Cfa Flashcards
1
Q
Full price of bond?
A
Pv on last coupon * (1+ytm) ^ days since etc
2
Q
Which bonds more sensitive to yield change?
A
Lower coupon /longer maturity
3
Q
What’s convexity
A
Fall in value with rise in yield is BIGGER than other way round
4
Q
Current yield
A
Annual cash coupon / price
5
Q
Simple yield
A
Annual coupon +/- straight amortised discount / premium all over flat price
6
Q
Option value on a embedded bond
A
Z spread - OAS
7
Q
Short investment horizon
A
Price risk > reinv risk
8
Q
What is annual mac duration?
A
Weighted avg no. Of yrs until each of bonds promised cash flows is to be paid. Weights are pv of each cash flow as percentage of bond full value. Sweet spot where there’s no price or reinv risk.
9
Q
Difference between mac duration and inv horizon
A
Duration gap. If positive, exposed to price risk from rising interest rates.
If negative, exposed to reinv risk from falling interest rates.
10
Q
Mod dur (NOT APPRX MOD DURATION - THIS IS DIFFERENT). What does mod dur tell us?
A
Mac duration/ 1 + yield. Percent change in bond price for 1% change in yield.
11
Q
Eff duration used on embedded bonds. Why?
A
Cos interest rate risk for them is based on shifts in benchmark curve not bond’s yield.
12
Q
Loss given default (%)
A
Exp exposure (1- recovery rate)
13
Q
Credit spread
A
P(default) * LGD (%)
14
Q
For diluted EPS, when adjusting for warrants, what do you do?
A
(Ex. Price * no. Of warrants) / avg common stock price
15
Q
What cashflow is capitalising? What about expensing?
A
CFI. CFO.
16
Q
Slope of which line estimates a security’s beta? What’s x and y axes?
A
SCL. Excess return. Mkt excess return.
17
Q
Cumulative voting?
A
Shareholders get one vote per share but can spread over multiple candidates .
18
Q
What is a negative duration gap
A
When Mac dur is less than investment horizon
19
Q
If theres a negative duration gap, which risk dominates? What does this mean?
A
Reinvestment risk. Means decreasing rates causes reinvestment income to decrease more than bond price increases.
20
Q
Geo mean formula?
A
Geo mean squared = arithmetic mean * harmonic mean
21
Q
Revaluation in IFRS
A
Reval gain recognised in net income to the extent it reverses previously recognised impairment loss. Further gains are recognised in equity as reval surplus.
22
Q
Reval in GAAP
A
Not permitted.
23
Q
How to create DTL?
A
When taxable income on fin statements is less than pretax income. Treated as equity if not expected to reverse.
24
Q
Sharpe ratio and m squared measure?
A
Excess return per unit of total risk
25
Treynor measure and jensens alpha measure
excess return per unit of systematic risk
26
Cognitive errors: belief perseverance
Conservatism confirmation control representativeness hindsight. 3Cs, R H
27
Cognitive errors: info processing
Anchoring, adjustment, mental accounting, framing, availability. 4As, F
28
Quoted margin
Fixed margin above MRR
29
Required margin (aka discount margin)
Margin above MRR that prices the note at par. Fall in credit quality makes required margin larger than quoted margin.
30
High water mark
No incentive fee until value exceeds previous high
31
Clawback provision
Limited partners can recover performance fees if earlier gains are reversed
32
American (aka deal by deal) waterfall
Profits are distributed as each investment is sold
33
European (aka whole of fund) waterfall
Limited partners get all distributions until they've recovered initial investment plus hurdle rate.
34
Required margin < quoted
Bond trading at premium
35
Smart beta approach
Focuses on exposure to particular market risk factor
36
Mutual funds
Pooled investment (single portfolio with funds from multiple investors). Each investor owns shares. Management fee is % of NAV.
37
Open end fund
Can buy new issued shares at NAV of each share. Can redeem too.
38
No load vs load funds
No load funds don't charge extra fees for buying (up front fees) or redeeming shares (redemption fees). Load charge AT LEAST 1.
39
Closed end fund
Pro managed pools of money that don't take new investments into fund or redeem investor shares. Shares trade. Management charges ongoing fees.
