CFA Level I terms: C

Cabotage is the right of a foreign firm to carry goods or passengers within another country. Many countries restrict it, even inside trade agreements.

Tools of geopolitics: national security, economic and financial Economics

A call option gives the right, but not the obligation, to buy a share at the exercise price. A put option gives the right, but not the obligation, to sell.

Forward exchange rates and option values by no arbitrage Quantitative Methods

Yes. Call option leverage works through a derivative.

Gross, net, after-tax, real and leveraged returns Quantitative Methods

A bond usually has a call protection period in which it cannot be called, followed by a call period with a schedule of call prices that usually steps down towards par.

Callable, putable and convertible bonds Fixed Income

A bond usually has a call protection period in which it cannot be called, followed by a call period with a schedule of call prices that usually steps down towards par.

Callable, putable and convertible bonds Fixed Income

Many bonds have a call price schedule: a list of dates, each with its own price, usually falling toward par. You compute one yield to call per date.

Yield to call and yield to worst Fixed Income

The call protection in CMBS is what makes them trade more like corporate bonds than RMBS.

Commercial mortgage-backed securities (CMBS) Fixed Income

A bond usually has a call protection period in which it cannot be called, followed by a call period with a schedule of call prices that usually steps down towards par.

Callable, putable and convertible bonds Fixed Income

Investors bear call risk: the maturity is uncertain, price gains are capped and, when the bond is called, they must reinvest at lower rates.

Callable, putable and convertible bonds Fixed Income

A callable bond lets the issuer redeem all or part of the bond before maturity. The issuer wants the flexibility to refinance if rates fall.

Callable, putable and convertible bonds Fixed Income

Callable preference shares give the issuer the right, not the obligation, to buy the shares back at a set price.

Common shares and preference shares Equities

Callable preferred stock: the issuer can redeem the shares before maturity, often at par or at a premium that shrinks to par as maturity nears.

Valuing preferred stock, and how call, put and conversion features change value Equities

A candidate for the CFA designation is someone whose registration has been accepted and who is enrolled to sit a specified exam, or who has sat an exam and is awaiting results.

Standard VII(B): Reference to CFA Institute, the CFA Designation, and the CFA Program Ethical and Professional Standards

Include side effects on the rest of the firm. A new product that takes sales from an existing one causes cannibalization.

Capital allocation principles and pitfalls Corporate Finance

Capital spending (spending on property, plant and equipment) follows profits, cash flow, expectations and capacity utilization, the share of productive capacity in use.

Employment, capital spending, inventories, housing and trade over the cycle Economics

Capacity-based measures multiply the number of outlets by sales per outlet. Same-store sales growth looks only at stores that were open in both periods, and new stores add revenue on top.

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

A country that imports more than it exports (a trade balance deficit) must pay for the difference by borrowing from foreigners or selling assets to them. That inflow is a surplus on the capital account.

Exchange rate regimes and their effects on trade and capital flows Economics

Banking capital adequacy rules relate the capital a bank must hold to its specific risk exposure, using risk-weighted assets and other measures.

Industry-specific ratios and using ratios to forecast Financial Statement Analysis

Capital allocation is the process of deciding where a company puts its long-term money. It moves through four steps, and the NPV and IRR calculations belong to the second.

NPV and IRR in capital allocation Corporate Finance

Eliminating the weight gives a straight line from the risk-free rate through the risky portfolio, the capital allocation line (CAL).

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

Capital appreciation is the change in the property's value, as a share of the price.

Real estate returns: core to opportunistic, leverage and diversification Alternative Investments

The capital appreciation return is the curriculum's long-run name for the price return.

Long-run asset class returns and their components Quantitative Methods

The expected return that follows is the security market line (SML), shown here in its covariance form, and then in the beta form called the capital asset pricing model (CAPM).

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

The best-known single factor is the market, in the capital asset pricing model (CAPM). In it, the expected return on a stock equals the risk-free rate plus beta times the market risk premium.

Choosing a peer group for multiples Equities

During capital commitment, the manager picks deals and calls capital, either at once or later, and may invest in an early-stage company (venture capital), a mature firm (private equity) or properties (real estate).

Why alternative investment performance is hard to judge Alternative Investments

During capital deployment, the manager puts the money to work: building or improving properties, turning a company around, or launching a start-up.

Why alternative investment performance is hard to judge Alternative Investments

During capital distribution, the plan has worked: assets have appreciated or are producing income above their costs, and the fund sells them, perhaps through an initial public offering or a property sale.

Why alternative investment performance is hard to judge Alternative Investments

The capital distribution return is the cash paid to the holder: a dividend on a share, a coupon on a bond. Add the two and you have the total return, the same quantity as the holding period return you met in the previous module (the old names were capital gain yield and income yield).

Types of returns: assets, instruments and indicators Quantitative Methods

Capital expenditure is infrastructure investment: roads, hospitals, schools, prisons. It adds to the capital stock and the economy's productive potential.

Fiscal policy tools and the fiscal multiplier Economics

The capital expenditure forecast splits into two kinds of spending.

Forecasting working capital, capex, cash flow and the balance sheet Financial Statement Analysis

Compare capital expenditure to depreciation. Depreciation is the rate at which the asset base is being consumed, and capital expenditure is the rate at which it is replaced.

PP&E disclosures, fixed asset turnover and asset age Financial Statement Analysis

Rearrange for purchases. These are capital expenditures, an outflow in investing.

Investing and financing cash flows: asset sales, debt and dividends Financial Statement Analysis

When investors lose confidence, money that arrived as short-term portfolio flows can leave in a rush, a process called capital flight.

Capital restrictions: why governments limit capital flows Economics

And if you sell before maturity, you realize a capital gain or loss against what the bond was worth on the path you bought it on.

The sources of return from a fixed-rate bond Fixed Income

The capital gains tax on a share is (P₁ − P₀) × the capital gains tax rate.

Gross, net, after-tax, real and leveraged returns Quantitative Methods

Capital investments (also called capital projects) are investments with a life of a year or longer. They usually appear on the balance sheet as long-term assets, and they can be tangible (a plant, a fleet) or intangible (software, a patent).

Types of capital investments Corporate Finance

The capital market expectations are the investor's expectations of the risk and return prospects of asset classes: expected returns, standard deviations and correlations.

Asset classes, strategic asset allocation and portfolio construction Portfolio Construction

The capital market line (CML) is the CAL whose risky portfolio is the market portfolio. In practice a broad index stands in for "the market", because no one can observe every risky asset.

The capital market line Portfolio Construction

Money market securities have a tenor of one year or less at issue (Treasury bills, commercial paper). Capital market securities are longer.

The features of a bond Fixed Income

Capital restrictions are any policy designed to limit or redirect cross-border capital flows. They limit the openness of financial markets, as trade restrictions limit the openness of goods markets.

Capital restrictions: why governments limit capital flows Economics

Capital spending (spending on property, plant and equipment) follows profits, cash flow, expectations and capacity utilization, the share of productive capacity in use.

