CFA Level I terms: B

Are they other businesses (B2B, business-to-business) or consumers (B2C, business-to-consumer)?

Business model features Corporate Finance

Are they other businesses (B2B, business-to-business) or consumers (B2C, business-to-consumer)?

Business model features Corporate Finance

In a back door listing a private company acquires a listed company in order to use its existing listing.

Primary and secondary equity markets: issuing shares and why trading matters Equities

With backfill bias, the problem is when and how a fund enters the index. A manager may launch several funds at once and put only the most successful ones into an index a couple of years after launch.

Fund of funds fees, survivorship bias and backfill bias Alternative Investments

Backpropagation. The loss gradients show how each weight affects the error.

AI and machine learning: supervised, unsupervised, reinforcement, deep Quantitative Methods

Investors therefore usually require a backup line of credit from banks (also called a liquidity enhancement), which ensures the maturing paper can be repaid in full if a rollover is not possible.

Short-term funding for companies: credit lines, secured loans and commercial paper Fixed Income

Backwardation means the forward is below spot, a downward-sloping or inverted curve, which arises when the benefit of holding the physical good exceeds the carry costs, typically when inventories are low.

Commodities: sectors, ways to invest, contango and backwardation Alternative Investments

The balance sheet is a snapshot at one date. The other statements are flows: they explain how the snapshot changed between two dates.

How the cash flow statement links to the balance sheet and income statement Financial Statement Analysis

The balanced budget multiplier is 1: output rises by exactly the amount of the balanced change.

Fiscal policy tools and the fiscal multiplier Economics

The balancing figures then split each year's financing need across cash, debt and equity in fixed proportions.

Asset and financing models Equities

They pay interest and some principal, then require a large final payment at maturity, for example at the end of year 5 or year 10. That is the balloon maturity.

Commercial mortgage-backed securities (CMBS) Fixed Income

A partially amortizing bond has level payments too, but they leave part of the principal outstanding, which is repaid as a balloon payment with the final payment.

Bullet, amortizing and sinking fund bonds Fixed Income

The resulting balloon risk is the risk that the borrower cannot make that final payment, because it cannot refinance or cannot sell the property for enough.

Commercial mortgage-backed securities (CMBS) Fixed Income

To limit needless turnover, some providers use banding: Russell, for instance, moves an existing member between its large- and small-cap indexes only if its market value is more than 5% away from the central value of the breakpoint; the Russell 2000 is reconstituted once a year.

Rebalancing, reconstitution and what indexes are used for Quantitative Methods

Borrowers (and depositors)

Types of business models Corporate Finance

The one balance sheet quirk is bank overdrafts: IFRS can treat them as part of cash, US GAAP does not.

Cash flow statements under IFRS vs US GAAP Financial Statement Analysis

They include Treasury bills (government securities issued for a year or less), commercial paper, certificates of deposit (CDs), bankers' acceptances, repurchase agreements and time deposits tied to market reference rates.

Money market rates: discount basis and add-on basis Fixed Income

The SPE is bankruptcy remote. If the originator goes bankrupt, its creditors cannot claim the pool, and in most places a bankruptcy court cannot rearrange who gets paid from it.

The special purpose entity and bankruptcy remoteness Fixed Income

Then the buyer got a bargain purchase. No goodwill is recorded, and the shortfall is recognized as a gain in profit or loss straight away.

Goodwill: how it is measured and tested Financial Statement Analysis

The bargaining power of buyers is the ability of customers to push prices down or demand better terms. It is high when buyers are concentrated or the product is standardized.

Porter's five forces: how competition shapes prices and costs Financial Statement Analysis

The bargaining power of customers is high when the product is a commodity or switching costs are close to zero.

Porter's Five Forces and economic moats Equities

The bargaining power of suppliers is the ability of input providers to raise their prices or limit supply. It is high with few suppliers or unique inputs.

Porter's five forces: how competition shapes prices and costs Financial Statement Analysis

Barriers to entry are anything that keeps newcomers out: large capital costs, patents, licenses, control of a key input, strong brands.

The four market structures compared Economics

When leaving is costly, weak firms stay and keep cutting prices in downturns: these are barriers to exit. Outside events such as a recession or volatile fuel prices change which force matters most, which the next lesson takes up.

