Week 7 Flashcards
Fair Value Hierarchy
Level 1 - Quoted market prices
Level 2 - Observable inputs of similar instruments
Level 3 - Unobservable inputs
Quoted Market Prices
Has to be quoted somewhere publically, such as an exchange
Observable prices of simular instruments
If you get given some inputs, (such as a bond’s rate, face value, etc.) you can calculate the value of the security
Unobservable inputs
Private information (such as in between two private financial firms)
Hard to value, but you do not need to.
What do you have to do regarding the fair value hierarchy?
Every financial instrument needs to be classified as somewhere on the fair value hierarchy
3 Types of quantitative disclosure on financial risk
Credit risk
Liquidity risk
Market risks
Credit risk
The risk of not being paid back
Liquidity risk
Risk of not having enough cash in the company
Types of market risk
FX currency risk
Interest rate risk
Debt investment classification types
Held to maturity
Held for Trading
Available for sale
Available-for-sale
“Catch-all,” meaning if a security does not fit in the other categories, it will fit in here
Held-to-maturity securities
Purchased to be held until maturity
Characteristics of a derivative
(Example: call options)
- Little or no investment
- Settled at a future date
- Tied to an underlying security, commodity, or interest rate
Derivative definition*
a contract that derives its value from the performance of another product
P&L
Profit and Loss
IFRS way of saying “Income Statement”
OCI
Other comprehensive income
CECL
Current expected credit losses
What are the two credit loss models?
Incurred loss model vs expected loss model
Incurred loss model vs expected loss model
Incurred, actually lost
Expected, not lost yet, but can still be booked (such as a loss in an investment that has not been sold yet)
Who ran Long term Capital?
Marton Scholes
How does time affect expected credit loss schedules?
Percentage of default goes up the longer past due the loan is
Current expected credit loss journal entry
DR. Provisions (Credit loss)
CR. Allowance
Why is impairment important?
If you do not use impairment, you will overvalue your securities
How do you decide where debt goes on the financial statements
If it relates to everyday business operations, put it in the P&L statement
If it does not relate to everyday business operations, you put in in OCI (Other Comprehensive Income)
