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Fixed Income

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Nominal Spread vs Z – Spread
2 primary factors that influence the difference between Nominal spread and Z-spread for a bond are: a) the steeper benchmark spot rate curve, the greater difference between 2 spreads and b) the earlier principle paid back, the greater the difference between 2 spreads. Logic for the 2 statements: 1. N-spread doesn’t consider term structure of spot rate. It simply assume benchmark spot rate curve is flat. That’s why it is only a one-point (last point) spread. Z-spread cures this problem; it measures spread along every point of the spot curve. So if the spot curve in flat, Z-spread = N spread; on the other hand, the steeper the curve, the greater of differene of them.  What is important to note is The zero-volatility spread (or Z-spread, or static spread) is a measure of the spread that the investor would realize over the entire Treasury spot rate curve if the bond is held to maturity, thereby recognizing the term structure of interest rates. Unlike the nominal spread, the Z-spread is not a spread off one point on the Treasury yield curve but a spread over the entire spot rate
curve. It represents a spread to compensate for the target bond’s
added risks including credit risk, liquidity risk and volatility risk associated with embedded options. 2. N spread doesn’t consider cash flow change. Earlier principal payback definitely change cash flow. Z spread would adress this change. So compared to stable cash flow bond (bullet maturity bond), armortized bond has Z-spread which is different from N-spread.  For bullet bonds, unless the yield curve is very steep, the nominal spread will not differ significantly from the Z-spread; for securities where principal is repaid over time rather than just at maturity there can be a significant difference, particularly in a steep yield curve environment. To summarize the reasons for the divergence between z-spread and nominal spread: The slope of the Treasury yield curve. This
is the root cause of the divergence. The steeper the yield curve (either upward sloping or inverted), the greater the divergence. If the yield curve is flat, all spot rates and yields to maturity are the same,
thereby eliminating the divergence. Principal repayment. Assuming
the yield curve is not flat, the faster the principal is repaid, the greater the divergence will be. Therefore, the divergence is greater for
a mortgage-backed security than for a comparable standard coupon bond. Coupon rate. Assuming
the yield curve is not flat, the higher the coupon rate, the greater the divergence. In particular, there is no divergence for zero-coupon bonds. Lets illustrate all of this with an question / example: Mike Weishot wants to purchase the Sysco bond shown below. Its rating
has declined to BBB+, has a coupon of 11.40% and a price of 117.436. Mike is concerned about both the nominal spread and the Z spread and calculates both carefully. The comparable maturity Treasury has a YTM of
5% and the Sysco bond is currently providing bondholders a YTM of 5.822%. Given the Treasury data below and the information provided above, what is the difference between the zero-volatility spread and the nominal spread

Categories Alternatives (2) Corporate Finance (5) Derivatives (2) Economics (9) Equity (9) Ethics (3) Fixed Income (14) FRA (2) General (53) Portfolio Mgt (5) Quantitative Techniques (12) Uncategorized (1) Recent Posts Nominal Spread vs Z – Spread Risk Free Rate Labor Demand Elasticity Economic vs Technological Efficiency Roll Yield Archives March 2012 February 2012 September 2011 May 2011 February 2011 November 2010 October 2010 September 2010 August 2010 July 2010 June 2010

Now Nominal Spread is simply the difference between the Bond’s YTM and the YTM of the comparable Treasury. And Z spread is
determined by comparing the purchase price with the discounted cash flows under each spread category (so you have to choose the column of discounted coupons and principals

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Finguru which will sum to 117.436). Last column sums up to the price of the bond. Thus the Nominal Spread is
5.822 – 5 = 0.822% While the Z-spread is 99Bps. So the difference between Z spread and Nominal spread is 99 – 82.2 = 16.8bps Now notice the shape of the SPOT rate curve given in the data (3rd column). This is upward sloping curve. Higher rates for longer periods. And we also see that the nominal spread is smaller in this case than the
Z spread.

Corporate Finance, Equity, Portfolio Mgt

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Risk Free Rate
The risk free rate is the starting point for all expected return models. For an investment to be risk free, it has to meet two conditions. The first is that there can be no risk of default associated with  its cash flows. The second is that there can be no reinvestment risk in the investment. Using these criteria, the appropriate risk free rate to use to obtain expected returns should be a default-free (government) zero coupon rate that
is matched up to when the cash flow or flows that are being discounted occur. In practice, however, it is usually appropriate to match up the duration of the risk free asset to the duration of the cash flows being analyzed. In corporate finance and valuation, this will
lead us towards long-term government bond rates as risk free rates. In order to calculate the Risk Premium, one needs to use the correct Risk Free Rate.  In theory, the risk-free rate is the minimum return an investor should expect for any investment, as any amount of risk would not be tolerated unless the expected rate of return was greater than the risk-free rate. In practice, however, the risk-free rate does not technically exist; even the safest investments carry a very small amount of risk. Most financial analysts use the US Treasury rates as a proxy to the Risk Free Rate. The risk free rate you use should be consistent with the time horizon of the investment.
Typically the yield on the 10-year note is used for stocks. To be more accurate its better to use STRIPS or zero coupon bonds to avoid the effect of reinvestment of the coupons.

Economics

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Labor Demand Elasticity
Demand for labor will be less elastic when:a- at lower wage rates than at higher b- in the long run than in the short c- the less labor intenssive the process. Elasticity of labor must also be looked at in terms of the substitutability with capital, the other factor of production. When the wage is low, a lot of labor has been employed. Thus, if the wage rate rises then the labor can be fired to hire more capital. You shouldn’t be thinking in terms of the demand curve because that only shows the relationship between price and quantity demanded. Think about an isoquant (set of points at which the same quantity of output is produced while changing the quantities of two or more inputs),
where you have the two factors of production on the two axes. Towards each end of the isoquant, you’re employing a lot of one factor and
very little of the other, so it’s hard to switch away from the factor you’re not using much from. Not sure if that makes a lot of
sense, but that’s what they’re getting at in this question.

Economics

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Economic vs Technological Efficiency
1- Which of the following statements is accurate ?

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Finguru a- An economically efficient process must be technologically efficient also b- An economically efficient process is not necessarily technologically efficient c- A production process cannot be technologically efficient unless it is economically efficient The answer to the above question is: A. There are two concepts of efficiency: Technological efficiency occurs when it is not possible to increase output without increasing inputs. Economic efficiency
occurs when the cost of producing a given output is as low as possible.
Technological efficiency is an engineering matter. Given what is
technologically feasible, something can or cannot be done. Economic efficiency depends on the prices of the factors of production. Something
that is technologically efficient may not be economically efficient. But something that is economically efficient is always technologically efficient. A key point to understand is the idea that economic efficiency occurs “when the cost of producing a given output is as
low as possible”. There’s a hidden assumption here, and that is the assumption that all else being

equal. A change
that lowers the quality of the good while at the same time lowers the cost of
production does not increase economic efficiency. The concept of
economic efficiency is only relevant when the quality of goods being produced is unchanged.

Alternatives, General

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Roll Yield
Roll yield is the amount of
return generated in a backwardated futures market that is achieved by
rolling a short-term contract into a longer-term contract and profiting from the convergence toward a higher spot price. Now if the inventory of
a commodity is in shortage, the spot price is above the future price (one month later price). In other words, if on 1st September the
Spot Price > Forward Price for the contract expiring on the 30th September (which is called backwardation). As the contract approaches maturity, the forward price approaches the spot price. On 30th September, a new contract which expires on 30th October would be again trading at  below the current spot (if the market is still in backwardation). Thus, the old contract which expires on the 30th September can be sold for a higher price, and the new contract can be bought at a lower price. By selling the old at a higher price and buying
the new at a lower price, a return is generated. This is called roll yield. E.g. Spot price Rs.50, Future price Rs.48 (for one month later) and Future price (of a contract 2 months later) is Rs.45. Now if the spot price does not change for the first month and you had bought the first future at 48, as the month passes, this future price of the first month will converge to Rs.50. So you would be able to book your profits of Rs.2 on the contract. But if you wish to maintain exposure of the commodity, you can buy next month contract which if again is trading in backwardation would be priced at Rs. 47 for example. You can sell the future for 50 and then buy the next month contract which was earlier on 45 and assuming has moved to 47. This way you can roll over contract into cheaper rates. Roll Yield is, therefore, positive for the Long Position in Backwardation and Negative in Contango. Note: For the short position the roll yield would be negative in Backwardation and positive in Contango.

Uncategorized

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Economics – Terms
Crowding Out: Crowding out effect is basically when the government does fiscal deficit, it eats up into the savings of the public, and therefore leaves lesser amount of money for the private sector to use
for investment. Thus, the private investment gets crowded out of the investment due to fiscal deficit of the government.
Governments often borrow money (by issuing bonds) to fund additional spending. The problem occurs when government debt ‘crowds out’ private companies and individuals from the lending market.
Increased government borrowing tends to increase market interest rates. The problem is that the

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Monte Carlo Simulation: A problem solving technique used to approximate the probability of certain outcomes by running multiple trial runs. insurance. If. using random variables. the remaining $80 can be loaned out to other bank customers. rent seeking in the aggregate can impose substantial losses on society. engineering. The ATC curve shifts upward until. The samples must be independent http://www.finguru. Rent seeking can be performed by either buying a monopoly or by creating a monopoly. manufacturing. and the environment. The lower the reserve requirement. In other words. which results in a lower multiplier effect for every dollar deposited. of the equality of the two variances. If standard deviations are given instead of variances. in reserve but can lend out the remaining $64. even if the hypothesis is stated as a 2 tailed. $20 must be kept in reserve. So. they must be squared When the degrees of freedom aren’t given in the table.. It is important to note the following points: The larger variance should always be placed in the numerator The test statistic is F = s1^2 / s2^2 where s1^2 > s2^2 Divide alpha by 2 for a two tail test and then find the right critical value i. for every $100 a customer deposits into a bank. It does this by comparing the ratio of two variances. The higher the reserve requirement. for example. we start with the amount banks initially take in through deposits and divide this by the reserve ratio. energy. if the calculated test statistic is larger than critical value. research and development. The size of the multiplier effect depends on the percentage of deposits that banks are required to hold as reserves. project management. Rent seeking occurs when an individual. General. at the profit maximisation price. to calculate the impact of the multiplier effect on the money supply. The multiplier effect depends on the set reserve requirement. go with the value with the larger critical value (this happens to be the smaller degrees of freedom). rather than by earning profits through economic transactions and the production of added wealth. The decision rule is to reject the null hypothesis. So. the tighter the money supply. transportation. it is money used to create more money and is calculated by dividing total bank deposits by the reserve requirement. This creation of deposits is the multiplier effect. or $16.Finguru government can always pay the market interest rate. It shows the extreme possibilities—the outcomes of going for broke and for the most conservative decision—along with all possible consequences for middle-of-the-road decisions. The technique is used by professionals in such widely disparate fields as finance. which in turn must also keep 20%. While there may be few people in modern industrialized countries who do not gain something. This $80 is then deposited by these customers into another bank. but there comes a point when corporations and individuals can no longer afford to borrow. Monte Carlo simulation furnishes the decision-maker with a range of possible outcomes and the probabilities they will occur for any choice of action. the larger the money supply. This means that a firm which is a rent seeker only makes a normal profit. the ratio of the variances will be 1.e. This cycle continues – as more people deposit money and more banks continue lending it – until finally the $100 initially deposited creates a total of $500 ($100 / 0.2) in deposits. Quantitative Techniques By admin | No comments yet F-Test The F-Test is the appropriate test statistic to check the equality of two population variances. the firm breaks even. through some form or another of rent seeking. called simulations. the reserve requirement is 20%. if the variances are equal. the firm’s rent seeking costs are treated as fixed costs. organization or firm seeks to earn income by capturing economic rent through manipulation or exploitation of the economic or political environment. Money Multiplier: The expansion of a country’s money supply that results from banks being able to lend. However. directly or indirectly.in/blog/[1/31/2014 1:15:41 AM] . there is only one critical value. which means more money is being created for every dollar deposited. Hence. which get added to the total fixed costs and to the average total cost. Monte Carlo simulation is a computerized mathematical technique that allows people to account for risk in quantitative analysis and decision making. oil & gas. This is so that you are less likely to reject in error (type I error) The populations from which the samples were obtained must be normal.

and calculate the unlevered beta for the business. but more generally. (Be consistent about then using the same debt ratio in your cash flow estimates) Betaprivate firm = Betaunlevered (1 + (1 – tax rate) (Optimal Debt/Equity)) Step 5: Estimate a cost of equity for the private firm. your have comparable firms. however. we remove the financial risk from the beta of the comparable companies and only take into account the operating beta. Step 2: Estimate the average beta for the publicly traded comparable firms. If it is high (and positive). represents a theory that has been put forward. in a clinical trial of a new drug. based upon its operating income and cost of capital. based upon this beta. A Simple Test: To see if the group of comparable firms is truly comparable. therefore. bunlevered = blevered / (1 + (1 – tax rate) (Debt/Equity)) Step 4: Estimate a debt-equity ratio for the private firm. based upon comparable firms. but has not been proved. The basis of the approach is that the company has two main sources of risk: a) the risk that is inherent in the business (operating risk) and b) the risk due to leverage of the financial structure. This can be corrected in one of two ways ñ Assume that the private firm will move to the industry average debt ratio. the null hypothesis might be that the new drug http://www. preferably in the same line of business. either because it is believed to be true or because it is to be used as a basis for argument. whereas the financial risk is more of a management decision. The beta for the private firm will then also converge on the industry average beta. of course. So. Use this optimal debt ratio to calculate the beta. estimate a correlation between the revenues or operating income of the comparable firms and the firm being valued. Quantitative Techniques By admin | No comments yet Hypothesis Testing – terms Explaining in this entry some of the common terms used in Hypothesis Testing: Null Hypothesis: The null hypothesis.in/blog/[1/31/2014 1:15:41 AM] . The basic problem. is that you have only book values for the private firms.Finguru The test statistic has two degrees of freedom (n1 – 1) for the numerator and (n2 – 1) for the denominator Corporate Finance. General. General By admin | No comments yet Pure Play Beta The pure play approach or pure play method is a method for estimating the cost of capital for a proposed new project or product line. the the first risk which is operational in nature is comparable among companies in the same industry. affected by the same economic forces that affect the firm being valued. Now the point is. For example. The operating beta is then levered up for the risk of the company we are analyzing. and after adjusting for risk.finguru. Step 3: Estimate the average market value debt-equity ratio of these comparable firms. This might not happen immediately but over the long term. when calculating the beta of a company in the pure play method or the method of comparables. The steps to be used are as follows: Estimate the beta. Step 1: Collect a group of publicly traded comparable firms. Betaprivate firm = Betaunlevered (1 + (1 – tax rate) (Industry Average Debt/Equity)) Estimate the optimal debt ratio for the private firm. H0.

Think of it as a Mutual Fund that you can buy and sell in realtime at a price that change throughout the day. in a clinical trial of a new drug. The p-value is compared with the actual significance level of our test and. We either “Reject H0 in favour of H1” or “Do not reject H0“. compared to that of the current drug. 2. It indicates the strength of evidence for say. They enable investors to gain broad exposure to entire stock markets in different Countries and specific sectors with relative ease. suggests that the alternative hypothesis may be true.in/blog/[1/31/2014 1:15:41 AM] . By owning an ETF. We either “Reject H0 in favour of H1” or “Do not reject H0“. Can be bought / sold anytime during market hours at a price close to the actual NAV of the Scheme. on a real-time basis and at a lower cost than many other forms of investing. Equity. you get the diversification of an index fund as well as the ability to sell short. No separate form filling. Alternative Hypothesis: The alternative hypothesis. the result is significant. if it is smaller.Finguru is no better. An ETF is a basket of stocks that reflects the composition of an Index. and whether the test is one-sided or two-sided. rejecting the null hypothesis H0. The alternative hypothesis might also be that the new drug is better. Its value is used to decide whether or not the null hypothesis should be rejected in our hypothesis test. on average. you have to pay the same commission to your broker that you’d pay on any regular order. or even “Accept H1“. When buying and selling ETFs. we never conclude “Reject H1“. Can easily be bought / sold like any other stock on the exchange through terminals across the country. Just a phone call to your broker or a click on the net. If we conclude “Do not reject H0“. We would write H0: there is no difference between the two drugs on average.05″. Critical Value: The critical value(s) for a hypothesis test is a threshold to which the value of the test statistic in a sample is compared to determine whether or not the null hypothesis is rejected. The choice of a test statistic will depend on the assumed probability model and the hypotheses under question. The smaller it is. http://www. like S&P CNX Nifty or BSE Sensex. The final conclusion once the test has been carried out is always given in terms of the null hypothesis. We would write H1: the two drugs have different effects. the alternative hypothesis might be that the new drug has a different effect. on average. P-Value: It is equal to the significance level of the test for which we would only just reject the null hypothesis. ETFs offer several advantages to investors: 1. the more convincing is the rejection of the null hypothesis. this does not necessarily mean that the null hypothesis is true. this would be reported as “p < 0. is a statement of what a statistical hypothesis test is set up to establish. on average. if the null hypothesis were to be rejected at the 5% signficance level. General By admin | No comments yet Exchange Traded Funds Exchange Traded Funds: Exchange Traded Funds are essentially Index Funds that are listed and traded on exchanges like stocks. The ETFs trading value is based on the net asset value of the underlying stocks that it represents. Test Statistic: A test statistic is a quantity calculated from our sample of data. on average. In this case we would write H1: the new drug is better than the current drug. Rejecting the null hypothesis then. buy on margin and purchase as little as one share. 3. Another advantage is that the expense ratios for most ETFs are lower than those of the average mutual fund. rather than simply concluding “Reject H0‘ or “Do not reject H0“. on average. The critical value for any hypothesis test depends on the significance level at which the test is carried out. That is.finguru. it only suggests that there is not sufficient evidence against H0 in favour of H1. For example. than the current drug. H1. Small p-values suggest that the null hypothesis is unlikely to be true. Alternatives. Note: The equal to (=) sign is always used in the Null Hypothesis. than the current drug.

