Question Bank Flashcards
(213 cards)
1
Q
January 1 100,000 common shares outstanding
March 1 2 for 1 stock split
August 1 10% stock dividend
A
100,000 × 2 × 1.1 = 220,000.
2
Q
If convertible preferred stock is dilutive, the preferred dividends that would not have been paid if the preferred stock is converted must be added back to the numerator. Note that any nonconvertible preferred stock dividends are still subtracted from net income in the numerator.
A
3
Q
Venture capital providers invest in firms that are early in their life cycles. Stages of venture capital financing include seed stage, early stage, and mezzanine financing. In a leveraged buyout, an investor purchases all of a public firm’s equity, taking the firm private. In a private investment in public equity (PIPE), an investor purchases private equity issued by a public firm.
A
4
Q
Information directly from the company (e.g., annual or quarterly regulatory filings, investor presentations, press releases, investor relations department, website)
Publicly available third-party information (e.g., analyst reports, government research and reports, news outlets, social media)
Proprietary third-party information (e.g., analyst reports, Bloomberg)
Proprietary primary research, performed or commissioned by the analyst (e.g., surveys, market studies)
A
5
Q
Diluted EPS = [(Net income − Preferred dividends) + Convertible preferred dividends + (Convertible debt interest)(1 − t)] / [(Weighted average shares) + (Shares from conversion of conv. pfd shares) + (Shares from conversion of conv. debt) + (Shares issuable from stock options)]
A
6
Q
credit cycles are longer durations than business cycles
A
7
Q
increase in fiscal deficit to GDP is a concern because government spending did not lead to more private investment (gov spending increase, IR increase, private investment decrease=crowding out)
A
8
Q
impairment goes through operating loss in IS
A
9
Q
warrant is dilutive if excercise price<average price
A
ignore end price, release x shares on market and buyback y amount of shares to avoid too much share issuance; the difference is change in CS, no change to numerator
10
Q
stock div and stock split goes to beg of the year or day when issued
A
basic EPS=(NI-convertiblePS)/common stock;
10,000 convertible bonds (conversion ratio is 20 to 1)=>10,000*20=200,000 shares of common stocks;
11
Q
customer credit quality is improving=paying receivables faster
A
12
Q
significance level=type 1 error=significance level of a test is 5% will yield the correct decision about the null hypothesis 95% of the time; does not mean: yield the correct decision about the null hypothesis 95% of the time!!!
A
power of the test=1-type 2 error
13
Q
sign of LIFO liquidation, inventory units go down;
LIFO reserve=COGS FIFO-COGS LIFO; lifo reserve decrease when price decrease
A
14
Q
Protect domestic industries by placing restrictions on inflows of foreign capital to prevent invasion
A
14
Q
dynamic price=peak vs down time;
tiered pricing=charge less when different quantities bought
A
15
Q
prepare a sales-based pro forma company model use BS and IS (can derive CF stmt)
A
16
Q
RSF ratio=sets a minimum required return for a given level of risk, the greater the RSF ratiom the the probability of the portfolio’s return dropping below a threshold level is reduced
A
17
Q
equity investment without significant control = trading securities
GAAP=FV and g&l on IS
IFRS=may record g&l on IS or may elect at the time of purchase to report FV and g&l @ OCI
A
18
Q
if short selling is restricted, market value will be consistently higher than intrinsic value cuz not allowed to sell and drop the price
A
19
Q
if firm is unprofitable, an earnings multiplier model or a dividend discount model wont work cuz no earnings; use asset-based model.
A
price-to-sales ratio can be used for firms with negative earnings and internally generated intangibles.
price-to-earnings ratio cant use for negative earnings
price-to-book value ratio does not recognize value of nonphysical assets such as human capital or internally generate intangible assets cuz int intangibles are expense, not on BS
20
Q
increase in YTM, reaches a flatter part of the price-yield curve, changes in yield has smaller effects on value hence less interest rate risk
A
21
Q
benefits of derivative markets= discover information that is not available from cash market transactions, such as implied volatility from options markets.