Employment, capital spending, inventories, housing and trade over the cycle Economics

A company's capital structure is its mix of debt and equity. The amount of financing it needs depends first on its business model.

Factors affecting capital structure and the cost of capital Corporate Finance

The second is capital turnover: how much sales each unit of capital produces. So there are two routes to a higher ROIC, a fatter margin or a higher turnover.

Return on invested capital (ROIC) Corporate Finance

A capital-indexed bond scales the principal by the index, and the coupon is the fixed real rate times the adjusted principal.

Floating, step-up, inflation-linked and zero-coupon bonds Fixed Income

Capital-intensive businesses need a great many assets: utilities, transport, real estate, chip fabrication and resource extraction.

Factors affecting capital structure and the cost of capital Corporate Finance

Capital-light businesses hold few physical assets and so need little outside funding. Typical reasons: they run a network that others' assets plug into (a booking platform earning fees), they are paid upfront or have a very short or negative cash cycle, they pay staff partly in shares, or they are profitable early and have no need to…

Factors affecting capital structure and the cost of capital Corporate Finance

Costs that benefit several years are capitalization candidates: they go on the balance sheet as an asset and are expensed through depreciation (tangible assets) or amortization (intangibles).

Expense recognition: capitalizing vs expensing Financial Statement Analysis

Capitalization of costs decides whether a payment is an expense now or an asset spread over later years. Capitalizing development, software or interest cost lifts current profit and assets.

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

Improper capitalization is a classic way to hide expenses. Compare capitalization policies with the industry.

Warning signs of earnings manipulation Financial Statement Analysis

Capitalized interest has two effects an analyst must undo. First, it is an investing outflow, not an operating one, because the cash paid is part of acquiring the asset.

Expense recognition: capitalizing vs expensing Financial Statement Analysis

The CAPM regression then fits a line through the pairs of excess returns.

Estimating beta with a CAPM regression Quantitative Methods

Carbon offsets and water rights are part of the direct value of some properties, and conservation easements can add value too.

Raw land, timberland and farmland as investments Alternative Investments

You owe every client a duty of loyalty: act for the client's benefit and place the client's interests before your employer's and your own. You must also use prudence and care.

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

Use reasonable care and exercise independent professional judgment when analyzing, recommending, acting and doing other professional work.

The six principles of the Code of Ethics Ethical and Professional Standards

The Carhart four-factor model adds momentum, the return of recent winners over recent losers.

Systematic vs nonsystematic risk and return-generating models Portfolio Construction

The performance fee is a share of profits (often 20%) that rewards results. It is also called an incentive fee or carried interest ("carry").

Fees and waterfalls: hurdle, catch-up, high-water mark, clawback Alternative Investments

The tax base is the amount the tax authority attributes to an asset or liability. The carrying amount is the figure in the balance sheet.

Accounting profit vs taxable income: temporary and permanent differences Financial Statement Analysis

Six factors set an option's value: the value of the underlying, the exercise price, the time to expiration, the risk-free interest rate, the volatility of the underlying, and any income from the underlying or carrying costs of owning it.

Six factors that move an option's value Derivatives

A point on it is the bond's carrying value: the purchase price plus the amortized discount (or minus the amortized premium).

The sources of return from a fixed-rate bond Fixed Income

When firms agree openly and formally to restrict output or fix prices, the group is a cartel. Collusion is tempting because it raises profit, reduces uncertainty and can help build barriers to entry.

Oligopoly pricing: kinked demand, Cournot, Nash and Stackelberg Economics

Cash is coins, notes and non-interest-bearing deposits. It earns nothing until invested.

Types of returns: assets, instruments and indicators Quantitative Methods

Cash and short-term investments are subtracted because they are cash as a non-operating asset: a buyer of the business would get them.

Enterprise value multiples Equities

A cash collateral account is cash funded by a third party and held as a reserve. All three add credit risk: if the provider is downgraded, the protection is worth less.

Credit enhancement and credit tranching Fixed Income

A shorter cash conversion cycle means less cash tied up in operations. It can be negative when customers pay before the company pays its suppliers.

Activity ratios: turnover, days and the cash conversion cycle Financial Statement Analysis

The cash flow additivity principle says that cash flows falling on the same date can be added, and so can their present values: PV(A + B) = PV(A) + PV(B).

Cash flow additivity and implied forward rates Quantitative Methods

Customers and suppliers leave and assets are impaired, so the timing of cash flows is uncertain.

Model construction by company life cycle: from venture to decline Equities

Cash flow classification is a source of freedom under IFRS. Interest paid can go in operating or financing, and interest and dividends received in operating or investing.

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

A cash flow CLO redistributes the interest and principal collected on the loans across the tranches, and it is the most common.

Collateralized debt obligations and CLOs Fixed Income

The other financing lines: debt issued and repaid (shown separately), and share issuance less buybacks. Cash flow from financing activities is their total.

Investing and financing cash flows: asset sales, debt and dividends Financial Statement Analysis

These proceeds from sale of equipment are an inflow in cash flow from investing activities. The gain or loss is not cash: it only tells you how the price compares to book value.

Investing and financing cash flows: asset sales, debt and dividends Financial Statement Analysis

Indirect method is the name because it works indirectly, from net income, instead of listing cash receipts and payments. The result is cash flow from operating activities (CFO).

Cash flow from operations: the indirect method Financial Statement Analysis

Cash flow from operations is net income plus depreciation minus the change in working capital. Net debt issuance (written $\Delta$Debt) is additional borrowing minus debt repayment.

Dividend discount and free-cash-flow-to-equity models Equities

A cash flow hedge absorbs the variable cash flow of a floating-rate asset or liability, or of a forecast transaction.

How companies use derivatives: hedge accounting Derivatives

Multiples built on cash flow, the cash flow multiples, link more directly to discounted cash flow value and are harder to manipulate than earnings.

Price multiples: P/E, earnings yield, P/S, P/B and dividend yield Equities

Cash flow per share belongs only to common shareholders, so preferred dividends come off first.

Cash flow performance and coverage ratios Financial Statement Analysis

When net income runs ahead of operating cash flow, aggressive accruals may have shifted expenses to later periods. Build a time series of cash flow to net income.

Warning signs of earnings manipulation Financial Statement Analysis

Cash flow to revenue tells you how many cents of operating cash each dollar of sales brings in.

Cash flow performance and coverage ratios Financial Statement Analysis

The theoretically correct method treats the portfolio's combined cash flows as one bond and finds its internal rate of return, the cash flow yield.

Portfolio duration and convexity Fixed Income

Cash interest coverage adds interest and taxes back because both were paid out of cash before CFO was struck. The numerator is then the cash available to meet interest, before interest and tax.

Cash flow performance and coverage ratios Financial Statement Analysis

Compare it with the cash market, where an asset changes hands now at the current spot price. Buying units of an index fund is a cash-market trade, not a derivative.