Enjoy flexibility of a stock and diversification of index fund. 8. Provides arbitrage between Futures and Cash Market In Kind creation and redemption of ETFs: The authorised participant – generally a large financial institution – creates ETF shares by depositing a portfolio of stocks into the applicable fund in exchange for an institutional block of ETF shares (usually 50.finguru. 6. 7. Expense Ratio is lower.000).g. ← Older Posts Login | Home | RSS Feed    Powered by Trutech  Copyright © 2014 Finguru http://www. Ability to put limit orders. Minimum investment is one unit. the NASDAQ-100 Index)..in/blog/[1/31/2014 1:15:41 AM] .Finguru 4. The basket of shares that is deposited by the authorised participant represents the weighting of such shares in a particular index (e. This is known as “in kind” creation because a basket of stocks is exchanged for ETF shares rather than using cash. 5. Similarly the redemption of the ETF’s can also be done In-kind.

as the seller is willing to http://www. Thus. This means the that company’s PE is less than the expected growth of the company. If the actual growth comes out to be lower than expected. growth stock investors also may see these stocks as having great worth and may be willing to pay more to own shares. they have the ability to make more money than if they had invested in higher-priced stocks that increased modestly in value. The open market often places a high value on growth stocks. therefore. These stocks have similar fundamentals to those in the industry. The company is not heavily leveraged. High Price Multiples as the future growth is priced into the prices. successful companies whose earnings are expected to continue growing at an above-average rate relative to the market. Low PEG ratio – i. but are currently undervalued. High expected growth of earnings 2. Although dividends are sometimes paid to shareholders of growth stocks. Value stocks are those that tend to trade at a lower price relative to their fundamentals (including dividends. General By admin | No comments yet Growth vs Value Stocks Growth stocks are associated with high-quality. and sales). the price appreciation is expected due to correction in the market.finguru. the PE / growth ratio is less than 1.Value stocks generally have low current price-to-earnings ratios and low price-to-book ratios. growth stocks may be seen as expensive and overvalued. Investors who purchase growth stocks receive returns from future capital appreciation (the difference between the amount paid for a stock and its current value). it has historically been more common for growth companies to reinvest retained earnings in capital projects. which is why some investors prefer value stocks. then how would that help the consumer. Debt to Equity is about 1. March 2012 February 2012 September 2011 May 2011 February 2011 November 2010 October 2010 September 2010 August 2010 July 2010 June 2010 Value Stocks are usually characterized by: 1. In fact this price limit would be of no use.e. High ROE as compared to its peers in the industry 3. Categories Alternatives (2) Corporate Finance (5) Derivatives (2) Economics (9) Equity (9) Ethics (3) Fixed Income (14) FRA (2) General (53) Portfolio Mgt (5) Quantitative Techniques (12) Uncategorized (1) Recent Posts Nominal Spread vs Z – Spread Risk Free Rate Labor Demand Elasticity Economic vs Technological Efficiency Roll Yield Archives Growth Stocks are usually characterized by: 1. It is legally set by the government to help the consumers. 3. therefore the financial risk is not high of the company. Value stocks generally have good fundamentals. Growth stocks generally have high price-to-earnings (P/E) ratios and high price-to-book ratios. Thus. If the government was to set the limit as Rs100 as the max price. they hope that if they buy these stocks at bargain prices and they eventually increase in value. rather than dividends. the stock could take a beating and vice versa. which are considered undervalued by the market. earnings. but they may have fallen out of favor in the market and are considered bargain priced compared with their competitors. It’s possible that these companies have been affected by some problem that raises some concerns about their long-term prospects. So if the Oil prices were say Rs75 per liter the government sets is at Rs50 per liter to help the consumer. 2. Investors buy these stocks in the hope that they will increase in value when the broader market recognizes their full potential. They may have prices that are below the stocks’ historic levels or may be associated with new companies that aren’t recognized by investors. which would result in rising share prices. General By admin | No comments yet Price Floor & Price Ceiling Why should Price Ceiling be set below the current market price and price floor be set above the current market price: Well price ceiling is like a maximum price that can be charged. Low Price multiples. At times.Finguru Home (Blog) Home (FinGuru) Ask Question About Subscribe   Alternatives Uncategorized Corporate Finance Derivatives Economics Equity Ethics Fixed Income FRA General Portfolio Mgt Quantitative Techniques Search Equity. Economics.in/blog/?paged=2[1/31/2014 1:22:41 AM] .

http://www.Finguru sell at 75 and the consumer is still having to pay 75.finguru. There is NOT one interest rate or yield in the economy. the interest rate risk would be nonexistent as the bond would always pay the same yield as the market. The yield curve is the graphical depiction of the relationship between yield and maturity for bonds of the same credit quality. Now the farmer would benefit as he can sell the produce at a higher price. and embedded options. So a limit like 100 will not be effective. the risk that an investor faces is the price of a bond held in a portfolio will decline if market interest rates rise. The magnitude of interest rate risk can be measured by a bond’s price sensitivity to changes in interest rates. If the coupon rate could be reset daily or even hourly.100 per KG for wheat. the ceiling must be below the existing price. the government would like to support the farmer and therefore sets the price as Rs120 per Kg. Interest rate risk arises only because the market interest rates change and the coupon rate of a bond doesn’t. Since the price of a bond fluctuates with market interest rates. maturity. The greater the changes in interest rates. the greater the swings in bond price. The degree of sensitivity depends on many factors such as coupon rate. So If the price in the market is Rs. General By admin | No comments yet Interest Rate Risk vs Yield Curve Risk Interest Rate Risk (Market Risk): Interest rate risk is the risk that a change in market interest rates causes a change in the value of a bond. otherwise it will have no effect. Fixed Income. Thats why to make the price ceiling work.in/blog/?paged=2[1/31/2014 1:22:41 AM] . Same is a the case of the price floor which is applied to benefit the producer. While if the government was to set this price floor below the existing price. The bond market has a structure of yields. how would that help the farmer ? It wouldn’t and the price floor would be ineffective.

Portfolios have different exposures to how the yield curve shifts (parallel or nonparallel). causing the yield curve to shift up or down. long-term bond prices will decrease relative to short-term bonds. which was initially priced based on the initial yield curve. Therefore. This risk exposure is called yield curve risk. which is a result of changing yields among comparable bonds with different maturities. It refers to the risk that the price change of a bond portfolio varies depending on the shape of the yield curve. when interest rates change. and the price of the bond will change accordingly. If the yield curve flattens. the price of this bond will increase.Finguru Yield Curve Risk: The risk of experiencing an adverse shift in market interest rates associated with investing in a fixed income instrument. General. Portfolio Mgt By admin | No comments yet Security Market Line (SML) vs Capital Market Line (CML) http://www. As market conditions change. then the yield spread between long- and shortterm interest rates narrows. A bond portfolio has many bond issues usually with different maturities.in/blog/?paged=2[1/31/2014 1:22:41 AM] . If the yields at all maturities change by the same amount. When interest rates change.finguru. If the bond is a shortterm bond maturing in three years and the three-year yield decreases. typically yields do not change by an equal amount of basis points for all maturities. The risk is associated with either a flattening or steepening of the yield curve. Equity. the yield at each maturity changes too. the price of the bond. will change in price. this means that the spread between long.and short-term interest rates increases. Changes in the yield curve are based on bond risk premiums and expectations of future interest rates. However. When the yield curve shifts. the price of each bond issue in the portfolio will change and the portfolio’s value will change. the entire yield curve will shift in a parallel manner. If the yield curve steepens. This results in a non-parallel shift of the yield curve.

5. Beta coefficient determines the risk factors of the SML. the Security Market Line shows the expected returns of individual assets. for SML. 2. is how the risk factors are measured. The CML determines the risk or return for efficient portfolios. is a graphical representation of the market’s risk and return at a given time. the SML measures the risk through beta. whereas. which depends on risk-free rates of return and levels of risk for a specific portfolio. and the SML demonstrates the http://www. One of the differences between CML and SML. the Beta of security is shown along the X-axis for SML. The standard deviation of the portfolio is shown along the X-axis for CML. Where the market portfolio and risk free assets are determined by the CML. SML. Unlike the Capital Market Line. or through a total risk factor. While standard deviation is the measure of risk for CML. the expected return of the portfolio for CML is shown along the Yaxis. 4. the return of the securities is shown along the Y-axis. On the other hand. On the contrary. While calculating the returns.e. which is also called a Characteristic Line. The CML is a line that is used to show the rates of return. the securities and portfolios that plot above the SML are undervalued and the ones below that are Overvalued. which helps to find the security’s risk contribution for the portfolio. all security factors are determined by the SML. While the Capital Market Line graphs define efficient portfolios. 3.finguru.Finguru Differences between SML and CML: 1. The CML measures the risk through standard deviation. the Security Market Line graphs define both efficient and non-efficient portfolios i.in/blog/?paged=2[1/31/2014 1:22:41 AM] . The securities and portfolio which plot on the SML are correctly value.

Finguru risk or return for individual stocks. Fixed Income. This is different than the nominal spread because the nominal spread just uses one point on the curve. This can be calculated using the various asset pricing models – like the CAPM. Its an opportunity cost. Its the most likely return you would expect from an investment based on its risk. it ignores the shape of the yield curve i.in/blog/?paged=2[1/31/2014 1:22:41 AM] . the Yields at other maturities (other than the maturity of the 2 bonds relevant) are ignored. the investor would expect the rate of return calculated by CAPM. http://www.finguru. The Yield mentioned here is the YTM (Yield to Maturity) for the bond. the distortions of Yield-to-Maturity spreads outlined above are eliminated. This return is based on the expected price of the security and the current price at which the security is quoting. Unlike the Nominal Yield Spread. the security is undervalued if the required return is less than the expected return. Portfolio Mgt By admin | No comments yet Required Return vs Expected Return Required return is the amount that you would need in order to get you to put your money into that investment. in a positively sloped Yield Curve environment and comparing two bonds with the same cash flow dates and maturity – A higher coupon bond will offer a lower YTM than a low coupon bond. Here a fixed value (in basis points) is added to all the Treasury Spot rates to measure the approx. Thus two fairly and correctly priced corporate bonds from the same borrower and having the same cash flow dates and maturity may well have significantly different Yields to Maturity. On the other hand. Expected return is the weighted average of all probable outcomes for that investment. The idea is that the present value of the cash flows will equal to the price of the bond. The Z-spread is calculated as the spread that will make the present value of cash flows from the non-benchmark security when they are discounted at the benchmark Zero rates (plus the Z-spread) equal to the non-benchmark security’s price. if the security is overvalued then the required return would be more than the expected return. As the Z-Spread is not dependent upon only one point on the Yield Curve and takes account of all of the relevant term-structure. General. In such a case the investor would want to buy this security. If you could put extra money toward your mortgage that had an interest rate of 7 then 7 percent or more would be the required return that you would need on an alternative investment in order to get you to invest in the alternative. As it uses a single discount rate to value the cash flows. If the security is correctly valued then the required return would equal to the expected return. However. Thus. the resulting spreads may be markedly different i. An investor would want to sell this overvalued security.e. Zero Volatility Spread. This is done by trial and error. It follows that when these Yields are compared to that of a same-maturity benchmark. for a certain level of of beta for an investment. This is basically a measure of the distance between the YTM of the Corporate Bond and the Treasury Bond of the same maturity. The problem with this measure is that for example. then security is Undervalued and vice versa. Nominal Yield Spread: This is difference between the YIELD of a Corporate Bond vs the YIELD of a similar maturity Treasury Bond. If the expected return on the security is higher than the required rate. This is the return that the investor wants to compensate him for the risk that he is taking. But its not guaranteed. Zero Volatility Spread (Z-Spread): This is the parallel difference between the SPOT RATE curve of the Corporate Bond and the SPOT RATE curve of the Treasury Bond. The SML shows the required return on the security / portfolio based on its systematic risk.e the nominal spread. parallel distance between the spot rate curves of the 2 bonds. Option Adjusted Spread. this measure takes into account the rate of return for the entire maturity range. General By admin | No comments yet Spread Measures on a Bond Three measures of spreads in Bond are: Nominal Yield Spread.

followed by class C investors. So the calculation of the Z-spread and the OAS is very similar. http://www. Therefore. the OAS takes into account only the Credit Risk. Each class differs in the order they receive principal payments. The secondary mortgage market allows banks to sell mortgages. Then class B investors are paid off. Liquidity Risk and the Interest rate risk. and prime. giving them new funds to offer more mortgages to new borrowers. just with the difference being that the cash flows in the OAS are adjusted. Class A investors are paid out first with prepayments and repayments until they are paid off. Each tranche offers varying degrees of risk to the investor. STEP 4 – The tranches are then resold to investors who are willing to take on the varying degrees of risk and maturities. This process can be done by creating a SPV to which these loans are transferred and then securities are issued to investors which are backed by these loans. For example: The investors in the CMO are divided up into three classes. If banks had to keep these mortgages the full 15 or 30 years. that in calculating the OAS the parallel distance between the Spot Rate curves is being calculated. Now is these same securities are structured to have different level of exposure to risk. Liquidity Risk and Option Risk. General By admin | No comments yet Mortgage Backed Securities (MBS) Once the bank issues the mortgage (home) loans. As with any asset associated with risk.in/blog/?paged=2[1/31/2014 1:22:41 AM] . These securities are called Mortgage backed securities (MBS).Finguru The Z-spread includes the higher spread due to Credit Risk. Fixed Income.finguru. They are called either class A. They are grouped into categories by credit risk including subprime. The drawback of the Z-spread is that it does not take into account the change in the cash flows due to Option embedded in the Bond. the highest risk tranche receives the highest rate of return or yield while the lowest risk (AAA rated) will receive the lowest yield. it can sell these loans to investors. Other are packaged into mortgage-backed securities. Also note. and potential home buyers would have a more difficult time to find mortgage lenders. The securitization process (the process of creating the MBS) can be described simply by the following 4 steps: STEP 1 – A pool of mortgages are owned by a bank or lender. alt-a (between subprime and prime). then the name changes to Collateralized Mortgage Obligations. OAS: This is similar to the Z-spread. Interest Rate Risk. STEP 3 – The mortgage backed security is then sliced and diced into different classes with varying maturities (called tranches). The first loan to default will be placed into the Junk tranche while the strongest loans receive the highest credit rating of ‘AAA’ and are placed at the top of the tranche division. The repayments on the home loans come to the SPV and then are paid to the investors who had invested in these securities. Many of the mortgages on the secondary market are bought by Fannie Mae. and sold to investors. they would soon use up all their funds. but now the spread is calculated after adjusting for the cash flows for the option embedded in the bond. OAS adjusts the Option Risk from the bond and then measures the spread. but receives interest payments as long as it is not completely paid off. B or C investors. STEP 2 – The pool of mortgages are packaged into a mortgage backed security.

If the investors become more risk averse (i.e. Also note. if the bond rating falls from AAA to A the credit spread would widen to accommodate this change in rating. There are 3 theories which are proposed to explain the shapes of the yield curve – a) Pure Expectation Hypothesis. the risk is that this spread would change as the perception of investors with respect to risk changes. The difference in the spread would measure the credit risk.in/blog/?paged=2[1/31/2014 1:22:41 AM] . Therefore. as the rating of the bond changes the credit spread also changes accordingly. the expected rates offer enough information in order to construct a yield curve in a complete manner. General By admin | No comments yet Yield / Credit Spread Yield Spread: Yield spread is the difference between the yield of a normal corporate bond and the yield on a similar maturity treasury bond. This theory argues in favor of the no arbitrage principle and says that the return from investing for a period of 2 years is equal to http://www. The shape of the yield curve can be upward sloping. the credit spreads reflect the risk appetite of the investors. humped or any other shape. So by taking the time to maturity on the x-axis and yield on the y-axis you can draw the yield curve.Finguru Fixed Income. Thus the extra return on the corporate bond can be explained due to the additional risks on the corporate bond as compared to the treasury bond. how would the yield on the bonds change as the time to maturity changes. liquidity risk.g.e. The assumptions of the arbitrage opportunities being minimal. For e. downward sloping. The hypothesis also suggests that the shape of the yield curve is dependent on the expectations of the market participants on the future interest rates. In periods of economic crises the credit spreads widen and in periods of prosperity the credit spreads narrow. Fixed Income. b) Liquidity Preference Theory c) Market Segmentation Hypothesis (preferred habitat theory) Pure Expectation Hypothesis: According to the market expectations hypothesis. Further. interest rate risk and the option risk on the corporate bond. they demand higher return to take on risk) then this credit spread would widen and therefore the price of the corporate bonds would fall and vice-versa. the various maturities are supposed to be the perfect substitutes. General By admin | No comments yet Yield Curve Yield curve: Yield curve is the curve which plots the relationship between yield and time to maturity i. This means will a bond with 5 years to maturity have a higher or lower rate of return as compared to a 1 year bond.finguru.