A
22
Q
soft lockup period=period after initial investment during which there are significant penalties for redemptions;
lockup period=redemption requests will not be honored for a period after initial investment
A
23
Q
efficient market theory=investors should not earn CONSISTENT superior returns from technical trading rules such as a contrary opinion strategy; bset strategy is passive management as active management will have fees
A
24
if its a soft hurdle rate and already achieved, no need to do anything for soft hurdle. just deduct the high water-mark
25
Convenience yield=benefit of holding physical commodities, not commodity derivatives. Positive correlation with inflation makes commodity derivatives useful as a hedge against inflation. Derivatives pricing is more transparent compared to pricing of physical commodities due to standardized
26
duration gap=MACAULAY duration - investment horizon; modified duration=mac duration/(1+YTM)
27
commodity indexes are futures, cant be replicated by buying underlying commodities
28
beta=cov/VARIANCE of the market
29
GO bonds = backed by the full faith and credit of the issuing government (no collateral so like unsecured), but they are safe so senior; serviced by government revenues such as taxes
30
collateral is SECONDARY source of repayment for secured bond; CF is primary for both secured and unsecured bond
31
A+ is below AA
BB is below BBB–
32
pure discount bond has no coupon
33
discount bond: Coupon < Current Yield < YTM < YTC; YTC highest because early calling a bond that will be discounted in future
premium: Coupon Rate > Current Yield > YTM > YTC
34
solvency risk=A
35
Hyperbolic discounting= (self control bias, immediate gratification) favoring small payoffs in the short term over larger payoffs in the long term;
self-attribution bias=investor who takes personal credit for gains and blames others for losses exhibits self-attribution bias.
loss aversion bias=investor who experiences greater pain from a loss than pleasure from an equal-sized gain
36
dual-currency bond= Bonds that pay coupons in a different currency than their principal
37
Equal-weighted index require rebalancing the most (after each return period) cuz differences in returns among securities will drive the security weightings away from equal weighting.
Changes in the security prices automatically adjusted by the weights in price- and value-weighted index portfolios
The price returns of a price-weighted index mirror the returns on a portfolio with an equal number of shares of each security. An equal-weighted index mirrors the returns on a portfolio with the same money amount invested in each security. A market capitalization index mirrors the returns on a portfolio with security weights proportional to the market capitalizations of each constituent
38
preferred stock's value=dividend/required return
39
operationally efficient = low transactions costs.
informationally efficient = prices reflect new information rapidly
allocationally efficient = resources are allocated to their most productive use
40
soft-bullet covered bond=default and payment acceleration are delayed to a new maturity date if payments are not made as originally scheduled.
hard-bullet covered bond=default and payment acceleration are triggered if payments are not made
conditional pass-through covered bond=bond is converted into pass-through securities at the initial maturity date if payments are not made as originally schedule (cash generated directly pass on to investors)
41
casualty insurers are characterized by short-term time horizon and low risk tolerance
42
individual loan level protection=Prepayment lockout periods and defeasance
structural call protection=sequential-pay tranches where principal amount of each successive tranche must be repaid in full before principal on the next successive tranche can be paid
43
lowest to highest riskiness: Infrastructure debt, senior real estate debt, unitranche debt, mezzanine debt, private equity co-investments, and venture capital.
44
Risk shifting=changing the distribution of potential risk of outcomes.
Risk transfer = another party bears some or all of the risk (insurance)
45
weak form efficient=technical analysis and past info not work;
semi-strong=fundamental analysis and public info not work;
strong=private info not work; best is passive strategy as cant consistently generate abnormal (more then expected) return; save managing fee
46
Overconfidence bias occurs, reduce by sharing forecasts with others, widening confidence intervals (greater degree of uncertainty) and using scenario analysis
47
harmonic mean
geomatric=sqrt(harmonix*arithmetic)
48
Financial statement analysis is typically done by EXTERNAL people outside a company (Assigning credit ratings to the company’s debt, Forming an opinion of the company’s ability to earn future profits)
not for internal people Making decisions about the everyday operations of the business
49
currency board arrangement=country retains its own currency but commits to exchange it at a fixed ratio for a foreign currency
50
real P/B exchange rate=nominal P/B exchange rate×(CPI base currency)/(CP price currency)
51
100 JPY/EUR=>104.2 JPY/EUR, EUR appreciated by 4.2% (1unit of euro)
52
returns are identically distributed=mean and variance (therefore sd) are stationarity, which means they do not change over time.
