Concept 5 Flashcards
If an analyst who have big influence on a stock, change his recommendation to “sell” and only inform his clients, does he violate standard?
No, Material information applies to the issuer of the security, the analyst who covers the security is free to issue recommendation only to his clients
If the analyst receives an recommendation, can he act on his own account and on his client’s account at the same time?
No Standard VI(B) Priority of Transactions. Client transactions must take precedence over members’ or candidates’ trades.
One stock grows from 4000 to 6520 in 4 years with monthly compounding, what is the effective annual interest rate?
(6520/4000)^(1/4) -1 = 12/99%
Since it is asked about the effective annual interest rate, the monthly compounding is not relevant
Central Limit theorem, what is the sample mean distribution?
Normal distribution with mean = population mean , variance = population variance / n
Does Central Limit theorem apply to skewed distributions?
Yes
Crowding out effect
An economic concept where increased public sector spending replaces, or drives down, private sector spending.
What happens to the interest rate and corporate investment project profitability if government borrows lots of money?
Borrow money -> interest rate increase -> decrease profitability (since increased required rate of return
Tariff
A tariff placed on an imported good increases the domestic price, decrease quantity imported and increases quantity supplied domestically.
Domestic government collect all the tariff revenue
Quota
Restriction of the quantity of a good imported to the quota amount. Import license are gained by domestic government
Voluntary export restraint
Voluntary agreement by a government to limit the quantity of a good that can be exported
Forward discount/premium
if (Forward/spot -1 )
> 0 it’s forward discount
< 0, it’s forward premium
Non arbitrage value for forward spot
Forward/spot = (1 + interest rate num)/(1 + interest rate denominator)
If EUR/USD, then EUR int rate in num
Given spot rate S, 180 day interest rate of A and B, what’s forward rate?
F = S * (1 + A/2) / ( 1+ B/2)
note it’s 180 day, thus divide by 2
Objective of financial market regulation according to International Organization of Securities Commission (IOSCO)
- Protect investors
- Ensure the fairness, efficiency, and transparency of markets.
- Reduce systemic risk
What is “prior service costs” in defined benefit pension plan?
present value of the increase in future pension benefits from a change in the terms of the pension plan.
How does operating lease affect fixed charge coverage and interest coverage ratio?
Decrease fixed charge coverage, since paying more lease.
Increase interest coverage ratio
Accrued wage
It’s a liability, wages payable
Given fixed operating expense of 2, break even of 5, what is the operating income when sales = 7
Variable cost at 5 = 5 - 2 =3 = 60% of 5
Thus at 7, variable cost is 4.2
Operating income = 7 - 4.2 - 2 = 0.8
What is accounts receivable aging schedule?
A listing of different maturity accounts receivable over time (usually in months)
It identify trends in how well the firm is doing at collecting receivables and converting them to cash
Can a board member use the company’s asset, even to align the incentives of the Board members with those of the firm
no, it would compromise the independence of the board member
Considering dividend, what’s the effect of share repurchase versus paying dividends?
Assuming the tax treatment of the two alternatives is the same, a share repurchase results in the same shareholder wealth as a cash dividend payment of an equal amount.
Profitability index
PI = PV of future cash flows / CF0
Strategic asset allocation
Correlations of returns within an asset class should be relatively high, indicating that the assets within the class are similar in their investment performance. Low correlations between asset classes reduce risk through diversification.
Can a firm issue shares to two institutions without registering the shares with its country’s securities regulators
Yes
Government bond trade settlement date
T+1
Corporate bond trade settlement date
T+3
Will government bond have less bid-ask spreads than corporate bonds?
Not necessarily, bid-ask spreads depend on an issue’s liquidity and may be wider for an illiquid government issue than for a liquid corporate issue.
Use Macaulay duration to estimate bond return change
Over an investment horizon shorter than the Macaulay duration, market price dominates.
Thus, an increase in YTM decreases the bond’s market price by more than it increases reinvestment income.
Calculate YTM using Macaulay duration and modified duration
YTM = Macaulay duration/modified duration - 1
Which yield reflect macroeconomic factor
Bench mark yield, such as government bond yield
Which yield reflect microeconomic factor
Yield spread to bench mark yield
Pari passu ranking
All debt owner receive same recoverable percentage
Bankruptcy court
Might result in different result than default debt ranking
Contango
futures price greater than spot price
Backwardation
futures price less than spot price
Roll yield
the gains and losses that result from entering into a new, longer-dated futures contract as previous contracts expire or are closed out
If a member have a different opinion than the board, what should he do
If the consensus opinion has a reasonable basis, the member does not have to dissociate from the report but should document the difference of opinion.
Frequency polygon
plot the midpoint of the return intervals on the x-axis and the absolute frequency for that interval on the y-axis, connecting neighboring points with a straight line.
Basically connecting the histogram
When an employee violates standard, is it enough for the supervisor to speaking to the employee to determine the extent of the violations and receiving assurances that it will not be repeated
no
Can a candidate contact former clients
Standard IV(A) Loyalty does not prohibit former employees from contacting clients of their pervious firm so long as the contact information does not come from the records of the previous employer or violate a non-compete agreement.
Time weighted return
Calculate return on each year, then take average.
Ex:
Y1, 10
Y2, 15
Y3, 8
Return = 5/10 + (-7)/15
Stagflation
A condition of slow economic growth and relatively high unemployment - a time of stagnation - accompanied by a rise in prices, or inflation.
Recessionary gap
Low demand -> commodity price decrease
Decreasing economic activity is consistent with decreasing demand for borrowing. This lack of demand pushes interest rates downward.
decreasing interest rates should increase the prices of high-quality bonds
Inflationary gap
cause interest rates to increase, think of it as to reduce spending, increase interest rate
which would decrease bond prices
Accounting profit
= total revenue - total accounting costs (explicit cost)
Economic profit
Accounting profit - implicit opportunity costs
Normal profit
Economic profit = accounting profit - normal profit
Accelerated depreciation factor
Depreciation = cost * accelerated depreciation factor
Where should the exchange of debt or eqity been reported under cash flow statement
This transaction results in a reduction of debt and an increase in equity. However, since no cash is involved, it is not reported as a financing activity in the cash flow statement, but will be disclosed in the notes to the cash flow statement.
Objective of audit
The objective of an audit is to enable the auditor to provide an opinion on the fairness and reliability of the financial statements. This is not the same as numerical accuracy.
Who should appoint auditor? board or management
Board
Effect of capitalizing an asset
Higher net income (at first)
Higher equity (A = L +E , L unaffected), greater retained earning
Higher operating cash flow, lower investing cash flow, same total cash flow
ROA and ROE initially higher, lower later
Indifference curve
X: sigma, Y: return,
Curve is upward sloped, if flatter curve, means with same Expected value, the person is willing to take more risk (sigma)
Industry concentration
High industry concentration refers to an industry that has a small number of firms, which often leads to less price competition, higher pricing power, and higher return on invested capital.
Step up bond
A bond that pays an initial coupon rate for the first period, and then a higher coupon rate for the following periods
Special purpose vehicles
Created solely for the purpose of owning specific assets.
is a legal entity used to separate assets used as collateral from those of the company seeking financing
Repurchase agreement
A repurchase agreement is a form of short-term collateralized borrowing in which a bondholder sells a security and agrees to buy it back at a higher price.
Where is most options on currencies and government bonds traded?
Over the counter
Recapitalization (PE)
Recapitalization is when the company issues debt to fund a dividend distribution to equity holders (the fund). It is not an exit, in that the fund still controls the company, but often is a intermediate step toward an exit.