but short-term rates can be higher than long-term rates occasionally. a bond with a long duration would be appealing because the bond’s price would increase more than comparable bonds with shorter durations. Macaulay Duration calculates the percentage change in the price of the bond with respect to the changes in the market yield. he will only look at the 2 year rate and will require a high premium to invest in any other maturity. the higher the duration (the longer an investor needs to wait for the bulk of the payments). investors prefer specific investment horizons and require a meaningful premium to buy bonds with maturities outside their “preferred” maturity. duration takes into account interest payments that occur throughout the course of holding the bond. or habitat. That is. if an investor wants to invest money for 2 years. This theory is consistent with both the persistence of the normal yield curve shape and the tendency of the yield curve to shift up and down while retaining its shape. Therefore. Modified. Duration also changes as market yield changes. including the greater price uncertainty. Duration is stated in years. Shortcomings of expectations theory: Neglects the risks inherent in investing in bonds (because forward rates are not perfect predictors of future rates). what will be the percentage change in the price of the bond for a 1% change in the market yield. the slope of the line changes. For e. Proponents of this theory believe that short-term investors are more prevalent in the fixed-income market. This premium compensates investors for the added risk of having their money tied up for a longer period. long-term bond yields tend to be higher than short-term yields. The basic idea of this theory is that the rate for each maturity is decided as per the supply and demand for funds concerning that specific maturity. 1) Interest rate risk 2) Reinvestment rate risk Liquidity Preference Theory: The Liquidity Preference Theory. If an investor expects interest rates to fall during the course of the time the bond is held. Generally. Modified duration corrects the Macaulay duration measure and takes into account the second point i. Modified and Effective are difference ways of calculating Duration for bond. Fixed Income. that duration for a bond is not constant. but also because of the risk premium added by the risk of default from holding a security over the long term.Finguru investing the funds for 1 year and then reinvesting for a period of 1 year again.875 years. This way the rates in the future would be a function of the spot rates today. For example. called the term premium or the liquidity premium. duration (in years) is 0. Unlike maturity. It does not take into account whether the bond has an option embedded in it and also does not consider the point that Duration for a bond is not constant. So if the rates are rising. states that in addition to interest rate expectations. with the added risk comes greater expected returns. This is reflected in the slope of the tangent line drawn on the bond price vs yield relationship. So. General By admin | No comments yet Duration – Macaulay. The Liquidity Preference Theory asserts that long-term interest rates not only reflect investors’ assumptions about future interest rates but also include a premium for holding long-term bonds (investors prefer short term bonds to long term bonds). Therefore.g. but prices fall at a decreasing rate when the market yield rises. Because of the term premium.5(50/1200) + 1(50/1200)+ 1. and the yield curve slopes upward. Effective Bond Duration is a measure of the sensitivity of the Bond’s price to interest rate movements.5(50/1200)+ 2(50/1200) + 2(1000/1200) = 1. for a two-year bond with 4 coupon payments every six months of $50 and a $1000 face value. duration can be defined as the change in the value of a fixed income security that will result from a 1% change in interest rates .e. is an offshoot of the Pure Expectations Theory. As low market yield the duration is high and at high market yield the duration is low. Therefore. for the most part. the more its price will drop as interest rates go up. Basically. Of course. Duration also means the length of time before the asset is due to be repaid. a 5 year duration means the bond will decrease in value by 5% if interest rates rise 1% and increase in value by 5% if interest rates fall 1%. also known as the Liquidity Premium Theory. Macaulay. then the pure expectation hypothesis argues for a rising term structure and vice-versa. and therefore longerterm rates tend to be higher than short-term rates. Duration is a weighted measure of the length of time the bond will pay out. Market Segmentation Hypothesis: The Preferred Habitat Theory or the Market Segmentation theory. The slope of this line changes as the bond prices rise at an increasing rate when the market yields fall.in/blog/?paged=2[1/31/2014 1:22:41 AM] .finguru. modified duration is derived from the Macaulay http://www. Long term yields are also higher not just because of the liquidity premium. duration is a weighted average of the maturity of all the income streams from a bond or portfolio of bonds.

based on the current market yield.e. ← Older Posts Newer Posts → Login | Home | RSS Feed    Powered by Trutech  Copyright © 2014 Finguru http://www. This is the correct measure of duration if the bond has embedded options in it. is an incomplete measure for bonds which have options in them. The formula is Modified duration does not take into account the embedded options in the bond. Effective duration takes into account that expected cash flows will fluctuate as interest rates change.Finguru duration. Effective Duration is the measure which takes into account all the aspects i. Effective duration for a bond with no options would be the same as Modified Duration. Therefore.in/blog/?paged=2[1/31/2014 1:22:41 AM] . the embedded options and the current market yield.finguru.

the end result is a net gain of $50. most people view a single gain of $50 more favorably than http://www. despite the fact that you still end up with a $50 gain in either case. losses have more emotional impact than an equivalent amount of gains. Categories Alternatives (2) Corporate Finance (5) Derivatives (2) Economics (9) Equity (9) Ethics (3) Fixed Income (14) FRA (2) General (53) Portfolio Mgt (5) Quantitative Techniques (12) Uncategorized (1) Recent Posts Nominal Spread vs Z – Spread Risk Free Rate Labor Demand Elasticity Economic vs Technological Efficiency Roll Yield Archives March 2012 February 2012 September 2011 May 2011 February 2011 November 2010 October 2010 September 2010 August 2010 July 2010 June 2010 Equity. So the two are different approaches to handling the issue of inflation in an economy. Other important features of inflation targeting include increased communication with the public about the plans and objectives of the monetary policymakers. In India the RBI follows the Inflation targeting while in the US the Federal Reserve follows the Taylor (targeting) Rule. in many cases. the likely moves of the central bank to raise or lower interest rates become more transparent under the policy of inflation targeting. These announcements are hopefully credible announcements and people accordingly modify their inflation expectations in the economy. According to prospect theory. The FFR is a function of the deviations of inflation and output from their target values. one expressed in terms of possible gains and the other in possible losses. To explain this – if a person were given two equal choices. This is the Indian case – the RBI makes a public announcement on what it expects the short and the long term inflation rates to be. The RBI in turn makes changes in the interest rates as as to influence the inflation rates in the economy. This rule was first proposed by the US Economist John B Taylor and is therefore named after him as the Taylor Rule. or “target”. inflation rate and then attempts to steer actual inflation towards the target through the use of interest rate changes and other monetary tools. However. and by the explicit acknowledgment that low and stable inflation is the overriding goal of monetary policy.in/blog/?paged=3[1/31/2014 1:23:06 AM] . the amount of utility gained from receiving $50 should be equal to a situation in which you gained $100 and then lost $50. “This approach is characterized … by the announcement of official target ranges for the inflation rate at one or more horizons. In both situations. The Taylor rule therefore takes into account the deviations from the equilibrium condition of full level of employment and the inflation rate that is good for the economy.s ) for it ? Prospect Theory: The prospect theory says that the investor looks at gains and losses with different perspective. which stipulates how much the central bank would or should change the nominal interest rates in response to divergence from the target inflation rates and the actual GDP from potential GDP. This rule helps to decide the Federal Funds Rate and that in turn would impact that level of inflation and the unemployment in the economy. For example. and.Finguru Home (Blog) Home (FinGuru) Ask Question About Subscribe   Alternatives Uncategorized Corporate Finance Derivatives Economics Equity Ethics Fixed Income FRA General Portfolio Mgt Quantitative Techniques Search Economics. Because interest rates and the inflation rate tend to be inversely related. General By admin | No comments yet Inflation Targeting vs Taylor Rule Question: What is the diffrence b/w targeting rule and inflation targeting? Answer: Inflation targeting:Inflation targeting is an economic policy in which a central bank estimates and makes public a projected. In the words of Ben Bernanke Inflation targeting rule is. in a traditional way of thinking. increased accountability of the central bank for attaining those objectives…” Targeting Rule (Taylor Rule): This refers to the monetary policy rule followed by some central banks like the US Federal Reserve.finguru. people would choose the former – even when they achieve the same economic end result. General By admin | No comments yet Prospect Theory I cant understand prospect theory ? what would be an example (with no.

000 and you must pick one of the following choices: Choice A: You have a 50% chance of gaining $1. the volatility in the price of the bond due to changes in interest rate is lower. Therefore with increased volatility..000. they would pick either “A” or “B” in both situations.why does increase in interest rates decreases bond value ? Bond Price = The relationship between interest rates and bond prices is inverse. as the volatility of interest rate increases. 2. FRA.Finguru gaining $100 and then losing $50.? As the volatility increases the value of options increases.finguru. Therefore the call option is valuable only at lower yields. It would not make sense for the bond to be called back otherwise. General By admin | No comments yet Fixed Income doubts 1. 2.why is value of a call option greater at lower yields ? The call option will be exercised only when it is in the money. This is because. General By admin | No comments yet Annual Report – Sections Question: Sir please tell me the basic difference between the information which is shown under the following heads: http://www. However. Therefore. 3. and a 50% chance of gaining $0.how does increase in credit spread increases the yield ?? Increasing credit spread means that the spread between the treasury bond and the rated bond has increased. but are willing to engage in risk-seeking behaviors where they can limit their losses. Whereas. the value of the putable bond increases as the option to put the bond is with the bond holder. Choice B: You have a 100% chance of losing $500. You have $2. Choice B: You have a 100% chance of gaining $500. 5. If the subjects had answered logically. losses are weighted more heavily than an equivalent amount of gains. You have $1. as the option is with the bond issuer. higher the coupon rate.000. Thus.why does bond with higher coupon rate has lower duration or interest rate risk  ? The bond with a higher coupon has a lower interest rate risk as the cash flows in the bond are coming faster (as compared to a bond with a lower coupon) and therefore reducing the level of volatility in the price of the bond. and the value of the call is subtracted from the bond value. In other words. The value of the callable bond decreases. lower the duration or interest rate risk. the results of this study showed that an overwhelming majority of people chose “B” for question 1 and “A” for question 2.in/blog/?paged=3[1/31/2014 1:23:06 AM] . Fixed Income. there is an inverse relationship between price and discount rate: the higher the discount rate the lower the value of the bond. This would imply that the investor perceives a greater risk on the same bond and therefore now demands a higher level of return – therefore the price falls down and the yield on the bond increases. and 50% of losing $0. Since the price is the present value of the cash flows. This is because the probability of the option getting exercised increases. (People choosing “B” would be more risk adverse than those choosing “A”). For example. 4. The implication is that people are willing to settle for a reasonable level of gains (even if they have a reasonable chance of earning more). the person who has issued the bond would call the bond back only when the interest rates in the markets have reduced below the coupon rate.000 and you must pick one of the following choices: Choice A: You have a 50% chance of losing $1. the following questions were used in their study: 1. the value of the callable bond decreases and the value of the putable bond falls. the value of the call and the put option increases. and it is in the money only at low interest rates. Similar to the example I gave in class about the Maturity risk premium that the bond in which the cash flow comes faster.i didn’t understand the reason behind the mechanism between volatility risk and callable n  putable bonds .

technical analysis is used for a trade. While technical analysis can be used on a time-frame of weeks. but the goals of a purchase (or sale) of a stock are usually different for each approach. whereas fundamental analysis is used to make an investment.proxy statements Answer: The basic diff b/w info is as follows 1) Footnotes – contain information about accounting policies used . In financial terms. 4) Proxy statements – Contains issues which require shareholders’ approval to vet any any decision.supplementary schedules . http://www. fundamental analysis often looks at data over a number of years. Conversely. General By admin | No comments yet Short Selling Short selling means selling assets. usually securities.Finguru . the company has come up with the great product and therefore would increase market share and increase sales. it presents the qualitative perspective of the business – market share.MDA . The short seller hopes to profit from a decline in the price of the assets between the sale and the repurchase. looks at economic factors to explain the changes in stock prices. cash flow statement and income statement. fundamental analysis focuses on the reasons for changes in demand and supply of stocks. General. Fundamental analysis. risk in the business. while traders buy assets they believe they can sell to somebody else at a greater price. Fundamental analysis takes a relatively long-term approach to analyzing the market compared to technical analysis.in/blog/?paged=3[1/31/2014 1:23:06 AM] . Investors buy assets they believe can increase in value. 3) MDA – written by the management. Before the Annual General Meeting. By looking at the balance sheet. Equity. which would lead to increase in demand for the stock of the company. These are non-auditable. the short seller will incur a loss if the price of the assets rises. Technical Analysis focuses on the changes in demand and supply of stocks and analysts following technicals believe they can predict when the supply or demand will change and therefore impact the prices. 2) Supplementary schedules – contain additional information beyond what is required by law. on the other hand. a fundamental analyst tries to determine a company’s value. Technical analysis looks at the price movement of a security and uses this data to predict its future price movements. company issues these to the shareholders and also files it with the SEC. accounting estimates used and any assumption taken to prepare the financial statements. etc. competition. that have been borrowed from a third party (usually a broker) with the intention of buying identical assets back at a later date to return to the lender. A technical analyst approaches a security from the charts. In general. Technicians believe that all the information they need about a stock can be found in its charts.finguru.g. Other costs of shorting may include a fee for borrowing the assets and payment of any dividends paid on the borrowed assets. while a fundamental analyst starts with the financial statements. an analyst attempts to measure a company’s intrinsic value. Quantitative Techniques By admin | No comments yet Technical Vs Fundamental Analysis Technical analysis and fundamental analysis are the two main schools of thought in the financial markets. as the seller will pay less to buy the assets than the seller received on selling them. On the other hand. days or even minutes.footnotes . Not only is technical analysis more short term in nature that fundamental analysis. For e. future prospects.

A short position can be covered at any time before the securities are due to be returned. By shorting stocks that the investor believes will fall sharply when the market as a whole falls.finguru. Occasionally investors see a stock that they believe has been hyped to a ridiculously high level.Finguru The act of buying back the securities that were sold short is called “covering the short” or “covering the position”. They believe that the stock price will fall when reality replaces the hype. Short sales are also used to protect an investor’s portfolio against a market downturn.e. Quantitative Techniques By admin | No comments yet Mean Variance http://www. A short sale provides the opportunity to profit from the overpriced stock.in/blog/?paged=3[1/31/2014 1:23:06 AM] . The two primary reasons for selling short are opportunism and portfolio protection. Short selling just like long buying is essential for proper functioning of the stock market. investors can help insulate the value of their portfolios against sudden market drops. short sale can only trade at a price higher than the previous trade Dividends on the security belong to the owner of the security Short seller must deposit collateral to guarantee the eventual purchase of the security Note: SEC eliminated the uptick rule for short sales as of June’07 General. It provides essential liquidity which in turn leads to proper price discovery. The following 3 rules govern short selling: Uptick rule – stocks can only be shorted in an up market i.

But the tax authorities tax the implicit interest earned as income and therefore the investor has to pay a tax without having received the cash flow. But it is not necessary that just because a mean exists. The Cauchy distribution is an example of a distribution which has no mean. (ii) variance 2. General By admin | No comments yet STRIP Bonds Question: Can you please explain the following statement: STRIPS are taxed by the IRS on their implicit interest(movement toward par value). and it also happens to be its second cumulant. kindly explain Answer 1: What sort of a distribution does not have mean: When U and V are two independent normally distributed random variables with expected value 0 and variance 1.. Strip bonds are created from federal treasury notes and bonds. The mean exists whenever the variance exists. Kindly suggest me any eg.Finguru The variance of a real-valued random variable is its second central moment. you typically still have to pay federal income tax on the bond’s accretion for the year. Answer 2: The mean exists whenever the variance exists.finguru. of distribution which do not have (i) mean. On the other hand. Explaining the question statement: The principal part of the STRIP bond is like a zero coupon bond which does not give any explicit cash coupon payments during the tenure of the bond. but not vice-versa 1. If the interest rates rise the price of the IO bonds would rise to some extent as the prepayment would slow down and thus causing the IO to receive interest for a longer time – thus increasing the yield on such bonds.org/wiki/Cauchy_distribution Please note: This is not required to be known for the CFA Level 1 Exam. some do not have a variance. Although you receive no tangible income(in case of STRIPS). This results in a negative cash flow for the investor in the initial years of the STRIP bond. results in negative cash flows in years prior to maturity. To read more on this check out http://en. Ans: Lets first explain what is a STRIP Bond: A STRIP bond separates the Principal and the coupon part of the bond and then sells them separately. Just as some distributions do not have a mean. General.wikipedia.for fully taxable investors. They are created in large quantities for institutional clients.but not vice versa“. Once stripped. but not vice-versa: This means that if the variance exists then it is sure that the mean also exists. The holder of the PO would want the interest rates in the market to go down.in/blog/?paged=3[1/31/2014 1:23:06 AM] . The two types of bonds thus formed. It is also important to know that the PO Strip bond would have higher interest rate risk as the volatility in its price would be more than that of the original bond.which. last line of the above paragraph – “……. the IO Strip bond is to some extent positively related to interest rates (this is contrary to the usual relationship of bonds which have a negative relationship to interest rates). Because there is no way of calculating the variance if the mean is not known. the securities are not technically treasury issues but are securities backed by United States treasury issues. there will be a variance to the data. Portfolio Mgt By admin | No comments yet Asset Allocation – Importance Please explain the following statement: “approximately 90% of the variation in a single portfolio returns over time can be explained by their target asset allocations and asset allocation explains an http://www. then the ratio U/V has the standard Cauchy distribution. Fixed Income. PO (Principal Only) and IO (Interest Only) have now different risk characteristics and attract different types of investors. Its mode and median are well defined and are both equal to x0. variance or higher moments defined. so that the prepayment happens quickly and therefore the money comes faster. So if there is a finite variance then there must be a mean of the data.

