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Concepts Flashcards

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1
Q

Front-running by employee

A

Front-running is the purchase or sale of securities in advance of client trades to take advantage of knowledge of client activity and should be completely prohibited, not simply limited.

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2
Q

Is verbal consent enough if receiving additional compensation from client

A

Members and candidates shall obtain written consent from their employers to enter into the agreement for additional contingent compensation from a client.

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3
Q

Statement a firm can indicate compliance with GPIS standard

A

American Securities has prepared and presented this report in compliance with the Global Investment Performance Standards (GIPS®).

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4
Q

Can candidate use knowledge from the previous work for his own purpose?

A

The use in new employment, of knowledge and experience gained in previous employment, is not prohibited.

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5
Q

If a candidate overhear non-public information, which is meaningless on its own, and combines with other information to make recommendation, does he violate CFA standard?

A

No, the use of security analysis combined with nonmaterial nonpublic information to arrive at significant conclusions is allowable under the mosaic theory. He should disclose the details of the information and methodology they used to arrive at recommendation.

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6
Q

What is the trend if converging trend lines form a triangle pattern

A

The trend will continue in the same direction it was going when the triangle pattern formed

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7
Q

What does Relative Strength Index (RSI) above 70 tell you about trend

A

An RSI above 70 is thought to indicate an overbought condition, which can be a warning sign that the current uptrend is not sustainable.

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8
Q

If a strategy indicated statistical significant return, even including the transaction costs, should we implement it?

A

No, should also consider risk. Although the mean abnormal return is positive, returns for various sub-periods may be highly variable. Client might not be able to take the risk

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9
Q

Neglecting statistical discrepancy, should the income and expenditure approaches to calculating GDP yield same value for economic output?

A

Yes

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10
Q

J Curve Effect (trade deficit)

A

When domestic currency depreciates (the foreign currency appreciates), the trade deficit gets worse initially but improves over time.

  1. Higher exchange rate will at first correspond to more costly imports and less valuable exports, leading to a bigger initial deficit or a smaller surplus.
  2. Later, a country’s exports will start to increase due to lower price
  3. Local consumers will also purchase less expensive imports and focus on local goods. The trade balance eventually improves to better levels compared to before devaluation.
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11
Q

Conventional fixed peg aggrement

A

A country pegs its currency within a margin of ±1% versus another currency or a basket that includes the currencies of its major trading or financial partners.

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12
Q

Formal dollarization

A

Use currency of another country

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13
Q

Monetary union

A

Several countries use a common currency

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14
Q

Currency board aggrement

A

Exchange currency at a fixed rate

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15
Q

Pegged exchange rates within horizontal bands/target zone

A

Wider fluctuations than conventional fixed peg, (±2%)

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16
Q

Crawling peg

A

Exchange rates adjusted periodically, typically for high inflation

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17
Q

Management of exchange rates within crawling bands

A

Width of the band is increased overtime

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18
Q

Managed floating exchange rates

A

Attempts to influence the exchange rates in response to specific indicators.

Balance of payments inflation rates

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19
Q

Independently floating rate

A

Exchange rate is market determined

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20
Q

If supply is more elastic than demand, what is the effect of surplus if tax in implied on supply

A

Regardless of whether a tax is imposed on suppliers or consumers, the relative burden of the tax to each depends on the relative elasticity of supply and demand.

In this case:

  1. The burden of the tax will be greater on consumers than on producers.
  2. Total consumer and producer surpluses will be reduced by the amount of the resulting deadweight loss in addition to the total amount of tax collected.
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21
Q

What is a firm’s short-run supply curve under perfect competition?

A

marginal cost curve above average variable cost.

  1. MC = P in perfect competition
  2. Firm is always producing at MC = MR
  3. Firm will shutdown if P (MC) < AVC
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22
Q

Matching principle (accrual accounting)

A

The matching principle holds that expenses should be accounted for in the same performance measurement period as the revenue they generate, no matter if cash is received or not

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23
Q

How is dividend paid, dividends received, interest paid, interest received,taxes paid categorized under GAAP and IFRS? (Cash flow)

A

GAAP:
CFF: Dividends paid
CFO: Interest paid, interest received, dividends received, taxes paid

IFRS:
Dividends paid and interest paid can be either CFO or CFF
Dividends received and interest received can be either CFO or CFI
Taxes paid are operating cash flows unless arose from an investing or financing transaction

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24
Q

If an inventory was 28000, then wrote down to 25000, and eventually wrote up to 30000, how should it be revaluated under IFRS and GAAP? Where is gain recognized?

