Professional Documents
Culture Documents
Clients come first. Treat clients’ investment like VII(A) Conduct as Participants in Money Market Yield (CD Equivalent Yield)
your own but with higher priority. CFA Institute Program 360 360 × r_`
rff = HPY × =
Do not compromise CFA Institute’s reputation. Days to maturity 360 − t × r_`
III(B) Fair Dealing
Do not share exam details.
Treat all clients fairly. Communicate investment
Bond Equivalent Yield
h.^
recommendations and changes simultaneously. VII(B) Reference to CFA Institute, the CFA BEY = 2 1 + EAY −1
Designation, and the CFA Program
III(C) Suitability Type of Measurement Scales
Do not misrepresent or exaggerate CFA Institute
Use a regularly updated IPS during investment Nominal: Only differentiates between objects
membership, designation, or candidacy.
decisions. Choose suitable investments in a Ordinal: Allows for rank order
portfolio context. Interval: Allows for degree of difference
Ratio: Has meaningful zero value
III(D) Performance Presentation QUANTITATIVE METHODS
QUANTITATIVE METHODS
P AB = Sampling
Zero skewness: P B
Simple random sampling: Subset of population is
- Distribution is symmetrical (e.g. normal)
x − µh Reversal Patterns
t-statistic = , degrees of freedom = n − 1 Head and shoulders (H&S): Indicate an upcoming
Significance Confidence s n
𝑧𝑧ô t
level interval x − µh downtrend following a preceding uptrend
z-statistic = Inverse H&S: Indicate an upcoming uptrend
10% 90% 1.645 s n
5% 95% 1.960 Small sample from normal population with following a preceding downtrend
1% 99% 2.575 unknown population variance: Price target = Neckline − Head − Neckline
x − µh Double/Triple tops: When an uptrend reverses
Biases t-statistic = , degrees of freedom = n − 1
s n two/three times at about the same high
Sample selection bias: Excluding subsets of data
Double/Triple bottoms: When a downtrend
because of data availability Tests Concerning Differences between Means reverses two/three times at about the same low
Survivorship bias: A type of sample selection Normal populations with unknown variances that
ECONOMICS ECONOMICS Average total cost (ATC): AFC + AFV or TC Q Market Power Measures
Marginal cost (MC): ΔTC ΔQ N-firm concentration ratio: Sum of market share
Own-Price Elasticity of Demand
of the N largest firms in the industry
%ΔQJä Shutdown & Breakeven
ERJ• = Herfindahl-Hirschman Index (HHI): Sum of squares
%ΔPä Perfect competition:
of market share of the N largest firms
ERJ• > 1: elastic AR = ATC: Break even
ERJ• < 1: inelastic AR ≥ ATC: Stay in the market Gross Domestic Product (GDP)
AVC ≤ AR < ATC: Stay in short run; exit in long Nominal GDP: GDP in terms of current prices
ERJ• = ∞: perfectly elastic
AR < AVC: Shut down in short run; exit in long Real GDP: GDP in terms of base-year prices
ERJ• = 0: perfectly inelastic
Imperfect competition: GDP deflator: Nominal GDP Real GDP ×100
Income Elasticity of Demand TR = TC: Break even GDP = C + I + G + X − M
%ΔQJä ΔQJä I TC > TR > TVC: Continue operation in short run; C = consumption; I = investment
E©J = = G = government spending
%ΔI ΔI QJä shutdown in long run
E©J > 0: normal good TR < TVC: Shutdown in short and long run X = exports; M = imports
E©J < 0: inferior good Productivity National Income
Cross-Price Elasticity of Demand Marginal revenue product (MRP) of labor: Sum of:
%ΔQJä ΔQJä PQ Change in TR Change in quantity of labor - Employee compensation
ERJ™ = = Profit maximization: - Corporate and government pretax profit
%ΔPQ ΔPQ QJä
MRPo MRPO - Interest income
ERJ™ > 0: substitutes =⋯= = 1
Price of input 1 Price of input n - Unincorporated business net income
ERJ™ < 0: complements Profit maximized for each product when: - Rent
MRP = Price of input - Indirect business taxes, less subsidies
Income and Substitution Effects
Price of Good X decreases: Perfect Competition Personal Income
Substitution Consumption - Many firms = National income − Indirect business taxes
Income effect
effect of Good X - Identical products − Corporate income taxes