Porter's Five Forces and economic moats Equities

The value under the most likely assumptions is the base case; alternatives for the length of the fast stage, the first-stage growth rate and the long-run rate give a range around it. Report the base case and value range together.

Discount rates and terminal values Equities

The base currency (B, the denominator) is the one unit being priced.

Exchange rate quotes and percentage change in a currency Economics

A historical growth rate is the compound rate between two past years. The base effect is the effect of the starting year chosen.

Constant growth models, implied growth and the sustainable growth rate Equities

The base rate is how often something happens across the larger class it belongs to, for example the typical margin of companies in the same industry.

Behavioral biases in analyst forecasts and how to fix them Financial Statement Analysis

Base-rate neglect lets specific information about a case override how common the event is in its wider group. Sample-size neglect treats a small sample as if it described the whole population.

Cognitive errors: belief perseverance and information processing Portfolio Construction

A firm at the bottom of the cycle shows a high P/E, and at the top a low one. This is the multiples version of the base-year effect in present value models: the starting year may not be typical.

Trailing, current and forward multiples Equities

Operating profit, margins and investment in long-term assets and working capital can be hard to define for both FCFE and free cash flow to the firm (FCFF). These base-year effects also bias historical growth rates of volatile measures (lesson 3).

Where DCF and growth models break down Equities

Basic EPS is the profit earned for each ordinary share. Take net income, remove what belongs to preferred dividends, and divide by the average number of common shares outstanding during the year.

Basic EPS and the weighted average number of shares Financial Statement Analysis

Understanding fundamental scientific principles, usually with no immediate commercial use. Governments and universities are often the largest funders, and technology, manufacturing and drug companies also pay for or do it.

PESTLE and the innovation matrix Equities

The basis point value (BPV) is money duration times one basis point, 0.0001.

Money duration and PVBP Fixed Income

Basis risk is a divergence in value. The derivative references something similar to, but not the same as, the exposure: a broad index against a regional bank-stock portfolio, a different market reference rate, a credit default swap (CDS) spread on an issuer against its actual bond.

Derivative risks: leverage, basis, liquidity, counterparty and systemic Derivatives

Bayes' theorem (also called Bayes' rule or Bayes' formula) connects them. The denominator, P(B), is the marginal probability of the information: its overall chance of showing up.

Bayes' theorem: updating a probability with new information Quantitative Methods

Bearer bonds kept no record of the owner: only the clearing system knew who held them. Today Eurobonds, domestic bonds and foreign bonds are all registered bonds, with ownership recorded by name or serial number.

Domestic, foreign and Eurobonds, and how bonds are taxed Fixed Income

The weights are the beginning-of-period weights: each holding's share of the portfolio's value at the end of the previous period.

Portfolio returns over time: buy-and-hold, drift and rebalancing Quantitative Methods

A behavioral bias is a systematic way in which people's decisions depart from the fully rational choice that traditional finance assumes.

Cognitive errors vs emotional biases Portfolio Construction

Cognitive errors are calculation and input problems. Behavioral biases are errors of judgment and blind spots.

Capital allocation principles and pitfalls Corporate Finance

A belief perseverance bias is a way of clinging to what we already believe, driven by the discomfort of conflicting information (cognitive dissonance).

Cognitive errors vs emotional biases Portfolio Construction

The benchmark is a reference rate close to risk-free: the expected real rate plus expected inflation. It captures the top-down, macroeconomic forces that move every bond.

G-spread, I-spread, Z-spread and option-adjusted spread Fixed Income

The one that matches what the portfolio holds: the same markets, the same size range, the same weighting approach and the same theme. This is the benchmark choice.

Types of equity indexes Equities

Take a benchmark rate, usually a government yield at the same maturity, then add the required yield spread that comparable bonds of the issuer's credit quality pay over it.

Matrix pricing Fixed Income

Regular issues at set maturities are benchmark securities, the risk-free yardstick used to price other debt.

Sovereign debt: who borrows, in what currency, for how long Fixed Income

The spread over one particular benchmark bond is a benchmark spread. It pays for credit and liquidity risk, and possibly the tax treatment of the bond.