Asset allocation explains an average of 40% of the variation in fund returns: This statement talks about the cross sectional differences among fund returns i. and so is the variation among fund returns. the Portfolio Manager should focus on building an Investment Policy Statement which helps the client understand his objectives of investing money and the portfolio manager helps the investor allocate money on the basis of his long term requirements.cfainstitute. There is no “one size fits all” solution. The CFA Curriculum therefore argues that as the return on the fund over time is largely explained by the policy asset allocation. The main point here is that the difference between the fund returns is 40% attributable to the policy asset allocation. The idea of both the statements is to demonstrate the importance of portfolio management over the idea of security selection.g.or end-of-year values? The way ratios are calculated depends on the availability of data and how particular ratios are going to be used.” Approximately 90% of the variation in a single portfolio returns over time can be explained by their target asset allocations: The returns on a fund over time are driven by the fund’s policy benchmark that they are following (for e. “use beginning-of-year balance sheet data for your calculations”). Research study shows that more than 90% of the returns over time on a fund are explained by their policy benchmarks..org ← Older Posts Newer Posts → Login | Home | RSS Feed    Powered by Trutech  Copyright © 2014 Finguru http://www.in/blog/?paged=3[1/31/2014 1:23:06 AM] . FRA By admin | No comments yet Ratio Calculation – FSA On the exam.e. BSE500 is the policy benchmark for numerous mutual funds) and by the active returns generated by the asset managers ability to over or under weight asset classes and securities relative to the policy and magnitude and timing of those bets. If it is relevant. when trying to calculate a ratio that mixes income statement and balance sheet statement information. when should I use the average values of the balance sheet information as opposed to the beginning.g.finguru. You should be familiar with the assigned curriculum and be prepared to perform calculations and interpretations based on that curriculum. the exam questions will normally specify how the calculation is to be performed (e.Finguru average of 40% of the variation in fund returns. and such differences are part of the nature of financial analysis. the reasons why the returns of one fund is different from the other. Source: www.

1/Y = 5%. 1/Y = 5%. If he starts next year and makes 17 payments into the savings account paying 5% p.50. N = 4. X plans to send his child to college for 4 years starting 18 years from now. Increases in market yield rates cause a decrease in the present value factors of each cashflow. This is because the percentage change in the interest rates is much higher when the interest rates are low as compared to when interest rates are high.02% Fixed Income. $5. He has already set aside money for the tuition. Therefore. Therefore Duration varies inversely with yield rates.50 So its quite a simple question.00. Higher market yield means lower duration. To put the same thing in other words. But what does the owner of coupon strip pay? Will a selling action taken by any party affect the holding of another? What situation is favourable for each party? Yes. Since Duration is a product of the present value of each cashflow and time. Quantitative Techniques By admin | No comments yet Quant Doubts Question 1. N = 17. PMT = 2744.01. The owner of the coupon pays the present value of the expected interest payments.Mr. This is convex to the origin and decreases from left to right. the owner of principal strip pays a discounted price to get face value at maturity (like a zero coupon bond).00 and $7.Finguru Home (Blog) Home (FinGuru) Ask Question About Subscribe   Alternatives Uncategorized Corporate Finance Derivatives Economics Equity Ethics Fixed Income FRA General Portfolio Mgt Quantitative Techniques Search General.finguru. the owner of principal strip pays a discounted price to get face value at maturity (like a zero coupon bond). Principal Only. How? Duration is the slope of the line (relationship between the yield and price of the bond). the sensitivity of bond prices to change in interest rates is higher when the interest rates are low as compared to when interest rates are high. So the duration is lower at higher yields while it is higher when the yield is low. PV = 70919. The rate at which is falls decreases as you move from left to right. He estimates $20000 per year payable at beginning of each year by the time his child goes to college. If the interest payments exceed than what he paid for – he would gain.00. and now wants to provide for the room and other expenses. what annual payments must he make? Categories Alternatives (2) Corporate Finance (5) Derivatives (2) Economics (9) Equity (9) Ethics (3) Fixed Income (14) FRA (2) General (53) Portfolio Mgt (5) Quantitative Techniques (12) Uncategorized (1) Recent Posts Nominal Spread vs Z – Spread Risk Free Rate Labor Demand Elasticity Economic vs Technological Efficiency Roll Yield Archives You first need to calculate the present value of the 4 payments that need to be made 18 years from now. Question 2: Earnings per share for a company for the last 5 years is $4. Calculate the compound annual rate of growth for EPS during these years To calculate the CAGR you need to use the formula (Ending Value / Beginning Value) ^ (1/n) – 1. http://www. $6.01 This present value will become the FV for the 17 equal payments that need to be made. So with PMT = 20000. To state it simply. and if the interest payments fall short of what he paid for – he would loose.in/blog/?paged=4[1/31/2014 1:23:27 AM] .00.a.. Yield. higher yield rates also lower Duration. In this case you will do so by (7/4) ^ (1/4) – 1 = 15. $4. In a strip bond. The first payment will be made at the beginning of 19th. FV = 70919. Interest Only bonds 1. General By admin | No comments yet March 2012 February 2012 September 2011 May 2011 February 2011 November 2010 October 2010 September 2010 August 2010 July 2010 June 2010 Duration. 2.

Fixed Income. buyers are entitled to receive the principle amount and the interest earned.in/blog/?paged=4[1/31/2014 1:23:27 AM] . General By admin | No comments yet CD vs Savings Deposit How are certificates of deposits different form bank deposits? Why would investors prefer CDs over bank deposits? A certificate of deposit (CD) is a fixed-deposit investment option offered by banks and lending institutions. usually. term of deposit and date of maturity are stated. and. How does a CD work: A person can buy a certificate of deposit (CD) by depositing the minimum requisite amount. the higher the deposited amount. At the time of maturity. The issuer would want to call the bond back when the interest rates in the market go down i. they are “money in the bank”.e. When the yields are higher than the coupon rate being paid on the bond then the bond owner would rather not call the bond back as he is paying a lower rate than in the market. the yields decrease. six months. The penalty can be in the form of either the interest earned over six months or an overall reduction in the interest rate. They are different from savings accounts in that the CD has a specific. The buyer of a CD receives a written declaration or certificate where the applicable interest rate. He would do this because he can then refinance his funding at a cheaper cost that prevails at the market. Corporate Finance. It is intended that the CD be held until maturity. While on the other hand the Principal only would want the interest rates to go down so that the prepayment happens faster and his annualized yield ends up being higher. the better will be the interest rate offered on it. Therefore the call option is valuable only when the rates / yield is low in the market. In general. institutions usually grant higher interest rates than they do on accounts from which money may be withdrawn on demand. or one to five years). Fixed Income.Finguru No Selling of the bond by any party will not impact the other. General By admin | No comments yet Call Option embedded in bond Why value of a call option greater at  lower yields ? Call option gives the Owner of the bond the option to call the bond back.finguru. It offers higher interest rates than conventional savings accounts because it requires investors to deposit funds for a specified term ranging from one month to more than five years. a fixed interest rate. CDs are similar to savings accounts in that they are insured and thus virtually risk-free. like savings accounts. Thus the interest only holder will want the interest rates to go up. at which time the money may be withdrawn together with the accrued interest. In exchange for keeping the money on deposit for the agreed-on term. CDs are a secure form of investment. In order to encourage buyers to maintain their long-term investment. As this will cause the prepayment to fall and therefore the interest payments will continue for a longer time. as the money would come faster. http://www. as they are insured by government agencies. However. An investor would want to invest in Interest Only bonds when he expects the interest rates to increase. fixed term (often three months. You can also see this from the shape of the bond price relationship when there is a call option embedded. banking institutions levy heavy penalties on the early withdrawal of the amount deposited in a CD.

for a long position the price of the underlying rises. Is swap a type of forward? A series of forward make one swap.Finguru Derivatives. So its like saying lots of forward contract together make one swap agreement. The clearing house ensures that the trade happens and there is no counter-party risk. General By admin | No comments yet Derivatives Doubts 1. They may impose a penalty on the defaulting traders and also maintain a contingency fund to ensure availability of funds to meet the liability of a default by one party.e. In derivatives securities the investor will be paid if the event happens in his favor i. what do you mean by “backed by a/the clearinghouse” If a trade is backed by the clearing house (all trades done on the exchange are backed by the clearing house) then even if one party (for e. so the claim is contingent on the movement of prices.finguru. seller) will get the money for the sale at the price at which the sale happened.g. Claims on Forward contracts and other Derivative instruments are contingent on the movement of the prices of the underlying instrument. The clearing house is the buyer to every seller and seller to every buyer. 2. the other party (for e. They take the opposing side of each transaction and ensure that the transaction will continue. buyer) defaults.in/blog/?paged=4[1/31/2014 1:23:27 AM] . For a long on the forward contract the claim is contingent that the prices of the underlying increase while the payment to the short is contingent on the prices of the underlying decreasing. http://www.g. such as a particular interest rate or the value of a financial index at a specified time. Financial derivatives (aka derivative assets. What is a contingent claim? How are forwards contingent claims? How is a future contract least likely to be a contingent claim?? Contingent Claim ” A claim for expenses not yet incurred that is dependent on some future event that may or may not happen. 3. contingent claims) are securities whose value depends on another security or some benchmark.

If an investor is say holding an asset which is highly illiquid. This is because if one asset does not do well.’ Can you explain this statement? Yes.in/blog/?paged=4[1/31/2014 1:23:27 AM] . So therefore diversification reduces the magnitude of impact on the portfolio due to movement in a single asset. Hope the basic concept is clear. the price of Reliance on NSE and BSE cannot be different. put the eggs in more than one basket – then falling of one basket may not impact the other basket and therefore save the other eggs from breaking. that the former is more standardized? since we know forwards is mostly a tool of the OTC. Thus. student loans etc !! Q2.e. I will try to explain both of these in the easiest way possible: Diversification: To put it simply. The same way. it does not lead to the other also doing badly. the two securities give the same return in every possible scenario – therefore the price of these securities should be the same today. The main difference between MBS & ABS is the underlying asset. Fixed Income. The key difference between the Forward and Future contract is that forward trade OTC while Futures trade on the Exchange. In case of MBS the underlying security is the Mortgage loan i. Arbitrage: Law of one price says – that assets which have the same cash flows in the future irrespective of the future events. then it is possible that the prices of the security do not change much and become stale due to illiquidity of the security. the underlying can be any other load i. Car loans. credit card loans. diversification into securities that are not perfectly positively correlated would cause risk of the portfolio to reduce. there is a mechanism of mark to market which is followed. The mathematics of it is illustrated by the following equation: The correlation here can be less than positive 1 and therefore the variance of the portfolio would be less than the simple combination of the two assets. An investor who spots an arbitrage can make money by selling the security that is more expense and buying the one which is cheaper. the bank puts the Mortgage (Home) Loans or Other loans into a SPV through which it issues securities – which are backed by the security of the home / other loans. For e. the value of houses went down drastically and they stayed there for some time due http://www. diversification means not to put all your eggs in the same basket because if say this basket drops all the eggs would break. during the credit crisis. corporate loans. That is what arbitrage is – a riskless profit due to mis-pricing of securities in the market. What is the difference between mortgage backed/asset backed securities and bank loans? Aren’t bank loans also mortgage/asset backed? To create MBS or ABS. Home Loan while in the case of ABS. the risk reduces when we combine two assets which do not have perfectly positive correlation. there is no counterparty risk. If it is then you can buy from one exchange and sell on the other to make a riskless profit.e. This same concept can be illustrated through the variance of the portfolio which is a function of the individual standard deviations of the assets. initial margin (performance guarantee) has to be put forward etc. So while the future may be uncertain. It is not – then you will be able to make money out of it due to arbitrage. So the return on the portfolio may not be impacted too badly. and the correlation between the returns of the assets in the portfolio. 5.g. the weights in which they are combined. This would be true on the upside as well. ‘An institutional investor who plans to hold an issue to maturity but is periodically marked to market is concerned with liquidity risk.e. they are more standardized. Can you please explain the two concepts Diversification and Arbitrage? The two concepts Diversification and Arbitrage are not related to each other. So the key difference is where the forwards and futures trade and because of that the other differences arise. should have the same price today. General By admin | No comments yet Fixed Income doubts Q1.finguru. For ex. Is the key difference between A futures Contract and a forward commitment is just that. The securities thus issued are called Mortgage Backed Securities or Asset Backed Securities. So if you diversify your baskets i. this is true. Marking to market involves bringing in money if there is a loss prior to maturity of the security.Finguru 4. As the futures trade on the exchange.

all winning bidders are awarded securities at the highest yield accepted by the government. So the prices quoting in the market were on very low volume. Ethics. illiquidity will be a risk for the investor. General By admin | No comments yet Importance of Ethics on the CFA Program We often talk in class about the importance of Ethics on the CFA Program and what implications could there be for an unethical behaviour. So even if the investor wants to hold the security upto maturity and if the security requires marking to market during the life of the asset. What is the concept of pre-refunded bonds? Pre-refunding a bond means: A type of bond issued to fund another callable bond.aspx Equity. Q5. As the credit rating drops the spread would need to be higher to get the investor to invest in the security with higher credit risk. The following link on the CFA Website gives a good detail of the ethical standards which are important from the perspective of candidate: http://www. So in such a case till the company survives. Q4. winning bidders are allocated securities at the yield they bid. I came across a question where ROE was less than the K. where the issuer actually decides to exercise its right to buy its bonds back before the scheduled maturity date. Now. In case of multiple price method. In the regular auction cycle mutiple price method.org/ethics/conduct/Pages/candidate_sanctions.in/blog/?paged=4[1/31/2014 1:23:27 AM] .100 on its first call date of January 2007. Out of all the bids put in.or  what is the solution in that case.finguru. and therefore take a hit on the P&L.e. and then they see the max yield at which their demand will get satisfied and then award the same (max) yield (lowest price) to all winning bidders. Q3. For example. How is the credit spread higher when the credit rating is lower? Credit spread is the additional yield on the bond the investor gets for buying a lower credit rating bond as compared to the risk free security. The proceeds from the issue of the lower yield and/or longer maturing pre-refunding bond will usually be invested in Treasury bills (T-bills) until the scheduled call date of the original bond issue occurs. In that case equity share holders want to pull out money. so how can a company survive. The government has a target in terms of raising money. In actuality this price should have been higher but wasnt due to low liquidity. the highest price).cfainstitute. XYZ Corp would have issued a new bond yielding 7% and took all the proceeds from that bond and invested them into Tbills – ensuring that enough money would be available to retire the issue come January. the Government chooses to allocate the securities to those who bid at the lowest yield (i. A security with a credit rating of AAA will have a lower credit spread than a security with a credit rating of A). The management may however not do this as they would otherwise loose their jobs. If this does not happen for long – the company will go bust!! http://www. General By admin | No comments yet Equity – Beta / Cost of Capital Q1. XYZ Corp decided to call its 9% callable bond (that is originally set to mature in 2009) for $1. In July. In case of multiple price method. either they will demand 100% DP ratio . If the sustainable ROE of the company is below the K then it does not make sense to stay invested in that company and the shareholders would rather want their money to be returned to them. (Lower credit rating means higher credit risk. is the highest or lowest yield used? Regular auction cycle can be done in both single and multiple price. the management would try and choose projects which have a return greater than the cost of capital.Finguru to the fact that there was no buyer for these assets and the sellers were not willing to sell them at a very cheap price. Yes you are absolutely right. suppose that in June 2006. the banks which were holding these assets had to mark to market the loss on these investments.

nor would he hold a loss making position too long. He would treat good and bad news in the same light and make rational decisions. The use of Standard Normal distribution is that it standardizes the normal distribution and helps us compare and measure the area under the curve for all normal distributions. over a multiple-year period.finguru. So CAGR is a percentage that describes the rate at which an investment would have grown if it grew at a steady rate. CAGR is not the arithmetic mean but the geometric mean of the growth. General By admin | No comments yet Behavioural Finance How does Behavioural Finance create mispricing of securities and refute the EMH. In CAPM. Behavioural finance basically says that the investor may not act rational all the time.e. per year. You can think of CAGR as a way to smooth out the returns. Standard Normal Distribution is denoted as N ~ (0. then if I combine X and Y to make a portfolio. So to calculate the compounded growth we need to calculate GM.Finguru Q2. But as rationality is not true all the time – some stocks which should be bought because they are undervalues are not bought and some stocks which should be sold because they are overvalued are not sold. The other way of looking at a negative beta is to say that the expected rate of return of the stock would be less than the risk free rate of investment. By using the AM to calculate the average. what is the diff between standard normal distribution and normal distribution and what is the use or application of standard normal distribution Standard Normal distribution is a special case of the Normal Distribution. Q3. So most investors would not want to stay invested in such a security and therefore the price would fall and therefore the expected return would go up. http://www. Equity. It IS possible to have a negative regression slope. The reason why we cant use arithmetic mean here is because growth is not additive. While. If the beta of the company is – ve the K will be less than RFR. normally distributed with mean 0 and variance of 1. after considering the effects of compounding. Please explain: Geometric mean is used in measuring compound growth rate??? does AM amd HM doesnt inculde compound growth rate??? if they dont then what is the usefulness of them???? Average compound growth rate is a measure of how much something grew on average. a normal distribution is the general definition i. He also is guided by certain behaviours which can cause the mispricing in the market not to correct. Plz explain the following conceptual part: one of the property of normal distribution says a linear combination of randomly distributed random variable is also normally distributed This means that if X and Y are two random variables. 2. it is multiplicative. Q2. but it would be RARE.e. If you have found a negative beta then you should cross check your calculations and see if everything is correct. If he was rational then he would not be overconfident about his estimates. General. The slope of the regression equation is the beta.is it possible. So the linear combination of X and Y is also normally distributed. for example X is Daily returns of Reliance and Y is the Daily returns of Google. the portfolio would also have daily returns that are normally distributed.in/blog/?paged=4[1/31/2014 1:23:27 AM] .σ2). Now honestly that doesnt make sense. And for EMH to be true the investor needs to be rational and buy undervalued and sell overvalued securities. He is not guided only by his rationality to make decisions. 1) i. beta represents the systemic risk of a stock by regressing the stock’s excess returns against the market portfolio’s excess returns. Quantitative Techniques By admin | No comments yet Quant Doubts Q1. we would overestimate the growth. So it is highly unlikely to have negative beta for anything but gold stocks. Yes a negative beta (using the CAPM model) would imply that a company has a cost of capital less than the risk free rate and a risk which is less than the risk free security. N~(µ.