Positive Positive Increase - Very low barriers to entry − Undistributed corporate profits
Negative - Firms have no pricing power + Transfer payments
Positive (smaller than Increase Profit maximization:
- Increased labor productivity - Regulate and supervise payments system Exchange Rate Calculations
- Decreased input prices - Lender of last resort CPIÆ
Real ex. rateJ Æ = Nominal ex. rateJ Æ ×
- Expectations of higher output prices - Gold and foreign exchange reserves holder CPIJ
- Decrease in business taxes/increase in subsidies - Operate monetary policy Forward exchange rateJ Æ 1 + iJ
=
- Appreciating exchange rate Spot exchange rateJ Æ 1 + iÆ
Tools to Implement Monetary Policy Cross rate: SÖ = SÖ Ø × SØ _
_
Factors Increasing LR Aggregate Supply (AS) Policy rate: Expansionary when less than neutral Forward exchange rates in points:
- Increased supply and quality of labor interest rate; contractionary otherwise - Unit of points is last decimal place in spot
- Increased supply of natural resources Reserve requirement: Increase/decrease funds exchange rate quote
- Increased stock of physical capital available for lending and money supply - Example: If spot exchange rate is quoted in 4
- Technological improvements Open market operations: Buy/sell government
decimal places, each point is 0.0001
bonds to increase/decrease money supply
Business Cycle Phases
Exchange Rate Regimes
Trough (lowest point) Fiscal Policy: Spending Tools Formal dollarization: No own currency; adopt
Expansion (comes after trough) Transfer payments: Redistribution of wealth (e.g.
another country’s currency
Peak (highest point) Social Security and unemployment benefits)
Monetary union: Adopt common currency
Contraction (comes after peak) Current spending: Spending on goods and services
Currency board: Commitment to exchange
Capital spending: Spending on infrastructure
Business Cycle Theories
domestic currency for specified foreign currency at
Neoclassical: Free market; “invisible hand” Fiscal Policy: Revenue Tools fixed exchange rate
Austrian: Similar to Neoclassical; government Direct taxes: Tax on income (e.g. income taxes, Fixed peg: Currency is pegged to foreign currency
intervention causes market fluctuations corporate taxes, capital gains taxes) (or basket of currencies) within ±1% margin
Keynesian: Advocate government fiscal policy Indirect taxes: Tax on goods and services Target zone: Fixed peg with wider margin
Monetarist: Maintain steady money supply growth Crawling peg: Exchange rate is pegged and
Fiscal Multiplier
New classical: Applies microeconomic analysis adjusted periodically
1
to macroeconomics = , where MPC = marginal Crawling bands: Margin increases over time,
1 − MPC 1 − t
usually to transition from fixed peg to floating
Unemployment propensity to consume; t = tax rate
Managed floating: Monetary authority intervenes
Unemployed: Jobless people who are seeking jobs
Gains from Trade to manage exchange rate without a target level
Labor force: People with a job or unemployed
Absolute advantage: Can produce at lower cost Independently floating: Exchange rate is
Unemployment rate: Unemployed Labor force
Comparative advantage: Opportunity cost of market determined
Type Result of
producing good is lower
Frictional Temporary transitions
Quotas: Limits on quantity of imported goods
Economic Indicators Export subsidies: Government payment to
Leading: Turning points precede those of the exporting firms
overall economy Minimum domestic content: Minimum domestic
Coincident: Turning points occur along with those product requirement in goods
of the overall economy Voluntary export restraint: Voluntarily limiting
Lagging: Turning points occur after those of the exports, often to avoid tariffs or quota
overall economy
Cash movement after accounting recognition: shares shares debt options Free Cash Flow (FCF)
- Accrued revenue: Asset; cash not yet received Only include potentially dilutive security in
Measures cash available for discretionary purposes
calculation after checking that it is dilutive.