G-spread, I-spread, Z-spread and option-adjusted spread Fixed Income

Instead take the benchmark yield changes (for example the 1-month, 6-month, 1-year and 2-year yields) or changes in zero-coupon prices, apply them to today's yield curve and reprice the bond's remaining cash flows (CF): present value = $\sum CF_t \div (1 + y_t)^t$.

Historical simulation and historical value at risk Quantitative Methods

The right tool shifts the market, not the bond's own yield. It moves a benchmark yield curve (for example the government par curve) and asks what happens to the bond's price once the model lets the cash flows react.

Effective duration and effective convexity Fixed Income

Down the chain. The materials travel from the company through the securities depository and the custodian to a shareholder voting service and on to the beneficial owner.

How shareholders vote: proposals, proxies, proxy advisors and asset managers Equities

Under priority of transactions, trades for clients and the employer must come before trades in any account where you hold beneficial ownership.

Standard VI(B): Priority of Transactions Ethical and Professional Standards

A Bernoulli trial has two outcomes: success with probability p and failure with probability 1 − p. Count the successes in n independent Bernoulli trials and you have a binomial distribution.

Discrete distributions: uniform, binomial and Poisson Quantitative Methods

Dividing by n − 1 instead, known as Bessel's correction, removes that bias from the sample variance. n − 1 is also the number of degrees of freedom: 100 observations leave 99.

Range, mean absolute deviation, variance and standard deviation Quantitative Methods

You must still seek the best price and execution, and you should disclose that the client may not be getting best execution.

Standard III(A): Loyalty, Prudence, and Care Ethical and Professional Standards

The best linear unbiased estimator (BLUE) wins the same contest only among estimators that are linear combinations of the data, a narrower field.

The central limit theorem and the standard error of the mean Quantitative Methods

In a best-efforts offering, the bank only sells on commission, and only if it finds buyers at the agreed price.

Primary and secondary bond markets vs equity markets Fixed Income

Diversification removes non-systematic risk (security-specific risk) at no cost, so only systematic risk (market risk) earns a premium. Beta measures it.

From the capital allocation line to the capital market line and the CAPM Quantitative Methods

The slope on the market's excess return is the beta estimate. Its t-statistic tests whether beta differs from zero (or, subtracting 1 first, from one).

Estimating beta with a CAPM regression Quantitative Methods

Beta estimation by regression uses the asset's excess returns on the market's excess returns. The slope is the historical beta, and the intercept is the alpha.

From the capital allocation line to the capital market line and the CAPM Quantitative Methods

Bias in applying standards is different. Applying a standard takes judgment, and choosing the pessimistic end of a reasonable range every year is a matter of intent, not definition.

Conservative vs aggressive accounting Financial Statement Analysis

Biased accounting choices are choices and estimates that do not faithfully represent the economics. Bias can run either way, aggressive or conservative (the next lesson).

Reporting quality vs earnings quality, and the quality spectrum Financial Statement Analysis

The dealer buys at the bid, the lower price, and sells at the offer, the higher price. The gap is the dealer's spread.

Exchange rate quotes and percentage change in a currency Economics

The bid price is what a buyer will pay for a stated quantity, and the ask (offer) price is what a seller will accept.

Where shares trade: exchanges, off-exchange and over the counter Equities

The bid-ask spread (or bid-offer spread) is the lowest ask minus the highest bid. It is the round-trip cost of buying and selling straight away.

Where shares trade: exchanges, off-exchange and over the counter Equities

The cost of trading has three parts: the brokerage commission, the bid–ask spread and the price impact. Liquidity drives the last two.

How the major asset classes compare on return and risk Portfolio Construction

The bid–offer spread is the main liquidity gauge, often quoted in basis points.

Primary and secondary bond markets vs equity markets Fixed Income

Big bath accounting records unusually large write-offs and restructuring charges in one period, often when results are poor or a new chief executive arrives.

Conservative vs aggressive accounting Financial Statement Analysis

Big data are the vast, fast-growing datasets produced by markets, companies, governments, individuals and devices.

Big data, the four Vs and alternative data Quantitative Methods

Participants often use a third party to manage these risks. In a bilateral repo, the two parties deal directly.

Repurchase agreements (repos) Fixed Income

Bilateralism is cooperative and nationalist.

Geopolitical risk and the four country archetypes Economics

Bill-and-hold recognizes a sale when the customer buys but asks the seller to keep the goods. It is easy to fake with end-of-period inventory marked "sold but held".