No.39. PMT = 0 and now calculate for N.Finguru Let me quote an example: The profit of Company A. For e.272.035 to find the average percentage. Remember. It is hard to explain the entire concept in written here. Q5.700 Here we see that we should use the geometric mean of the growth  factors 1.in/blog/?paged=4[1/31/2014 1:23:27 AM] . India or Australia. A normal distribution has zero as skewness i. Q7.e. Hope this explains it. for which we use the arithmetic mean. You will have to bother about only the confidence intervals of normal distributions. 3%. if we take the average heights of males in India and Australia. but this is not in your course. that’s why the prefix ‘Bi’.270. Q4. calculate for N.125 This is less than a yearly increase of 3% would yield. So its usage is same as that of any other measure of dispersion. it is neither positively nor negatively skewed. 12 million. So when you toss a coin.  started with a 100-million-dollar profit. That is always less than the arithmetic mean would yield. and 1. In this case you would use a binomial distribution. Divide by 12 and add to 35 years. A client has $202971. MAD tells us where would you find greater average variation in the heights of people.5%. Q8. you try and calculate the probability of getting x number of successes in n trials and as each trial is independent of the other.finguru. This is an interesting question. Is the +ve or -ve skwed distribution is also a normal distb or not??  and if the prob of dist of population +ve or -ve skewed can its sample can be plotted to construct confindence interval???? if yes it means it mean sample of skwed popultn  distb would reach normal as n kept increasing let me know is it correct and if ans is no than also let me knw y??? Lets take one question at a time.e. At what age can she retire if she puts no more money in the account? At what age can she retire if she puts $250/month into the account every month beginning one month from today? Its a simple question. using a binomial distribution.025 * 1.39 in an account that earns 8% per year. The clients 35th birthday was yesterday and she will retire when the account value is $1Mn. Divide by 12 and add to 35 years to get the answer. compounded monthly. Why not? Suppose that Company B. Here we cannot use the arithmetic mean and say that the average growth was 3%. and 3. a head and a tail or like pass or fail.000 * 1. this tells us how scattered the data is i.03 * 1. It is appropriate to say that it has grown by an average of 12 million dollars yearly. has grown over the last three years by 10 million. Please explain  me the concept of continous uniform distribution. FV = $1000000. there are 2 possibilities. The bionomial distribution. has grown the over last three years by 2. Just think how would you calculate the probability of getting 8 heads when you toss a coin 10 times. PMT = -$250. Three years later it will have become:  $100. since: $100.000 * 1.03 * 1.03 * 1.03   = $109. Like any other measure of deviation.03. 7 have passed. Binomial means – 2 possibilities.67%. The continuous uniform distribution is a family of probability distributions such that for each member of the family. 1. Q6. So the deviations on either side of the mean are added up (ignoring the signs) and divided by number of observations to see the average absolute deviations.025.67%. N is in the format of months.000.g. Now you have to value the bond’s cash flows using the info – for the next 3 yrs. Confidence intervals can theoretically be drawn for ve or -ve skewed distributions. The profit of Company B. 1/Y = 8% / 12 = 0. Part 1) PV = -$202971.39.035 = $109. Could you please elaborate the usage of MAD-mean absolute deviation and its usage with an example. It is symmetric in shape. Will try to give it  shot nonetheless. Part 2) PV = -$202971. the probability of success in each respective trial is constant. and 14 million dollars. http://www.5%. FV = $1000000. So there is nothing in between.000. Thus. N is in the format of months. all intervals of the same length on the distribution’s support are equally probable. 1/Y = 8% / 12 = 0. how far away from the mean are observations in the data set collected. Mean absolute deviations measure the ABSOLUTE deviations in the data from the mean. Out of 10 years.

Q11. Central Limit theorem and Confidence intervals. and you know the value of z for 95% confidence interval. Because it has a smaller head and fatter tails.in/blog/?paged=4[1/31/2014 1:23:27 AM] . the distribution of the sample means approaches a normal distribution with a mean same as that of the population and a variance of population variance divided by n. The inferential statistics involved in the construction of confidence intervals and significance testing are based on standard errors.e. in this case it is 31. Q9. Pl let me knw am I right or wrong in the statement below. 31. The implication is that the t-stat calculation changes slightly in case of unequal variance. The variances of the two populations can be same and different. c)    Is t-dist a leptokurtic distribution? No.96 SE = 44 and 19. as you draw samples of size n and plot the sample means. CLT says that for any distribution. t-distribution approaches a normal distribution as the sample size gets larger.5 /. Confidence interval on the other hand tries to draw the inference of where the population parameter would lie. equal then use the formula for the t test which has equal variance.finguru. t-distribution is neither leptokurtic. Q10. nor platykurtic. but has tails that are fatter than the normal distribution therefore tails like leptokurtic. Therefore. b)     What is the use of standard error.e. The case of equal variance is a http://www. The standard error of a statistic depends on the sample size. So if they are same i. otherwise they will be unequal so the formula would change accordingly. So it is an effective tool to study the return distributions. all that you need to do is to find the standard error. the student t-distribution is not a leptokurtic distribution. we always use a t-stat. So just calculate for this equation and would you get the SE. So its head is like that of a platykurtic – shorter than a Normal distribution. So once you have the mean. Always remember that the average of the confidence interval is the sample mean. The choice between a z and t comes only in case of a single mean test.D he has not taken the whole formula of SE instead he has used the formula used to in previous chapter where we calculated value of Z is this fine???? This is an interesting question. Standard errors are important because they reflect how much sampling fluctuation a statistic will show. Page 285 Q17 schwezer at the back ans the formula should have been used is point estimate  _ Reliability factor*standard error but in calculating S. Hypothesis test for equality of poplationn mean of 2 samples with equal and unequal assumed variance  the T-statstic is used but as told by u when populaton variance is knwn we use z test now here y r v using t test then??? In testing for equality of 2 population means. Q12. plz explain me what is meant by equal and unequal variance and whats its application of these wordz in this test??? You draw two samples from the same population. This is because you are adding the subtracting the same amount from the sample mean to get to the confidence interval. a)   We use normal distb curve cz it is easy to estimate the confidence interval for stocks with the help of normal disb curve and we r able to predict the 90% or 99% probability of stock in that range??? Yes and also because it has been observed the financial asset returns tend to follow a normal distribution.Finguru Dont mix up the two concepts i.5.1. The standard error of a statistic is the standard deviation of the sampling distribution of that statistic.

Its simply asking you the probability of one tail i. Basically you can put N=3 1/Y = 4. It would also depend on the degree of confidence with which you want to reject the null.5%? This questions says that the bond has a life of 10 years but out of that 7 years have passed. What is the probability of a return that exceeds 20 percent in any given year? Question is very simple.dev. Well technically we cant. But as this is a multiple choice question its easy to work backwards – just look at the choices and calculate the average of the two extremes. The average of the 2 should be the mean which in this case is 35.e. greater than 20%. If runs scored are normally distributed.000 par. Assume that Interest rates have fallen over the past seven years since a Rs1. Given that 3 years are left to maturity and 7% is the annual coupon payment and the required rate of return is only 4. So that will be the answer. 10-year bond was issued with a coupon of 7 percent annual payments. As 95% of data is within /. ← Older Posts Newer Posts → Login | Home | RSS Feed    Powered by Trutech  Copyright © 2014 Finguru http://www.5 PMT = 70 FV = 1000 and compute PV = -1068. Q15.5% what is the current value of this bond. Q13. And during the 7 years the interest rates have decreased. At the same level of confidence it would actually become easier to reject the null. A security with a normal distribution of returns has an annual return of 10 percent with a standard deviation of annual returns of 5 percent. Calculate the present value of this bond if the required rate of return is currently 4. what would be the range of points corresponding with a confidence interval of 90 percent? A) 15 to 55 B) 14 to 88 C) 10 to 75 Only n = 25 and X = 35 is given and the standard deviation is not given so how do we calculate the confidence interval.in/blog/?paged=4[1/31/2014 1:23:27 AM] . If we keep everything else constant and just increase the sample size then the standard error will get smaller and therefore the z or t stat will get larger. only 5% data is left.5%.Finguru special case and the formula becomes simplified. A cricketer played in 25 matches and averaged 35 runs per game.724 Q14. The option should be B. as explained in the answer as well.2 st. therefore the answer is 2. As the question asks for only one part of the remaining 5%. Q14.finguru. is it true when v increase our sample size its is difficult to reject null hypothesis??? The rejection of the null would depend on what the null is and not on the sample size.

Finguru Home (Blog) Home (FinGuru) Ask Question About Subscribe   Alternatives Uncategorized Corporate Finance Derivatives Economics Equity Ethics Fixed Income FRA General Portfolio Mgt Quantitative Techniques Search Economics. If the government doesn’t fix these then there could be exploitation with the low skilled labour. Therefore. Reason for Stagflation: There are two principal explanations for why stagflation occurs. Similarly. it is very much possible that the countries importing oil might face the issue of stagflation. such as an increase in the price of oil for an oil importing country. in case of agricultural goods farmers can be ill treated by consumers if the government doesn’t have a min price. This is a difficult economic condition for a country. as both inflation and economic stagnation occur simultaneously and no macroeconomic policy can address both of these problems at the same time. Both types of explanations are offered in analyses of the global stagflation of the 1970s: it began with a huge rise in oil prices. General By admin | No comments yet June 2010 Floor Price Why does the government fix a minimum price (price floor) above the equilibrium price.g minimum wage rate or agricultural commodities producer.finguru. Either of these factors can cause stagflation. So the floor price is set to promote production and provide a better bargaining power to the producer. central banks can cause inflation by permitting excessive growth of the money supply. 2) Second. both stagnation and inflation can result from inappropriate macroeconomic policies. stagflation can result when the productive capacity of an economy is reduced by an unfavorable supply shock. Categories Alternatives (2) Corporate Finance (5) Derivatives (2) Economics (9) Equity (9) Ethics (3) Fixed Income (14) FRA (2) General (53) Portfolio Mgt (5) Quantitative Techniques (12) Uncategorized (1) Recent Posts Nominal Spread vs Z – Spread Risk Free Rate Labor Demand Elasticity Economic vs Technological Efficiency Roll Yield Archives March 2012 February 2012 September 2011 May 2011 February 2011 November 2010 October 2010 September 2010 August 2010 July 2010 Economics. Excessive growth of the money supply taken to such an extreme that it must be reversed abruptly can clearly be a cause.in/blog/?paged=5[1/31/2014 1:24:03 AM] . http://www. Yes. So by putting a floor price some power is shifted from the consumer to producer. For e. Such an unfavorable supply shock tends to raise prices at the same time that it slows the economy by making production more costly and less profitable. and the minimum wage rate is put into place to support such producers. support prices are mostly set in cases where the equilibrium price is not be profitable for the producer and could lead to excess power with the consumer. and the government can cause stagnation by excessive regulation of goods markets and labor markets. Therefore inflation rate and unemployment rate both are high at the same time. For example. but then continued as central banks used excessively stimulative monetary policy to counteract the resulting recession. General By admin | No comments yet Stagflation Question: Can imposition of quota on some sector lead to stagflation in that particular sector? Stagflation is when the economy experiences slow GDP growth (stagnation) with high inflation. causing a runaway wage-price spiral. Now coming to your question on Quota and Stagflation. 1) First. if the OPEC countries put excessive control on the quantity produced. as the producers already earns a profit at equilibrium price? It is not necessary that the producer always makes a profit. This type of stagflation presents a policy dilemma because actions that are meant to assist with fighting inflation might worsen economic stagnation and vice versa.

and if we simply sum the cash flows we would get the vertical intercept of the NPV profile.Year 3 (difference) 36 – 175 = -139 <. Cash Flows ————————————————Year              0               1              2            3           4             NPV           IRR ———————————————————————————————– Project 1    -100            36            36          36         36           14. The NPV profile basically shows the NPV of the project at different levels of discount rate. In the question above the vertical intercept would increase from 60 to 65. b. IRR declines from 21.02% What discount rate would result in the same NPV for both projects? a.Year 1 (difference) 36 – 0 = 36 <. An investment has an outlay of 100 and the after tax cash flows of 40 annually for four years.37% Project 2    -100             0              0            0         175          19. up and the horizontal intercept shifts right c.86% to 20. In the same problem. If the discount rate of the project is zero.37% This question has been asked to me before. But on giving it a greater thought. Calculate its IRR and that is your crossover rate. it’s actually very simple. I said that time you would need to plot the 2 curves. This intercept would move to the left in the question above. A rate between 0-10 % b. The logic to the above lies in the following 2 points: 1) The IRR is the discount rate that results in an NPV of zero 2) NPVs are “additive” http://www.finguru.16%.12          16.02-16. A rate between 15. This can be seen by putting in the cash flow in the question into the calculator. The cash flows as well as the NPV and IRR for the two projects are given. which is the ratio provided by the key answer. A project enhancement increases the outlay by 15 and the annual after tax cash flows by 5. Thus the answer to the above question should be A. up and the horizontal intercept shifts left. It will return 13.53          15. As a result.02% c. Take the difference of every two cash flows and input the difference as if it’s a new project.1.Year 2 (difference) 36 – 0 = 36 <.Finguru Corporate Finance.in/blog/?paged=5[1/31/2014 1:24:03 AM] . The horizontal intercept measures the IRR as this is the rate at which NPV is zero. down and the horizontal intercept shifts left This is a very good question and can come on the exam. This is how you solve the problem: -100 – (-100) = 0 <. A rate between 10-15.68%.2> Consider the two projects below. the vertical intercept of the NPV profile of the enhanced project shifts – a. you’re given the cash flows of the two projects. General By admin | No comments yet Corporate Finance – Good Questions (Doubts) Q. Q. For both the projects the required rate of return is 10%.Year 0 (difference) 36 – 0 = 36 <.Year 4 (difference) CF0 = 0 CF1 = 36 CF2 = 36 CF3 = 36 CF4 = -139 Solve for IRR.

finguru. Client tells him what to do and he does so. Q. discount rates of 0 percent and 32 percent. Whenever unemployment is low. inflation tends to be high. Producers would pass on the increase in the costs due to increase in wage rate to the customers as increase in prices.3> Wilson Flannery is concerned that this project has multiple IRRs. PM may recommend the client and suggest him strategies. Inflation is considered low or high relative to the expected rate of inflation. for the unemployment rate to be below the natural rate of unemployment. there may be more than one solution for IRR. a discount rate of 0 percent 2. the IRR of the “difference project” (i. but cannot trade without the consent of the client. by (1). http://www. Thus inflation. Stated simply. Non-discretion accounts are the ones in which PM acts as the broker / trader for the client. Two. Economics. 32 and 62. the money wage rate would get pushed up. the synthetic project you created by taking the differences in cash flows) is the discount rate that forces the NPV of that project to zero. In the long run however the economy operates as the natural rate of unemployment and therefore any increase in money wages / money supply would directly cause prices to rise without impacting the unemployment rate. In cases where there is more than one solution. General By admin | No comments yet Phillips curve In economics. Unemployment is considered low or high relative to the socalled natural rate of unemployment. it would mean that there is a shortage of quality labor with the adequate skills. the BA II PLUS and the BA II PLUS PROFESSIONAL will display the solution that is closest to zero. the lower the unemployment in an economy. Now. The relation would be true vice versa as well in the short run. inflation tends to be low. Remember that at Natural rate of unemployment there was no cyclical unemployment and only structural and frictional unemployment exists. ————————————————————Year                   0              1              2              3 Cash Flows      -50           100            0            -50 ————————————————————How many discount rates produce a zero NPV for this project? 1. General By admin | No comments yet Discretionary Accounts – Ethics Level 1 Discretionary accounts are the ones in which the client has given authority to the portfolio manager to exercise his discretion and trade on the clients account. By (2) the NPV of the “difference” is equal to the difference in the NPVs. discount rates of 0 percent and 62 percent When a sequence of cash flows has two or more sign changes. the client would have discussed with the PM his requirements. at that rate. the Phillips curve is an inverse relation between the rate of unemployment and the rate of inflation in an economy. Portfolio manager would keep those in mind while transacting in his clients discretion portfolio. the higher the rate of increase in nominal wages in the economy. so NPV1 = NPV2. 3. This inverse relationship between inflation and unemployment is called the Phillips curve. Ethics. NPV1`-NPV2 = ). Two. One. The Phillips curve is a relative relationship. One IRR is 0% and the second one is 62%. If this question comes on the exam you would have to see the NPV on discount rate = 0.e. risk / return profile etc.in/blog/?paged=5[1/31/2014 1:24:03 AM] . In other words.Finguru So. Due to the shortage. Whenever unemployment is high.

b = 10. Now there is a potential conflict of interest here. General By admin | No comments yet Ethics Level 1 – Doubts Question 1: Example 7 under 4-A (Source: Schweser CFA Level 1 Book 1) Doubt: How is he considered an employee when not paid? Answer: Whether paid or unpaid – the work done here belongs to the firm. And you as a member are not allowed to take the work along with you without the written permission of the Firm. Ethics.in/blog/?paged=5[1/31/2014 1:24:03 AM] . Therefore if X> b. Question 3: CFA Institute Book 1 Page 111. and this must be disclosed to the potential client. Quantitative Techniques By admin | No comments yet F(X) – Cummulative Distribution QUES: A continuous uniform distribution is given with a= 4 . Question 2: Example 3 under 6-C (Source: Schweser CFA Level 1 Book 1) Doubt: Unable to decipher the question. where b is the upper limit – then F(X) will be equal to 1 as all the possible probabilities are being summed up. then the disclosure may not be required. The conflict is that – the referal fee that the portfolio manager will earn by offering this product.Finguru Hope this explains it !! General. Answer: The point in the question is – that the fund manager is promoting a ‘proprietary product offering‘. http://www. ANS: 1 The explanation given is F(X) = 1 whenever X > b F(x) denotes the cumulative distribution function for a random variable.finguru. As mentioned in the second para – if the product was any other product – general of the firm. find F( 20).