53
BOD=set compensation for a firm's senior managers and establish a strategic direction
Senior management=manage the budget during the fiscal year. develope operational goals and objectives to carry out the strategy is management's responsibility.
54
g&l is on asset sale is not a cash flow, only proceed and purchase are cash flow and deferred tax
54
Nonparametric tests=not testing a population parameter (mean, sd, etc) and not making assumptions about population
55
CV (relative dispersion)= standard deviation / sample mean
56
Either the direct or indirect method may be used for reporting cash flow from operating activities. It is noteworthy, though, that the direct method is encouraged. However, unlike under IFRS, a reconciliation of net income to cash flow from operating activities must be provided regardless of the method used.
56
Text analytics= analyze unstructured data in text (or voice) forms, for example identifying how often a word appears in a report.
Corporate exhaust = potentially useful data that businesses generate from retail transactions and bank data.
natural language processing=computers and artificial intelligence are used to interpret human language.
57
cite a purchased report but no need to cite public government report or public S&P report
58
Standard VI(C) Referral Fees requires members and candidates to disclose any compensation received for referrals and the nature of the compensation, to their employers and to any clients or prospects they refer to others with the expectation of compensation in any form.
59
sanctions=public censure, suspension of membership and revocation of CFA charter. CFA Institute does not impose fines
60
Situational influences external to an individual are claimed to be a more important determinant of ethical behavior than personal traits.
61
basic EPS =>deduct convertible pref div just like usual pref div;
dilutive EPS=>deduct convertible pref div and add it back so net effect is 0
62
write-down of inventory to net realizable value is typically recognized increase in COGS cuz EI decrease, COGS has to increase; ending inventory = beginning inventory + purchases – cost of goods sold
63
asset: beg Prepaid insurance+insurance paid-insurance expense=end PI
liabiliy: beg Interest payable-interest paid+interest expense=end IP
cash paid=expense+incrase or - decrease in A L e.g. payable
64
lower income=>lower tax=>higher cash flow
65
value of a trademark can appear on the balance sheet if the trademark was PURCHASED or obtained in a business acquisition.
66
Direct investment in cryptocurrencies occurs when a transaction is recorded on the blockchai
67
Professional organizations adopt codes of ethics that govern their members' behavior. Legal standards are enforced by governments or regulatory agencies.
68
financial reporting reporting=how good the reporting is authenticity, relevance and faithful
quality of reported result=how sustainable earing is, performance sustainability and adequancy
69
Two common capital allocation pitfalls are basing investment decisions on the change in earnings per share in the short term and considering the effects of not spending the entire capital budget available for the current period.
70
Placing a tariff on imports of a good increase domestic supply, decrease domestic demand (graph)
71
Efficienct of tax policy=minimizing interference with market forces and disincentives to work.
Sufficiency = tax policy raises enough revenue to meet the government's spending needs.
Fairness = "horizontal equality" =(people in similar situations pay similar taxes) or "vertical equality
72
neutral interest rate (nominal)=long-term growth rate of real economic output + target inflation rate;
if central bank rateexpansionary
73
static trade-off theory=increasing debt proportions will initially reduce the weighted average cost of capital (because of tax savings), but that at some level of debt financing, increasing expected costs of financial distress will outweigh additional tax savings of greater debt issuance;
MM=optimal at 100% debt
74
Confirmation bias =seek out data that affirms their earlier convictions, and to disregard or underestimate information that calls those opinions into question. mitigated by seeking out the points of view of colleagues who have no emotional investment in the opinion
Conservatism bias =making only small adjustments to prior forecasts when new information becomes available.