How accounting choices and estimates manage earnings, cash flow and the balance sheet Financial Statement Analysis

Count the successes in n independent Bernoulli trials and you have a binomial distribution.

Discrete distributions: uniform, binomial and Poisson Quantitative Methods

The simplest is the binomial model: over one period, which is the whole life of the option, the share either goes up or goes down.

The one-period binomial tree and the hedge ratio Derivatives

After n periods with i ups and j downs the price is S₀ × uⁱ × dʲ, and the number of ups is binomial. A binomial stock-price tree lays these prices out node by node.

Discrete distributions: uniform, binomial and Poisson Quantitative Methods

Trees grow, which is the factory and warehouse idea: the "factory" makes more timber every year through biological growth, and the "warehouse" stores it, because simply not cutting the trees is a way of storing them.

Raw land, timberland and farmland as investments Alternative Investments

Bitcoin, the original cryptocurrency (2009), was built for payments between peers with no bank in the middle, as a rival to ordinary money: something to pay with and to save in.

How digital assets differ from stocks, bonds and currencies Alternative Investments

Because nobody programs the rules, ML models can be black box models: their results are hard to explain. The label comes from their complexity and lack of interpretability, not from bias in the data.

AI and machine learning: supervised, unsupervised, reinforcement, deep Quantitative Methods

A black swan risk is an exogenous event that is rare and hard to predict but has a large impact.

How geopolitical risk affects investments Economics

Blackout period or restricted period. Investment staff cannot trade personally around client trades. In a large firm that is close to a total ban, because the firm trades most securities continuously.

Standard VI(B): Priority of Transactions Ethical and Professional Standards

A block trade is usually an order of 10,000 shares or more in one company, and it is the main source of off-exchange activity.

Where shares trade: exchanges, off-exchange and over the counter Equities

A blockchain is a distributed ledger in which entries are recorded in sequence inside blocks, and the blocks are linked ("chained") together and secured with cryptography.

Distributed ledgers and blockchain: how digital assets are recorded Alternative Investments

The Bloomberg Industry Classification Standard (BICS) does this, so an analyst can find the competitors of each segment.

Industry classification: GICS, ICB, TRBC and other groupings Equities

Board membership. Serving as a director creates three problems: duties to shareholders can clash with duties to clients, directors may receive shares or options, and the seat can bring material nonpublic information.

Standard VI(A): Avoid or Disclose Conflicts Ethical and Professional Standards

The board of directors is elected by shareholders to advance their interests. It hires and monitors the chief executive and the performance of the company.

Corporate stakeholders and their interests Corporate Finance

The Board of Governors keeps oversight and ultimate responsibility for the Professional Conduct Program (PCP).

How the Code and Standards are enforced: the Professional Conduct Program Ethical and Professional Standards

A bond (debt) is a loan. The investor lends principal and receives contractual coupons, and the principal comes back at maturity.

Types of returns: assets, instruments and indicators Quantitative Methods

A bond discount arises when the bond is sold below face value, which happens when the market rate is above the coupon rate.

Non-current liabilities: bonds at amortized cost and deferred taxes Financial Statement Analysis

The common footing is the bond equivalent yield (BEY): a money market rate stated as an add-on rate on a 365-day year.

Comparing money market instruments: bond equivalent yield Fixed Income

A bond indenture is the legal contract that sets out the structure of the bond, the issuer's obligations and the bondholders' rights.

Corporate governance mechanisms Corporate Finance

Bond market vigilantes are bond investors who sell long-dated bonds (pushing yields up) when they think the central bank is losing control of inflation, and buy them (pushing yields down) when they fear a sharp slowdown.

The neutral rate and the limits of monetary policy Economics

A bond mutual fund holds a portfolio of bonds, with maturities from about one year to 30 years or more. Categories include global, government, corporate, high yield, inflation protected and tax-free funds.

Mutual funds, ETFs and other pooled investment products Portfolio Construction

A bond premium is the opposite, when the coupon is above the market rate.

Non-current liabilities: bonds at amortized cost and deferred taxes Financial Statement Analysis

The result is the bond pricing with forward rates method, and it must equal the price from spot rates.