who is the fund manager of the Private Endowment fund. because his solvency is because of his poor investment decisions (3d) and he should not report to the regulatory authorities. i am confused between option b and c. is this material non public information? if yes how? Sir. he is not required to report this to the CFA Institute. Personal Bankruptcy due to poor investments made are not a reflection of bad professional standards.Finguru Sir. must not disclose information about the proposed expenses of the fund – as this info is pvt to the fund trustees.in/blog/?paged=5[1/31/2014 1:24:03 AM] . or if it is legally required. Branson. Also. also a violation on part of 3-d. I feel he violates both the standards. Question 4: Schweser CFA Level 1 Book Sir. He can give this pvt info to any one only after taking permission from his client. Mr. Whether the investments were good or bad can be found out only retrospectively. While making the investment we make assumptions about the future which may very well turn out to be incorrect.finguru. Question 5: Source Schweser CFA Level 1 Book 1 http://www.

even planning is a CFA violation? Well – you cannot cheat http://www. he has informed his employer about all the gifts. am a little confused between what exactly are facts and opinions and how do you distinguish between them? The statement clearly distinguishes between fact and opinion. not the client. the high society dinner is an inconclusive about objectivity hampered. Sir.. then how come he is in violation? Plus the clock is a modest gift. Question 6: Source – Schweser CFA Level 1 – Book 1 Doubt: Sir.finguru. The statement is “Based on the fact” …. There are no facts according to me. The clock for sure can be accepted without disclosure. But the high society dinner tickets could very well be something that he must not accept. and then once the fact has been stated he says “We expect” which is his opinion. how can he say that the information given in the question is a fact and not an opinion. By accepting the tickets to this high society dinner – his objectivity could be in question. If he believes that this will benefit his employer. the employer must pay for it.in/blog/?paged=5[1/31/2014 1:24:03 AM] . So he is therefore not in violation.Finguru Doubt: Sir. Question 7: Source: Schweser CFA Book 1 – Level 1 Doubt: Sir.

then callable bonds are cheapest. zero coupon bonds have the highest interest rate risks. If the intent is proved. The duration of a zero coupon bond is the highest. so % change should be largest in them ? http://www. all will fall in price. Of course the bond with the longer maturity. Q11: Which of the following 5-yr bonds has the highest interest rate risk ? A. Further.in/blog/?paged=5[1/31/2014 1:24:03 AM] . If you plan to do so and make arrangements to do so. 5% 10-yr option-free bond Ans is 3. Schweser. A 5% fixed coupon bond Answer is B – Zero Coupon Bond But why is that so. Why is that ZCB will fall more ?  Is it because we are talking about %change. If the interest rate changes. A Zero Coupon Bond C. the value of the call option becomes 0.finguru. if you add coupons to the picture the interest rate sensitivity would reduce. A floating rate bond B. Also. You may not do so in the end. That is a violation of the code of ethics. so why is there any difference b/w 1 & 3 options ? Also if we take the same logic. it has serious questions on your professional ethics and integrity. but the fact that your intentions were wrong – it is possible you can be reported to the CFA Institute and get a warning from them. 5% 10-yr putable bond 3. the amortizing bond. P41. so the changes in % is more than others ? Explanation: The concept of Interest rate risk is the same as that of Duration. nearly equal to its maturity. P293. And as ZCB are the cheapest. Fixed Income. fixed coupon bond and the ZCB. General By admin | No comments yet Interest rate risk – Fixed Income Interest rate risk of zero coupon bonds ? Questions: CFA Book.Finguru on the CFA Exam. Option Free Bond But when the interest rate rise. which bonds price today will change more in percentage terms. Q24: An amortizing security has more interest rate risk than a ZCB or not ? Answer is NO. 5% 10-yr callable bond 2. if could be a violation of the code too. if you remember the example of interest rate sensitivity that I gave in class: 2 zero coupon bonds of face value 1000 and with maturity 3 years and 7 years. P42. As the interest rates rise. Interest rate risk & embedded options Schweser. Q5: Which of the following has the highest interest rate risk ? 1.

Finguru

Look at the diagram of the bond price relation of a normal bond, callable bond and putable bond. The movement of price is far much more in case of a normal bond as compared to when you have options embedded in the bond. With an option in the bond, the price of the bond becomes a
little less volatile as there is either a cap price (in the form of a call option) or there is a floor price (in the form of a put option.) So
the interest rate sensitivity actually reduces with embedded options in
the bond.

Equity, General, Quantitative Techniques

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Investor and Data Biases
Please explain: -Equity-Investor Biases (Overconfidence, Confirmation and Escalation Bias) -Quant-The various biases (Data mining, sample selection, survivorship, look ahead and time period bias) Equity Overconfidence Bias – The investor is overconfident about his ideas and projections. Therefore, the investor does excess trading. Overconfident investors/traders tend to believe they are better than
others at choosing the best stocks and best times to enter/exit a position. Excess trading actually leads to higher commissions and lower profits. Escalation Bias – This is a resultant of overconfidence, as you
don’t pull out of a loosing position and instead commit more money and time to it. So instead of accepting ones mistake and moving ahead, the investor invests more money into it and calls it averaging. Confirmation Bias – The investor seeks out information / opinions that match with his. When the others say the same thing as him,
he feels he is making the right decision, just because the others are confirming it as well. Putting in other words, the confirmation bias suggests that an investor would be more likely to look for information that supports his or her original idea about an investment rather than seek out information that contradicts it. As a result, this bias can often result in faulty decision making because one-sided information tends to skew an investor’s frame of reference, leaving them with an incomplete picture of the situation.

http://www.finguru.in/blog/?paged=5[1/31/2014 1:24:03 AM]

Finguru Quant: Data Mining Bias: Data mining is the practice of searching through historical data in an effort to find significant patterns, with which researchers can build a model and make conclusions on how this
population will behave in the future. The results obtained from the data
mining however could very well be coincidental and have no predictive power. Sample Selection: Some data has been systematically been excluded from the sample and thus, the choice of the sample is not random and therefore the results obtained are not correct either. Look Ahead Bias: If you remember the P/E example that I gave in class, that the price and earnings of 31st March 2009 is used to calculate the P/E for that year, but on that date the earnings value was not available. So therefore the price does not reflect the full info. Time period bias: The relationships in variables change over time due
to structural changes in the economy. Thus, too long time period data or too short ones (due to lack of data) could give you results which are not correct.

Corporate Finance, General

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Cumulative Voting
Question: Is cumulative voting good for shareholders or not? Lets first understand what cumulative voting is? Cumulative voting is
a type of voting process that helps strengthen the ability of minority shareholders to elect a director. This method allows shareholders to cast all of their votes for a single nominee for the board of directors when the company has multiple openings on its board. In contrast, in “regular” or “statutory” voting, shareholders may not give more than one vote per share to any single nominee. For example, if the election is for four directors and you hold 500 shares (with one vote per share), under the regular method you could vote a maximum of 500 shares for any one candidate (giving you 2,000 votes total – 500 votes per each of the four candidates). With cumulative voting, you could choose to vote all 2,000 votes for one candidate, 1,000 each to two candidates, or otherwise divide your votes
whichever way you wanted. So in general it strengthens the corporate governance of the company as the minority shareholders will also have a say in the company.

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General, Portfolio Mgt

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Market Portfolio – Question
Question: According to CAPM, the market portfolio: A.includes all risky assets in equal amounts
B.is exposed to unsystematic and systematic risk
C.is perfectly positively correlated with other portfolio on the CML The answer to this question would be option C. This is because, the market portfolio does not include all the risky assets in equal amounts but in the proportion of their market cap. So option A is incorrect. The
market portfolio is completely diversified therefore is only exposed to
systematic risk and not the unsystematic risk. Therefore option B is also incorrect. Option C is correct because, Market portfolio plots on the CML and as CML is a straight line, it has positive correlation with all other portfolios on the CML.

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Economics, General

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Risk Free Rate Labor Demand Elasticity Economic vs Technological Efficiency Roll Yield

Natural Monopoly
Question: Natural monopoly. I did not understand why is the MC curve horizontal, when would the firm produce quantity Qac and Qmc and weather subsidy is provided at quantity Qac or Qmc. Answer: The concept of Natural Monopoly is that a very large player in the market has a significant cost advantage which cannot be matched by other smaller players due to lack of scale. Therefore, it makes sense
to have one large player who can help to reduce the costs of manufacturing the commodity. This concept is most often seen in capital intensive industries such as Oil Refineries, Electricity Manufacturing etc. To put it in other words, A “natural monopoly” is defined
in economics as an industry where the fixed cost of the capital goods is so high that it is not profitable for a second firm to enter and compete. There is a “natural” reason for this industry being a monopoly, namely that the economies of scale require one, rather
than several, firms. Small-scale ownership would be less efficient. To prevent these natural monopolies from exploiting with high prices,
they are regulated by government. Looking at the graph below, leaving the monopolist alone the output produced would be less than the efficient level as the monopolist would wish to maximize profits. He would produce at Qm and charge Pm. Now most Natural monopolies produce commodities which are essential for mass consumption therefore the government intervenes and makes the monopolist charge lower and produce more. If the govt. makes the monopolist charge Qr then the monopolist will make no profit and no loss as he will charge a price equal to his cost at Pr. If due to any reason the government makes the monopolist produce even more the monopolist would produce Qc and charge Pc. Here the monopolist is making a loss and would need to be subsidized.

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average costs continue to fall over the relevant range of output.e. As a result. average costs are very large at small amounts of output and fall as output increases. expands output. Economics. It is not necessary for the MC curve to be flat – its just that it is below the AC curve. 1. Lets illustrate with an example: On January 1. 2.  Therefore. which leaves an open interest and also creates trading volume of 1.  Therefore. necessitating subsides. Average costs exceed marginal costs over the “relevant range of output” (i. increases social surplus. C and D create trading volume of 5 and there are also five more options left open. and reduces deadweight loss. General By admin | No comments yet http://www. Require the monopoly to set its price where the average cost curve crosses the demand curve. tax money must be used to subsidize the production of the good. average costs exceed marginal costs over a wide range of output.  As a result. General By admin | No comments yet Open Interest What is Open Interest? Open Interest is the total number of options and/or futures contracts that are not closed or delivered on a particular day.Finguru To summarize:  The properties of a natural monopoly are as follows.. the range between the first unit of output and the amount consumers would demand at a zero price). Allow the monopoly to maximize profits by producing at the monopoly level.  This transfers some surplus from the monopoly to consumers. There are at least four policies the government could follow in regards to a natural monopoly. open interest is reduced by 1 and trading volume is 1. can provide a given amount of output at a lower average cost than could several competing firms.  This also results in a deadweight loss and causes costs to exceed revenues. A buys an option. -On January 3.finguru. 4. Fixed costs are very large relative to their variable costs. -On January 4. Open interest is not the same thing as the volume.in/blog/?paged=6[1/31/2014 1:24:27 AM] .  Thus. one firm.  This results in a deadweight loss. trading volume increases by 5. a natural monopoly. Require the monopoly to set its price where the marginal cost curve crosses the demand curve. E simply replaces C and open interest does not change. Require the monopoly to charge a zero price. Derivatives.  This eliminates deadweight loss but revenues no longer cover costs. -On January 2. 3. A takes an offsetting position.

It means ROE = Cost of capital.e. Unitary elasticity refers to a situation where a change in the market price of a good results in no change in the total amount spent for the good within the market. 1) Unit elastic is neither elastic nor Inelastic true or not ?? Yes Unit elastic is neither elastic nor inelastic. Quantitative Techniques By admin | No comments yet Standard Error The standard error of a statistic is the standard deviation of the sampling distribution of that statistic.finguru.e. a return equivalent to the risk. For e. It is the standard deviation of the sampling distribution of the mean. 3) In schweser it is given that Producer surplus is defined as the sum of the difference between the price of each unit of good and its opportunity cost.in/blog/?paged=6[1/31/2014 1:24:27 AM] .org/wiki/Standard_error_(statistics) http://www. The inferential statistics involved in the construction of confidence intervals and significance testing are based on standard errors. over and you would earn super-normal profits.  2) Not clear about the relationship between normal profit. i. they would earn their opportunity cost of capital. normal profit does not mean zero accounting profits. But because you had to pay only 10 – there was a 5 Rs consumer surplus for you. The standard error of a statistic depends on the sample size. Standard errors are important because they reflect how much sampling fluctuation a statistic will show. a company uses the skills and premises of the owner. economic profit and Accounting profit Accounting Profit is the profit made as per the accounting rules. The formula for the standard error of the mean is: where σ is the standard deviation of the original distribution and N is the sample size.wikipedia. This includes on the explicit costs and not the implicit costs. The larger the sample size the smaller the standard error.g. If you earn more than the risk adjusted return. In a perfect competition. Therefore. General. That is called Normal profit. This happens on the mid point of a downward sloping demand curve. Read further on the topic at http://en. Now that is the opportunity cost of producing 10 cars. For example if you take some risk. i.e. on a consistent basis) as that would be wiped out by  the firms that enter the market. This concept is similar to that concept of consumer surplus example I gave in class – where you draw a benefit of more than Rs. Normal profit includes in it the opportunity cost of capital as well. Normal profit is a concept something similar to – getting market returns when you invest in an asset. no one would earn super normal profits in the Long run (i. The standard error of the mean is designated as: σM. If the producer is able to charge the customer a price higher than his opportunity cost of capital he would make something called a producer surplus.Finguru Micro Economics Doubts Just got 3 questions on Micro Economics. Or simply said. but no rent or salary is given for those services – that is an implicit cost and not an explicit cost as the company does not pay anything for it. I am not able to understand this Opportunity cost of a good is the amount of resources you would need to give up from another good to produce the good & services you want. to produce 10 cars you will have to use some factors of production which cannot be used somewhere else. had the price been 15 you would have still bought it. whereas accounting profit need not. you get compensated for it.10 when you drink the first bottle of water – as you were very thirsty.e. All firms would earn only normal profits i. If we include all the implicit costs along with the explicit costs and subtract them from the revenue I would get the economic profit.

TWR eliminates the effect of addition and withdrawals that can distort the MWR. no. the reinvestment rate in NPV is lower (as discount rate is usually lower than IRR). int. compound rate of return = TWR? http://www. Add the three to get 19603. while the IRR method assumes that the reinvestment rate is the IRR. all the cash flows generated are assumed to be reinvested in the project and the rate earned by this is the same as the discount rate or the opportunity cost of capital.com) Is there a way to solve this problem without changing calc function from END -> BGN. Is avg.finguru.dev i. – What would be the best way to understand/Remember this? Good question. In the formula for mean of a sample and mean of a population we use n in the denominator.schweser. TWR will be same if the same stock (or 2 stocks that performed similarly) is held for the same amount of time irrespective of the no. then second cruise as $6530.08]) and third cruise as $6258.e. mathematically. Is this correct?  No – the other way round.49. NPV uses opportunity cost of capital while IRR method uses the Internal rate of return itself.Finguru General.45.dev (variance).   5. APR is the rate with the effect of compounding and APY is the yield without considering effect of compounding. Instead of calculating the PV of the cash flows for the cruises at t=0 (like given in the book) you can calculate the FV. IRR on the other hand. this is correct. And MWR will depend on the no. in the classes at FinGuru. if we have PV of annuity due. The reason why sample St. NPV method assumes the reinvestment of a project’s cash flows at the opportunity cost of capital.e.  Yes. and any other question sent to us by our students.035 / 1. The other one is like the stated annual rate.55 (6814. and N = 10. 1. It systematically underestimates the population st.e. 2. in case of MAD is denominator always n irrespective of sample or population?  Yes.49 x [1.  Is this correct?  Also.22.49.dev (variance) is a biased estimator of the population st. In order to correct for this bias. of shares you had during each period where the stock performed differently. So to generate an IRR the company would need to continuously find investment opportunities which generate the IRR. This is one of the reasons why NPV is a prefered method of project evaluation because. APY (yield) is the rate which takes the impact of compounding. 6.com). Questions here are from multiple sources viz.wikipedia.org/wiki/Bessel%27s_correction 3. by taking the cost of the first cruise as $6814. Is this correct. it is too low. the course material provided by the CFA Institute. This becomes the FV. Mathematically. i. rate. Quantitative Techniques By admin | No comments yet CFA L1 Quant Doubts Given below are some common questions that we are asked in the Quantitative section of the CFA Level 1 curriculum.in/blog/?paged=6[1/31/2014 1:24:27 AM] . assumes that the cash flows generated are reinvested at the IRR. of years and have to calculate PMT. 1/y = 8 and compute PMT = $1353. 4. The way to remember this is – just remember which discount factor is used in NPV and which one in IRR i.dev (variance) is divided by n-1 is because. NPV discounts all future cash flows at a single rate – which is the discount rate. we use “Bessel’s Correction” to adjust for the biasnes in the sample statistic. Schweser Level 1 books (www.Check out the following link http://en.  Whereas in Variance / Std. of shares. Deviation we use n for a population and n-1 for a sample in the denominator. Source: Schweser (www.schweser. sample st.