Illusion of control bias =overestimating what an analyst can control and trying to control things an analyst cannot control. invest in companies they know, over detailed financial models= mitigated by focusing only on variables with known explanatory power, and by seeking outside opinions from those who have a relevant perspective (note that a relevant perspective is different to an opinion with no emotional investment)
75
arithmetic mean = best estimate (expected value) of the next single year's return
harmonic mean = average cost of shares purchased over time
geometric mean = calculate average annual compound returns. future multi-year annual compound returns
76
IRR>required rate of return=>positive npv
77
Monitoring developments allows an analyst to understand changes in financial reporting standards and therefore how these changes affect a company's financial statements and analysis such as ratios that caused may require a company to restate its financial statements.
78
central clearing can be both OTC and exchange traded; if OTC, contracts might still be customizable
79
Risk-neutral pseudo-probabilities are calculated using the risk-free rate and the sizes of an up-move and down-move of the underlying asset.
80
LEVERAGED buyout=acquire public companies, with the purchase price is largely funded by debt.
81
81
Finite-life, closed-end funds are appropriate for riskier real estate investment strategies such as development, redevelopment, repositioning, and leasing.
Indefinite-life, open-end funds often focus on core real estate strategies that provide steady cash flow from well-leased, high-quality commercial and residential real estate in desirable markets.
82
theory that bearing unsystematic risk will provide no additional expected return assumes that unsystematic risk can be diversified away at no cost.
82
Multilateral trading facilities =alternative trading systems= same trading function as exchanges but have no regulatory function.
83
higher than market beta=outperformed the market based on systematic risk. excess return per unit of systematic risk. The portfolio does not necessarily have more risk than the market
84
SPV and firm bond are not comparable, they are seperate entity
85
buy stop order is entered at a stop price above the current market price
A sell stop order is entered at a stop price below the current market price.
86
defensive= maintain a firm's market share
offensive=used to gain market share.
87
core-satellite approach= majority of the assets are invested passively (in the "core" portfolio) with a smaller proportion in actively managed "satellite" portfolios. This reduces the likelihood of excessive trading and offsetting active positions.
88
call market=one negotiated price that clears the market. set opening prices; small markets
continuous market=trade at anytime market is open; prices set by auction or by dealer bid-ask quotes.
89
prepayment risk includes extension and contraction risk
89
enterprise value=D+E-cash-short term securities=amount that would be needed to take over a firm
90
endowment bias=tendency to value something already owned more than the same thing if it were not already owned; only sell shares he owns for $58 or more, but would not buy the same shares for more than $53
91
Incentive fee = [ending value − beg value − mgmt fee − beg value × hard hurdle] × 20;
dont minus for soft hurdle
91
Closed-end mutual fund shares can be purchased for market-determined prices.
Hedge funds (which include market neutral funds) and wrap fee (separately managed) accounts typically require substantial minimum investment amounts.v
92
diversification ratio= sd equally weighted portfolio's returns / avg sd of returns of the securities
Adding a security with a sd equal to the average will decrease the portfolio standard deviation as long as not perfectly positively correlated with the portfolio.
The result is a lower diversification ratio, which indicates a greater benefit from diversification.
adding assets classes with low correlation improves the risk–return trade-off as long as the stand-alone risk of the added asset class does not exceed its diversification effect.
93
Dow Jones Industrial Average is a price-weighted index
94
drawdown period = private equity fund is the span of time over which the fund will draw down its committed capital and use it to invest in portfolio companies
95
Interbank rates are the interest rates at which banks lend to each other in the short-term money market, often for overnight loans. Central bank rates, like the Federal Funds rate in the US, are the interest rates set by the central bank, which influence the overall financial environment and can impact interbank rates.
interbank rates
96
RFRnominal = (1 + RFRreal)(1 + Inflation)-1
97
To receive the next dividend, an investor must buy a stock before its ex-dividend date, which is one or two business days before the holder-of-record date. This one- or two-day period allows orders executed before the ex-dividend date to be settled by the holder-of-record date
ex-dividend date is normally determined by the security exchange on which the shares are listed.