Implied forward rates: from spot to forward and back Fixed Income

Bondholders are often institutional investors and asset managers. They rely on public information such as financial statements, and have little or no influence over operations beyond the terms negotiated at issue.

Corporate stakeholders and their interests Corporate Finance

Bonds payable are reported at amortized cost: the amount received at issue, adjusted as any discount or premium is amortized, so that the carrying amount equals face value at maturity.

Non-current liabilities: bonds at amortized cost and deferred taxes Financial Statement Analysis

A stock dividend, also called a bonus issue of shares, gives shareholders extra shares instead of cash. It can also take the form of a spin-off: the company turns a division into a separate company and hands its shares to existing shareholders.

Dividends, share repurchases, stock splits and the dividend timetable Equities

book building collects investors' orders and the prices they would pay, to set the offer price and decide who receives shares.

Primary and secondary equity markets: issuing shares and why trading matters Equities

In practice, the book value of debt as a proxy for market value is common, and the same goes for preferred shares.

Enterprise value multiples Equities

Three numbers you can look up: book value of equity (from the financial statements), market capitalization (from the share price) and enterprise value (EV) (from the market values of all claims, net of cash).

Book value, market capitalization and enterprise value Equities

For a single share, analysts use book value per share. Shareholders' equity includes closely held shares but excludes minority interest (also called non-controlling interest), a stake with little say over the company.

Book value, market capitalization and enterprise value Equities

Book value weights come from the balance sheet and reflect historical prices, which can be far from current values, especially for equity.

Weighted-average cost of capital (WACC) Corporate Finance

Another is book/tax conformity, where the financial statements follow the tax rules, so reports aim at legal compliance rather than fair presentation.

Why managers misreport, and what stops them Financial Statement Analysis

The boom. Late in an expansion, growth tests the limits of the economy. Confidence, profits and credit are strong, firms struggle to find qualified workers and bid up wages, and the central bank may step in against overheating.

The business cycle and its four phases Economics

Bootstrap resampling pretends the sample you hold is the whole population and draws from it at random. You never see the true population, but a random sample should resemble it, so repeated draws from the sample play the part of repeated draws from the population.

Bootstrapping: simulating from the data you have Quantitative Methods

The 2.5th and 97.5th percentiles of them give a 95% interval, a bootstrap percentile confidence interval.

Bootstrapping: simulating from the data you have Quantitative Methods

Bootstrap simulation redraws the observed data at random, with replacement, so a date can appear twice and others not at all.

Historical, bootstrap or Monte Carlo: the four-step engine Quantitative Methods

The standard deviation of those statistics is the bootstrap standard error. The 2.5th and 97.5th percentiles of them give a 95% interval, a bootstrap percentile confidence interval.

Bootstrapping: simulating from the data you have Quantitative Methods

Most traded bonds pay coupons, so spot rates are extracted from them one maturity at a time. This is called bootstrapping.

Implied forward rates from spot rates Derivatives

The names for the points on the line follow the weight: a lending portfolio has w below 1, a borrowing portfolio has w above 1, and a borrowing portfolio is also called a leveraged portfolio.

The capital market line Portfolio Construction

Bottom-up (company-specific) limitations hit the cash flow: the cash flow measure itself, wrong assumptions or models, and company changes the model cannot capture.

Where DCF and growth models break down Equities

The forecast itself can follow a top-down analysis, which starts with a macroeconomic outlook, the company's growth relative to gross domestic product (GDP), its addressable market and market share, or a bottom-up analysis, which starts with its own revenue drivers and balance sheet.

Assessing corporate creditworthiness Fixed Income

It builds revenue from the company's own drivers: how many units are sold and at what price, by product line, segment or region. The bottom-up approach is close to how management runs the business.

Revenue drivers and pricing power Equities

A bottom-up revenue model multiplies units of business activity by revenue per unit. It suits companies that disclose these quantities.

Revenue models: historical, bottom-up and top-down Equities

Bounded rationality is the idea that people decide with limited information, limited time and limited processing capacity, so they use rules of thumb and settle for a good-enough answer instead of the best one.

Cognitive errors vs emotional biases Portfolio Construction

A box and whisker plot draws that information. The box runs from Q1 to Q3 with a line at the median, and the whiskers reach out toward the extremes.

Quartiles, percentiles and box plots Quantitative Methods

For a price taker the breakeven point is the minimum of the ATC curve.