What a derivative is Derivatives

Cash paid for income taxes falls when taxes payable or a deferred tax liability (DTL) rises, and rises when a deferred tax asset (DTA) rises.

The direct method and converting indirect to direct Financial Statement Analysis

Cash paid for interest needs a correction when bonds were issued at a discount or premium: amortizing a discount adds to interest expense without cash, so subtract it; amortizing a premium reduces expense without cash, so add it back.

The direct method and converting indirect to direct Financial Statement Analysis

Cash paid for other operating expenses rises with prepaid expenses and falls with accruals. Cash paid for interest needs a correction when bonds were issued at a discount or premium: amortizing a discount adds to interest expense without cash, so subtract it; amortizing a premium reduces expense without cash, so add it back.

The direct method and converting indirect to direct Financial Statement Analysis

Cash paid to employees falls when wages payable rises. Cash paid for other operating expenses rises with prepaid expenses and falls with accruals.

The direct method and converting indirect to direct Financial Statement Analysis

Cash paid to suppliers starts with cost of goods sold (COGS), adds extra inventory bought and subtracts the part that suppliers have not yet been paid.

The direct method and converting indirect to direct Financial Statement Analysis

The quick ratio keeps only cash, short-term investments and receivables, because inventory and prepaid expenses are slow or impossible to turn into cash quickly. The cash ratio is stricter still and is the best crisis measure.

Liquidity and solvency ratios: can the company pay? Financial Statement Analysis

Cash received from customers falls when receivables grow (customers owe more) and rises when unearned revenue grows (customers paid in advance).

The direct method and converting indirect to direct Financial Statement Analysis

The cash reserve ratio and liquid asset requirement show banking liquidity and reflect monetary and regulatory requirements.

Industry-specific ratios and using ratios to forecast Financial Statement Analysis

Cash return on assets is the cash version of ROA: how hard the asset base works to produce operating cash. The cash return on equity divides by average shareholders' equity instead.

Cash flow performance and coverage ratios Financial Statement Analysis

The cash return on equity divides by average shareholders' equity instead.

Cash flow performance and coverage ratios Financial Statement Analysis

Because that interest is not due for another D days, the FRA uses cash settlement at the start of the period: the net is discounted back to t = A at the reference rate that has just set.

Forward rate agreements (FRAs): settlement and uses Derivatives

The effective tax rate is what the company actually bears on its reported profit. The cash tax rate is what it actually pays in cash.

Effective, statutory and cash tax rates Financial Statement Analysis

Cash to income asks how well operating profit turns into operating cash. A ratio that keeps falling while profit rises, or sits well below peers, is an accrual warning.

Cash flow performance and coverage ratios Financial Statement Analysis

This is cash-and-carry arbitrage: buy the asset with cash and carry it to expiration.

Replication and the no-arbitrage forward price Derivatives

Cash-settled awards pay cash based on the share price instead of delivering shares. Stock appreciation rights pay the increase in the share price over a base price.

Share-based compensation: stock grants, options and SARs Financial Statement Analysis

The catalysts are expected events or developments that could make the market revalue the stock toward intrinsic value, such as a product launch, a contract award or a ruling.

Equity research reports: contents, ratings and price targets Equities

A catch-up clause is how a soft hurdle works in the cash flow: LPs get 100% of distributions until the hurdle, then the GP gets 100% until it holds its full share of the profit so far, then the profit is split (for example 80/20).

Fees and waterfalls: hurdle, catch-up, high-water mark, clawback Alternative Investments

Counts suit categorical data, which are labels such as sector or rating band.

Parametric vs non-parametric tests Quantitative Methods

Then they choose one of three outcomes: close the inquiry with no sanction, issue a cautionary letter, or continue proceedings to discipline.

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

CDS contracts trade on a spread, the CDS credit spread, much like the credit spread on a cash bond. That spread depends on the probability of default and on the loss given default.

Credit default swaps Derivatives

A central bank is a state-owned institution that the law makes the sole supplier of the national currency and, from that position, the center of the financial system.

The role of central banks Economics

Central banks are studying their own versions: a central bank digital currency (CBDC) is typically a tokenized version of the central bank's fiat currency, in effect a digital bank note or coin.

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

Banks must hold reserves at the central bank, and some run short while others hold a surplus. The central bank funds market solves the imbalance, at the central bank funds rate.

How banks fund themselves short term Fixed Income

Banks must hold reserves at the central bank, and some run short while others hold a surplus. The central bank funds market solves the imbalance, at the central bank funds rate.

How banks fund themselves short term Fixed Income

Central bank independence matters because politicians face elections and may be tempted to keep interest rates too low beforehand, which feeds inflation.

Inflation targeting vs exchange rate targeting Economics

central clearing does not remove the need for liquidity: users of either contract must hold cash or eligible collateral ready for margin calls.

Why forward and futures prices differ Derivatives

After the 2008 crisis, regulators introduced a central clearing mandate for most standardized OTC derivatives.

OTC vs exchange-traded derivatives and central clearing Derivatives

A central counterparty (CCP) takes on the credit risk between the counterparties, one of which is typically a dealer, and provides clearing and settlement.

OTC vs exchange-traded derivatives and central clearing Derivatives

The central limit theorem (CLT) says that, for any population with mean μ and finite variance σ², the sampling distribution of the sample mean from random samples of size n is approximately normal with mean μ (the population mean) and variance σ² ÷ n, once n is large.

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

The central tendency of peer multiples, the peer mean or median, is taken as the fair multiple for the group. Peers far from the middle are more likely to be mispriced or wrongly included, so they are the outliers to examine.

Valuing with multiples: comparables and forecasted fundamentals Equities

A centralized exchange is a privately held trading platform. It offers volume, liquidity and price transparency, and trading is electronic and direct.

Ways to invest in digital assets: direct and indirect Alternative Investments

The probabilities assigned to outcomes are too high.

Emotional biases: loss aversion, overconfidence and four more Portfolio Construction

A deposit with a set maturity and interest rate is a certificate of deposit (CD). CDs typically mature in under a year and pay interest at maturity.

How banks fund themselves short term Fixed Income

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

A CFA charterholder has earned the right to use the designation by completing the program and the required work experience.

Standard VII(B): Reference to CFA Institute, the CFA Designation, and the CFA Program Ethical and Professional Standards

When you refer to CFA Institute, its membership, the CFA designation or candidacy for the CFA designation, you must not misrepresent or exaggerate what they mean or imply.

Standard VII(B): Reference to CFA Institute, the CFA Designation, and the CFA Program Ethical and Professional Standards

A change in accounting estimate is a better guess, such as a longer useful life. Prospective application means current and future periods only; nothing is restated.

Non-recurring items, discontinued operations and accounting changes Financial Statement Analysis

A change in accounting policy means moving to another acceptable method, such as from weighted average cost to first in, first out (FIFO) for inventory.

Non-recurring items, discontinued operations and accounting changes Financial Statement Analysis

Cash flow from operations is net income plus depreciation minus the change in working capital. Net debt issuance (written $\Delta$Debt) is additional borrowing minus debt repayment.