98
forward yield curve =forward rates of the same length, different period
99
Investment Objectives=Risk and return objectives
Investment Constraints= liquidity needs, time horizon, tax considerations, legal and regulatory constraints, and Religious preferences. Investor preferences with capital gains or dividend distributions especially if these have different tax treatments.
100
assessing the credit risk of a commercial property are its debt service coverage ratio (net operating income / debt service cost) and its loan-to-value ratio (current mortgage amount / current appraised value).
101
sponsored DR=voting rights of the shares are held by the investor.
unsponsored DR=voting rights are retained by the depository bank.
102
The standard deviation of return of a portfolio of many risky assets can be less than or greater than the standard deviation of the least risky asset (diversification), depending on the correlations of returns among the assets and their weights in the portfolio. However, the portfolio standard deviation must be less than or equal to the standard deviation of the most risky asset.
103
solvency risk=run out of cash; liquidity risk=A
103
less risk-averse investor will have a lower risk aversion coefficient, FLATTER risk-return indifference curves, and an optimal portfolio with greater risk and a higher expected return.
104
Smart beta =blend of active in passive management;
strategic beta=sector beta
105
Crowdsourcing = business model that depends on user contributions; in this case the website produces its own content
106
thematic risk=happens over long period of time;
Event risk = unknown outcome of specific events, occurrence date is known.
Exogenous risk = unanticipated events.
Macro strategy funds= based on expected shifts of global economies, currency and interest rate
Quantitative directional funds=long and short positions in equities based on technical analysis.
Event-driven funds= based on specific corporate events and one-time transactions.
107
Capitalizing the cost of the asset is CFI, expensed cash outflow is CFO
108
coefficient of determination R2=ssr/sst; sse/k=mse
109
higher inflation rate currency=>weakning exchange rate;
higher interest rate currency=>discounted fwd rate
110
share-based compensation plan estimate the fair value at the grant date and expense it to the income statement over the vesting period.
111
ROTC>WACC=>mgmt is creating value for shareholders
112
Under IFRS, equity securities are measured at fair value through profit and loss, unless the firm elects at the time of purchase to treat them as measured at fair value through OCI
113
Information asymmetry= management has more information about the company than its shareholders. Some debtholders, such as banks, may have more information about a company than is available to the public, including shareholders.
114
permanent difference in tax=difference in taxable income, will not create DTA DTL;
DTL DTA are temporary differences
Valuation allowance accounts only apply to deferred tax assets and are created when it becomes probable that the company will not have enough future income to realize the full value of the deferred tax assets.
115
IFRS where research is expensed but development capitalized; Advertising costs are expensed under both.
116
ytm is an appropriate estimate of a firm's before-tax cost of capital
117
change in salvage value and dep method is prospective, not retrospectivel inventory valuation method change is retro
118
Liquidity supplied by dealers in a quote-driven market (OTC), by other traders in an order-driven market (exchange traded)), and by brokers (who arrange the trades) and traders in a brokered market.
119
Public-private partnerships=vehicle for investing in infrastructure
120
An investor purchases a 5-year, 6% coupon, annual-pay note at issuance with a yield to maturity of 5.5%. If an investor holds this note to maturity and earns a 4.5% return on reinvested coupon income, his realized yield on the note is closest to:
mock 3 178
realized yield means annualized
Because the return on reinvested coupon interest is less than the note's yield to maturity, the investor's realized yield on the note must be less than the YTM
121
alternative investments redemptions are more restrictive
122
MRR of 60 day FRA is unknown until @ 60 day point, end of FRA contract at settlement date
long FRA=give fixed receive floating
123
firms with acquisition have large chnage in nature of business so historical info is not relevant ratio. use fwd price to earnings ratios (no trailing ratio, to book ratio)
124
short seller is required to set up a margin account.
125
SML and CML both intersect the vertical axis at the risk-free rate.
The SML describes the risk/return tradeoff for portfolios, whereas the CML of various combinations of the market portfolio (not just a stock) and a riskless asset.