after good or service provided
Free cash flow to the firm (FCFF): Cash available to
- Accrued expenses: Liability; cash not yet paid for Balance Sheet Components equity owners and debt holders.
expenses incurred Accounts receivable: Reported at net realizable FCFF = NI + NCC + I × 1 − t − FCI − WCI
value based on bad debt expense. Bad debt FCFF = CFO + I × 1 − t − FCI
FASB, IASB, and IOSCO
expense increases allowance for doubtful accounts, NI = net income
FASB: Sets forth Generally Accepted Accounting
which contras accounts receivables. NCC = noncash charges (e.g. depreciation)
Principles (GAAP) in the U.S.
Inventory: I = interest expense
IASB: Establishes International Financial Reporting
IFRS – LIFO not permitted; inventories reported at FCI = fixed capital investment
Standards (IFRS) outside the U.S.
lower of cost or net realizable value. WCI = working capital investment
FASB-IASB Convergence: In May 2014, FASB and
U.S. GAAP – LIFO permitted; inventories reported Free cash flow to equity (FCFE): Cash flow available
IASB each issued converged standard for
at lower of cost or market. to common shareholders
revenue recognition.
Property, plant, and equipment (PP&E): FCFE = CFO − FCI + NB
IOSCO: Not a regulatory authority but
IFRS – can be reported using cost model or NB = net borrowing = debt issued − debt repaid
members regulate most of the world’s
revaluation model; recoverable amount is greater
financial capital markets Common-Size Analysis
of (1) fair value less selling costs, and (2) value in
Vertical:
Income Statement Components use (PV of asset’s future cash flow stream); loss
- Represent each item on income statement as
Gross profit: Revenue less direct costs to produce recoveries are allowed.
percentage of revenue.
good or service U.S. GAAP – only cost model is allowed; loss
- Represent each item on balance sheet as
Operating profit: Gross profit less selling, general, recoveries not allowed.
percentage of total assets.
and administrative expenses
Cash Flow Statement Components - Represent each item on cash flow statement as
Revenue Recognition Methods U.S. GAAP: percentage of total cash inflows/outflows.
Percentage-of-completion: Item Classification Horizontal:
- Used under IFRS and U.S. GAAP when outcome of Dividends paid Financing - Express each item relative to its value in a
long-term contract can be reliably measured Interest paid Operating common base period
- Revenue, expense, and profit are recognized Dividends received Operating Activity Ratios
based on percentage of completion Interest received Operating Annual sales
- Percentage of completion is cost incurred to date Receivables turnover =
All taxes Operating Average receivables
divided by total expected cost
Days of sales 365
Completed contract: IFRS: =
outstanding Receivables turnover
- Used under U.S. GAAP when outcome of long- Item Classification Cost of goods sold
Inventory turnover =
term contracts cannot be reliably measured. Dividends paid Operating/Financing Average inventory
- Revenue, expense, and profit are recognized only Interest paid Operating/Financing Days of inventory 365
=
when the contract is complete Dividends received Operating/Investing on hand Inventory turnover
- Under IFRS, revenue is recognized to the extent of Interest received Operating/Investing Purchases
Payables turnover =
contract costs, which means profit is recognized Income taxes Operating Average trade payables
at completion Tax expense from Number of days 365
Investing =
Installment & Cost recovery: of payables Payables turnover
investing transaction
- Under U.S. GAAP, if collectivity is certain, revenue Revenue
Tax expense from Total asset turnover =
is recognized at time of sale. Profit is cash Financing Average total assets
financing transaction
Revenue
collected multiplied by expected profit as Fixed asset turnover =
CFO Direct Method Average net fixed assets
percentage of revenue
- Convert each accrual-based item in the income Working capital Revenue