Dividend discount and free-cash-flow-to-equity models Equities

Strip out revenue from changes in scope (acquisitions and disposals) and currency effects, then compare with the prior year.

Non-recurring items, discontinued operations and accounting changes Financial Statement Analysis

An increase in an operating liability means you kept cash you owed, so add it. These are the changes in working capital.

Cash flow from operations: the indirect method Financial Statement Analysis

The risk-free rate sits inside both the cost of debt and the cost of equity, so when it changes, WACC, $r_e$ and the value all move, often as much as any company-specific factor. This is the changing risk-free rate problem.

Where DCF and growth models break down Equities

Channel stuffing overloads distributors with product, using unusual discounts, threatened price rises or even unordered shipments.

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

A firm's channels are how it sells (sales and marketing) and how it delivers (distribution and logistics). The analyst should separate what the firm does itself from what partners do.

Business model features Corporate Finance

Checking accounts have no stated maturity, pay little or no interest and can be withdrawn at any time. Even so, balances are stable in normal times, because the bank attaches services to them: fee rebates, uncommitted credit lines and so on.

How banks fund themselves short term Fixed Income

The chi-square distribution is non-negative and skewed right, and its shape depends on the degrees of freedom (df).

Chi-square and F-tests of variance Quantitative Methods

A chief risk officer (CRO) is the executive responsible for building and implementing the framework. A CRO is a strategic participant, not only a police role.

Risk governance, risk tolerance and risk budgeting Portfolio Construction

The Cholesky decomposition factorizes a covariance or correlation matrix so that independent normal draws can be turned into correlated ones.

Simulating two correlated assets: the Cholesky step Quantitative Methods

Choosing FCFF over FCFE makes sense when the financing assumptions are shaky, for example when debt is simply held flat.

From the forecast model to an equity value Equities

A circuit breaker is a short pause in intraday trading when a limit is hit.

Futures contracts, daily settlement and margin calls Derivatives

A party whose code meets the Code's principles may make a statement of claiming compliance, worded to say it claims compliance and that CFA Institute has not verified the claim.

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

A clawback lets LPs reclaim part of the performance fees the GP has already received, when later losses show the GP was overpaid.

Fees and waterfalls: hurdle, catch-up, high-water mark, clawback Alternative Investments

A residual income model starts from today's book value and adds the value of future residual income; the formula is in Learning Module 5. It relies on clean surplus accounting: book value changes only through earnings and transactions with shareholders (dividends, buybacks, share issues).

Dividends, FCFE, FCFF or residual income: which cash flow, which discount rate Equities

Clearing is the process of verifying the trade, the exchange of payments and the participants. Settlement is the final payment or delivery.

OTC vs exchange-traded derivatives and central clearing Derivatives

The exchange sets the contract terms based on what buyers and sellers want, so every contract is the same. That uniformity, together with an organized market and a central clearinghouse, gives futures more liquidity and much better protection against default than a forward, which trades over the counter (OTC).

Futures contracts, daily settlement and margin calls Derivatives

IV(B) asks whether pay or benefits compete with, or conflict with, your employer's interests, and requires written consent.

Standard IV(B): Additional Compensation Arrangements Ethical and Professional Standards

Client brokerage means the commissions generated by trading a client's account. They are an asset of the client.

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

You must keep information about current, former and prospective clients confidential. This client confidentiality duty applies when you learn the information because of your special ability to handle part of the client's business or personal affairs, and the information arises from or is relevant to that part of the client's affairs.

Standard III(E): Preservation of Confidentiality Ethical and Professional Standards

Has client focus. Clients' interests, and the integrity of the profession, come above personal interests. The core obligation is fiduciary duty: a high standard of care when acting for the benefit of another party, with reasonable care, skill and diligence.

How professions build trust, and professionalism in investment management Ethical and Professional Standards

Permission. The client or prospective client gives client permission to disclose.

Standard III(E): Preservation of Confidentiality Ethical and Professional Standards

misappropriating clients or client records;.

Standard IV(A): Loyalty (to employers) Ethical and Professional Standards

A closed-end fund has a finite life and is used for riskier strategies: redevelopment, repositioning, new leasing and other value-add or opportunistic plans.

Real estate: features and ways to invest (direct, REITs, funds) Alternative Investments

On a coupon date $t/T = 0$. This is the closed-form duration formula.

Macaulay duration: definition and calculation Fixed Income

A closed-form solution gives an exact answer through standard operations, with no iteration. An analytic pricing formula is a closed-form solution for a security's price; shares and plain bonds usually have one, many complex securities do not.

Monte Carlo simulation Quantitative Methods

In cluster sampling the population is divided into clusters, each ideally a miniature of the whole (often geographic).

Sampling methods and sampling error Quantitative Methods

In co-investing the investor holds an interest in the fund and has co-investment rights: the right to put money directly into the same deal.

Fund investing vs co-investing vs direct investing Alternative Investments

In co-investing the investor holds an interest in the fund and has co-investment rights: the right to put money directly into the same deal.

Fund investing vs co-investing vs direct investing Alternative Investments

A code of ethics is the general written statement of the community's principles and values. It tells members, and outsiders, what the community stands for.

What ethics is, and why professions have a code of ethics Ethical and Professional Standards

The coefficient of determination, $R^2$, is the share of the variation in Y that the model explains. The total variation, the sum of squares total (SST), splits into the explained part, the sum of squares regression (SSR), and the unexplained part, the sum of squares error (SSE), so SST = SSR + SSE.

Goodness of fit and testing the regression coefficients Quantitative Methods

Here E[r] and σ are in decimals, σ² is the variance, and A is the coefficient of risk aversion. A is seldom below 1, and studies have documented values between 2 and 3.

Risk preferences, mean–variance utility and indifference curves Quantitative Methods

The coefficient of variation (CV) fixes this by expressing the standard deviation relative to the mean. It is a measure of relative dispersion.

Semi-deviation, downside deviation and the coefficient of variation Quantitative Methods

Any business can also be assessed on risk with the coefficient of variation of operating income: the standard deviation of operating income divided by its average.

Industry-specific ratios and using ratios to forecast Financial Statement Analysis

Belief perseverance biases come from the mental discomfort of meeting information that conflicts with what we already believe. That discomfort is called cognitive dissonance.

Cognitive errors: belief perseverance and information processing Portfolio Construction

A cognitive error comes from faulty reasoning: a statistical slip, a memory slip or illogical information processing.

Cognitive errors vs emotional biases Portfolio Construction

Mistakes fall into two groups. Cognitive errors are calculation and input problems.

Capital allocation principles and pitfalls Corporate Finance

A coin trust holds a large pool of a cryptocurrency, and investors buy its shares. The shares trade over the counter and behave like closed-end funds.

Ways to invest in digital assets: direct and indirect Alternative Investments

Coincident economic indicators turn at about the same time as the economy and show the present state.