A

GAAP, no write up is allowed

IFRS, write up only to the extent of recover previous write down (28000), gain is recognized in income statement

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25
Q

Components of net pension asset under IFRS

A
  1. Service costs -> Income statement (expensed)
  2. Interest income or expense -> Income statement(expensed)
  3. Re measurements (actuarial g/l, actual return minus expected return) -> other comprehensive income on balance sheet, not amortized
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26
Q

Components of net pension asset under GAAP

A
  1. Service costs -> Income statement (expensed)
  2. Interest expense -> Income statement (expensed)
  3. Expected return on plan assets -> Income statement (expensed)
  4. Past service costs -> other comprehensive income, amortized
  5. Actuarial gains/losses -> other comprehensive income, amortized
27
Q

Four general categories for credit rating agency

A
  1. scale and diversification
    2, operational efficiency
  2. margin stability
  3. leverage.
28
Q

Cost of preferred stock = ?

A

Preferred dividend divided by the market price.

Note: NOT par value

29
Q

After-tax cost of debt is ?

A

Expected yield to maturity on newly issued debt

30
Q

If a project is risker than the company’s average project, further, IRR = Marginal cost of capital. The company will finance the project with debt that have after-tax cost less than project’s IRR, should company pursue the project?

A

No, because company should not consider capital raising and budgeting decisions independently

31
Q

If stock estimated return < return calculated from beta, is the stock overvalued or undervalued?

A

Overvalued
Estimated return = expected return
calculated return = required rate of return

32
Q

Systematic Risk

A

Also known as “undiversifiable risk”, or market risk. It’s the risk that affect the whole market

33
Q

Unsystematic risk

A

Also known as “diversifiable risk”, “company risk” , can be reduced through diversification.

34
Q

Explain commodity index

A

Commodity index are based on futures price of commodities, and cannot be replicated by investing in the commodities themselves

35
Q

Explain Real Estate Investment Trust indexes (REIT) and REIT index

A

REIT trades like common shares and are liquid, it invest directly in mortgages or real property.

REIT indexes track the prices of shares of those company that invest in real estate business

36
Q

How will stock price react to news in an efficient market

A

Increase on report of an increased earnings that exceeds expectation

37
Q

Explain bond interest rate risk

A

The sensitivity of a bond’s full price to a change in its yield. Shorter duration will yield lower interest rate risk

38
Q

How will the following change the bond’s duration and interest rate risk?

  1. Increase in coupon rate
  2. Increase in bond’s YTM
  3. Adding a put or a call provision
  4. Increase in bond duration
A
  1. Decrease interest rate, since more bon’s value will be received sooner, so it is less sensitive
  2. Decrease interest rate risk. Look at the price-ytm curve, at higher ytm, slope is flatter, thus less sensitive
  3. Decrease interest rate risk, since these option hedge the risk
  4. Generally increase interest rate risk, since uncertainty is increased
39
Q

What is low-quality collateral?

A

Assets that are likely to be written down in value if firm encounters financial distress.

Such as goodwill or deferred tax assets.

40
Q

How will yields of lower-quality corporate bonds change during recession?

A

Yields will increase since the probability of default increases.

41
Q

How will yield spread between lower-quality and higher quality bonds change during recession?

A

Increase, since investors tends to sell lower quality bonds and buy high quality issues

42
Q

What is Moody’s credit rating symbol and base line for investment grades?

A

Aaa, Aa1, Aa2, Aa3, A1, A2, A3,Baa1, Baa2, etc.

Baseline is Baa3

43
Q

What is S&P credit rating symbol and base line for investment grade?

A

AAA, AA+, AA, AA- ,A+, A, A-, BBB+, …

Baseline is BBB-

44
Q

Relationship between no-arbitrage value of a bond calculated using SPOT price and market price of the bond?

