duration and modified duration

Answer 29

YTM = Macaulay duration/modified duration - 1

Question 30

Which yield reflect macroeconomic factor

Answer 30

Bench mark yield, such as government bond yield

Question 31

Which yield reflect microeconomic factor

Answer 31

Yield spread to bench mark yield

Question 32

Pari passu ranking

Answer 32

All debt owner receive same recoverable percentage

Question 33

Bankruptcy court

Answer 33

Might result in different result than default debt ranking

Question 34

Contango

Answer 34

futures price greater than spot price

Question 35

Backwardation

Answer 35

futures price less than spot price

Question 36

Roll yield

Answer 36

the gains and losses that result from entering into a new, longer-dated futures contract as previous contracts expire or are closed out

Question 37

If a member have a different opinion than the board, what should he do

Answer 37

If the consensus opinion has a reasonable basis, the member does not have to dissociate from the report but should document the difference of opinion.

Question 38

Frequency polygon

Answer 38

plot the midpoint of the return intervals on the x-axis and the absolute frequency for that interval on the y-axis, connecting neighboring points with a straight line. Basically connecting the histogram

Question 39

When an employee violates standard, is it enough for the supervisor to speaking to the employee to determine the extent of the violations and receiving assurances that it will not be repeated

Answer 39

no

Question 40

Can a candidate contact former clients

Answer 40

Standard IV(A) Loyalty does not prohibit former employees from contacting clients of their pervious firm so long as the contact information does not come from the records of the previous employer or violate a non-compete agreement.

Question 41

Time weighted return

Answer 41

Calculate return on each year, then take average. Ex: Y1, 10 Y2, 15 Y3, 8 Return = 5/10 + (-7)/15

Question 42

Stagflation

Answer 42

A condition of slow economic growth and relatively high unemployment - a time of stagnation - accompanied by a rise in prices, or inflation.

Question 43

Recessionary gap

Answer 43

Low demand -> commodity price decrease Decreasing economic activity is consistent with decreasing demand for borrowing. This lack of demand pushes interest rates downward. decreasing interest rates should increase the prices of high-quality bonds

Question 44

Inflationary gap

Answer 44

cause interest rates to increase, think of it as to reduce spending, increase interest rate which would decrease bond prices

Question 45

Accounting profit

Answer 45

= total revenue - total accounting costs (explicit cost)

Question 46

Economic profit

Answer 46

Accounting profit - implicit opportunity costs

Question 47

Normal profit

Answer 47

Economic profit = accounting profit - normal profit

Question 48

Accelerated depreciation factor

Answer 48

Depreciation = cost * accelerated depreciation factor

Question 49

Where should the exchange of debt or eqity been reported under cash flow statement

Answer 49

This transaction results in a reduction of debt and an increase in equity. However, since no cash is involved, it is not reported as a financing activity in the cash flow statement, but will be disclosed in the notes to the cash flow statement.

Question 50

Objective of audit

Answer 50

The objective of an audit is to enable the auditor to provide an opinion on the fairness and reliability of the financial statements. This is not the same as numerical accuracy.

Question 51

Who should appoint auditor? board or management

Answer 51

Board

Question 52

Effect of capitalizing an asset

Answer 52

Higher net income (at first) Higher equity (A = L +E , L unaffected), greater retained earning Higher operating cash flow, lower investing cash flow, same total cash flow ROA and ROE initially higher, lower later

Question 53

Indifference curve

Answer 53

X: sigma, Y: return, Curve is upward sloped, if flatter curve, means with same Expected value, the person is willing to take more risk (sigma)

Question 54

Industry concentration

Answer 54

High industry concentration refers to an industry that has a small number of firms, which often leads to less price competition, higher pricing power, and higher return on invested capital.

Question 55

Step up bond

Answer 55

A bond that pays an initial coupon rate for the first period, and then a higher coupon rate for the following periods

Question 56

Special purpose vehicles

Answer 56

Created solely for the purpose of owning specific assets. | is a legal entity used to separate assets used as collateral from those of the company seeking financing

Question 57

Repurchase agreement

Answer 57

A repurchase agreement is a form of short-term collateralized borrowing in which a bondholder sells a security and agrees to buy it back at a higher price.

Question 58

Where is most options on currencies and government bonds traded?

Answer 58

Over the counter

Question 59

Recapitalization (PE)

Answer 59

Recapitalization is when the company issues debt to fund a dividend distribution to equity holders (the fund). It is not an exit, in that the fund still controls the company, but often is a intermediate step toward an exit.