Leading, coincident and lagging economic indicators Economics

A secured bond adds a legal claim on specific assets. That claim is called a lien or a pledge, and the assets are the collateral.

Bond indentures and covenants Fixed Income

The pool is managed: a collateral manager buys and sells assets within selection rules.

Collateralized debt obligations and CLOs Fixed Income

Corporate and emerging-market bonds.

Collateralized debt obligations and CLOs Fixed Income

A collateralized debt obligation (CDO) issues tranched securities backed by a pool of debt. The pool is managed: a collateral manager buys and sells assets within selection rules.

Collateralized debt obligations and CLOs Fixed Income

Leveraged (senior secured) bank loans: the dominant type today.

Collateralized debt obligations and CLOs Fixed Income

A collateralized mortgage obligation (CMO) takes mortgage pass-throughs, or several pools of loans, and re-cuts their cash flows into tranches.

Mortgage pass-throughs and CMOs Fixed Income

Relative valuation tells you where a share stands in its group, not whether the group is right, so analysts practice combining relative and present value methods: a multiples verdict checked against a discounted cash flow estimate.

Trailing, current and forward multiples Equities

In short, commercial mortgage-backed securities (CMBS) are backed by loans on income-producing property: apartment blocks, offices, warehouses, shopping centers, hotels and health care facilities.

Commercial mortgage-backed securities (CMBS) Fixed Income

Large investment-grade manufacturer.

Bond market segments, issuers and investors Fixed Income

The exam splits it into two sectors: residential real estate (homes) and commercial real estate (property leased to tenants for business or as rental housing).

Real estate: features and ways to invest (direct, REITs, funds) Alternative Investments

The company pays a commitment fee on the unused amount (sometimes on the full line) for the commitment period.

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

A committed (regular) line of credit is a formal written commitment, so it is more reliable. It is usually unsecured and can be repaid without penalty.

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

LPs make a promise rather than a payment. Their committed capital is the total they have agreed to provide.

Ownership structures: general and limited partners Alternative Investments

Commodities are standardized traded goods such as energy, metals and crops. They produce no cash flow of their own.

What makes an investment alternative: features and categories Alternative Investments

IFRS (International Accounting Standard, IAS, 2) does not apply the lower-of-cost rule to agricultural and mineral inventories or to commodity broker-traders.

Lower of cost and net realizable value (and write-down reversals) Financial Statement Analysis

Commodity futures (with forwards, and options on futures) are the main route. A future is an obligation to buy or sell a set amount at a fixed price, place and date.

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

Companies in markets with many competitors and little or no product differentiation are price takers: they receive the market price set by supply and demand. They are commodity producers.

Pricing and revenue models Corporate Finance

These commodity return drivers help explain the history: over long samples, commodities have beaten global stocks and bonds on average but with much higher volatility. They had their worst year in the 2007–2009 crisis, then their best year as economies recovered.

Natural resources: risk, return, inflation hedging and diversification Alternative Investments

Commodity sectors group the basic goods that feed the economy: energy, base metals, precious metals, agriculture and a catch-all "other".

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

Commodity trading advisers (CTAs) run managed futures strategies that take directional positions based on technical and fundamental signals.

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

A common market adds free movement of labor and capital between members.

Trading blocs: free trade areas, customs unions, common markets and economic unions Economics

Common shares (also called ordinary shares or common stock) are the main type of equity. Unlike bonds and preference shares, they have no par value that sets the claim.

Common shares and preference shares Equities

The second is the percentage of revenue (net revenue), which puts every line on the same yardstick as the income statement. Together they make up the common-size cash flow statement.

Reading a cash flow statement: sources, uses and common-size Financial Statement Analysis

A common-size income statement turns absolute amounts into percentages, so the statements of a company with revenue of 1,000 and one with revenue of 2,500 can be compared line by line.

Common-size income statements and margin ratios Financial Statement Analysis

Communication with clients means telling clients, promptly, about material changes in the process, as well as the costs and risks.

Cases on duties to employers and investment analysis Ethical and Professional Standards

Together the people bound by that code form a community of members, and joining it means agreeing to follow it.

What ethics is, and why professions have a code of ethics Ethical and Professional Standards

A company in decline has revenue that is falling, or growing well below nominal gross domestic product (GDP) or well below its competitors, usually with falling profitability.

Company life cycle and the addressable market Equities

The company life cycle drives dividend policy. Start-ups and growth companies make losses or small, growing profits and reinvest everything, so their investors look for capital appreciation.

Common shares and preference shares Equities

The areas of valuation focus move as a company ages, and the company life cycle stages vary widely in length.

Model construction by company life cycle: from venture to decline Equities

Here $P_{t-1}$ is the close the day before the ex-date, $r_{market}$ is the broad index's change that day, and $r_{company}$ is the company-specific price change, found as what is left over. The whole change on that day is the ex-date price change.

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

Matrix pricing estimates the price from actively traded comparable bonds: bonds with similar credit quality, maturity and coupon rate.

Matrix pricing Fixed Income

Relative valuation, also called comparables models, uses ratios, or multiples, of a market value to a standardized income statement or balance sheet item.

Equity valuation models: present value, asset-based and relative Equities

A country has a comparative advantage in the good whose opportunity cost is lower: what it gives up of the other good to make one more unit.

Benefits and costs of international trade Economics

The comparison with market capitalization: the base case alone (410, 11% above) says undervalued. The weighted value (6.6% below) says the shares look slightly overvalued, or close to fair.

Scenario analysis with probability weights Equities

The compensation committee proposes pay policy for directors and key executives and sets performance criteria.

Corporate governance mechanisms Corporate Finance

The compensation growth assumption works the other way: higher expected raises mean higher final-salary pensions and a larger obligation.

Defined contribution vs defined benefit pension plans Financial Statement Analysis

Compensation structures. Bonuses that reward short-term results, or revenue from companies you cover, give you a personal reason to lean one way.

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

Competence means having the knowledge, skills and abilities that a professional in your specific role needs to succeed.

Standard I(E): Competence Ethical and Professional Standards

Competence in a new role does not forbid a move. It forbids acting beyond your skills without a plan to build them, and without telling those who rely on you.

Professionalism cases: law, independence, misrepresentation, misconduct, competence Ethical and Professional Standards

Regulators care about these numbers because market power can lead to higher prices and lower output, which is inefficient for the market as a whole. Many countries have competition law to preserve competition.

Concentration ratio and Herfindahl-Hirschman index Economics

A high ROIC that persists year after year often signals a competitive advantage, in other words weak forces.

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

Carry out the competitive analysis, which evaluates the firm's competitive strategy and position. This step is specific to the company and is the subject of Learning Module 10, Company Analysis.

Why analyze an industry, and the steps to do it Equities

Dealers, institutional investors and individuals bid. A competitive bid gives a price (or yield) and an amount; if the auction price ends up worse than the bid, it gets nothing.

Government bond auctions and trading vs corporate bonds Fixed Income

A company's competitive strategy is a key part of its business model (the customers it serves, what it sells them, the resources it relies on and its partners; Corporate Finance covers the business model).

