64 views

Uploaded by Joseph E. Davis

CFA Level 1 - Secret Sauce Flashcards _ Quizlet

- CFA 1 Financial Reporting & Accounting
- DA4569-CFA-Level-I-SmartSheet.pdf
- Top 9 CFA Level 1 Formulas – Must Read _ FinQuiz
- Fixed-income.pdf
- CFA Level 1 Notes
- CFA Level 1 - Economics Flashcards _ Quizlet
- Free CFA Mind Maps Level 1 - 2015
- CFA level 1 Links.docx
- CFA Mind Maps Level 1
- CFA Level 1, June, 2016 - Formula Sheet
- mock quiz
- 2019 CFA Lecel 1 Check-point Exam 1 - Answers
- CFA Level 1 Summary
- FinQuiz-Level1Mock2016Version1DecemberAMSolutions.pdf
- FinQuiz-Level1Mock2016Version1DecemberAMQuestions
- 2018 cfa Level 3 Wiley Formula Sheet
- 2015CFAL1SecretSauce
- CFA Prep Level 1
- CFA Study Strategy v.2
- CFA mindmap

You are on page 1of 20

Here is my version of Schweser's secret sauce. This set contains formulas and key concepts

247 terms madelinepage1313

What are financial statement notes 1) details about the information summarized in the ﬁnancial statements

(footnotes)? 2) summarize accounting methods and assumptions, estimates,

contingencies, acquisitions and disposals.

3) *They are audited.*

4) discuss the ﬁscal period covered by the statements and the inclusion of

consolidated entities

5) additional information on items such as business acquisitions or disposals,

legal actions, employee beneﬁt plans, contingencies and commitments,

signiﬁcant customers, sales to related parties, and segments of the ﬁrm

What is management's commentary *required to discuss *

(MD&A)? 1) trends, signiﬁcant events and uncertainties that aﬀect the ﬁrm's liquidity,

capital resources and results of operations

2) eﬀects of inﬂation

3) impact of oﬀ‑balance‑sheet obligations and contractual obligations

4) accounting policies that require signiﬁcant judgement by management

5) forward‑looking expenditures and divestitures

1) discontinued operations

2) extraordinary items, and other unusual or infrequent events

*some parts may be unaudited; one of the most useful sections of the annual

report*

What is "other comprehensive changes which result from *foreign currency translation, minimum pension

income"? liability adjustments, or unrealized gains and losses on investments

(securities held‑for‑trading)*; ﬂows to accumulated other comprehensive

income on balance sheet

What is the super duper expanded assets = liabilities

accounting equation? + contributed capital

+ beginning retained earnings

+ revenue ‑ expenses ‑ dividends

What are the 4 owner's equity 1) capital (par value of common stock)

accounts? 2) additional paid‑in capital

3) retained earnings

4) *accumulated other comprehensive income (OCI)*

What are the two qualitative RF

characteristics that make financial 1) relevance

information useful? 2) faithful representation

What are the three characteristics PCM

of relevance? 1) predictive value

2) conﬁrmatory value

3) materiality

What are the three characteristics CNF

of faithful representation? 1) complete

2) neutral (absence of bias)

3) free from error

What are the three aspects of a TCC

coherent financial reporting 1) transparency

framework? 2) comprehensiveness

3) consistency

What are the 4 qualitative CTVU

characteristics that enhance 1) comparability

relevance and faithful 2) veriﬁability

representation under IFRS? 3) timeliness

4) understandability

What are the major differences 1) IASB: performance elements are income and expenses

between GAAP and IFRS? *FASB: performance elements are revenues, expenses, gains, losses, and

comprehensive income*

2) *FASB*: an asset as a future economic beneﬁt

*IASB*: an asset is a resource from which a future economic beneﬁt is

expected

3) The word *probable* is used by the FASB to deﬁne assets and liabilities

4) *FASB does not allow the values of most assets to be adjusted upward*

What is the net income formula? = revenues

‑ ordinary expenses

+ other income

‑ other expense

+ gains ‑ losses

OR

= ending equity

+ dividends

‑ stockholder investments

‑ beginning equity

What is the percentage of outcome of long‑term contract *CAN BE* reliably measured; same for IFRS

completion method? and GAAP; *more aggressive*; income and balance sheet will diﬀer from

completed contract ‑ cash ﬂows are not diﬀerent

net income = [(total cost incurred / total cost) x total revenue] ‑ total cost

incurred

What is the "under completed when outcome of a long‑term contract *CANNOT* be reliably measured

contract method"? *IFRS*: pairs revenue and expense together, costs are expensed when

incurred and proﬁt is recognized only at completion.

*GAAP*: revenue, expense and proﬁt are recognized ONLY when the contract

is completed

What is the formula for straight‑line = (orig cost ‑ *salvage value*) / depreciable life

depreciation?

What is the formula for double‑ = *2 / depreciable life in years x book value at beg of year*; *does not use

declining balance? salvage value but depreciation stops when residual value has been reached*

Where are discontinued operations same for both US GAAP and IFRS; must be physically and operationally

reported? distinct from the rest of the ﬁrm; management has decided to dispose of but

either hasn't done so or did dispose of in the current period after the

operation had generated income or losses; reported separately in the income

statement, net of tax, after income from continuing operations; should be

excluded by the analyst when forecasting future earnings

What are extraordinary items? US GAAP: *unusual AND infrequent items*; reported separately net of tax and

appears on the income statement below discontinued operations

IFRS: *does not allow extraordinary treatment in the income statement

What are unusual or infrequent events which are either unusual in nature or infrequent in occurrence but not

items? both; included in income from continuing ops & reported before tax.

EX:

1) G/L from from sale of assets or part of business

2) Provisions for environmental remediation, impairments, write‑oﬀs, write‑

downs, restructuring.

