Concepts 4 Flashcards
Should candidate who distributes IPO participate in IPO?
May participate unless IPO is oversubscribed.
Also, Standard VI(B) Priority of Transactions recommends, but does not require, that a member or candidate obtain pre-clearance from his or her supervisor before participating in an equity IPO.
Is it required to record data and analysis for research recommendations? Should research be sent out regarding suitability?
Yes, record is required
A list of recommendations may be sent without regard to suitability, including both safe income stocks and aggressive growth stocks, for example.
How should one act if one’s supervisor does not comply with the standard?
Standard IV(C) Responsibilities of Supervisors indicates that a member should decline supervisory responsibility in writing until the firm adopts reasonable compliance procedures.
Does Standard I(B) Independence and Objectivity require disclosure of the nature of any compensations from the subject company?
Yes
Under mosaic theory, if candidate gathers several piece of nonmaterial information, should he inform compliance officer before using them?
no
Relative strength chart
Display the price of an asset relative to the price of another asset or benchmark over time. Useful for demonstrating whether one asset class or market has outperformed or underperformed another
Point and figure chart
Used to display price pattern for a single asset or market over time
If a price drop from 180 to 100, then estimated to have resistant level of 140, 150, 153.33 what is the trend
Fibonacci numbers,
The forecast resistance levels are one-half, five-eighths, and two-thirds of the price decrease from $180 to $100. All of these are Fibonacci ratios.
Unstable equilibrium for supply and demand
When supply intersects demand from below.
Draw horizontal price line
Statutory tax rate v.s. Effective tax rate
Statutory tax rate: tax rate of the jurisdiction where the firm operates
Effective tax rate: income tax expense/pretax income
What does PPE include
land, building, machinery, equipment, furniture, natural resources
How is PPE reported?
Under IFRS, can be reported using either cost model or revaluation model.
Land is not depreciated
Uder GAAP, only cost model can be used
Revaluation model
Reported at fair value less any accumulated depreciation. Change in fair value reflected in shareholder’s equity
Cost model
Reported at amortized cost (historical cost minus accumulated depreciation, amortization, depletion and impairment losses)
Historical cost
Purchase price plus any cost necessary to get the asset ready for use
Supplementary schedules
Supplementary schedules contain additional information, including a more detailed breakdown of certain large account balances.
Classified balance sheet
Report their current assets and non current assets, current liabilities and noncurrent liabilities
Liquidity based balance sheet
Allowed under IFRS if presentation is more relavent and reliable.
Often used in banking industry
Present assets and liabilities in order of liquidity
Bond interest rate calculation.
Interest rate = BEGINNING bond PV * interest rate
If market rate changes after a bond is issued, should the interest rate used in calculating interest expense change?
No
If an asset has an expiration date but can be renewed at minimal cost, shall we amortize it?
No
Succession planning
It is a process for identifying and developing internal people with the potential to fill key business leadership positions in the company.
If debt to equity ratio is 0.5 , what is weight of debt and equity?
Debt = 0.5* equity
Thus 33% debt, 66% equity
SML
X axis, Beta. Y axis, Expected return.
Intersection with y: RFR
Unsystematic risk can be significant, but is is not measured on the SML since unsystematic risk is not related to expected return.
The SML describes the risk/return tradeoff for individual securities or portfolios
CML
X axis, standard deviation. Y axis, expected return.
Intersection with y: RFR
This is because portfolios on the CML are all constructed from the risk-free asset and the (well-diversified) market portfolio
CML describes the risk/return tradeoff of various combinations of the market portfolio and a riskless asset.
Is asset allocation determined in IPS?
No
Stock execution instructions
Such as stop order or limit order
Stock Validity instructions
When an order should be executed, such as Good-till-cancelled, immediate-or-cancel, good-on-close, good-on-open or market-on-close
Stock Clearing instruction
Tell the trader how to clear and settle a trade.
Such as whether a sell order is a short sale or a long sale
Depository receipts
Ownership in a foreign firm. It is traded in the market of other countries in local market currencies.
Sponsored depository receipts
Give the investor voting rights. Usually subject to greater disclosure requirements
Global depository receipts
Issued out side US and the issuer’s home country.
Not subject to the capital flow restrictions
American depository receiptsq
Denominated in US dollars and trade in US.
What does restriction of subsidiaries address?
Structural subordination
Eurobond
A bond denominated in the currency of the country or region other than where they are sold
what is the price of a $20million 81 day T bill priced at 1.95% on a discount basis?
( 1 - (0.0195) * 81/360) * 20000000
Over-the-counter derivatives
Customized private contracts between counterparties
Exchange-traded derivatives
Standardized and backed by a clearing house
Is citing the expected date for completing a level of CFA exam a violation?
Yes
Is third party verification of claim of GIPS required?
It’s optional
Can memeber tell other people material nonpublic information while not acting on himself?
No, Members who possess material nonpublic information are prohibited from acting or causing others to act on that information
Price discrimination
As long as the company faces a downward-sloping demand curve, can identify at least two groups of customers with different price elasticities of demand, and can prevent reselling between groups, the company can profit from price discrimination.