Competitive strategy: cost leadership, differentiation and focus Equities

A complex capital structure contains convertibles, options or warrants, so diluted EPS can be lower (next lesson).

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

Failing to conform to laws, rules and policies. It covers regulatory risk, accounting risk and tax risk. Rules change more slowly than products, producing unexpected costs, back taxes, restatements and penalties.

Financial and non-financial risks, and how they interact Portfolio Construction

At a minimum, the Standard requires reasonable efforts to prevent and detect violations by making sure an effective compliance system exists.

Standard IV(C): Responsibilities of Supervisors Ethical and Professional Standards

Regular compliance training helps staff spot ethical and legal pitfalls and conditions that cloud judgment. It cannot stop someone set on fraud, but it builds a culture of integrity for the large majority who want to do the right thing.

Standard IV(C): Responsibilities of Supervisors Ethical and Professional Standards

Many regulators also publish governance codes of guiding principles for listed companies, applied on a comply or explain basis: a company discloses that it follows each recommendation or explains why it does not.

Corporate governance mechanisms Corporate Finance

A disaggregated model is most useful whenever components growing at different rates make up the cash flow. If every component grows at the same rate (or not at all), it gives the same answer as a constant growth model.

Why build a disaggregated model, and at what level of detail Equities

The income tax note gives you the raw material. It typically shows tax expense split into current and deferred parts (often by jurisdiction), the deferred tax note with the components of deferred tax assets and liabilities and the valuation allowance, and a reconciliation from the statutory rate to the effective rate.

Income tax disclosures and the tax rate reconciliation Financial Statement Analysis

A composite groups similar portfolios so that one weighted figure describes the whole strategy. A record built from the best account, or one that drops terminated accounts, shows only the survivors and overstates what a typical client received.

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

The most comprehensive is the composite equity index, which typically includes shares making up more than 90% of a market's value and is split into size indexes.

Types of equity indexes Equities

A composite indicator combines several variables that tend to move together, usually up to a dozen handpicked series.

Leading, coincident and lagging economic indicators Economics

It is divided by revenue, earnings before interest, taxes, depreciation, and amortization (EBITDA), or earnings before interest and taxes (EBIT). The composite multiple is the average multiple of the peer group.

Equity valuation models: present value, asset-based and relative Equities

Interest is often added more than once a year. How often is the compounding frequency.

Pricing bonds: zero-coupon, coupon and perpetual Quantitative Methods

Compound the yearly total returns. This is compounding periodic returns, and it is the same as reinvesting each year's dividend in shares at that year's closing price.

Price return, total return and the price of a share Equities

Computation versus analysis is the distinction that matters. Computation produces a number (inventory turnover of 6.0).

Analysis tools: common-size, trend, cross-sectional and the limits of ratios Financial Statement Analysis

In concentrated industries only a few firms are listed, so there is no real distribution of multiples to use. Peers in different jurisdictions face different regulation and taxes, so their multiples are not directly comparable until the analyst adjusts for the differences or narrows the group.

Choosing a peer group for multiples Equities

The concentration ratio for the N largest firms adds their market shares. It runs from 0 (perfect competition) to 100% (monopoly).

Concentration ratio and Herfindahl-Hirschman index Economics

One default can matter a great deal. That concentration risk means investors must look at the individual loans, the properties and the owners, as well as the structure of the deal.

Commercial mortgage-backed securities (CMBS) Fixed Income

Assets backed by a stable, long-term concession (the right to operate an asset for a fixed term under agreed terms) provide the most stable returns.

Infrastructure risk, return and diversification Alternative Investments

A concession agreement is the contract that grants the private operator the right to operate and charge fees for a fixed term.

Ownership structures: general and limited partners Alternative Investments

A conditional covariance measures how two variables move together inside one scenario, around that scenario's expected values.

Probability trees, conditional expectations and conditional variance Quantitative Methods

A conditional expected value is the expected value of a variable if one particular scenario happens. You compute it exactly like an ordinary expected value, but with the probabilities inside that branch.

Probability trees, conditional expectations and conditional variance Quantitative Methods

A conditional pass-through covered bond turns into a pass-through security after the original maturity if the bond has not been repaid, paying investors as the pool pays.

Covered bonds Fixed Income

Probabilities in the second stage are conditional probability values: the chance of an outcome given the branch you are on.

Probability trees, conditional expectations and conditional variance Quantitative Methods

Conditional VaR (CVaR) is the weighted average of all the loss outcomes that exceed the VaR. It answers: "When we are in the tail, how bad is it on average?"

Measuring risk: probability, VaR, CVaR and sensitivities Portfolio Construction

A conditional variance measures spread inside one scenario, around that scenario's expected value. As with the unconditional variance, there is a shortcut: the conditional mean of the squares minus the square of the conditional mean.

Probability trees, conditional expectations and conditional variance Quantitative Methods

Conduct in CFA Institute programs covers cheating, and also sharing exam content, even in general terms, with other candidates.

Cases on conflicts of interest and CFA responsibilities Ethical and Professional Standards

A confidence interval is an interval estimate built to contain the true mean with a stated probability, the confidence level, 1 − α.

Confidence intervals for a mean return Quantitative Methods

Beta is an estimate, so give it a range: the confidence interval for beta is $\hat{\beta} \pm t_c \times s_{\hat{\beta}}$, with the t critical value for $n-2$ degrees of freedom.

Estimating beta with a CAPM regression Quantitative Methods

It fixes the critical values: the cut-off points that separate the rejection region from the rest. The confidence level is its complement.

How a hypothesis test works: four steps from claim to decision Quantitative Methods

Confidential CFA Institute information includes specific details of questions and the broad topical areas and formulas tested or not tested.

Standard VII(A): Conduct as Participants in CFA Institute Programs Ethical and Professional Standards

Confidentiality has three exceptions: the client permits disclosure, the law requires it, or the client is involved in illegal activity.

Cases on market integrity and duties to clients Ethical and Professional Standards

Confirmation bias is noticing what supports a prior belief and discounting what contradicts it. In research it shows up as a narrow scope: studying the company thoroughly and its competitors and substitutes only briefly, or speaking only to analysts who agree and to management.

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

The defenses: fix the hypothesis and the data before testing (confirmatory testing), confirm with repeat tests, validate on data the strategy has never seen (out-of-sample validation), report every test you ran, and follow ethical reporting standards.

P-values, p-hacking and critical values from software Quantitative Methods

A conflict of interest is any personal or professional interest that could bias your judgment, or make it fair to question whether your decisions are free of bias.

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

Spot any conflicts of interest, including conflicts between your own duties, such as to a client and to your employer.

A framework for ethical decision making Ethical and Professional Standards

Data providers aggregate sell-side forecasts (earnings per share (EPS), revenue, margins) into a consensus, with the number of analysts behind each figure.

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

Three elements make up a DLT network: the digital ledger itself, a consensus mechanism and the network of participants (called nodes).