3) Integration expense for recently acquired business

What is the basic EPS formula? net income ‑ preferred dividends

‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑

weighted avg of common shares out

What is the diluted EPS formula? = net income

‑ [preferred dividends]

+ [*convertible* prf.dividends]

+ [*convertible* debt int.] (1‑t)

‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑

(weighted avg. of c/s o/s)

+ (shares from conversion of conv. pfd. shares)

+ (shares from conversion of conv. debt)

+ (shares issuable from stock options)

What is the treasury stock method? new shares = [(avg mkt price − exercise price) / avg mkt price] x [# of

options out]

What is the statement of *net income + other comprehensive income*; includes all changes in equity

comprehensive income? except for owner contributions and distributions (e.g. issuing stock,

repurchasing stock, and paying dividends)

What is accumulated other *subsection in equity* where "other comprehensive income" is accumulated

comprehensive income (OCI)? (summed or "aggregated"); diﬀerence between net income and

comprehensive income; *represents certain gains and losses not recognized

in the P&L account.*

How do you calculate ending =beginning stockholder's equity + contributed capital + net income ‑

stockholder's equity? dividends

What are treasury shares (stock)? stock that has been reacquired by the issuing ﬁrm but not yet retired;

*reduces stockholder's equity*; has no voting rights; does not receive

dividends

How do you calculate ending cash Operating cash ﬂow

balances? + Investing cash ﬂow

+ Financing cash ﬂow

‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑

= Chg in cash balance

+ Beg cash balance

‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑

= Ending cash balance

How do you calculate FCFF = NI

+ non‑cash charges

+ interest expense x (1 ‑ tax rate)

‑ capex (net capital expenditure)

‑ working capital investment

What is receivables turnover? annual sales / average receivables

What is days sales outstanding 365 / receivables turnover

(DSO)?

What is inventory turnover? COGS / average inventory

What is days of inventory on hand? 365 / inventory turnover

What is payables turnover? purchases / average payables

purchases = ending inventory ‑ beginning inventory + COGS

What is number of days of 365 / payables turnover

payables?

What is total asset turnover? revenue / average total assets

What is fixed asset turnover? revenue / average net ﬁxed assets

What is working capital turnover? revenue / average working capital

What is the quick ratio? cash + marketable securities + receivables / current liabilities

What is the cash ratio? cash + marketable securities / current liabilities

What is the cash conversion cycle DSO + DOH ‑ DPO

(CCC)?

How do you calculate income Net Sales

available to common? ‑ COGS

‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑

= Gross Proﬁt

‑ Operating expenses

‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑

= Operating Proﬁt (EBIT)

‑ Interest

‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑

= Earnings before taxes (EBT)

‑ Taxes

‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑

= Earnings after taxes (EAT)

+/‑ Below the line items adjusted for tax

‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑

= Net Income

‑Preferred Dividends

‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑

= Income available to common

What is the original three‑part ROE = Net Proﬁt Margin

DuPont formula? x Asset TO

x Leverage Ratio

‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑

= (NI/Sales)

x (Sales/Assets)

x (Assets/Equity)

What is the extended five‑part ROE [NI / EBT]

DuPont formula? x [EBT / EBIT]

x [EBIT / revenue]

x [revenue / total assets]

x [total assets / total equity]

tax burden

x interest burden

x EBIT margin

x asset turnover

x ﬁnancial leverage

What is the sustainable growth rate =RR x ROE

formula? RR = (1 ‑ dividend payout ratio)

FIFO results in (assuming 1) big inventory

inflationary period) 2) current ratio = big

3) working capital = big

4) COGS = small

5) net income = big

6) higher taxes

7) lower cash ﬂows

LIFO results in (assuming 1) small inventory

inflationary period) 2) current ratio = small

3) working capital = small

4) COGS = big

5) net income = small

6) lower taxes

7) higher cash ﬂows

FIFO inventory = LIFO inventory + LIFO reserve

FIFO COGS = LIFO COGS ‑ ∆ LIFO reserve

FIFO after‑tax profit? = LIFO after‑tax proﬁt

+ [(∆ LIFO reserve) (1 − t)]

How is CFO/CFI affected when CFO: higher

expenditures are capitalized? CFI: lower; *capitalized expenditure is reported as an outﬂow*

How is CFO/CFI affected when CFO: lower

expenditures are expensed? CFI: higher; the expense ﬂowed through the income statement & CFO

statement. CFI is higher than normal because there is *no outﬂow for

investing activities*

Under IFRS where can interest as either an *operating expense OR an investing activity*

expense be reported?

What is the units‑of‑production [original cost ‑ salvage value / life in output units] x output units in the

method? period

What is a revaluation surplus *a component of shareholder's equity* that reports the revaluation upward of

account? an asset's value above its historical cost; this is not reported on the income

statement and is only allowed under IFRS

How are impairments recognized if carrying value > *undiscounted CF* from asset's use and disposal

under GAAP?

What is the income tax expense = taxes payable + ∆DTL ‑ ∆DTA

equation?

if taxes paid > income tax expense create DTA

if taxes paid < income tax expense create DTL

How do you calculate a DTL? = (pretax income − taxable income) × tax rate

How is interest expense calculated beginning bond value x *market rate of interest*

for a discount or premium bond?

How do you calculate the ending *beginning book value + interest expense ‑ coupon*

book value of a bond liability?