- If collectivity is uncertain, use the cost recovery =
turnover Average working capital
method, where profit is only recognized when the statement to cash inflow/outflow
project cost is recovered - CFO is net of cash inflows and outflows
Bonds
Retention rate RR = 1 − Dividend payout ratio
Intangible Assets Premium bond: Coupon rate > yield at issuance
Sustainable growth rate g = RR × ROE
Purchased: Record at fair value (assumed equal to Discount bond: Coupon rate < yield at issuance
Price per share
P/E Ratio = purchase price) Zero-coupon bond: Bond with no coupons
Earnings per share
Developed internally: Issuance costs: U.S. GAAP – capitalized as an asset;
DuPont Analysis IFRS IFRS – reduces initial bond liability
Net income Assets - Research expenditures are expensed
ROE = Derecognition of debt: If an issuer redeems a bond
Assets Equity - Development expenditures are capitalized
before maturity, a gain/loss (book value minus
Return on Leverage GAAP
ROE = redemption price) is recognized
Assets ratio - Generally, both research and development costs
Net income Revenue Assets are expensed Debt covenants: Affirmative – borrower promises
ROE = to do certain things; negative – borrower promises
Revenue Assets Equity Acquired in business combination:
Net profit Asset Leverage Acquirer allocates purchase price to each to refrain from certain things
ROE =
margin turnover ratio asset acquired on fair value basis; excess
NI EBT EBIT Revenue Assets
ROE = recorded as goodwill
EBT EBIT Revenue Assets Equity
Tax Interest EBIT Asset Financial
ROE =
burden burden margin turnover leverage
payments recognized as rental expense - CPT + NPV to compute NPV; CPT + IRR for IRR Flotation Costs
Conditions requiring a lease to be a finance lease: NPV decision rules: Correct way to account for flotation costs is to
IFRS - Accept projects with positive NPV adjust initial investment, not to increase WACC
- Title transferred to lessee at end of lease - Reject projects with negative NPV
Measures of Leverage
- Bargain purchase option available to lessee - If only one of multiple mutually exclusive projects
Degree of operating leverage (DOL):
- Lease term is majority of asset’s economic life can be accepted, accept project with highest NPV
%Δ Operating income Q P−V
- PV of lease payment is close to fair value
DOL = =
Internal Rate of Return (IRR) %Δ Units sold Q P−V −F
- Asset is so specialized that only lessee can use
IRR is r such that NPV = 0. Degree of financial leverage (DFL):
asset without significant modifications. %Δ Net income Q P−V −F
IRR decision rules: DFL = =
U.S. GAAP (lease must be treated as finance lease if %Δ Operating income Q P − V − F − C
- Accept if IRR > required rate of return
any of the following criteria are met) Degree of total leverage (DTL):
- Reject if IRR < required rate of return
- Title transferred to lessee at end of lease %Δ Net income Q P−V
- Go with NPV decision if IRR decision does not DTL = =
- Bargain purchase option available to lessee %Δ Units sold Q P−V −F−C
match NPV decision
- Lease period is ≥ 75% of asset’s economic life DTL = DOL × DFL
- PV of lease payments is ≥ 90% of fair value Payback Period
- Number of years required for cumulative cash Breakeven
Pension F+C
flows to equal initial investment Breakeven: Q _ª =
Defined contribution: Firm periodically contributes P−V
- Does not take into account time value of money
to employee’s retirement account during F
Operating breakeven: Q ≥_ª =
employment. Employer contribution is expensed in Discounted Payback Period P−V
period incurred. Number of years required for cumulative Q = quantity; P = price; V = variable cost/unit
Defined benefit: Firm makes periodic payments to discounted cash flows to equal initial investment F = fixed operating cost; C = fixed financial cost
employee after retirement. Over- (under-) funded Dividends
Profitability Index (PI)
plan recognized as asset (liability). - Cash dividends and stock dividends do not affect
PV of future cash flows NPV
PI = =1+ shareholder wealth.