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

Ethical conduct is behavior that follows those principles and balances your self-interest against the consequences of what you do, both direct and indirect, for other people.

What ethics is, and why professions have a code of ethics Ethical and Professional Standards

Conservatism bias is holding on to a prior view by inadequately incorporating new information. It is also called anchoring and adjustment: the old forecast is the anchor and the adjustment is too small.

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

No. Conservatism in accounting standards is written into the rules, and it is not a reporting-quality failure by management.

Conservative vs aggressive accounting Financial Statement Analysis

A choice is aggressive accounting when it makes the current period look better: more revenue, earnings or operating cash flow, or fewer expenses and less reported debt. It is conservative accounting when it does the opposite and makes the current period look worse.

Conservative vs aggressive accounting Financial Statement Analysis

Valued with consistent assumptions, FCFE at $r_e$ and FCFF at WACC should give similar equity values; this is the consistency of FCFE and FCFF valuations.

Discount rates and terminal values Equities

The rule is consistency of numerator and denominator: a price or market capitalization numerator needs a denominator that belongs to shareholders, such as net income, dividends, free cash flow to equity (FCFE) or book value of equity.

Valuing with multiples: comparables and forecasted fundamentals Equities

A consistent estimator converges to the true value as the sample grows, and a robust estimator stays reliable when the data contain outliers or are not normal, for example by trimming extreme values before averaging.

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

Consolidating line items that you expect to grow at the same rate is fine. Cost of goods sold, SG&A and depreciation can become one "operating expenses" line, and interest expense and interest income can become net interest.

Why build a disaggregated model, and at what level of detail Equities

The simplest assumption is assets growing with revenue, so that constant asset turnover (revenue divided by assets) holds.

Asset and financing models Equities

The same formula fits a common share whose dividend is expected to stay flat (constant dividends): a flat EUR 1.80 a year at a 9% required return is worth 1.80 ÷ 0.09 = EUR 20.00.

Valuing a stock from its dividends Quantitative Methods

When dividends grow at the same rate g forever, the infinite sum still has a closed form. This is the Gordon growth model, and the pattern is constant growth.

Valuing a stock from its dividends Quantitative Methods

If dividends grow at a constant rate $g$ forever and the required return on equity, $r_e$ (also called the cost of equity), is above $g$, the endless stream sums to one fraction, the intrinsic value $IV_t$. This is the constant growth dividend discount model.

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

The same formula applies to any cash flow measure, discounted at the matching rate. This is the constant growth model for any cash flow.

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

The constant growth terminal value needs positive free cash flow and stable fundamentals at the horizon. The alternative is relative valuation: a peer multiple of final-year revenue, earnings before interest, taxes, depreciation and amortization (EBITDA), EBIT or earnings, which needs a sound peer group.

From the forecast model to an equity value Equities

From 4,000 to 5,000 it is flat: constant returns to scale.

Economies and diseconomies of scale Economics

As maturity approaches, the remaining cash flows shrink in number and the price is pulled to par, provided the issuer does not default. This is the constant yield-price trajectory, and the pull itself is called pull to par.

How price, coupon, maturity and yield are related Fixed Income

The constant-yield price trajectory is the path the price follows if the yield stays at its purchase level. A point on it is the bond's carrying value: the purchase price plus the amortized discount (or minus the amortized premium).

The sources of return from a fixed-rate bond Fixed Income

The market can be a country, a sector, an investing style or a whole asset class. The securities in the group are its constituent securities.

Index value, price return and total return Quantitative Methods

Contango means the forward is above spot: the cost of ownership exceeds the benefit of the convenience yield, which is typical when inventories are ample.

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

Contingency features are rights, but not obligations, to redeem the shares at a set price or to convert them into common shares.

Valuing preferred stock, and how call, put and conversion features change value Equities

A contingency provision allows an action if an event occurs. The most common are embedded options: the right to call (redeem early), put (sell back) or convert to shares.

The features of a bond Fixed Income

To attract investors, issuers add contingency provisions: terms that give the investor a share of improved performance, protect the investor if results are weak, or give the issuer flexibility.

Common shares and preference shares Equities

A contingency table shows how often combinations of categories occur, and works with counts. Here are 500 corporate bonds by rating and by whether they were downgraded within a year.

Covariance and correlation from a joint probability table Quantitative Methods

A contingent claim is a security whose value depends on another asset, such as an option. A path-dependent option pays according to the prices along the way, not only the final price.

Monte Carlo simulation Quantitative Methods

Contingent convertible bonds (CoCos) are bank bonds that convert into equity, or are written down, automatically when a regulatory capital ratio falls below a set minimum.

Callable, putable and convertible bonds Fixed Income

Liabilities at face value may miss contingent liabilities such as product liability, environmental or legal claims.

Book value, market capitalization and enterprise value Equities

No particular continuing education or professional development plan is mandated. The Standard recommends considering the activities in the tree above: regular professional development, studying for certifications, conferences, employer training, self-study, expert groups and learning new skills when your responsibilities change.

Standard I(E): Competence Ethical and Professional Standards

Encourages continuing education. Qualifying once does not keep anyone competent. Most bodies require a set amount of new learning each year, known as continuing professional development.

How professions build trust, and professionalism in investment management Ethical and Professional Standards

The limit is continuous compounding, where growth over t years is a factor of $e^{\tilde{r}\,t}$ (e ≈ 2.71828) for a continuously compounded rate $\tilde r$.

Annualized and continuously compounded returns Quantitative Methods

A continuous random variable can take any value in a range: tomorrow's index return, or the share of a loan recovered after a default.

Random variables and distribution functions Quantitative Methods

A continuous uniform distribution makes every value between a and b equally likely. The density is a flat line at 1/(b − a), and the cumulative curve is a straight line from 0 to 1.

Continuous distributions: uniform, normal and logistic Quantitative Methods

The continuously compounded return is always a little smaller than the holding period return for a gain, because it compounds at every instant and so needs a lower rate to get to the same place.

Annualized and continuously compounded returns Quantitative Methods

Incremental contract costs of winning a deal, such as a sales commission, are capitalized and amortized over the contract.

Revenue recognition: the five-step model Financial Statement Analysis

Contract manufacturers (also called private label manufacturers) produce goods that others market. This is common for offshore production.

Types of business models Corporate Finance

Quantity or amount the payoff is computed on.

What a derivative is Derivatives

Identify the contract with a customer: enforceable rights, clear payment terms, commercial substance, and collection that is probable.

Revenue recognition: the five-step model Financial Statement Analysis

Negative gap opens (recession if severe)

The business cycle and its four phases Economics

When rates fall, homeowners refinance at the lower rate. Here contraction risk is the risk that principal comes back faster than expected, so the bond's life shortens.

Prepayment risk and time tranching Fixed Income

When the policy rate is above neutral, policy is contractionary; it is designed to slow the growth of money and the economy.