According to SAS No. 99 what are 1) *incentive/pressure* (the motive to commit fraud)

the three conditions that are usually 2) *opportunity* (weak internal controls)

present when fraud occurs? 3) *attitude/rationalization* (mindset that fraud is justiﬁed)

What are some examples of 1) *bill‑and‑hold arrangements* whereby revenue is recognized before the

aggressive recognition of revenue? goods are shipped

2) *holding the accounting period open* past year‑end

3) *sales‑type leases* whereby the lessor recognizes a sale, and proﬁt, at the

inception of the lease, especially when the lessee does not capitalize the

lease

4) *early revenue recognition*: IE before fulﬁlling all of the terms and

conditions of sale

5) *recognizing revenue from swaps* and barter transactions with third

parties

What are some indications of low 1) boosting revenue w/non‑operating income and nonrecurring gains

quality earnings? 2) delaying expense recognition

3) abnormal use of operating leases by lessees

4) *hiding expenses by classifying them as extraordinary or nonrecurring*

5) LIFO liquidations ‑ used to boost earnings when more inventory is moved

but that cannot go on forever, only so much inventory can be sold

6) abnormal gross margins and operating margin as compared to industry

peers

7) extending useful lives of long‑term assets

8) aggressive pension assumptions

9) year‑end surprises

10) equity method investments and oﬀ‑balance sheet special purpose

entities

11) other oﬀ‑balance‑sheet ﬁnancing arrangements including debt

guarantees

What are the 3 C's for credit 1) *Character*: management's reputation and history of repayment

analysis? 2) *Collateral*: ability to pledge speciﬁc collateral reduces lender risk

3) *Capacity*: ability to repay debt. requires LT view of ﬁrms prospect.

What are 4 way to terminate a 1) Mutual termination

swap? 2) Oﬀsetting contract

3) Resale

4) swaption

What are the 4 major characteristics 1) delivery time

of futures contracts? 2) quality/qty of the goods

3) manner of delivery

*what is not included is delivery price*

What is a Eurodollar deposit? USD time‑deposits outside of the US. Banks borrow dollars from other banks

by issuing Eurodollar time deposits (*certiﬁcates of deposit*), which are

essentially unsecured loans. The rate of the loans is LIBOR (London Interbank

Oﬀer Rate)

What is Euribor? Europe Interbank Oﬀer Rate; a daily reference rate based on the averaged

interest rates at which Eurozone banks oﬀer to lend unsecured funds to other

banks in the euro wholesale money market (or interbank market)

What is a forward rate agreement A forward rate agreement can be viewed as a forward contract to

(FRA)? borrow/lend money at a certain rate at some future date. FRAs:

1) settle in cash

2) no actual loan is made

3) *creditworthiness of the parties involved need not be considered.*

Considering forward rates, if long has right to borrow at below market rates and short has obligation to

floating rate > fixed rate lend. *The long will receive a payment.*

Considering forward rates, if short will receive cash payment from the long (right to lend at higher than

floating rate < fixed rate market rates)

What is the FRA formula?

Why do we discount the future since the interest savings would come at the end of the loan period, the cash

payout from a forward rate payment at settlement of the forward is the present value of the interest

agreement (FRA)? savings

What are the methods of settlement *Delivery*: seller delivers the good to the buyer

for a forward contract? *Cash*: buyer and seller exchange the net cash value at the settlement date.

This method is much more common.

How does the concept of margin in in the futures market no funds are loaned to the buyer of the futures and

the futures market differ from the consequently there are no interest charges

concept of margin in the stock

market?

What are the four ways to terminate 1) *short can deliver the goods* and the long can accept the delivery and pay

a futures contract? the contract price

2) *cash‑settlement*, delivery is not an option

3) make an *oﬀsetting trade* (*most common*)

4) *exchange for physicals* (ﬁnd a trader with an opposite position to your

own and deliver the goods and settle up oﬀ the ﬂoor of the exchange. ex‑pit

transaction)

How do you solve futures contract 1) *identify all the important elements in the question*

margin problems? a) how many contracts are long/short?

b) what is the contract price?

c) how many units does each contract represent?

d) what is the initial margin per contract

e) what is the maintenance margin per contract

2) *start solving the problem*

a) take diﬀerence between initial price and next day's price

b) multiply: (a) x (units in contract) x (number of contracts)

c) next day's account value = initial margin ‑ b

What are four synthetic portfolios 1) c = S + p ‑ (X / (1+RFR) ^ T)

illustrating put‑call parity? 2) p = c ‑ S + (X / (1+RFR) ^ T)

3) S = c ‑ p + (X / (1+RFR) ^ T)

4) S + p ‑ c = (X / (1+RFR) ^ T)

What are the maximum and Min: c ≥ MAX[0, S ‑ [X / (1+RFR)^T‑t]]

minimum values for a European call Max: S

option?

What are the maximum and Min: p ≥ MAX[0, [X / (1+RFR)^T‑t] ‑ S]

minimum values of a European put Max: X / (1+RFR)^T‑t

option?

What are the maximum and Min: C ≥ MAX[0, S ‑ [X / (1+RFR)^T‑t]]

minimum values for a American call Max: S

option?

What are the maximum and Min: P ≥ MAX[0, X‑S]

minimum values of a American put Max: X

option?

What is the general formula for (ﬁxed rate ‑ ﬂoating rate) x (days/360) x notional

interest rate swaps?

If the net‑fixed payment is positive the ﬁxed pays, ﬂoating receives

...

If the net‑fixed payment is negative the ﬂoating pays, ﬁxed receives

...

What is the cost method? value is determined by the *replacement cost* of improvements plus an

estimate for the value of the land

What is the sales comparison value is determined by the price of a *similar property* or properties from

method? recent transactions

What is the income method? uses a discounted cash ﬂow model to estimate the present value of the future

income produced by the property; this method uses NOI (net operating

income) divided by estimated market required rate of return (or cap rate).

Ignores changes to NOI and does not take in to account an investors income

tax implications

How do you calculate NOI? = rental income x (1 ‑ vacancy rate)

‑ insurance costs

‑ property taxes

‑ utility expense

‑ repair / maintenance costs

What is the discounted after‑tax net present value of an investment equals the present value of after‑tax cash

cash flow method? ﬂows, discounted at the investor's required rate of return, minus the equity

portion of the investment. Only projects w/a NPV > 0 should be accepted.

