Concepts 3 Flashcards
CFA Professional Conduct Program (PCP), if a sanction is warranted against a member, what is his possible action
Member may accept or reject the sanction. If the member rejects the sanction, the matter is referred to a hearing by a panel of CFA Institute members.
Can a member accept gifts from client?
According to Standard I(B) Independence and Objectivity, members and candidates may accept gifts from clients but must disclose them to their employers
What is Standard I(A) knowledge of the law
Standard I(A) Knowledge of the Law states that members and candidates are not to commit any act that they know or should know violates the Code and Standards.
If a member intentionally violates one of the other standard, he also violates this one.
If a member brings a cheat note into the exam but did not use the note, did he violate Code of Ethics and Standard of Professional Conduct?
Yes , both.
For code of Ethics, he is not acting “with integrity, competence, diligence, respect, and in an ethical manner.”
Up-move factor, down-move factor
Used in binomial tree option pricing.
The up-move factor equals one plus the percentage increase when the variable goes up, and the down-move factor is equal to one divided by the up-move factor.
Ex, over the next period, price will increase by 1% or decrease by 1%. upmove factor = 1.01, down move factor = 1/1.01
Limitation on Central bank’s ability to target interest rate
interest rates are bounded by zero
Limitation on Central Bank’s ability to target inflation
liquidity trap conditions may exist
Limitation on Central Bank’s ability to target exchange rate
Central bank’s ability to increase the value of the domestic currency is limited by the amount of foreign reserves the country has available to buy its own currency in the foreign exchange market
Liquidity trap
A situation in which prevailing interest rates are low and savings rates are high. Consumers choose to avoid bonds and keep savings, believing that interest rates will soon rise. Because bonds have an inverse relationship to interest rates, consumers do not want to hold an asset with a price that is expected to decline.
If short term interest rate is above equilbrium rate, will there be excess or insufficient real money balance?
Excess supply.
In the money supply/demand graph, if interest rate is above equilibrium, Supply is still vertical, demand decreases to the left of supply, thus excess supply.
If real money supply increases, will household buy or sell interest bearing securities?
Buy, an increase in real money balances will leave households and businesses with more money than they wish to hold, so they will purchase interest-bearing securities, driving their prices up and yields down until a new equilibrium short-term rate is established.
Interim SEC filing (quarterly or semiannual reports)
Typically update the major financial statements and foot notes, not necessarily audited/
Is annual reports to shareholders the most factual and object source of information about a firm?
No, Annual reports to shareholders and press releases are written by management and are often viewed as public relations or sales materials.
Proxy statement
Issued to shareholders when there are matters that require shareholder vote.
FIled with SEC.
Are a good source of information regarding the election of board members, management, compensation and stock option issuance.
What type of company does low P/E ratio identify?
It will exclude growth companies
What type of company does low price-to-book or high dividend screen like to identify?
Include too many financial services company
Revenue recognition for long-term projects whose outcome is uncertain
IFRS: Revenue is recognized to the extent of contract cost. Cost are expensed.
Profit is recognized only at completion.
Ex. spent 3000, collected 2000 cash, the firm should still record 3000 revenue, 3000 expense and no profit
GAAP: completed contract method, postpone the reporting of income and expenses until a contract is completed
Revenue recognition for long-term projects whose outcome is measurable
Percentage-of-completion method is used. Percentage of completion is measured by the total cost incurred to date divided by total expected cost of the project.
Should future warranty expense incur a deferred tax asset? or deferred tax liability?
Deferred tax asset.
Warranty cost is expensed, then since these expense is not yet tax deductable, we create a deferred tax asset.
In the future, as warranties are paid, the deferred tax asset will decrease.
If a firm changes from FIFO to LIFO, what is the effect on its net cash position? Assuming rising price
Short-term (4-6 weeks) forecast is not affected.
Long-term (3 - 5 year), since firm is paying less tax due to the higher cost, it would reflect a decrease in outflows for taxes.
Line of credits
Short-term funding from bank primarily used by large, financially sound companies.
Uncommitted line of credit
A bank extends an offer of credit of a certain amount, but may refuse to lend if circumstances change
Committed (regular) line of credit
A bank extends an offer of credit that it “commits to” for a period of time.
Revolving line of credit
An even more reliable source of short-term financing than a committed line. Usually for longer term, sometimes as long as years
Banker’s acceptance
Used by firms that exports goods. It is a guarantee from the bank of the firm that ordered the goods stating that a payment will be made upon receipt of
Factoring
Sales of receivables at a discount from their face values. This method would be dependent on company’s customer’s creditworthy