Financial Reporting Quality Spectrum CFh CF≥
1. Compliant with GAAP; decision useful; adequate Accept if PI > 1; reject if PI < 1 - Stock splits are essentially stock dividends.
and sustainable earnings
Payment chronology:
Crossover Rate - Declaration date – company declares dividend
2. Compliant with GAAP; decision useful;
- Rate at which NPV profile of two projects cross - Ex-dividend date – two days before HOR date
inadequate and unsustainable earnings
- Calculated as IRR of difference in cash flows - Holder-of-record (HOR) date – shareholders
3. Compliant with GAAP; reporting choices biased;
inadequate and unsustainable earnings Weighted Average Cost of Capital (WACC) listed on company records will be deemed to have
4. Compliant with GAAP; earnings actively WACC = wJ rJ 1 − t + wR∂ rR∂ + w∑L r∑L ownership of shares to receive dividends
managed (increased/decreased/smoothed) wJ = percentage of debt in capital structure - Payment date – company pays dividends
5. Not compliant with GAAP; numbers presented wR∂ = percentage of preferred stock Share Repurchases
based on company’s actual economic activities w∑L = percentage of common stock Changes in earnings per share (EPS):
6. Not compliant with GAAP; numbers fictitious t = tax rate Cost of debt < Earnings yield EPS increases
or fraudulent rJ = cost of debt Cost of debt > Earnings yield EPS decreases
rR∂ = cost of preferred stock = DR∂ P Changes in book value per share (BVPS):
Aggressive vs. Conservative Accounting
r∑L = cost of common stock Stock price < BVPS BVPS increases
Aggressive Conservative k ∑L = Do Ph + g dividend discount model Stock price > BVPS BVPS decreases
Costs capitalized Costs expensed k ∑L = R ≤ + β E R ; − R ≤ CAPM
Expected'Return
Aversion - Markets are frictionless
change a company’s financial and operating
Risk'Neutral - All investors plan for same single holding period
positions (e.g. asset liquidation, renegotiation of
- Investors have homogeneous expectations
debt, bankruptcy protection, reorganization)
- Investments are infinitely divisible
Drag on liquidity: Delayed cash inflows Risk'Seeking
Pull on liquidity: Accelerated cash outflows - Investors are price takers
Cost of trade credit (CTC): Cost of not taking the E R R = R Æ + βN E R ; − R Æ
discount for early payment 0 !i
\]^ Standard'Deviations
Security Market Line (SML)
%discount JPQ∂ RP∂S JN∂∑MKOS
CTC = 1 + − 1 Graphical representation of CAPM:
1 − %discount Minimum-Variance Portfolios SML
E(Rp)
Corporate Governance E(Rp)
- Board should be independent of management. Markowitz(EfDicient(Frontier
E(Rm) M
Expected*Return
- Audit committee should resolve conflicts !i =*!m
between auditor and management in a way that
Expected(Return
8R i
favors shareholders Rm
*=*
pe
- Compensation committee should Slo
provide shareholders with executive Minimum<Variance
Global( Frontier Rf
compensation information
Minimum<
- Firms should have strong code of ethics.
Variance
- Confidential voting and remote proxy voting 0 !i
Portfolio 1.0
promote shareholder interests Beta
0 !p
Takeover defenses (provisions to make Portfolio(Standard(Deviations
Expected*Return
PORTFOLIO MANAGEMENT
PORTFOLIO MANAGEMENT E RN − RÆ
E RR = RÆ + σR
Portfolio Management Process σN
Stock Y
Planning: List objectives and constraints in IPS Capital Market Line (CML)
Execution: Asset allocation, security analysis, CAL with risky portfolio being market portfolio
Rf
portfolio construction E R; − RÆ
Feedback: Monitoring and rebalancing, E RR = RÆ + σR
σ;
0 !i
performance measurement and reporting
- Communications ratio σR
- Strategic analysis or integration M- σ;
RR − RÆ − R; − RÆ
Risk tolerance: Which risks are acceptable and how squared σR
much risk should be taken Treynor RR − RÆ
Systematic
Financial risks: Arise from financial market Beta Jensen’s
activities (e.g. market, credit, liquidity risk) Systematic risk = Non-diversifiable / market risk R R − R Æ + βR R ; − R Æ
alpha
Non-financial risks: Arise from within entity or Unsystematic risk = Diversifiable risk