40
ETFs
Passive. Mkt prices kept close to NAVs (not always true for closed end funds)
41
Properties of ETFs
Can short, buy on margin, trade at intra day prices, u get dividends, less capital gains liability vs open end. ETF investors have to pay brokerage commissions when they trade.
42
Thematic investing
Investing to promote specific ESG goals
43
Impact investing
Investing for a return AND to promote positive ESG practices.
44
GIPS composite
Group of individual discretionary portfolios representing similar investment strategy or objective. Must include all fee paying discretionary portfolios.
45
FCF (firm)
NI + NCC + interest net of tax - FC investment - WC investment
46
FCF (equity)
CFO - FC investment + net borrowing
47
Callable bond
Issuer has right to redeem at a call price. Higher yield. Lower duration
48
Moody bond ratings
Best to worst: Aaa, Aa123 (high quality), A123, Baa123 (IG), BaBCaaCaC (speculative)
49
S+P bond ratings
Best to worst: AAA, AA+,AA,AA-, A+,A, A-, BBB+,BBB,BBB-, (IG) BB,B,CCC,CC
50
Quoted price = flat price = clean price
Full price - accrued interest
51
Maturity effect
Longer bond has bigger % price change when yields change by same amount.
52
Exception to maturity effect
Low coupon long term bonds trading at discount
53
Bond with high interest risk has
Lower coupon rate
54
Matrix pricing is best for
Inactively traded and newly underwritten bonds
55
I spread
Basis points above swap rate
56
Z spread
Accounts for yield curve shape
57
OAS
Adjusts Z spread to remove effect of embedded options
58
Yield to worst
Lowest of bond YTC or YTM
59
Quoted add on yield
Holding period yield x (365/days to maturity)
60
Quoted discount yield
Actual discount on security x (360/days to maturity )
61
Good apprx of spot rates
Simple avg of fwd rates
62
Can construct par bond yield curve from?
Spot curves
63
Borrowing for 3 yrs at 3 yr spot rate has same cost as
Borrowing for 1 year periods in 3 successive years
64
(1+S3)^3=
(1+S1)(1+1y1y)(1+2y1y)
65
Fwd rates used to make fwd curves are derived from
Spot rates
66
Prices based on duration are
Underestimated. Need to be adjusted for convexity
67
Debt seniority rankings
1st lien / mortgage, second secured, junior secured, senior unsecured, senior subordinated, senior unsub, sub, junior unsub
68
Covered bonds?
Senior debt of fin institutions. No SPE. Dual recourse
69
Agency RMBS
Guaranteed by govt. Non agency have credit enhancements
70
CMOs
Securities collateralised by pass through MBS. Each has multiple bond classes (tranches)
71
Pac and support tranches are used in?
CMOs
72
What are PAC tranches
Structured to make predictable payments as long as prepayment speeds stay in a certain range. If it falls, contraction and extension risk falls.
73
R costs under IFRS
Expensed as incurred
74
Dev costs under IFRS
Might be capitalised
75
R + D costs under GAAP
Both Expensed BUT Costs of developing saleable products is capitalised
76
If exercise price is higher than avg market price
The conversion effect is anti dilutive
77
Credit default swap is
Form of insurance which pays out if issuer defaults on bonds
78
Interest received, paid. Dividends received. GAAP and IFRS?
GAAP- CFO for all. IFRS- CFO or CFI
79
Dividends paid in GAAP/IFRS
Gaap- CFF.
IFRS- CFO OR CFF
80
Bank overdraft gaap vs IFRS
Bs debt for gaap. Bs cash for ifrs
81
Lepto. Meso
More. Same
82
Bond has more convexity/ duration
Lower the coupon, longer the time to maturity, lower the YTM
83
When CAPM's required return is less than estimated return
Stock is undervalued
84
Percentile formula
Y(n+1)/100
85
Use lower of cost or NRV for
LiFO or avg cost. (Under gaap)
86
Use lower of cost or mkt value
Under fifo. Note: IFRS prohibits lifo
87
Mkt cap
Enterprise value - net debt
88
Validity
Clearing
Execution
When to fill
How to settle
How to fill
89
Key rate duration
Measures bond sensitivity to change in benchmark yield at specific maturity.
