CFAI Mock Flashcards
3/10, net 40
For account payables, 3% discount if paid in 10 days, need to pay in 40 days
Cost of trade credit calculation
Cost of trade credit = (1 + Discount/(1-Discount) ) ^ (365/Number of days beyond discount period)
For example, 3/10 net 40
= (1 + 3%/(1+3%) )^ (365/(40-10))
Which profit does firm need to stay in business?
Normal profit
LowP/E Ratio
Identify value stock, exclude growth stock. Think of as value stock has low price, while although growth stock has high price, it grows quickly
Retained earning calculation
Beginning RE + Net Income - Dividends
Shareholder’s equity calculation
Shareholder’s equity = share capital + Retained Earnings - Treasury Shares
Earning before tax
Sales minus the cost of goods sold, interest and selling, general and administrative expenses have been subtracted from gross sales
What kind of industry have higher economic profit?
The economic profit
tends to be larger in industries with differentiated products, greater pricing power, and high
switching costs to customers.
Convexity of callable and putable bonds
When interest rates rise, a putable bond is more likely to be put back to the issuer by the investor,
limiting the loss of value and giving the bond more positive convexity than an option-free bond.
A callable bond is likely to be called from the investor when interest rates fall, limiting the
gain in value and giving the bond negative convexity
Given spot rate S1,S2,S3,S4, calculate bond (coupon P) price
P/S1 + P/(S1*S2) + P/(S1+S2+S3) + …
What happens if a member’s CFA designation got suspended?
He can begin to use it after expiration of the suspension period
If candidate disagree on a report which has her as author, can she issue a new report?
Standard IV(A): Loyalty calls for employees to be loyal to their employer by not causing harm. If
candidate released a contradictory research recommendation report to clients, it could possibly cause
confusion among clients and embarrassment to the firm.
If a candidate write free recommendation to a newspaper, should he send newest recommendation to his client and newspaper at the same time?
To avoid violating Standard III(A), Candidate
must ensure any change in an investment recommendation is first distributed to her asset
management clients before any newsletter recipients, who are not necessarily clients
Which travel fee can the candidate require to be paid by other company?
Candidate should only accept transportation that he is otherwise unlikely be able to find viable
Current account
It measures the flows of goods and services.
Current account deficit must be compensated by surplus in sum of capital account and financial account
- Merchandise and services (imports, exports)
- Income receipts
- Unilateral transfers
Capital account
Capital transfers and acquisition and disposal of non-produced, non-financial assets
- Capital transfers
- Sales and purchase of non-financial assets
Financial acount
Records investment flows
- Government owned asset abroad
- Foreign-owned assets in the domestic country
Financial ratios are least likely sufficient to determine company’s
Creditworthiness
Change in investment property value
All changes are reported under net income
Where does the securitization of account receivable proceeding go?
Cash from operation
Which intangible asset should be amortized?
Identifiable intangible asset.
Goodwill is unidentifiable intangible, should be tested for impairment but not amortized.
Reputation is internal and is not recorded on balance sheet.
Cash flow debt coverage ratio
CFO/Total debt
Antidilutive
A transaction is considered to be antidilutive if its effect is to increase the amount of EPS, either by lowering the share count or increasing earnings.
Equity return distribution are leptokurtotic or playkurtotic?
Leptokurtotic
Main source of return for commodities
Collateral yield, roll yield, spot price return
Fundamental weighting index
Fundamentally weighted indices generally will have a contrarian “effect” in that the portfolio
weights will shift away from securities that have increased in relative value and toward securities
that have fallen in relative value whenever the portfolio is rebalanced.
Tatical asset allocation
An active management portfolio strategy that rebalances the percentage of assets held in various categories in order to take advantage of market pricing anomalies or strong market sectors.
Optimal risky portfolio
The point of tangency between the Capital allocation line and the efficient frontier of risky assets.
Should candidate participate in “Hot” IPO?
A popular or “hot” IPO in a frontier market is likely to be
oversubscribed. In such cases, Standard VI(B) dictates that the manager should not participate in
this event to better ensure clients will have a higher probability of getting their full subscription
allotment, even though clients have allowed or dictated that she participate alongside them.
Whistleblowing policy
A whistleblower as defined by this policy is an employee of (Name of Company/Organization) who reports an activity that he/she considers to be illegal or dishonest to one or more of the parties specified in this Policy. The whistleblower is not responsible for investigating the activity or for determining fault or corrective measures; appropriate management officials are charged with these responsibilities.
Primary sources of liquidity
Cash balance, collecting receivables, generating cash from short-term investments.
Secondary source of liquidity
Liquidating short-term or long-lived assets
Negotiating debt agreements (renegotiating)
Filing for bankruptcy
Reorganizing the company
Value at risk
minimum amount of loss expected over a given time period at a given probability level.
Covered call
An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset in an attempt to generate increased income from the asset.
When an FRA expires, use the contract fixed rate or the latest LIRBOR to discount the future gain/loss?
Use the latest LIBOR
Example:A forward rate agreement (FRA) that expires in 180 days and is based on 90-day LIBOR is quoted at 2.2%. At expiration of the FRA, 90-day LIBOR is 2.8%. For a notional principal of $1,000,000, the payoff of this FRA is closest to:
$1,000,000 × (0.028 – 0.022) × (1/4)/(1 + (0.028/4)) = $1,489.57
Enterprise Value (EV)
EV = Market capitalization + Market Value (MV) of debt + MV or preferred stock - cash and short-term investments
Price of a callable bond when interest rates fall
When interest rate fall, bond price increase, call option value also increase. Thus total bond value will rise less
Spot rate in terms of bond
Spot rate is the ytm on a zero coupon bond
Debt repayment priority tranking
First lien/First mortgage Senior secured debt Junior secured debt Senior unsecured debt Senior subordinated debt Subordinated debt Junior subordinated debt
Fives Cs of credit
- Character
- Capacity
- Capital
- Collateral
- Conditions
For dividend dates, security exchange determines which dates?
The ex-dividend date is normally determined by the security exchange on which the shares are listed. The corporation determines the holder-of-record date and declaration date.
Labor force participation rate
The participation rate refers to the number of people who are either employed or are actively looking for work. The number of people who are no longer actively searching for work would not be included in the participation rate.
Disposal of long-lived asset other than sale
Long-lived assets that will be disposed of other than by sale, such as in a spin-off, an exchange for other assets, or abandonment, are classified as held for use until disposal and continue to be depreciated until that time.
Limitation of the yield to maturity measure
It assumes coupon payments can be invested at the yield to maturity.
Portfolio duration
= weight average of the individual bond duration
Approximate convexity of bond
ApproxCon = (Pv- + Pv+ - 2*PV0)/(delta_yield^2 * PV0)