What are the stages of venture 1) *seed stage*: provide capital for r&d

capital investing? 2) *early stage*

a) start‑up ﬁnancing: complete product development

b) ﬁrst stage ﬁnancing: refers to the funding of the transition to commercial

production and sales of the product

3) *formative stage*

4) *later stage*: company is still private, company needs second and third

stage ﬁnancing. Third stage ﬁnancing would fund a major expansion of the

company. *Mezzanine or bridge ﬁnancing would enable a company to take

the steps necessary to go public*

How do calculate whether to invest 1) estimate probability of failure for each year until a payment is expected

in a start‑up? 2) take each probability and subtract it from 1 and multiply them all together:

this is the probability of success

3) discount the expected payout to the present and multiply that value by the

probability of success (value from #2)

4) subtract probability of success from 1 to get the probability of failure and

multiply that value by the initial cash outlay

5) add the two numbers together:

*[PV x P(success)] + [CF0 x P(failure)]*

How do you calculate after‑tax cash =NOI

flows? ‑ Depreciation

‑ ﬁrst mtge payment

‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑

= blah x (1 ‑ marginal income tax rate)

‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑

= after‑tax blah

+ depreciation

‑ (mtge payment ‑ (amt borrowed * mkt rate of interest))

What are the three sources of 1) *Collateral yield*: the return on the cash used as margin

return for a commodity investment? 2) *Roll Yield*: the return from rolling forward the maturity

3) *Spot price*: changes to the price

What are the capital budgeting 1) decisions are based on cash ﬂows, not accounting income

principals? 2) Cash ﬂows based on opportunity costs & taxes

3) timing of cash ﬂows is important

4) Cash ﬂows are analyzed on *after‑tax basis*

5) *ﬁnancing costs are reﬂected in the projects required rate of return and

thus should not be included in incremental cash ﬂows.*

What is the discounted payback uses present values of the projects estimated cash ﬂows. Number of years it

period? takes a project to recover its initial investment in PV terms and must be

greater than the payback period without discounting. This method ignores

terminal values.

What are NPV profiles? graph that show's a project's NPV for diﬀerent discount rates; y‑axis=NPV

x‑axis=cost of capital/discount rate

*when proﬁle touches x‑axis NPV = 0*

What is the crossover rate? *point where two project's NPV's are equal*. Usually need to ﬁnd mystery

initial cash outﬂow for a project.

1) Find NPV for project w/all known cash ﬂows. 2) set initial cash outﬂow for

unknown project to 0 and calculate NPV

3) subtract that value from other project's NPV

What is project sequencing? an investment in a project today that creates the opportunity to invest in

other projects in the future

What is capital rationing? The situation where a ﬁrm has more positive NPV projects than its available

budget can fund. It must choose a combination of those projects that

maximizes shareholder wealth.

What is the WACC formula? (Wd) [Kd (1‑t)] + (Wps)(Kps) + (Wce)(Kce)

Wps = % preferred stock in cap structure

Wce = % C/S in cap structure

What are the three methods of 1) *CAPM*: Kcs = RFR +β [E(Rm) ‑ RFR]

determining cost of equity? 2) *(Div / P0) + growth rate* (sometimes you will have to add growth to the

dividend if it's going to be paid in the future)

3) *Add‑on yield* method (bond yield + add‑on rate)

What is the CAPM formula? Kcs = RFR +β [E(Rm) ‑ RFR]

What is the CAPM with country risk Kce = RFR + β [E (Rmkt) ‑ (RFR + CRP)]

premium (CRP)?

What are the two dividend discount 1) Po = D1 / [Kce ‑ g]

model formulas? 2) Kce = (D1 / Po) + g

Kce = required rate of return

g = expected constant growth rate

What is asset beta? D/E: % debt / (1 ‑ %debt)

t : marginal tax rate

D/E: % debt / (1 ‑ %debt)

t : marginal tax rate

What is the break point formula? amt of capital at which a component's cost of cap chgs

= ‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑

weight of component in capital structure

What is the marginal cost of capital the WACC at diﬀerent levels of capital investment. It is usually upward

schedule? sloping and is a function of a ﬁrm's capital structure and its cost of capital at

diﬀerent levels of total capital investment.

What is business risk? risk associated with *operating income* and is result of *uncertainty about a

ﬁrms revenues and expenditures* necessary to produce those revenues; main

factors are *demand variability, sales price variability, input price variability,

ability to adjust output prices, and operating leverage*

What is operating risk? uncertainty about operating *EARNINGS* caused by *FIXED* operating costs.

What is a DOL (using price and

qty)?

variable cost)?

What is a DOL formula (using EPS = [%∆EPS / %∆Sales] / [EBIT / (EBIT‑interest)]

and sales and knowing about the = DTL / DFL

firm's use of debt)?

OR

EBIT / [EBIT ‑ interest]

What is the DTL formula? = DOL x DFL

What is an alternative DTL formula? = %∆EPS / %∆Sales

What is Qbe (break even quantity)? ﬁxed operating costs + ﬁxed ﬁnancing costs

‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑

Price ‑ variable cost per unit

What is Qbe (operating breakeven ﬁxed operating costs

quantity)? ‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑

Price ‑ variable cost per unit

What is the proper dividend DEHP (Department of Environment and Heritage Protection)

sequence? 1) Declaration date

2) ex‑dividend date (occurs TWO business days before the holder‑of‑record

date)

3) holder‑of‑record date

4) payment date

BDY = ([face value ‑ price] / face value) x (360 / days)

MMY = HPY x (360 / days)

BEY = HPY x (365 / days)

most appropriate for comparing a company's investments in short‑term

securities

Good corporate governance 1) the board of directors protects shareholders interests

practices seek to ensure that? 2) the ﬁrm acts lawfully and ethically in dealings w/shareholders

3) the rights of shareholders are protected and shareholders have a voice in

governance

4) the board acts independently from management

5) proper procedures and controls cover management's day‑to‑day

operations.