Breakeven and shutdown points Economics

The forward rate is the breakeven reinvestment rate: the rate at which rolling over one-year deposits exactly matches the two-year deposit.

Cash flow additivity and implied forward rates Quantitative Methods

A new product, service or business model, or a fundamental change to existing businesses, with big effects across industries.

PESTLE and the innovation matrix Equities

Companies use it for working capital, seasonal cash needs and bridge financing (interim funding until permanent financing is arranged).

Short-term funding for companies: credit lines, secured loans and commercial paper Fixed Income

A brief presentation, such as a headline return in a talk, is acceptable, but the detailed information behind it must be available on request.

Standard III(D): Performance Presentation Ethical and Professional Standards

A broad-based index holds a market's largest listed firms and is usually split into size tiers: large, mid and small cap.

Types of equity indexes Equities

Investors do not reach the exchange themselves. A broker-dealer that is an exchange member brings their orders.

Where shares trade: exchanges, off-exchange and over the counter Equities

Brownfield investments expand existing facilities. They may involve privatizing a public asset or a sale-leaseback of a completed greenfield project.

Infrastructure: economic vs social, greenfield vs brownfield Alternative Investments

Bubbles and crashes challenge market efficiency: prices run far from value, then fall quickly. Behavioral finance does not yet give a full explanation, but certain biases are visible.

How biases show up in markets: momentum, bubbles and value Portfolio Construction

The budget balance is government revenue minus spending over a fixed period, usually a year. A negative balance is a deficit; a positive one is a surplus.

Fiscal vs monetary policy and what fiscal policy is for Economics

A bullet bond pays interest only until maturity and then returns all the principal in one go. Most government and corporate bonds are bullets, and investors like them because the stream and the maturity date are easy to match to a known future need.

Bullet, amortizing and sinking fund bonds Fixed Income

Bundling combines multiple products or services so customers are encouraged, or required, to buy them together, usually at a discount to the sum of the parts.

Pricing and revenue models Corporate Finance

Goodwill arises in a business combination, when one company buys control of another. Accounting standards require the purchase price allocation in three steps.

Goodwill: how it is measured and tested Financial Statement Analysis

A business cycle is a recurring sequence of expansions and contractions in economic activity that affects broad parts of an economy.

The business cycle and its four phases Economics

Business mix. The business mix is the split of revenue and profit between activities, for example generation against distribution in utilities.

Choosing a peer group for multiples Equities

A firm's business model is how it earns its money. Stable, predictable cash flows, good-quality assets and low business risk let a company carry more debt with a lower chance of default.

Assessing corporate creditworthiness Fixed Income

Business model innovation introduces or adapts a model in an existing market. It is often combined with technology and pioneered by new entrants, but it does not need to be.

Types of business models Corporate Finance

Goods producers move mass production to lower-wage countries, and service firms use business process outsourcing (BPO): moving customer service and back-office work to lower-cost locations.

PESTLE and the innovation matrix Equities

Business risk is the chance that results deviate from what the model expects, whether from company-specific execution, industry life cycle or outside forces such as technology, regulation or the economy.

Assessing corporate creditworthiness Fixed Income

The sell side is the large dealing banks that make markets, quoting prices to clients and earning the bid-offer spread. The buy side is everyone who uses those prices.

The foreign exchange market and who trades in it Economics

For a buy-and-hold return, weight each asset's cumulative return by its starting weight. Compounding the portfolio's three period returns gives the same answer.

Portfolio returns over time: buy-and-hold, drift and rebalancing Quantitative Methods

A buy-side research report is written inside an asset manager to support its own decisions.

Sell-side, buy-side and activist short-seller research Equities

A share repurchase, or buyback, is a transaction in which a company uses cash to buy back its own shares. Unlike a split, it moves cash.

Dividends, share repurchases, stock splits and the dividend timetable Equities

Buyout equity serves the mature stage. A leveraged buyout (LBO) is the purchase of all the outstanding common shares of a listed company by one or more investors, often with significant debt.

Public vs private equity: venture capital, buyouts and PIPEs Equities

Other people. The bystander effect shows that we are less likely to step in when others are present and say nothing.

Challenges to ethical behavior, and ethical vs legal standards Ethical and Professional Standards