126
sinking fund provision =borrower set aside a specific amount of money regularly into a fund to ensure the borrower has sufficient funds available to repay the debt
retires the bonds based on a schedule (pay x amount at x date). does not have to be at maturity
127
Internal rates of return are appropriate for measuring returns of investments that are characterized by cash inflows and outflows that may vary in their timing and magnitude, such as real estate and private capital investments. Neither multiple of invested capital nor time-weighted rate of return account for the timing of cash flows.
128
increase rf, higher discount rate, PV is lower so call option gain, put option loss
think of put call parity: C=S+P-PV(K)
interest rate increase, bond PV decrease, call option gain
129
duration/convexity measures assumed a parallel shift in curve (long and short term IR chnage by same amount); but if nonparallel shift, bonds with lower duration could have more price volatility than higher duration
Portfolio duration is an approximation of the price sensitivity of a portfolio to parallel shifts of the yield curve (yields for all maturities increase or decrease by equal amounts). Key rate duration may be used to estimate interest rate risk for non-parallel shifts in the yield curve, a measure of a bond’s sensitivity to a change in the benchmark yield at a specific maturity.
sum of key duration = effective duration which measures a bond’s sensitivity to changes in the benchmark yield curve if all yields change by the same amount
(Module 58.1, LOS 58.c)
130
interpolated spread=ispread=benchmarked at swap rate
131
price of an option=excercise value(intrinsic value/payoff)+time value
132
open end fund:
pool money, purchased or redeemed, continuous public offering;
closed end fund:
fixed cap, trade on exchange
133
price index=sum of stock price/# of stocks in index not total shares
133
operational efficiency=low transaction costs
informational efficiency=price rapid change to reflect new info and rate of returns are proportional to risk
134
risk shifting= buying forwards, futures, or swaps
risk transfers=buy insurance
bear a risk= use diversification to help more efficiently.
135
beta=0.95 means slope of a security's characteristic line is its beta. This stock is 95% as volatile as the market, and the covariance of its return with the market return is 95% of the variance of the market return.
SCL plots securitys excess return against markets excess return;
SML return vs beta
CML CAL return vs total risk
136
measures in analyzing general obligation bonds= attractiveness of the local business climate, government's ability to levy and collect taxes, stability of the tax base, and economic diversification.
measure of revenue bond=min coverage ratio, riskiness of CF
137
portofolio management process:
planning=IPS
execution=how to allocate funds to asset types, top down analysis of economics and forecasts
feedback=adjust portfolio
138
mortgage REIT (debt); equity reit (equity)
public debt=MBS, CMBS, CMO, covered bonds, mortage reits, mortgage etfs
139
market price of callable bond (higher yield)
140
Haircut = (Security Price – Purchase Price amount would like to borrow) / Security Price
141
par rate is the coupon rate that would result in a bond value equal to par; trail and error to get the par rate given spot rate
142
hurdle rate of 6% and generates a positive return of 10% for the year. The performance fee is 15% of gains.
soft hurdle rate, pay all if above hurdle: 10%*.15. nothing paid if below soft hurdle
hard hurdle, only pay if above
143
Contractionary monetary policy typically results in increased interest rates, which decrease the prices of financial assets by decreasing the present value of future cash flows. Increasing interest rates typically cause the domestic currency to appreciate.
144
indefinite life intangible is not amortizing but impairment; if revelue intangible upwards, higher assets, higher OCI, higher shareholders equity; not NI
Finite-life intangible assets are amortized over their useful life
145
inflection point is a point=future will look significantly different from the past due to a fundamental change such as new regulations or technology.
146
supervisory board and a management board. The independent board members serve on the supervisory board, which oversees the inside board members who serve on the management board. A staggered board refers to the frequency with which individual board members are elected.
146
Independent variables are uncorrelated, but uncorrelated (no linear relationship) variables are not necessarily independent.