from external (e.g. operational, legal, regulatory, Total risk = Systematic risk + Unsystematic risk Investment Policy Statements (IPS)
political, model, tail risk) Cov R N , R ; ρN,; σN Investment objectives: Risk objectives,
Risk measures: Standard deviation, beta, duration, βN = =
σt; σ; return objectives
delta, gamma, VaR, CVaR, etc. Constraints: Liquidity, time horizon, tax concerns,
Risk modification: By prevention and avoidance, legal and regulatory factors, unique circumstances
transfer (insurance), or shifting (derivatives)
- Threat of new entrants Putable Bonds
Orders - Intensity of rivalry VìKSP∫¨L ∫MOJ = VNon-putable bond + VìKS
Execution instruction: How to fill the order
(e.g. market order, limit order) Industry Life Cycle Convertible Bonds
Validity instruction: When the order may be filled Embryonic Conversion price: Price per share at which bond
(e.g. day order, fill or kill) Slow growth, high prices, high failure risk, can be converted into shares
Clearing instruction: How to settle the trade significant investment required Conversion ratio: Number of common shares
Total Return over Single Period Decline CR = MDR Price = Par Value Par
PNo − PNh + IncN Negative growth, excess capacity, CR < MDR Price < Par Value Discount
TR N =
PNh high competition CR > MDR Price > Par Value Premium
I
VìΩ©o − VìΩ©h + Inc© Dividend Discount Model (DDM) Flat Price, Accrued Interest, and Full Price
TR © = = wN TR N
VìΩ©h ø
Nno DS PV ≤K¨¨ = PV ≤¨PS + AI = PV 1 + r S æ
Vh =
1+r S AI = t T × PMT
Price Return Index over Multiple Periods Sno
O
VìΩ©æ = VìΩ©h 1 + PR ©o 1 + PR ©t … 1 + PR ©æ DS PO Yield Measures
Vh = +
1+r S 1+r O Annual cash coupon payment
Total Return Index over Multiple Periods Sno Current yield =
Flat price
VæΩ©æ = VæΩ©h 1 + TR ©o 1 + TR ©t … 1 + TR ©æ Perpetual preferred stock; constant dividend:
Annual cash Amortized
Dh +
Weighting Vh = coupon payment gain/loss
r Simple yield =
PN Flat price
wNì = Gordon constant growth model:
Price I Yield-to-call (YTC) = IRR assuming the bond is
Ñno PÑ
ø
Dh 1 + g S Dh (1 + g) Do called early at the stated call price
1 Vh = = =
Equal wNª = 1+r S r−g r−g Yield-to-worse = min YTC, yield-to-maturity
Sno
N
fN Q N PN g = Earning retention rate × ROE
Market capitalization wNf = Yield Measures for Money Market Instrument:
I g = 1 − Dividend payout ratio × ROE
Ñno fÑ Q Ñ PÑ Discount Rate (DR) Basis
FN Days
Fundamental wN≤ = I
PV = FV × 1 − × DR
Ñno FÑ Year
1 + zÖ Ö
× 1 + IFR Ö,_ãÖ = 1 + z_ _ PVã + PVï − 2 PVh Option Moneyness
EffCon = Option Moneyness Call Put
ΔCurve t PVh
Yield Spreads over Benchmark Yield Curve
Duration gap = Macaulay duration In-the-money SS > X SS < X
PMT PMT PMT + FV
PV = + + ⋯+ At-the-money SS = X SS = X
1 + zo + Z o 1 + zt + Z t 1 + zI + Z I − Investment horizon
OAS = Z-spread − Option value in basis points
Out-of-the-money SS < X SS > X
Credit Analysis
Asset-Backed Securities E[Loss] = Pr(Default) × Loss severity Factors Impacting Option Values
Securitization Process Loss severity = 1 − Recovery rate Increase in Call Put
- A special purpose vehicle (SPV) buys assets from
Value of underlying ↑ ↓
the seller firm and issues asset-backed securities Credit Ratings
Exercise price ↓ ↑
(ABS) against the assets Investment grade: Baa3/BBB- and above
Non-investment grade: Ba1/BB+ and below Time to expiration ↑ ↑*
- A servicer (could be same entity as seller) collects
funds and performs other related responsibilities
Risk-free rate ↑ ↓
Four C’s of Credit Analysis Volatility of underlying ↑ ↑
Residential Mortgage Loans
- Interest: fixed, adjustable, convertible - Capacity Payments on underlying ↓ ↑
- Amortization: full, partial, interest-only - Collateral
Cost of carry ↑ ↓
- Prepayment: penalty, no penalty - Covenants
*Except for some deep-in-the-money put options
- Foreclosure: non-recourse, recourse - Character
Hedge Fund Fees: For annuity, loan, and bond calculations The Month Before Exam Day
- “2 and 20” – 2% management fee and 20% N : Number of periods ¨ Review and print your exam admission ticket on
incentive fee I/Y : Effective interest rate per period (in %) clean, blank paper.