A

Equal

45
Q

Which duration reflects a bond’s cash flow change associated with changes in yield?

A

Effective duration

46
Q

How to determine the type of option of the bond based on spread?

A

If option-adjusted spread > zero-volatility spread, bond has positive value to holder, thus it is putable bond.

If option-adjusted spread < zero-volatility spread, bond has negative value to holder, thus it is callable bond

47
Q

Describe the long and short position in Forward Rate Agreement (FRA)

A

Long: will borrow the money, thus is at fixed rate, if floating rate at expiration is above the specified rate, the long can borrow money at lower rate, thus will receive payment

Short: Equivalent to lend at rates higher than market rates if market rate fall

48
Q

Describer settlement of FRA. Ex: 30 day settlement, based on 90-day LIBOR

A

At expiration, the long would borrow money at specific rate.If long would receive 1000 at expiration, the actual cash settlement should be decreased to present value since actual interest saving comes after 90 days.

Pay = 1000/ (1 + (LIBOR) *90/360)

49
Q

Leverage buy-out

A

Use significant amount of borrowed money to acquire a public company. Usually pursued by private equity

50
Q

What investments would require liquidity premium?

A

Investments that are illiquid, such as private equity funds

51
Q

Describe Chebyshev’s inequality

A

Percentage of data within n std deviation = 1 - 1/(n^2)

52
Q

Parametric test and non parametric tests

A

Parametric tests rely on assumpts regarding the thetribution of the population and are specific to population parameters.

Nonparametric tests do not consider particular population parameter or have few assumptions about the population being sampled

53
Q

Quantity theory of money

A

MV = PV

Money supply * Velocity = Price * Real output

54
Q

Recognition methods:

  1. Completed contract method
  2. Percentage of completion method
  3. Installment method
  4. Cost recovery method
A
  1. recognizes longterm contract revenue only as each phase of production is complete.
  2. recognizes profit corresponding to the costs incurred as a proportion of estimated total costs.
  3. recognizes profit in proportion to cash collected
  4. profit is recognized only when cash collected exceeds cost incurred
55
Q

Operating lease, lessee’s perspective

A

Inception: balance sheet is unaffected

During term: rental expense is recognized in income statement, lease payment is reported as an COO in cash flow

56
Q

Financing lease, lessee’s perspective

A

Inception: lower of PV of future lease payments of fair value of lease assets is recognized as both an asset and liability. (As if used debts to purchase an asset)

During term: Asset is depreciated, interest expense is recognized. Interest expense = lease liability * lease interest rate. Liability is amortized.

Interest payment is CFO
Principle payment is CFF

57
Q

When will an lease be treated as finance lease? under GAAP and IFRS

A

GAAP either:

  1. Title is transferred at the end of lease
  2. A bargain purchase option exists
  3. Lease period is at least 75% of asset’s economic life
  4. PV of the lease payment >= 90% of the leased asset’s fair

IFRS similar but not so quantitative

58
Q

Compare net income in finance lease and operating lease

A

Net income is lower initially in finance lease and higher later. This is due to the initial interest is high, as liability decreases, net income increase

59
Q

Operating lease, lessor’s perspective

A

Asset is kept on balance sheet
Recognize lease payment as rental income
Recognize depreciation expense on asset

60
Q

Finance lease, lessor’s perspective

A

Lease receivable is reported on balance sheet

Lease payment as part interest revenue and part capital

61
Q

Sales-type lease

A 
Usually lessor is manufacturer
PV of lease payments > Carrying value of asset
Recognize at inception:
1. Sale, PV of lease payment
2. COGS, carrying value of the asset

Interest revenue recognized over lease term

62
Q

Direct finance lease

A

Lessor is not manufacturer, usually A ask company B to buy asset and lease for A
PV of lease payments = carrying value of leased assets
Inception: lessor removes the asset from balance sheet and create lease receivable

Interest revenue recognized over lease term in income statement
Cash flow: Interest portion is CFO, principal reduction is CFI

63
Q

Simple capital structure

A

One that has only common stock or only common stock and nonconvertible stock

64
Q

Do preferred shares have voting rights?

A

No

CFA (11 decks)

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