147
hortizontal analysis=overtime comparison
vertical comparison=each proportion in total, or comparison between firms of different sizes in same industry
148
effective tax rate (tax expense / pretax income)
statutory rate =fixed rate that is set by law and must be paid for a specific service or product
149
positive skew: mean>media>mode
150
Automatic stabilizers are built-in features (transfer payments) that tend to automatically promote a budget deficit during a recession and a budget surplus during an inflationary boom, without a change in policy. increase transfer payment (welfare) when recession and increase tax when maxed output
151
In future periods, lower-valued inventory will result in lower cost of sales and higher net income.
inventory writedown reduce inventory now and cogs increase now
152
1-V when calc return+ probbility
153
The most useful estimates of inventory and cost of sales are those that best approximate current cost. Whether prices are increasing or decreasing, FIFO provides a better estimate of inventory values, and LIFO provides a better estimate of cost of sales. If prices are stable, there is no difference between LIFO and FIFO estimates of inventory or cost of sales.
In the absence of taxes, there is no difference in cash flow between LIFO and FIFO.
154
liquidity trap is a situation in economics where interest rates are so low that increasing the money supply doesn't stimulate economic growth because people prefer to hold onto cash rather than investing or spending
155
Interest and dividends received are reported as income, regardless of the balance sheet classification of marketable securities.
156
Voluntary export restraints are an example of a noncooperative economic tool.
157
The F-statistic is the ratio of the mean regression sum of squares (MSR) to the mean squared error (MSE)
158
Spurious fitting, in the context of statistical modeling, refers to a model that appears to fit the data well but is not a valid representation of the underlying relationship between variables
overfitting
159
direct method:
start with negative COGS:
inventory is A, increase in inventory=>deduct from COGS which is same as adding to COGS cuz its negative
accounts payable increase, increase from COGS meaning deducted since its negative COGS
increase cogs makes it more negative
add deprecitaion so decrease cogs
160
reinvestment ratio=CFO/cash paid for long-term assets
safety ratio
161
Taxable Income --> Income Tax Payable, tax reporting
Pretax Income (EBT) --> Tax expense, financial reporting
162
Performance obligations =promises to transfer distinct goods or services.
steps to recognize revenue:
-identify contracts
-identify performance obligations
-determine transaction price
-allocate transaction price to performance obligation
-recognize rev as obligations fulfilled
converged accounting standards
163
interest coverage ratio or operating profit=EBIT or operating profit / interest expense
164
Acquired patents are most likely purchased with the intent to use over a specific period of time and therefore would be an example of an intangible asset with a finite life. Goodwill, by definition, is an intangible asset with an indefinite life. Trademarks that can be renewed at minimal cost are also considered to be intangible assets with infinite lives.
165
financial average multiplier or equity mulitplier=A/E
166
IFRS permits reversals of inventory writedowns but the firm must disclose the circumstances of the reversal in its financial statements.
GAAP change to LIFO do not need to state retro specitvely; everything else should;
disclosures:
cost method
carrying value by type
inventory reported at fair value-selling COGS
reversal write down
writedown
colateral
167
reinvestment ratio = ability to acquire long-term assets with cash flows from operations
investing and financing ratio= ability to purchase assets, satisfy debts, and pay dividends.
cash-to-income ratio =ability to generate cash from operations and （performance ratio）
debt payment ratio = ability to satisfy long-term debt with cash flow from operations （coverage ratio）
168
When analyzing trends in tax rates, an analyst should only include reconciliation items that are continuous in nature rather than sporadic. Tax-exempt income and differing tax rates in different countries tend to be continuous, whereas tax holiday savings tend to be sporadic.
169
Using the information in a company's financial statements to make economic decisions is financial analysis (used to make econoimc decision), not financial reporting (provide info).
financial reporting provide information about the financial position, performance and changes in financial position of an entity
170
Standard III(D) requires that members communicate performance in a fair, accurate, and complete fashion, and covers both written and oral communication. Implying that the return produced by a single fund during one quarter is typical of a firm's performance is a violation of this Standard.
171
"nonpublic" until it has been disseminated to the marketplace in general as opposed to a select group of investors.