- Hard hurdle rate – incentive fee calculated on ¨ If the name on your exam admission ticket does
PV : Present value
returns above the hurdle rate not match the name on your passport exactly,
PMT : Payment/coupon amount
- Soft hurdle rate – incentive fee calculated on update your name in your CFA Institute account
FV : Future value/redemption value as soon as possible. Reprint your ticket after the
entire return if hurdle rate is cleared
- High water mark – incentive fee only applies to CPT + one of the above : Solve for unknown name change.
profits after previous losses have been recovered 2ND + BGN : Toggle between ordinary annuity ¨ Check directions to the test center and special
and annuity due instructions for travel and parking.
Private Equity
2ND + CLR TVM : Clear TVM worksheetNote: ¨ Plan travel route to the test center.
Leveraged buyouts:
- Always clear the TVM worksheet before The Week Before Exam Day
- “Going private” transactions
starting a new calculation. ¨ Plan to dress in layers as temperatures at test
- Management buyouts – current management
- For bonds, PMT and FV should have the same centers can vary.
team is involved in the acquisition
sign, and opposite signs to PV ¨ Plan your lunch.
- Management buy-ins – current management team
¨ Review instructions for filling out answer sheet.
is being replaced by the acquiring team Cash Flow Worksheet ( CF , NPV , IRR )
¨ Review the CFA exam personal belongings
Venture capital: For non-level payments
policy (link at end of section).
- Formative-stage financing – angel investing, Input ( CF )
seed-stage financing, early stage financing CF0: Initial cash flow What to Bring to the Test Center
- Later-stage financing – after commercial C01: 1st distinct cash flow after initial cash flow ¨ Valid international travel passport
production and sales have begun but before IPO F01: Frequency of CO1. ¨ Exam admission ticket
- Mezzanine-stage financing – prepare to go public C0n: nth distinct cash flow. ¨ At least one approved calculator
Exit strategies: F0n: Frequency of C0n. ¨ No. 2 or HB pencils
Trade sale, IPO, recapitalization, secondary sales, Note: ¨ Eraser
write-off/liquidation - Always clear the CF worksheet before starting ¨ Pencil sharpener
a new calculation. CFA Exam Personal Belongings Policy
Real Estate
- The use of F0n is optional. You can leave them as http://www.cfainstitute.org/about/governance/p
Examples: Residential property, commercial real
1 and input repeating cash flows multiple times. If olicies/Pages/personal_belongings_policy.aspx
estate, REIT investing, mortgage-backed securities,
you do so, C01 will be the cash flow at time 1, C02
timberland, and farmland
Real estate valuation: comparable sales, income, will be the cash flow at time 2, and so on.
and cost approaches Output ( NPV , IRR )
I: Effective interest rate per period (in %)
Commodities NPV + CPT : Solve for net present value
Contango: Little/no convenience yield; futures IRR + CPT : Solve for internal rate of return
price > spot price
Backwardation: High convenience yield; futures
price < spot price
Roll yield: Spot price − Futures price
Futures price: Spot price 1 + 𝑟𝑟 + Storage
costs – Convenience yield