6) the ﬁrm's ﬁnancial, operating and governance activities are reporting to

shareholders in a fair, accurate and timely manner.

How do you calculate the margin P0 x (1 ‑ initial / 1 ‑ maintenance)

call price?

What are the 3 types of market QOB (Queen of Bobs)

structures? 1) *quote‑driven*: investors trade w/dealers

2) *order‑driven*: matches buyers and sellers based on price and time

precedence

3) *brokered markets*: investors use brokers

What is the price‑weighted index *= sum of stock prices / number of stocks in index*

formula? simple to calculate; downward bias; divisor is adjusted for stock splits and

changes in the composition of the index when securities are added or deleted

(reconstituted); higher priced stocks have greater impact than lower priced

stocks

What is the market capitalization‑ computed by adding up the collective market capitalizations of its members

weighted index formula? and dividing it by the number of securities in the index

What is the equal‑weighted index arithmetic average *of the returns* of each component in the index;

formula? disadvantage: period rebalancing (similar to price‑weighted); weights placed

on returns of the securities of smaller cap ﬁrms are greater than their

proportions of the overall market value of the index stocks

What is a total return index? uses both price return and interim cash ﬂows to calculate return; *always

greater than price return index*

What is weak form market 1) prices fully reﬂect all currently available security mkt data

efficiency? 2) price chgs are *independent* from one period to the next.

3) *TA will not work.*

What is semi‑strong form market 1) prices fully reﬂect all publically available security mkt data

efficiency? 2) prices do include past security mkt info plus non‑mkt info available to the

public

3) timing of *news announcements are independent* of each other

4) large # of proﬁt maximizing participants

5) *FA will not work*

What is strong‑form market 1) prices fully reﬂect all *public and private sources* (perfect market)

efficiency? 2) *all info is reﬂected, past, public and private (inside)*

3) no group has a monopoly on info

4) noone should be able to consistently achieve abnormal returns

5) assumes cost *free availability* of all information

What does market efficiency it does not assume that individual market participants correctly estimate

assume? asset prices, but does assume that their *estimates are unbiased*. That is,

some agents will over‑estimate and some will under‑estimate, but they will

be correct, on average

What are the 5 most important 1) *macro* ‑ cyclical or structural; interest rates; credit availability; inﬂation;

external factors influencing industry education leading to productivity

growth? 2) *technology* ‑ increases in productivity

3) *demographic* ‑ age distribution and size

4) *governments* ‑ taxes and regulation

5) *social inﬂuences* ‑ relate to how people work, play, spend money

What are the five phases of industry 1) *embryonic*: slow growth, high prices, large investment needed, high risk

life cycle? of failure

2) *growth*: rapid growth, limited competition, falling prices

3) *shakeout*: growth has slowed, intense competition, industry

overcapacity, declining proﬁtability, cost cutting, increased failures

4) *mature*: slow growth, consolidation, high barriers to entry, stable

pricing, superior ﬁrms gain market share

5) *decline*: negative growth, declining prices, consolidation

What is the one‑year holding period value of stock *TODAY* is PV of any dividends during the year plus the PV of

DDM? the expected price of the stock at the end of the year (terminal value); *be

sure to use the expected dividend*

What is the multi‑period DDM? discount all dividends to present as well as a "perpetuity" value; don't forget

to discount the "perpetuity" value to the present as well. add dividends and

perp value together; *appropriate for rapidly growing companies*

model (justified P/E formula)? = payout / (k ‑ g)

According to Markowitz, an investor's highest utility curve is tangent to the eﬃcient frontier

investor's optimal portfolio is

determined where the?

What are the 3 steps in the portfolio 1) *Planning*: IPS

management process? 2) *Execution*: top‑down or bottom up analysis, security selection

3) *Feedback*: monitor changes with client and rebalance portfolio, evaluate

performance relative to benchmark portfolio identiﬁed in the IPS

How do you calculate covariance 1) put return data into calculator using 2nd data func to ﬁnd mean

between two assets? 2) ﬁnd diﬀerence between each period's value and each sets mean

3) take period A's diﬀerence and multiply it by period B's

4) sum all the values up

5) *divide by n ‑1*

What is the formula for correlation (Cov of A, B)

coefficient? ‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑

(STD of A) x (STD of B)

be careful, sometimes the question will include the variance, which is the

standard deviation squared.

What is the formula for the standard

deviation of a portfolio of two risky

assets?

What is the efficient frontier? *plots expected return against standard deviation of returns for eﬃcient

portfolios*; the set of portfolios that gives investors the highest return for a

given level of risk or the lowest risk for a given level of return; *the point at

which there are no more beneﬁts to diversiﬁcation*; the eﬃcient frontier line

bends backwards due to less than perfect correlation between assets; a

*portfolio to the left of the eﬃcient frontier is not attainable*

frontier that has the least risk is the

...

What is the separation theorem? think budget constraints and indiﬀerence curves from economics; this

combines the CML (risk‑free rate and eﬃcient frontier) with an investor's

indiﬀerence curve map; it separates out the decision to invest from what to

invest in. The investment selection process is simpliﬁed from stock picking to

eﬃcient portfolio construction through diversiﬁcation.

What is the capital allocation line A line created in a graph of all possible combinations of risky and risk‑free

(CAL)? assets. Also known as the "reward‑to‑variability ratio"; as you increase the

weight of the risky asset you get more risk but also a higher return

What is the capital markets line A line used in the capital asset pricing model to illustrate the rates of return

(CML)? for eﬃcient portfolios depending on the risk‑free rate of return and the level

of risk (standard deviation) for a particular portfolio; represents all possible

combinations of the market portfolio with the risk‑free asset; *derived by

drawing a tangent line from the intercept point on the eﬃcient frontier to the

point where the expected return equals the risk‑free rate of return.*;

considered to be superior to the eﬃcient frontier since it takes into account

the inclusion of a risk‑free asset in the portfolio. The capital asset pricing

model (CAPM) demonstrates that the market portfolio is essentially the

eﬃcient frontier.