Average annual compound rate of return refers to the Geometric mean of the rates of return. For more on IRR visit: http://en. Therefore. high data points are given greater weights than low data points. The last column on the right gives the HPR returns earned by this fund every year. It is the rate at which only the principal would grow without reinvestment of the interest.. Covariance. We do this because the rates of return can be negative and GM cannot be calculated if the numbers are negative.in/blog/?paged=6[1/31/2014 1:24:27 AM] . The harmonic mean is the preferable method for averaging multiples. but is it always true that the stated rate one would earn if one were to cash out rather than reinvest the interest payments. Schweser Book 1 – pg. TWR is the rate at which Re.1 in the begining of 1999. 11.wikipedia. Correlation coefficient Coefficient of variation – I know this was slightly a confusing one (and not everyone in class understood the concept well) .org/wiki/Internal_rate_of_return Quantitative Techniques By admin | No comments yet The Three Co’s Three concepts between which you tend to confuse on the exam: Coefficient of variation. For more on harmonic mean visit: http://www. Check out the following link for more info http://www. Schweser Book 1 – pg. Both your statements are the same. Schweser Book 1 – pg. How we are supposed to calculate NPV or IRR if perpetuity is given as annual incremental cash flow Remember – to calculate the IRR we need to equate the NPV equal to zero. in which price is in the numerator. Whenever you are asked to calculate the compount rate of return – it is the Geometric mean. monthly or quarterly. 220 – Q4 (Practice problems for reading 5) – I understand the stated rate is the rate without considering the effect of compounding. And because you are dealing here with rates of return. 187 – Q1(G) – Is avg. 10. Calculate for IRR. 4% the second year and so on.1 compounds over a specified performance horizon.1 and divide by Rs.investopedia. The harmonic mean is a better “average” when the numbers are defined in relation to some unit. The harmonic mean.com/terms/t/time-weightedror. 187 – Q1(C) – Did not understand how to solve this. This investment grew at 3% in first year. A takes great risk (standard deviation of 25%)  while B is a safer investment (standard deviations of 12%). such as the price/earning ratio.com/how_4856820_use-harmonic-means-statistical-analysis. we can calculate the Standard Deviation / Mean return generated by these funds and then http://www. on the other hand. Now consider 2 Mutual funds (A & B).  Or does both of these mean the same thing? Banks and financial institutions usually state the rate of interest without the compounding effect.a compounded annually. Harmonic mean gives a better average in this case. Which one is better out of the two? To compare the two you need to measure the risk relative to the return generated by these funds. The 10% here is the stated annual interest rate. What would be value of the investment at the end of 2004 simply multiply (1.so thought of explaining it to you guys with an example. CFA Book 1 – pg. Now to understand what the book has done. just think you make an investment of Rs. They would state 10% p. A generated a return of 20% while B generated a return of 10%. 187 – Q1(F) – Did not understand how to solve this. Simply (incremental cash flow / IRR) – expense = 0.04) …. you need to add 1 to each number and then calculate the GM and then subtract 1.03) (1.finguru. The question asks you to calculate the holding period rate of return on the 6 year investment. The question asks for the HPR for the Emfund from 1999 for the entire period.Finguru  Yes. If these ratios are averaged using an arithmetic mean (a common error). 8.  The common example is averaging speed. Subtract the original investment which was Rs. gives equal weight to each data point. Holding period return is basically the return generated over the period of the investment. We know that standard deviation is considered a measure of risk. price paid per share = HM (harmonic mean) of the prices of the share? Yes.ehow. The discount rate which makes the NPV = 0 is the IRR.html 9.asp 7. 1 and you get the answer.

Y) / Stdev (X) Stdev (Y) = Correlation Coefficient (X. If the interest is compounded quarterly. It is similar to the concept of variance (in which one variable moves with itself).60 PMT = 0 http://www.2 for B. Quantitative Techniques By admin | No comments yet Time Value of Money – Basic Questions 1.Finguru compare which one has a lesser risk (variability. if X increases by 10% what happens to Y. for every unit of return generated. Covariance - this is simply how one variable moves with another i. standard deviation). A deposit of $1300 earns $339.04 I/Y = ? (periodic rate) Nominal Rate = Periodic rate x 4 = 15.e. we standardize it by dividing it by the standard deviation of the 2 variables. B took lesser risk.31% 3) At what nominal rate compounded monthly will money double in 6 years? N = 6 x12 = 72 months PV = 1 PMT = 0 FV = 2 I/Y = ? (Periodic rate) Nominal Rate = I/Y x 12 = 11.2 are the Coefficient of Variations.26 in 7 years and 7 months. what is the effective rate? N = 3 x 12 = 36 PV = 1300 PMT = 0 FV = -1639. What is the nominal rate compounded monthly? N = (7 Years * 12) + 7 months = 91 months PV = 1301.45 I/Y = ? (Periodic rate) Nominal Rate = Periodic rate x 12 = 7. Implies. Y) Hope these concepts are clear now and don’t confuse between them.finguru. what is the effective rate? N = 7 x 4 = 28 PV = 1500 PMT = 0 FV = -4264. Cov (X.in/blog/?paged=6[1/31/2014 1:24:27 AM] . 1. Because the covariance could range from negative to positive infinite and like variance has squared units – is hard to interpret.45 interest in 3 years. If interest is compounded monthly.2% Effective Rate = (1+periodic rate)^4 = 16.61% 4) A present value of $1301. Therefore.25 and 1. In the example above – this would be 1. We couldn’t compare the two standard deviations directly – so we had to standardize them.09% 3) 9% compounded quarterly is equivalent to what effective rate? On the calculator press 2nd -> ICONV -> Nominal = 9% -> down arrow -> CPT Effective Rate = ? -> 9.04 in 7 years.04%   2) A deposit of $1500 grows to $4262.76% Effective Rate = (1+periodic rate)^12 = 8.25 for A and 1.69 has a future value of $2569.

the terminologies and techniques. The more you do to prepare.finguru.34 in the account. Global pass rates for the CFA Level 1 have dropped significantly over the last 15 years and the trend is surely downwards. At the end of 3 years there is $179. Hard work. Source: CFA Institute www.cfainstitute. the more likely it is you will pass.26 I/Y = ? (Periodic rate) Nominal Rate = Periodic rate x 12 = 9% 5) A person opens a bank account with a deposit of $150.34 I/Y = ? (Periodic rate) Nominal Rate = Periodic rate x 4 = 6% General By admin | 2 comments Cracking CFA Exams: ‘The Guru Mantra’ The CFA Charter is fast becoming a highly preferred designation for finance professionals. There is no shortcut. but at the same time it is only getting harder to attain it.Finguru FV = – 2569. and increase your chances of success on this program? There is no doubt that passing the exam requires considerable effort. What nominal interset rate compounded quarterly was earned on the account? N = 3 x 4= 12 PV = 150 PMT = 0 FV = -179.in/blog/?paged=6[1/31/2014 1:24:27 AM] . you must know the material. understand the concepts and be able to answer (at least 70% of) 240 questions quickly and correctly. & Perseverance. Therefore the 3 key points to remember are: Commitment. b) Investment Tools. so you must devote considerable time and effort to be well prepared.org So how can you be better prepared for this exam. Topic Weights: The Course is divided into 4 broad heads: a) Ethics & Professional Standards. Your first hurdle is the Level 1 CFA exam which is held twice a year (in June and December). c) http://www. The preparation for this exam could be a formidable challenge as the curriculum includes 74 Readings and 450+ Learning Outcome Statements all being tested on the same day.

70% of the course. Some of the other topics are easier and you may be able to score good points in them. 120 on the ‘Morning Session’ from 9:00 AM to 12:00PM and another 120 questions on the ‘Afternoon Session’ from 2:00PM to 5:00 PM. Fixed Income. B. If you score well in these 5 topics. Quantitative Techniques. and if you find it too extensive and feel pressure of time. All questions are equally weighted and there is no penalty for guessing. How to prepare: 1. Each multiple choice question is free-standing (not dependent on other questions) and has three possible answers: A.in/blog/?paged=6[1/31/2014 1:24:27 AM] . So the key to success on the CFA Exam is to be thorough in your preparation and cover the basics of all topics. You must devote adequate time on each Study Session and understand the concepts. you should spend about 12−15 hours per week for 18 weeks on going through the concepts. 3. and C. and Ethics. The curriculum is vast therefore you need to be regular and consistent. These 5 topics comprise approx. Periodic review: Review the Learning Outcome Statements (LOS) both before and after you study each reading to ensure that you have mastered the applicable content and can complete the action(s) specified. Equity Analysis. systematic approach is essential to successful completion of the exam. Having said that. so it just means that u need to use the material available to the best n try to leave nothing out of it. Focus on Learning Outcome Statements (LOS) – the Level I Weightage 15% 12% 10% 20% 8% 50% 10% 12% 5% 3% 30% 5% http://www. there is a good chance of clearing the paper. Develop a study plan: You need to be systematic and methodical in your study.Finguru Asset Classes and d) Portfolio Management. you cannot ignore the other topics.e.finguru. For Level 1 the most important topics are FSA. This is not like the other exam for which you can study in the last one month and expect to clear it. Focus on the core material: The material is the same for everyone. weightage of each in the Level 1 Exam is given below: Topic Areas Ethics/ Professional Standards  Quantitative Methods Economics Financial Statements Analysis (FSA) Corporate Finance Investment Tools (Sub Total)  Equity Analysis Fixed Income Derivatives Alternative Investments Asset Classes (Sub Total) Portfolio Management Exam Structure: The Level I exams will include 240 multiple choice questions. divided between 2 exams held on the same day i. Ideally. you can take classes and use preparatory material. 2. An orderly. There are a total of 10 subjects. Focus on the material provided by the CFA Institute. Complete all reading assignments and the associated problems and solutions in each study session.

If you are going too slow you can pick up pace and if you are going too fast you might want to slow down to make sure you get the accuracy higher. Keep a track of the time and a good pace throughout the paper. It is possible that you have done that concept before but just are not able to recall the concept or answer for it that moment. including time to record your answer on the answer sheet. it is easy to get disheartened if the paper didn’t go well. Strict Invigilation: As mentioned. The way to reduce your mistakes is to make a list of your common mistakes made during practice tests. Conceptual Clarity over mugging: The CFA exam checks your concepts not your memory. the CFA Institute gives high importance to the Ethical Standards of the candidate. Make sure you understand the basics of the all the topics. If you understand the work of a Financial Analyst and his job profile. So it would be a good idea to take some practice tests for 6 hours on the same day with only a 2 hour break in the middle. to give you the mental and physical strength to face the grueling conditions on the exam day. do not start your preparation with this section. Read the LOS to make sure you know the syllabus. It is easy to get carried away with a good performance in the morning and get complacent. Read the questions carefully. The pass rates are not representative of the probability of passing the examination for people who prepare properly. The trick is to make the least number of them. Nobody knows everything: You should expect to encounter questions that you will not be able to answer correctly. so there would be some errors you make on the CFA exam. Have time targets – like 40-45 Questions in an hour and about 20-22 questions every half hour. Do not even accidently write anything on your examination ticket or carry anything that is not allowed in the examination hall. Don’t let either happen to you. If you do not clear ethics. 6.Finguru curriculum of the exam is very well structured and no question will be out of the course. 2. Also. Common Mistakes: No one has ever scored 100% on the CFA exam.in/blog/?paged=6[1/31/2014 1:24:27 AM] . So it is very important that you follow the instructions of the instructions of the proctor / examiner and stop writing when he calls time. 5. As each question has one point. Practice and Revision: Use the final four to six weeks before the exam to review study materials and take online sample exams. Standard setters and the Board of Governors (at all three levels) take account of exam difficulty in setting Minimum Passing Scores. most of you have not often given 6 hour exams on a single day.  8. You will be in due course turn your weakness into strength.5 minutes to each multiple choice question. answer. Mental & Physical Strength: Lastly. and review them often especially just before sitting for another test. A careless “skimming” of the question may lead you to a completely different. but might make a silly mistake by trying to read the question too fast. and incorrect. which you will by first going through the topics on Valuation and Financial Analysis. There are very few concepts / topics on the CFA exam which you would need to mug up. On the Exam Day 1. 3.finguru. The CFA Institute gives importance to your understanding of the code of ethics prescribed by the institute. you should allocate 1.  6. Read and follow the instructions given on your examination ticket to avoid unnecessary scrutiny. Also. Read carefully if the question is asking for the Correct / Incorrect or Least Likely / Most Likely option etc. 5. you will be able to appreciate the relevance of Ethics. No negative marking: Remember there is no negative marking on the CFA Exam. You do not need to go to your school books to prepare your fundamentals before starting to work through this course. Make an intelligent guess by eliminating the most improbable options. Don’t get stuck on questions. there is good chance you will not clear the exam. http://www. do not spend too much time one question. 7. This way your retention and understanding of this section would also be higher. Move on and come back later to mark the most probable answer from the options. There is a great deal of material to master and exam questions are challenging. Mental Strength: Morning and Afternoon exams are equally important. Last 45 days your focus on problem solving: practice as much as possible and reduce the component of luck. 4. Read the question carefully: This is the most common mistake on the exam. On average. You do not want to miss attempting questions. Don’t just sit on it till you get the answer. There will be sitters (Easy Questions) throughout the paper – so make sure you go through the entire paper. Time management is critical. You may know the question. Don’t let the challenge or the low worldwide pass rates discourage you. Doing well or badly in the morning paper should not impact your performance in the afternoon. 4. Ethics & Professional Standards: This section of the curriculum is critical. so it would be unwise to leave any question unmarked even if you have no clue on it.

     Practice loads of questions: The time pressure on the exam is intense and many candidates run out of time. 6. ← Older Posts Newer Posts → Login | Home | RSS Feed    Powered by Trutech  Copyright © 2014 Finguru http://www. Pay close attention to the command words in each 4. Like Sachin Tendulkar said – “He is anxious and nervous before a big game. 7. Try to eliminate the most improbably choice and make an intelligent guess. The final month should be spent reviewing the material. or you may not remember the answer to. Focus on key concepts of all the material. A good rule of thumb is to have completed all the readings at least one month in advance of the examination.     Start early: 4-5 months of dedicated study is a good time to prepare. General By admin | No comments yet 7 Key Tips to Pass the CFA Level 1 Exam 1. There will be questions that will confuse you.     Intelligent Guessing: Nobody knows everything. 2.     Build an Exam Strategy: Do lots of mock tests in the last one month and build a strategy of how will you approach the exam. There is no negative marking on the paper.     Commit to learning the material: You must really be motivated to pursue the course.” So your internal mechanism is also doing the same and preparing you for the big day. 5.in/blog/?paged=6[1/31/2014 1:24:27 AM] .finguru. Another reason is not being familiar with your calculator. A primary reason is less practice questions and making silly mistakes. Note also that an important part of your study is reviewing what you have studied. Some level of it is in fact good. Use your calculator often so that you will be proficient when it is time to take the exam. not just the topics you like. 3.     Study with the exam in mind: Focus on the Learning Outcome Statements (LOS) and study with the exam in mind. There is no one right way – but you need to figure out which one will work for you. I would like to remind you that even the best in the world feel the same. The bottom line—there is no substitute for preparation. so that you can eliminate the wrong choices from a tough question.     Study every topic: The trick is to know at least a little of everything. But over the years he has learnt that this is the way his body prepares for a big match.Finguru You are bound to feel nervous and anxious about the paper. Make a weekly plan of study and build in some slack to allow for emergencies later. It’s very natural to feel that way.

whether you change company or move country. The 2005 CFA Institute and Russell Reynolds Associates’ Survey indicated CFA charterholders out earned their MBA counterparts by 18%. Pass three rigorous six-hour exams over at least three years. The CFA® charter is globally regarded as a designation of excellence in the investment community. Career-enhancing – demonstrates your commitment to knowledge and high ethical standard to employers and clients Credible – praised and supported by the clients. The CFA designation is now entering its fifth decade having been established in 1962. the investment community at large More and more of our corporate clients view participation in the CFA® program as a prerequisite for job progression. The CFA Institute network boasts: Almost 100. Advantages over an MBA Comment : Enter Text Given Below:* News Desk @ Finguru Congratulations on Clearing L1 & L2 Exams Excellent result for December 2012 See more. Portable reputation – the charter remains a mark of quality. unlike an MBA. you must: 1.in/web/about_cfa.principles that are common to any market. How do I earn the CFA Charter (Requirements) B I U To earn the CFA charter..Finguru Home CFA About CFA Level 1 Level 2 Level 3 About Testimonials FAQs Job Prospects Contact About the CFA® Charter Quick Enquiry Name*      : Phone*     : Email Id*  : City          : Courses Interested in*  : Select Select +91 Upcoming Batches Level 1 12th Jan 1 PM to 5 PM 16th November 9:00AM to 1:00PM FREE DEMO . you must first become a candidate and sign up for the Level 1 exam. Have at least four years of professional investment experience. Global relevance – an international standard for measuring competence and integrity . To become a CFA charterholder. Level 3 10th November 9AM to 1PM See more. CFA Program Curriculum The curriculum is based on the Candidate Body of Knowledge which is divided into 4 major areas: Ethical and professional standards Tools and inputs for investment valuation and management Asset valuation Portfolio management http://finguru. especially in the areas of Research and Portfolio Management.000 members in 135 countries.php[1/31/2014 1:27:04 AM] . employers and regulators.000 CFA charter holders. The CFA program can cost one tenth of an MBA and allows you to carry on working whilst studying.. The CFA designation sets the standard in exam based qualifications for the global financial industry and is recognized by employers as a badge of distinction by which to measure serious investment professionals. Regarded as the Global Gold Standard and is considered a designation of excellence in the investment community. More than 88. submit Chat with FinGuru CFA Exam Countdown 127 Days until the 7th June 2014 CFA Exam Unlike MBA program the CFA content and exam are standardized around the world. Become a regular member of CFA Institute 4. 137 member societies in 58 countries Benefits of CFA Designation The CFA designation is desirable for career progression in a bull market but also greater job security in bearish markets. 3.27th OCT 9AM Level 2 9th February 9AM to 1PM 9th November 1:00 PM to 5:00 P . Commit to abiding by CFA® Institute's Code of Ethics and Standards of Professional powered by ZO HO Chat Conduct. 2. It is a key certification for investment professionals.