172
A CFA charterholder in a managerial position is in the process of hiring new analysts. If the charterholder conducts background checks on the job applicants with respect to their character, the charterholder has:
complied with Standard I(D) concerning professional misconduct
guidance
According to Standard I(D) Misconduct - Procedures for Compliance: Members should encourage their employers to conduct background checks on potential employees to ensure that they are of good character and eligible to work in the investment industry.
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"Practice and encourage others to practice in a professional and ethical manner that will reflect credit on members and the profession."
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If the analyst had been an investment manager, it would have been inappropriate for him to make a blanket recommendation for all of his clients without considering the unique needs of each. However, the analyst is merely stating that given the qualities of the investment, it is an attractive buy.
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Directed brokerage occurs when the client requests that a portion of the client's brokerage be used to purchase services that directly benefit the client. Although this may prevent best execution, it does not violate the Standards as it was directed by the client, not the brokerage firm.
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g = earnings retention rate × ROE
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short FRA, pay floating, get fixed, IR decrease, still get higher fixed; hedge against interest rate decrease; only look at fixed leg
long FRA. pay fixed, interest rate increase still pay fixed, hedge againt interest rate increase
a FRA is used to hedge a fixed interest rate by fixing a future interest rate
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CML have an expected return equal to:
E(Rp) = Rf + [(E(Rm) – Rf)/σm] × σp
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option profit includes premium, payoff does not
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limit buy order will be executed whenever the current market price is at or below the limit price specified. Therefore, it cannot protect a short position from adverse price movement. Rather, it specifies a profit target for the position.
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ESG integration= integration of qualitative and quantitative ESG factors into traditional security and industry analysis.
thematic investing and impact investing focus on investment in objectives, themes, and trends that relate positively to ESG issues
negative screening and best-in-class eliminate investment options
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EBIT=operationg income; EBITDA=op income+D+A
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With Macaulay duration equal to the investment horizon, market price risk and reinvestment risk approximately offset and the annualized horizon return should be close to the yield to maturity at purchase.
Portfolio duration as a weighted average of the individual bonds' durations is calculated assuming parallel shifts in the yield curve.
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Investment guidelines in an IPS will address policy execution, permitted asset types, and leverage to be deployed. Investment objectives refer to risk and return goals. The appendices typically include information such as baseline asset allocations and permitted deviations
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Relative value strategies e.g. convertible arbitrage bond, compare to if wanna convert to securties
event driven=merger arbitrage
opportunity strategy=macro varaibles, trading commodity
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Issuance of new shares will change the total value of shares outstanding for a company, so the percentage weights of a market capitalization weighted index will need to be adjusted.
stock split effect price weighted index
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The liquidity requirement makes futures the most appropriate instrument because they are standardized instruments and are traded on an exchange, which is not the case for most swaps or forward contracts.
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using duration, price estimate will be
too low for both an increase and decrease in YTM.
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earnings surprise effect=positive risk adjusted return follows positivng earnings surprises
IPO effect=Shares purchased in the open market when IPO shares begin trading have actually underperformed in the long run on a risk-adjusted basis
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M2=excress return on port if leveraged to have same total risk as market portfolio
jensen's alpha=difference between actual return and return on SML at same SYSTEMATIC risk
positive M2 means sharpe ratio is higher than market portfolio CML (exceess return on total risk)
negative jensens alpha means port plot below SML (CAPM graph), slope of treynor ratio is less than SML
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Contingent convertible bonds automatically convert to equity if the issuer's equity falls below the minimum percentage stipulated by regulators. Issuers are typically banks. Neither the issuer nor the bondholder has an option to convert the shares.
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Enterprise value = market value of equity + market value of debt − cash and short-term investments.
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time tranching=redistribute prepayment risk e.g. sequntial pay, PAC
credit tranching (credit enhancement)=redistribute credit risk
e.g. sernior/subordinated structure, reserve funds, collateralization (internal credit enhancement); external: gurantee from third party
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cash flow hedge convert floating rate liabilty to fixed rate
fair value hedge convert fixed rate liability to floating rate
net investment hedge=value of foreign subsidiary (currency forwards or futures)
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