What is the security market line positively sloped straight line showing relationship between expected return

(SML)? and beta (systemic risk)

Alternate beta formula = =correlation x [Std Stock / Std Market]

What does it mean to move you are borrowing funds and owning more than 100% of the market portfolio

rightward of the mkt portfolio?

What does it mean to move leftward you are lending funds or *buying the risk‑free asset* (IE lending to someone

of the mkt portfolio? else for a return)

What are some assumptions of *All investors:*

Capital Asset Pricing Model 1) Aim to maximize economic utilities

(CAPM)? 2) Are *rational* and risk‑averse

3) Are broadly diversiﬁed across a range of investments

4) Are *price takers*; they cannot inﬂuence prices

5) Can *lend and borrow* unlimited amounts under the risk free rate of

interest

6) Trade *without transaction* or taxation costs

7) Deal with securities that are all *highly divisible* into small parcels

8) Assume *all information is available* at the same time to all investors

9) All investors have the *same one‑period time horizon*

10) All investors have the *same risk/return expectations*

What is the Sharpe ratio? calculated by subtracting the risk‑free rate ‑ such as that of the 10‑year U.S.

Treasury bond ‑ from the rate of return for a portfolio and dividing the result

by the standard deviation of the portfolio returns

What is Roy's Safety First Criteria? calculated by subtracting the minimum desired return from the expected

return of the portfolio and dividing the result by the standard deviation of

portfolio returns. The optimal portfolio will be the one that minimizes the

probability that the portfolio's return will fall below a threshold level.

If the RR > ER stock is overpriced; short it

If a portfolio plots above the SML, undervalued (RR < ER)

the portfolio is ...

If a portfolio plots below the SML, overvalued (RR > ER)

the portfolio is ...

What are federally related 1) owned by the US govt and exempt from the SEC registration

institutions? 2) *backed by full faith and credit of US govt*

3) free from credit risk

EX: Government National Mortgage Association (Ginnie Mae), TVA (Tennessee

Valley Authority)

What are government sponsored 1) privately owned but publicly chartered organizations

enterprises? 2) created by US Congress

3) securities issued directly in the marketplace

4) expose investors to some credit risk

What are the four tools the Fed 1) discount rate

uses to control interest rates? 2) open market operations (most common)

3) bank reserve requirements

4) persuading banks to tighten or loosen their credit policies

Par bond coupon rate = current yield = yield to maturity

Discount bond coupon rate < current yield < yield to maturity

Premium bond coupon rate > current yield > yield to maturity

What are four characteristics of the 1) Z‑Spread is the credit spread that adjusts for the curvature of the spot rate

zero‑volatility spread measure? yld curve.

2) Z‑Spread is the constant spread which must be added to each rate on the

Treasury spot yield curve in order to make the present value of the risky

bond's cash ﬂows equal to its market price.

3) The steeper the benchmark spot rate curve, the greater the diﬀerence

between the two spread measures.

4) The earlier bond principal is paid, the greater the diﬀerence between the

two spread measures.

When the spot yield curve is upward z‑spread > nominal spread

sloping ...

When the spot yield curve is z‑spread < nominal spread

downward sloping ...

How do you calculate a forward rate if given 3f3, this means you want to know the 3 year fwd rate, 3 years from

from spot rates? now. what you need to calculate this is:

1) 3‑year spot rate

2) 6‑year spot rate

3) formula:

= [ (1 + z6)⁶ / (1 + z3)³ ] ‑ 1

How do you calculate reinvestment EX: how much reinvestment income would so‑and‑so need to earn over X

income? years to achieve a compound rate of return of Y?

PV * (rate ^ periods)

‑ principal repayment

‑ [bond coupons x periods]

‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑

= reinvestment income

How do you calculate total interest (coupon payments x n periods) + bond FV ‑ bond PV

expense?

How do think about duration think sensitivity; when you get more cash now, the bond has less sensitivity

to interest rate moves; when you have to wait longer to get the ﬁnal payout,

the bond has more sensitivity

What is the effective duration

formula?

How do you apply the effective ‑(eﬀective duration) x Δ yield x original bond price

duration when given a change in

yield and the effective duration?

What is the combined = [‑duration x Δ y] + [convexity x (Δ y) ²] x 100

duration/convexity formula?

What is the PVBP formula? = duration x 0.0001 x bond value

What does r on your calculator correlation coeﬃcient

when using the 2nd Data functions?

How do you calculate HPY from MMY x [t / 360]

MMY?

How do you calculate HPY from [1 + EAY] ^ (t / 365)

EAY?

How do you calculate the MMY from [360 × bank discount yield]

the BDY? ‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑

[360 − (t × bank discount yield)]

How do you calculate the BEY from 2 x [[1+HPY] ^ (182.5 / t)]

the HPY?

What are the four measurement 1) *nominal*: no particular order

scales? 2) *ordinal*: ordered w/respect to a speciﬁc characteristic

3) *interval*: provides relative rankings; diﬀerences between the scale values

are equal

4) *ratio*: equal diﬀerences between scale values; also have true 0 as the

origin

What is the formula for determining =(n + 1) x [y / 100]

the position of an observation at a

given percentile?

What is Chebyshev's inequality? =[1 ‑ 1/k²]

What is the formula for the standard deviation of x / mean of x

coefficient of variation?

negative skewness mean < median < mode

What are the 3 moments? Moment 2 = variance (squared)

Moment 3 = skew (cubed)

Moment 4 = kurtosis (4ths)

What is the multiplication rule of =P(AB) = P(A|B) x P(B)

probability?