Exam format: Level 1 & 2 are completely multiple choice. Every Level places an emphasis on ethical and professional standards within the industry. Level 2 and 3 Exams are conducted only once every year in June every year. | Site designed and developed by Trutech Web Solutions. review.cfainstitute.org   Source: www. CFA®.. Source: www. Level 3 has one written paper and one paper which is multiple choice.Finguru The focus of the questions alters as you progress through the CFA levels. Number of Questions 240 Level  Type of Questions Duration of the Exam I Multiple Choice Multiple Choice vignette Style 2 Exams of 3 Hrs Each II 120 2 Exams of 3 Hrs Each III 50% essay type. CFA Institute also ensures they reflect changes within the global investment community.org Exam Structure:  The exam is structured as 3 Levels: Level 1. or warrant the accuracy of the products or services offered by Finguru® or verify or endorse the pass rates claimed by Finguru®. 2 and 3. | http://finguru. Please read our privacy policy. promote. CFA Institute does not endorse.php[1/31/2014 1:27:04 AM] . 50% multiple choice 60 2 Exams of 3 Hrs Each         ©2009 byFinguru® Ltd.in/web/about_cfa.cfainstitute. Level 1 Exam is conducted twice every year in June and December. All Rights Reserved. and Chartered Financial Analyst® are trademarks owned by CFA Institute.

We provide special focus to students from non-finance backgrounds. we have had students from various backgrounds such as Non-Finance bachelors. A solid understanding of the basic concepts Provide ample practice questions on testable areas Our vibrant and competitive classroom atmosphere helps students to maintain regularity in studies and get motivated to excel in the exam Level1  Exam Weightage   submit Chat with FinGuru CFA Exam Countdown 127 Days until the 7th June 2014 CFA Exam B I U powered by ZO HO Chat Coaching Course structure: Topic Areas Ethics/ Professional Standards Quantitative Methods Economics Weightage 15% 12% 10% Approx Hours 4 16 12 http://finguru. MBA’s in Finance and other finance specialists. while at the same time encourage students with any prior knowledge on the topics to actively participate in discussions in the class Apart from Chartered Accountants..in/web/level1. Human Resource.php[1/31/2014 1:27:26 AM] .. Level 1 Coaching:  Coaching for Level 1 is divided into 22 sessions of 4 hours each Time is allocated to topics in accordance to their weightage and approximate time taken by an average student to grasp the important concepts. You do not need to have a Finance/Commerce background to start your journey to become CFA Charter holder. Our coaching is structured to ensure students from all backgrounds are able to quickly learn the concepts and apply them in solving tricky questions on the exam. Engineering.27th OCT 9AM Level 2 9th February 9AM to 1PM 9th November 1:00 PM to 5:00 P . Level 3 10th November 9AM to 1PM See more. Hospitality Management and Doctors etc. More than 3000 Practice Questions are provided Concise and Exam oriented study material is provided in the classes The classes are highly interactive and ensure quality education Personal attention is ensured We help students gain: Quick Enquiry Name*      : Phone*     : Email Id*  : City          : Courses Interested in*  : Select Select +91 Comment : Enter Text Given Below:* News Desk @ Finguru Congratulations on Clearing L1 & L2 Exams Excellent result for December 2012 See more.Finguru Home CFA About CFA Level 1 Level 2 Level 3 About Testimonials FAQs Job Prospects Contact Upcoming Batches Level 1 12th Jan 1 PM to 5 PM 16th November 9:00AM to 1:00PM FREE DEMO .

or warrant the accuracy of the products or services offered by Finguru® or verify or endorse the pass rates claimed by Finguru®.Finguru Financial Statements Analysis Corporate Finance Equity Analysis Fixed Income Derivatives Alternative Investments Portfolio Management Mid Term & End Term Tests 4 Full Length Tests Other Tests Doubt Clearing Sessions Total Schedule & Location:  20% 8% 10% 12% 5% 5% 3% 50% Each 100% Each 24 6 8 8 8 4 4 10 12 24       10 150 Classes are held over the weekends (Saturday & Sunday) For New batchers stating check out our home page For professionals who also may face difficulty coming on Saturday day time.. | http://finguru.Lodi Road. Please read our privacy policy.10 Institutional Area.in/web/level1. promote. Classes are held at India Social Institute. All Rights Reserved. we have a batch with timings 5:00 to 9:00PM on Saturday and Sunday. | Site designed and developed by Trutech Web Solutions.php[1/31/2014 1:27:26 AM] . New Delhi 110003 Map to Indian Social Institute   ©2009 byFinguru®   Ltd. review. CFA Institute does not endorse. and Chartered Financial Analyst® are trademarks owned by CFA Institute. CFA®.

Finguru Home CFA About Testimonials FAQs Job Prospects Contact Upcoming Batches Level 1 12th Jan 1 PM to 5 PM 16th November 9:00AM to 1:00PM FREE DEMO .php[1/31/2014 1:27:46 AM] . highly rigorous. Our experienced faculty not only help you understand and learn key concepts but also provide loads of classroom practice questions All faculty have practical experience in applying financial techniques being taught . At Level 2.. submit Coaching Course structure Level 2 Exam Weights 10% 5-10% 5-10% 15-25% 5-15% 20-30% 5-15% 5-15% 5-15% Approx. Our coaching for Level 2 is. Our coaching is not just focused on getting our students through the Level 2 exam but also to apply financial techniques on their jobs  Level 2  Exam Weightage Quick Enquiry Name*      : Phone*     : Email Id*  : City          : Courses Interested in*  : Select Select +91 Comment : Enter Text Given Below:* News Desk @ Finguru Congratulations on Clearing L1 & L2 Exams Excellent result for December 2012 See more. Class Room Hours 4 12 Topic Areas Chat with FinGuru CFA Exam Countdown 127 Days until the 7th June 2014 CFA Exam Ethics/ Professional Standards Quantitative Methods Economics Financial Statements Analysis Corporate Finance Equity Analysis Fixed Income Derivatives Alternative Investments 4 12 8 16 8 8 4 B I U powered by ZO HO Chat http://finguru. you are required to demonstrate advanced knowledge on the same topics as in Level 1.which means our students learn the practical application of what they are learning too. Level 3 10th November 9AM to 1PM See more. therefore.27th OCT 9AM Level 2 9th February 9AM to 1PM 9th November 1:00 PM to 5:00 P .in/web/level2..

php[1/31/2014 1:27:46 AM] .Lodi Road. | http://finguru. promote. review.check out updates on the home page Classes are held at India Social Institute. Please read our privacy policy. All Rights Reserved. CFA®..in/web/level2.10 Institutional Area. New Delhi 110003  Map to Indian Social Institute     ©2009 byFinguru® Ltd. and Chartered Financial Analyst® are trademarks owned by CFA Institute. | Site designed and developed by Trutech Web Solutions.Finguru Portfolio Management 2 Mid Term Tests 2 Full Length Tests Total  Schedule & Location: 5-15%  50% Each  100% Each 100%  8 8 12 100 Classes are held over the weekends (Saturday & Sunday) For New batches . or warrant the accuracy of the products or services offered by Finguru® or verify or endorse the pass rates claimed by Finguru®. CFA Institute does not endorse.

but the trend is similar. submit What are the pass rates at Level 3? Although the pass rates for Level 3 are higher than for Level 1 and 2.Finguru Home CFA About CFA Level 1 Level 2 Level 3 About Testimonials FAQs Job Prospects Contact Upcoming Batches Level 1 12th Jan 1 PM to 5 PM 16th November 9:00AM to 1:00PM FREE DEMO . You must continue the effort and maintain discipline for your preparation for the CFA Level 3 Exam. Chat with FinGuru CFA Exam Countdown 127 Days until the 7th June 2014 CFA Exam B I U powered by ZO HO Chat   Topic Weights in Level 3 Topic Weight http://finguru. Quick Enquiry Name*      : Phone*     : Email Id*  : City          : Courses Interested in*  : Select Select +91 Comment : Enter Text Given Below:* News Desk @ Finguru Congratulations on Clearing L1 & L2 Exams Excellent result for December 2012 See more. Therefore. Especially post 2007. It’s all about application of the concepts that you have learnt over the first 2 levels. At Levels 1 and 2.27th OCT 9AM Level 2 9th February 9AM to 1PM 9th November 1:00 PM to 5:00 P . clearly show your calculations. it is possible and sometimes even necessary that the answer from one question is used as an input for another. Afternoon Session: Similar to the Level 2 exam. The weight of each essay question and each of the parts is denoted in minutes. the material is tested much the way it is presented in the curriculum and memorization alone could get you through these levels. Also. downwards. For example. You have demonstrated great commitment and ability to be a CFA Charterholder. It only means the preparation strategy used in the Level 1 and 2 is not going to work in Level 3. A single item set or essay question can incorporate concepts from several study sessions. then let us first congratulate you. You must learn each study session well enough so as to integrate your knowledge of it with that of the other study sessions.. it is possible to get some marks for correct method and incorrect final answer. Level 3 – How is it different from the Level 1 and 2? CFA Level 3 is a whole new ball game. As the morning exam is an essay paper. Level 3 10th November 9AM to 1PM See more. a question allocated 12 minutes would carry 12 points. If you have cleared the first 2 Levels of the CFA Exam. Exam Format? Morning Session: 10 to 12 multi-part essay questions worth a total of 180 points. The curriculum may not look as challenging and lengthy as the first 2 levels. that does not mean that Level 3 is anyway easier than the first 2 levels.php[1/31/2014 1:28:06 AM] . However. there are 10 cases followed with 6 multiple choice questions each. The Level 3 curriculum is not as heavy on the content (theories and formulas). the pass rates for Level 3 have dropped significantly and now range around 45-50%..in/web/level3. So a total of 60 questions from any of the topics.

All Rights Reserved.. the training methodology must also be accordingly suited. We ensure you get enough time to do self study. Take up real exam questions in the class and train students on writing well structured answers. There is no negative marking for guessing. is the possible combination of several study sessions in the same item set. Remember. and Chartered Financial Analyst® are trademarks owned by CFA Institute. This ensures you are upto speed with the classes. Try not to leave anything blank.in/web/level3. The afternoon exam is similar to the Level 2 exam. CFA Institute does not endorse. How can we help you pass the Level 3 exam? We conduct rigorous classes for the CFA Level 3 on the weekends and help candidates prepare well for the exam. have practical experience in Portfolio Management and thus are able to help connect the content with real world examples. We help you learn how to manage time effectively.     ©2009 byFinguru® Ltd.php[1/31/2014 1:28:06 AM] . and is usually manageable. we encourage candidates in our classes to participate in discussions and even try to explain the concepts to each other. of course. | Site designed and developed by Trutech Web Solutions. Attempt the easy questions first and come back to tougher questions. However. by practicing to write answers within allocated time. by giving you breaks after every 4-5 classes.Finguru Ethical and Professional Standards 10% Equity 5-15% Fixed Income 10-20% Derivatives 5-15% Alternatives 5-15% Portfolio Management 45-55%   How should I study for the Level 3 Exam? Time management is extremely critical in the morning Level 3 Exam. or warrant the accuracy of the products or services offered by Finguru® or verify or endorse the pass rates claimed by Finguru®. promote. CFA®. As discussing the topics is the best way to learn and understand them. Candidates must attempt all questions in the time allocated and keep their answers to the point. review. We spread out our classes over a long period (at least 3-4 months) so that you spend a long period to go through the topic and review it. For our Level 3 Classes: All faculty besides being CFA Charterholders. But the difference. as the exam format of Level 3 is unlike the first 2 levels (esp the morning exam). at Level 3 you sometimes have to use what you learn about one topic to answer a question about another topic. | http://finguru. especially on the morning exam. Please read our privacy policy.

  The charter bodes well with employers. FinGuru) Quick Enquiry Name*      : Phone*     : Email Id*  : City          : Courses Interested in*  : Select Select +91 Upcoming Batches Level 1 12th Jan 1 PM to 5 PM 16th November 9:00AM to 1:00PM FREE DEMO .  But the rewards of earning the CFA charter are worth all the effort.  Obtaining the CFA charter is. with experienced instructors who can help them clear the exam in a single attempt. the 250 recommended study hours are a minimum. Mefcom Securities Ltd) "In my opinion. the CFA charter is a must for any serious finance professional..  Specifically in India. however. Fidelity Investments) http://finguru. It gave me a wider perspective to look at things which is a key ingredient of success in the investment field. CFA. the CFA charter has significantly added to my financial knowledge and immensely improved my job prospects. The monthly magazines.in/web/mycfaexp.  CFA research publications are an excellent source for research ideas.27th OCT 9AM Level 2 9th February 9AM to 1PM 9th November 1:00 PM to 5:00 P . real estate etc.” Comment : Enter Text Given Below:* News Desk @ Finguru Congratulations on Clearing L1 & L2 Exams Excellent result for December 2012 See more. One gets to be a part of an elite club which is well respected and recognized by anyone in the financial world. It did test my understanding of the basics and how to co-relate the different frameworks and modules of the curriculum like economics. CAIA (Director & Lead Trainer.php[1/31/2014 1:32:05 AM] .    Such applicants are best off preparing under the guidance of coaching institute such as FinGuru. Saurabh Basrar. economics and accountancy. both in India and abroad. There are no shortcuts to doing well on the exam. It helps one develop different frameworks to analyze different investment classes be it equities. The 6 hour exam on a Sunday can be very stressful. quarter journals allow Charterholders to share research ideas on current relevant topics. primarily because of its rigorous course content and strong relevance to industry needs." B I U powered by ZO HO Chat Zera Tyagi. equity. Being a CA it was not very difficult for me to write the CFA exam as it was more objective based. given a dearth of world-class finance courses. The global fraternity of Charterholders is a great source for networking. CFA is a globally recognized qualification and surely adds weight to anyone’s resume. combined with long working hours. The program requires commitment and dedication. Having the three letters (CFA) against my name has helped me get connected with senior people in companies across the globe. a tough ask specially for those with a limited background in maths.. Level 3 Candidate. “I have no doubt the program was tough and challenging. can make an indigestible cocktail. Level 3 Candidate (Director. Working full time only makes the preparation tougher. financial statements etc” Chat with FinGuru 127 Days until the 7th June 2014 CFA Exam Karan Mehta.Finguru Home CFA About Testimonials FAQs Job Prospects Contact Sushant Suri. (Associate Research Specialist. derivatives. the CFA Program opens an important window of opportunity for professionals who seek to advance their knowledge of theoretical finance. debt. These elements. Level 3 10th November 9AM to 1PM See more. debt. without having to attend a costly masters program at a foreign university.  Despite having done a Masters in Economics and Finance. CFA (Director Altais Advisors) submit CFA Exam Countdown “I believe CFA has an excellent curriculum for anyone who is interested in the financial markets.

I can confidently say that the last three years of my involvement with the CFA Program has been a splendid learning experience. Also. Level 2 Candidate (NTU Singapore) “Coming for an engineering background I decided to pursue the CFA charter after much deliberation. The CFA charter is indisputable in its recognition across the industry and is relevant for both beginners and veterans and thus it was my only option. I really had to struggle in getting around on topics in FSA and Economics. Most of the stuff taught in CFA can be immediately and directly applied to one's work. I came to know about CFA from one of the candidate in this program and found that it’s quite helpful for investment professionals. At senior level positions.  In my view. the proverb "The grass is always greener on the other side" bothered me. For having cleared the Level 1 I can only recommend being regular and spending at least the last 4 weeks on questions and test papers before the exam. The greener side here being the core of asset management . I did struggle with topics in FSA and Economics to begin with but they are very doable with that extra push at times.php[1/31/2014 1:32:05 AM] .” Dr. The focus of the preparation should be on a thorough understanding of the study material & mastering all the key concepts. The curriculum is undoubtedly exceptionally challenging. The vastness of the course and paucity of time made all this more complicated. It is most encouraging and rewarding to witness the kind of recognition & credibility the Program commands in the Industry. effectively allocating time & effort among his strong & weak areas. it is of significant help to devise a preparation strategy. Level 3 Candidate “Upon completing my Master's Degree.” http://finguru. Level 3 Candidate "I trained as a medical Doc and thereafter completed my MBA a few years back.  The tripartite structure and curriculum of the CFA is both exhaustive and rigorous. After mulling over the several available alternatives. I had planned to start my CFA after a few years of work experience. Level 1 is all about the fundamentals and getting to know the basic valuation tools and techniques. Unlike other courses that do not have practical applicability most of the concepts learnt are used in work assignments. The exams tests our analytical abilities which is what is required in investment profile globally. This course is helpful in getting clarity about investment concepts and getting s in depth understanding of various valuation tools. The CFA curicullum is very topical and takes one through many financial concepts in an exhaustive manner. therefore enables one to acquire a considerable wealth of knowledge – the foundation of a successful career." Swati Sethi.Finguru "CFA course is a great help in enhancing one’s analytical skills and developing sound fundamental base of financial concepts. Abhishek Sharma. it is absolutely essential to put in a minimum of recommended 250 hours of dedicated effort. I realized that my MBA (finance & marketing) background is not sufficient to grow and develop understanding of markets and various asset classes. did I begin to truely appreciate the importance of CFA.in/web/mycfaexp."Aiding and making investment decisions". It was at my first job at one of the portfolio management firm. Having worked on the IT side in an asset management company. CFA qualification assumes an entirely different meaning by providing financial discipline to strategic efforts. What I love the most about the Program is its dynamic approach and comprehensive in-depth coverage of the various aspects of finance. I enrolled for this course and started preparing on my own but always felt a need for guidance. I eagerly hunted around for a Course that would assist me in gaining a foothold in the world of finance. The course content is so relevant that I usually reference study material in case of doubt with my work." Vivek Agarwal. CFA also helps establish credentials for job opportunities as it reflects one's focus to pursue this line as career. It serves both to open new doors and also to send the right signals to recuiters. I opted for the CFA Program. I found that the guidance provided by other CFA candidates and charter holders was indeed valuable in all the three levels. Its only when I landed in a financial services firm.

promote. review. or warrant the accuracy of the products or services offered by Finguru® or verify or endorse the pass rates claimed by Finguru®.in/web/mycfaexp.Finguru     ©2009 byFinguru® Ltd.. CFA®. CFA Institute does not endorse. | Site designed and developed by Trutech Web Solutions. | http://finguru. Please read our privacy policy.php[1/31/2014 1:32:05 AM] . All Rights Reserved. and Chartered Financial Analyst® are trademarks owned by CFA Institute.