Automatic stabilizers
Built-in fiscal devices triggered by the state of economy.
Such as tax.
Increase deficit during recession due to lower tax -> gov expenditures on unemployment insurance will increase.
Decrease deficit during boom, higher tax receipt -> lower deficit.
Discretionary fiscal policy
Spending and taxing decisions of a government that are intended to stabilize the economy
Fisher effect
Nominal interest rate is the sum of real interest rate and the expected inflation rate
Shifts in the short run aggregated demand curve
- Increase in consumer wealth
- Business expectations
- Consumer expectation of future income
- High capacity utilization
- Expansionary monetary policy
- Expansionary fiscal policy
- Exchange rates (depreciation will increase exports and decrease imports, both increase demand)
- Global economic growth
Shifts in the short run aggregate supply curve
- Labor productivity
- Input prices
- Expectation of future output prices
- Tax and government subsidies
- Exchange rates (Appreciation decrease cost of imports, thus increase output)
Shifts in the long run aggregate supply curve
- Increase in supply and quality of labor
- Increase in supply of natural resource
- Increase in the stock of physical capital
- Technology
Describe average product of labor curve
First increasing, then decreasing as diminishing margin returns.
It is at maximum when it intersects with marginal product of labor. Since further, one more unit will be less than previous average
Accrued revenue
An asset class for goods or services that have been sold or completed but that have not yet been billed and/or paid for. The income has been earned (since an individual or firm rented the item) but the revenue has not been received (as per the rental agreement to pay in arrears)
Unearned revenue
When an individual or company receives money for a service or product that has yet to be fulfilled.
Direct method of calculating CFO
Add:
- Cash collected from customers
- Cash used in the production of goods and services
- Cash operating expenses
- Cash paid for interest
- Cash paid for taxes
Note: depreciation is not included
Premium payments on life insurance, will it cause permanent difference between pretax and taxable income?
Yes
Periodic versus perpetual inventory system
Will result in same gross profit for FIFO.
Will be different for LIFO
Can you compare two company base on per share ratios (EPS, operating cash flow per share, etc)
No, it would depend on the number of shares outstanding
Impairment under IFRS
When is considered impaired
What happens after it is impaired
Asset is impaired when carrying value > recoverable amount
Recoverable amount = greater of
- Fair value less selling cost
- Value in use (present value of future cash flow)
If impaired, asset value must be written down to the recoverable amount. Impairment loss is recognized in income statement.
Loss can be reversed, but limited to original impairment loss
Impairment under GAAP
When is considered impaired
What happens after it is impaired
Tested for impairment when events and circumstances indicate the firm may not be able to recover the carrying value through future use.
Impaired if carrying value (original cost less depreciation) > asset’s future undiscounted cash flow.
If impaired, asset value is reduced to fair value. Loss is recognized in income statement
Loss recovery not allowed
Upward revaluation, what should be disclosed.
FRS requires disclosure of
- the date the asset was revalued
- how management determined its fair value
- the asset’s carrying value using the historical cost model
- and (for intangible assets) whether the asset’s useful life is finite or indefinite.
Upward revaluation, where does the increase in value go?
Although assets and shareholders’ equity will increase as a result of the revaluation, net income will not increase. The increase in the value of the asset is reported as a revaluation surplus in shareholders’ equity.
How will repurchase of stock affect Book value per share?
If repurchase price > original BVPS, BVPS will decrease.
If repurchase price < original BVPS, BVPS will increase.
BVPS = (Asset - Liability) / share
3-factor model of Fama and French
Return generating model.
Three factor: Firm size, firm book value to market value ratio, excess return on market portfolio.
Carhart suggest a fourth factor of price momentum
Single factor model (single index model)
Return generating model
E(Ri) - Rf = beta_i * [E(Rm) - Rf]
Excess return is the product of beta and excess return on market portfolio.
If a company is in multiple industry, should it be included in multiple peer groups?
Yes
Which equity index require most rebalancing?
Equal weight balancing.
It need to be rebalanced periodically to restore equal weights since security prices changes over time.
It is similar to put equal dollar amount on each stock
Is bond index more difficult to build and maintain than stock indexes? Why
Yes, it is more difficult to build since there are a large universe of securities and infrequent trading
Full price of the bond
Clean price plus accrued interest
Calculate full price for a bond that settle on aug 21, pay coupon between jun 15 and dec 15
June 15 - Dec 15 = 183 days
June 18 and Aug 21 = 67 days
Full price = flat price * (discount) ^ (67/187)
Basically it always increase by the days until next payment
Advantage and disadvantage of sinking fund provision
Advantage: decreased credit risk. Since payments reduce the total amount of principal to be repaid at maturity
Disadvantage: when interest rate fall, bond holder would be forced to reinvest the retired principle at a decreased rate
Shelf registration
an entire issue is registered with securities regulators but the bonds are sold to the public over a period of time as the issuer needs to raise funds
Serial bond issue
includes bonds with multiple maturity dates
Mezzanine financing
In the context of an LBO, mezzanine financing refers to debt that carries warrants or equity conversion features.