What is the addition rule of =P(A or B) = P(A) + P(B) ‑ P(AB)

probability?

What is the total probability rule? =P(X | Y) = P(X).

What are the "odds for" something = P(E) / [1 ‑ P(E)] A probability of 20% would be "1 to 4"

happening?

What are the "odds against" = [1 ‑ P(E)] / P(E) A probability of 20% would be "4 to 1"

something happening?

What is a confidence interval?

How do you calculate continuous 1) input the given rate in decimal format (IE: 10% = .10)

compounding given a rate? 2) 2nd + LN

3) raise to power if doing for multiple periods

4) subtract 1 and multiply by 100

How do you calculate continuous 1) divide ending value by beginning value

compounding given a beginning and 2) Hit the LN button

ending value?

What is sampling error? sample mean ‑ population mean

What is the standard error of the

sample mean?

What is the general confidence point estimate + reliability factor + standard error

interval formula?

Normal distribution with known 1) small sample: z‑stat

variance? 2) large sample: z‑stat

Normal distribution with unknown 1) small sample: t‑stat

variance? 2) large sample: t‑stat or z‑stat

Non‑normal distribution with known 1) small sample: NA

variance? 2) large sample: z‑stat

Non‑normal distribution with 1) small sample: NA

unknown variance? 2) large sample: t‑stat

Type I & II Errors If null is true & fail to reject = Correct!

if null is true and reject = Type 1 error! signiﬁcance level, α

‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑‑

If null is false & fail to reject = Type 2 error!

if null is false and reject = Correct! (1‑ P)

When is a pooled variance used? with the t‑test for testing the hypothesis that the *means of two normally

distributed populations are equal*, when the variances of the populations are

unknown but assumed to be equal

What is a paired comparisons test? a test of whether the average diﬀerence between monthly returns is

signiﬁcantly diﬀerent from zero, based on the standard error of the

diﬀerences in monthly terms

What is a chi‑squared test? used for hypothesis tests concerning the variance of a normally distributed

population

How do you calculate a test chi‑ (n‑1) / hypothesized value

squared statistic?

What is the F‑statistic? s₁² / s₂²; always put the larger variance in the numerator

concerned with the *equality of the variances of two populations*

What are parametric tests? rely on assumptions regarding distribution of population and are speciﬁc to

population parameters.

What are non‑parametric tests does not consider particular population parameter or have few assumptions

about population that is sampled. Used when concerned about quantities

other than the parameters of a distribution or when the assumptions of the

parametric tests can't be supported.

What are non‑parametric test 1) hypothesis test of mean value for a variable that comes from a distribution

situations? 2) when data are ranks (an ordinal measurement scale) rather than values

3) hypo not involve parameters of distribution, such as testing whether a

variable is normally distributed. Use run tests

Marginal cost = ∆ TC / ∆ in output

Breakeven points 1) perfect competition: AR = ATC

2) imperfect competition: TR = TC

Short‑run shutdown points 1) perfect competition: AR < AVC

2) imperfect competition: TR < TVC

Long‑run shutdown points TR < TC

P < AC

GDP deflator = [nominal GDP in year t / value of year t output at base year prices] x 100

GDP equation = C + I + G + (X ‑ M)

Growth in potential GDP = growth in technology + growth in labor + growth in capital

Money multiplier = 1 / reserve requirement

Equation of exchange = MV = PY (money supply x velocity = price x real output)

Fisher effect = nominal interest rate = real interest rate + *expected* inﬂation rate

What are the three categories of Ep > 1; demand is elastic

price elasticity? Ep = 1; demand is unitary elastic

Ep < 1; demand is inelastic

Is there a well‑defined supply no. why? bc all three face downward sloping demand curves; qty supplied is

function under monopolistic determined by the intersection of MC and MR; price charged is then

competition, oligopoly and determined by the demand curve. only perfect competition has a well‑

monopoly? deﬁned supply curve.

What is the N‑firm concentration 1) measures the concentration of a market (usually in regards to determining

ratio? if a merger should be allowed).

2) sum of the percentage mkt shares of the N ﬁrms in a mkt. *does not

directly measure mkt power or elasticity of demand*.

3) *may be relatively insensitive to mergers of two ﬁrms w/large mkt shares.*

What is the Herfindahl‑Hirschman 1) measures concentration of a market (usually in regards to determining if a

Index? merger should be allowed).

2) *sum of the squares of the mkt shares of the largest ﬁrms in the mkt*.

3) *does not take possible entry into mkt into account; nor does it consider

elasticity of demand*

What is the source of differences in diﬀerences in labor productivity due to diﬀerences in technology

production costs in the Ricardian

model?

What are the two factors of capital and labor

production under the

Heckscher/Ohlin model?

What are the 5 kinds of trading 1) *Free Trade area*: all barriers to ﬂow of goods are eliminated between

blocs? members

2) *Customs Union*: same as FTA & in addition creates a common trading

policy with non‑members

3) *Common Market*: same as customs union & allows free movement of

factors of production; removes all barriers to movement of labor and capital

among members

4) *Economic Union*: same as common market & coordination of economic

policy

5) *Monetary Union*: same as economic policy + adopt a common currency

What are the three accounts which 1) current account

constitute the BOP (balance of 2) capital account

payments)? 3) ﬁnancial account

What is the current account? sum of the balance of trade (X ‑ M); both government and private payments

are included in the calculation; goods and services are generally consumed in

the current period.

What is the capital account? reﬂects net change in national ownership of assets. A surplus means money

is ﬂowing into the country; deﬁcit means money is ﬂowing out the country,

but it also suggests the nation is increasing its claims on foreign assets.

What is the financial account of? 1) govt‑owned assets abroad

2) foreign owned ﬁnancial assets with the reporting country

What is the equation representing X ‑ M = private savings + government savings ‑ investment

the relationship between trade X ‑ M = (T ‑ G) + (S ‑ I)

deficit, saving and domestic

investment?