90
When high watermark, incentive fees are
Based on performance vs previous high watermark AFTER FEES
91
Can only find change in bond price using
Mod or eff duration
92
Mean abs deviation
Mean of abs differences between each number and the mean
93
Risk return rankings for debt
Infra , senior real estate, unitranche, mezzanine, pvt equity co investment, venture capital
94
If OAS < Z spread
Embedded option has negative value to bondholder. Opposite applies
95
Sales based Proforma model
Estimate rev growth, cogs, SGA, financing costs, taxes, model working capital accounts, estimate PPE, capital spending, construct proforma statements
96
Capital allocation steps
Ideas, proposals, capital budget, monitor
97
Ind and competitive analysis
Define ind, survey size growth and profitability, porter, pestle, strategies
98
Cumulative preferred shares stipulate
All preferred dividends must be paid before commin stock dividends can be paid
99
Callable bonds have lower
Convexity
100
If return on reinvested coupons < ytm
Yield < ytm
101
Effective tax rate
Income tax expense / pre tax income
102
Impairment write down
Reduces deprcn next period, increasing EBIT. CFO and taxes aren't affected
103
Ex div date
1-2 business days before record date. If you buy on or after, you won't get dividend.
104
Positive duration gap
HPR less than yield at issuance
105
Event risk
We know timing but not outcome ege elections
106
2 for 1 split
100 shares become 200
107
When calculating eps
Apply dividends and splits from start of year. Do the month shit for repurchased or newly issued. Remember to minus the repurchased.
108
Pulls on liquidity
Accelerate cash outflows
109
Solvency risk
Firm runs out of cash
110
Time value of option = option premium - intrinsic value
X/S affect intrinsic value (aka exercise value). Change in vol affects time value
111
Delta and gamma
Delta measures sensitivity of derivative to underlying price. Gamma measures sensitivity of delta to underlying price.
112
Drawdown period
When fund invests committed capital
113
Mortgage pass through security
Claim on cash flows from mortgage pool net of admin fees. Any mortgage in pool is called a SECURITISED mortgage
114
CMBS coupon rate
Fixed in US. Floating in Europe
115
Credit card securitisation typically includes
Lockout/ revolving period where investors only get interest and fees paid on collateral
116
Finance lease
Lessee recognises lease receivable asset and amortises
117
Operating lease
Lessor keeps leased asset on bs and records deprcn expense over its useful life
118
Finance leases under IFRS and GAAP
RoU and lease liability have same value at inception and 0 at lease end
119
To find deprecn or aprcn for a currency
Ensure currency you're being asked is the BASE currency
120
Interest expense incurred in construction is
Capitalised
121
If asset for sale
Capitalised interest included in inventory, expensed in COGS
122
If asset for internal use
It's included in asset value on BS and expensed through deprcn over time
123
If you pay taxes NOW on something recorded as revenue later, it's a
DTA
124
Eff frontier
Set of portfolios with highest return for each level of risk
125
X BP change in bond formulas is
0.000x
126
Remember this
There's difference between financial reporting quality and earnings quality
127
Conservative accounting
Reduces litigation costs and increases current period debt value on bs
128
Perm differences
Differences between tax laws and accounting standards that won't be reversed in future
129
Income tax expense =
Current taxes plus change in dta/l
130
Effect on net income from taxes
Change in dta + change in dtl + change in val allowance
131
Unrealised gains and losses on assets held to maturity are
NOT recognised
132
Assets =
L + E
133
Impairment write downs
Reduce equity
134
VC formative stage has 3 phases
Pre-seed (angel- business plans), seed (r+d, marketing) , early/start up
135
If convertible preferred stocks are converted
They won't get preferred dividends
136
Putable bond convexity is
Always positive
137
Clawback most likely on a fund with
Deal by deal waterfall
138
When converting spot rate to fwd rate
Divide number of points by 10000
139
IFRS carrying value after impairment. Aka recoverable amount
Max (fair value - selling costs, value in use)
140
Impairment loss
Carrying - recoverable
141
Value in use
Discounted exp future cash flows
142
Stranded assets
Carbon intensive assets at risk of not being viable
143
Empire building happens when? What about excessive risk?
High growth related comp
Comp relies too much on stock grants/ options
144
Retro application required only for
Change in accounting policies
145
Event driven
Merger arb, distressed, activist, special situations
146
Relative value
Convertible arb, special/general fixed income, multi strat
147
Opportunistic
Macro, managed futures