How do you calculate ending ending inventory = beginning inventory + purchases ‑ COGS

inventory?

What is the base currency? currency in the denominator

What is the price currency? currency in the numerator

The foreign currency is the base direct quote (foreign currency in denominator)

currency for a?

The home currency is the base indirect quote (home currency in denominator)

currency for a?

What is the interest rate parity forward rate = spot rate x (1+domestic rate / 1+foreign rate)

formula?

If USD/EUR spot exchange rate is 1.3425, USD = forward premium, EUR = forward discount; in 6 months 1

1.3500 and 6‑month forward points Euro will only buy 1.3425 instead of 1.3500, so currently it is at a premium

are −75, the 6‑month forward

exchange rate is:

If RFR goes up puts: go down

calls: go up

If RFR goes down puts: go up

calls: go down

How are lease payments accounted whether a lease is an operating or a ﬁnance lease, both GAAP and IFRS

for? require disclosure of the minimum lease payments *for each of the next ﬁve

years and the sum of minimum lease payments more than ﬁve years in the

future*

- CFA 1 Financial Reporting & AccountingUploaded byAspanwz Spanwz
- DA4569-CFA-Level-I-SmartSheet.pdfUploaded byVedant chaudhary
- Top 9 CFA Level 1 Formulas – Must Read _ FinQuizUploaded byEshanMishra
- Fixed-income.pdfUploaded byAkash Deep
- CFA Level 1 NotesUploaded bykazimeister1
- CFA Level 1 - Economics Flashcards _ QuizletUploaded bySilviu Trebuian
- Free CFA Mind Maps Level 1 - 2015Uploaded byJaco Greeff
- CFA level 1 Links.docxUploaded byKamal Soni
- CFA Mind Maps Level 1Uploaded bymuneesa nisar
- CFA Level 1, June, 2016 - Formula SheetUploaded byWilliam Kent
- mock quizUploaded bynaveen.ibs
- 2019 CFA Lecel 1 Check-point Exam 1 - AnswersUploaded byjackxq4
- CFA Level 1 SummaryUploaded byTháng Mười
- FinQuiz-Level1Mock2016Version1DecemberAMSolutions.pdfUploaded bySiddharthaSaiKrishnaGonuguntla
- FinQuiz-Level1Mock2016Version1DecemberAMQuestionsUploaded bySiddharthaSaiKrishnaGonuguntla
- 2018 cfa Level 3 Wiley Formula SheetUploaded byjackxq4
- 2015CFAL1SecretSauceUploaded byMuhammad Hasnain Yousaf
- CFA Prep Level 1Uploaded byPrakarsh Aren
- CFA Study Strategy v.2Uploaded byKhanh Ngo
- CFA mindmapUploaded byHongjun Yin
- CFA Level I Formula SheetUploaded byAnonymous P1xUTHstHT
- CFA Level 1 Mock Exam 1 Morning PaperUploaded bySiddharthaSaiKrishnaGonuguntla
- CFA I Study Plan 12weeksUploaded byconnectshyam
- CfaUploaded byajeetmishra
- 1081 Q&A CFA EXAM level 1 - MacroeconomicsUploaded bykyo_naf
- Financial Analyst CFA Study Notes: Quantitative Methods Level 1Uploaded byAndy Solnik
- Past CFA Level 1 FRA QsUploaded byAditya Bajoria
- TimePrep Guide for the CFA ExamUploaded byCris Cris
- Notes Cfa SummaryUploaded byForis Lee

- Mesdaq Listing ProceduresUploaded byRaden Mash
- Never to Invest in Highest NAV Guarantee Plans WorkUploaded bykirang gandhi
- Finanacial Restructuring 2Uploaded byJim Mathilakathu
- International Portfolio InvestmentUploaded byMomina Ayaz
- Features of Corporate Governance-FactorUploaded byNeel Patel
- Bachelor of Science - Advanced Study PhaseUploaded byMatthias Catón
- NCFM Surveillance ModuleUploaded byVidyasagar Jagadeesan
- Financial Glossary Reuters .pdfUploaded byPablo Bouvier
- Special Report the Value of DividendsUploaded byDatuk Bendahara
- Schnieder_2017-annual-report-tcm50-370363.pdfUploaded byRaghav Bhatnagar
- Error 06280 or 06855 “Not Possible to Determine Shipping…” During STO Creation - ERP SCM - SCN WikiUploaded byDiego
- Rev. Financ. Stud. 2008 Bhattacharya 3 10Uploaded byDaria Yudintseva
- 15 Minute Retirement PlanUploaded byJohnathanStein
- Corporation Audio LectureUploaded byBi Tin
- Investing Answers Building and Protecting Your Wealth Through Education Publisher of the Next Banks That Could FailUploaded bylekha1997
- Tanmay Chattopadhyay, Shradha Shivani, Mahesh KrishnanUploaded byShikhar Virmani
- Edited Research 2Uploaded bySaad Hassan
- Statement of Change in Financial Position-5Uploaded byAmit Singh
- ws_20150525.pdfUploaded byDawood Gacayan
- "Trading the 10 O'Clock Bulls" Geoff ByssheUploaded byapi-26247058
- Reading 43-Private Real Estate Investments-QuestionUploaded byThekkla Zena
- Investment analysisUploaded byJaya Tibrewal
- eBook EtfmillionaireUploaded byray
- CFA Career GuideUploaded bylegolas55569
- Copy of Summer Internship ProjectUploaded byAchyut Saxena
- s14-33Uploaded byElsa Mendoza
- Corporate GovernanceUploaded byskb126
- Prediction of Tech Bubble Collapse Mark ThorntonUploaded byParallaxster
- San Juan Structural v CA Case DigestUploaded byEqui Tin
- M01 MishkinEakins3427056 08 FMI C01Uploaded byAhmad Rahhal