The neutral rate and the limits of monetary policy Economics

The rule is simple: expansionary fiscal policy is a rise in the budget deficit (or fall in the surplus), and contractionary fiscal policy is a fall in the deficit (or rise in the surplus).

Fiscal stance, structural deficits and policy lags Economics

A contrarian view, one that runs against the consensus, is public, and an analyst who rejects the consensus and is wrong pays for it, so it takes high conviction.

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

Using the float-adjusted start weights: 45.45% × 10% + 34.09% × (−4%) + 20.45% × 20% = 4.55 − 1.36 + 4.09 = 7.27%, the same answer as the change in total value. Each product is that constituent's contribution to index return: Y took 1.36 points off.

Market-cap, float-adjusted and fundamental weighting Quantitative Methods

FCFE suits the controlling investor perspective: an investor who can change those policies, and firms whose dividends bear little relation to earnings or that pay none.

Dividend discount and free-cash-flow-to-equity models Equities

Ownership is dispersed when many shareholders each hold too little to control the company. It is concentrated when an individual or group, a controlling shareholder such as a family, another company or a government, can exercise control.

Principal-agent problems and stakeholder conflicts Corporate Finance

Convenience sampling picks whatever is easiest to reach. It is quick and cheap, which suits a pilot study, but the sample may not represent the population and its error cannot be measured.

Sampling methods and sampling error Quantitative Methods

A convenience yield is a non-cash benefit of holding the physical commodity rather than a contract on it. It appears when inventories are low: a refinery that cannot afford to run out of crude will pay a premium for oil in hand, so spot prices are bid up and forward prices do not rise by the full cost of carry.

Cost of carry: income, storage and convenience yield Derivatives

Conventional business models are common and long established. Alone or in combination, they make up most business models in practice.

Types of business models Corporate Finance

Their convergence on conceptual frameworks and existing standards was put on hold in the late 2000s, but major new standards, such as revenue recognition, leasing and credit losses, have been mostly or entirely converged.

IFRS vs US GAAP, new standards and other information sources Financial Statement Analysis

The conversion premium measures how far the conversion price is above today's share price.

Callable, putable and convertible bonds Fixed Income

The share price at which the exchange happens is the conversion price. If exercised, the option replaces debt with equity, rather than retiring debt as a call or put does.

Callable, putable and convertible bonds Fixed Income

The conversion ratio is the number of shares one bond converts into. The conversion value is what those shares are worth now.

Callable, putable and convertible bonds Fixed Income

The conversion ratio is the number of shares one bond converts into. The conversion value is what those shares are worth now.

Callable, putable and convertible bonds Fixed Income

A convertible bond gives the investor the right to exchange the bond for a set number of the issuer's shares. The share price at which the exchange happens is the conversion price.

Callable, putable and convertible bonds Fixed Income

Convertible bond arbitrage exploits mispricing between a convertible bond and its parts, the straight bond and the embedded call option.

Hedge fund strategies: equity, event-driven, relative value, opportunistic Alternative Investments

Add back the after-tax interest, add the conversion shares. Interest saves tax, so the add-back is interest × (1 − tax rate).

Diluted EPS: if-converted and treasury stock methods Financial Statement Analysis

Convertible preference shares can be exchanged for a set number of common shares (sometimes at a set price) agreed at issue.

Common shares and preference shares Equities

Start-ups often raise money with convertible preferred shares. These rank ahead of common shares if the company is liquidated, so the investor recovers its investment before common holders receive anything.

Private equity strategies: buyouts, venture capital and growth equity Alternative Investments

Add back its preferred dividends, add the conversion shares.

Diluted EPS: if-converted and treasury stock methods Financial Statement Analysis

Duration is a straight line laid against a curve. Convexity measures how far the curve bends away from that line.

Convexity and the convexity adjustment Fixed Income

The real bond gains about 0.16 percentage points more than duration predicts when yields fall, and loses about 0.15 less when they rise. That gap is the convexity adjustment.

Convexity and the convexity adjustment Fixed Income

The loss (5.53%) is bigger than the gain (3.95%) for the same size of move. That is convexity asymmetry, the working of negative convexity in one line.

Price change with effective duration and convexity Fixed Income

Because the discount rate moves with the rate, the FRA's payoff is slightly curved. That difference is convexity bias.

Why forward and futures prices differ Derivatives

The convexity effect: for the same size of yield change, the percentage price gain when yields fall is larger than the percentage loss when yields rise.

How price, coupon, maturity and yield are related Fixed Income

The formula needs convexity scaling that matches duration squared, so rescale first: multiply by 100 (0.48 becomes 48).

Price impact of spread changes Fixed Income

Cookie jar reserves are estimates of future costs set too high in good years and released into income in lean years, for example loan loss or return allowances.

Conservative vs aggressive accounting Financial Statement Analysis

Cooperation is two or more actors working together toward shared goals. A cooperative country and a non-cooperative country differ in how they set rules and how they answer their partners.

Geopolitics: cooperation vs competition Economics

A cooperative country and a non-cooperative country differ in how they set rules and how they answer their partners.

Geopolitics: cooperation vs competition Economics

Non-linearity and changing dependence: relationships between assets are often non-linear and change. A copula is a function that joins each variable's own distribution into a joint distribution, capturing how the variables depend on each other.

Data science: processing, visualization and text analytics Quantitative Methods

Analysts therefore use core earnings, which are earnings with the non-recurring items removed before computing the P/E: gains and losses on asset sales, write-downs, goodwill impairment, provisions for future losses, changes in accounting estimates, and income or losses from discontinued operations.

Price multiples: P/E, earnings yield, P/S, P/B and dividend yield Equities

The first, low-risk end is real estate debt: core real estate strategies begin just above it.

Real estate returns: core to opportunistic, leverage and diversification Alternative Investments

Core-plus real estate strategies still earn mostly rent, but acquiring leases and refurbishing the building cost more, so risk and return are higher than core.

Real estate returns: core to opportunistic, leverage and diversification Alternative Investments

Core-satellite. Many portfolios use a core-satellite structure: a low-cost, passive or low-tracking-error core holds broad exposure, and a few smaller active satellites aim for extra return.

Asset classes, strategic asset allocation and portfolio construction Portfolio Construction

Corporate bonds promised higher yields than government bonds but earned slightly less over the sample. The reason is the default effect: some issuers fail to pay, so what is realized falls below what was promised.

Long-run asset class returns and their components Quantitative Methods

Corporate governance, for a lender, is about how management treats debtholders compared with shareholders. Debtholders cannot vote, so they specify the use of proceeds and any limits (covenants) when they lend.

Assessing corporate creditworthiness Fixed Income

A corporate issuer is a corporation that raises money from investors in financial markets, with equity, debt or both.

Key features of corporate issuers Corporate Finance

The corporate life cycle runs from start-up through growth to maturity, and a company's capital structure changes as it moves along.

Factors affecting capital structure and the cost of capital Corporate Finance

Business processes produce information flows from companies and public bodies: direct sales data such as card purchase histories, plus corporate operational data (supply-chain information, banking records, retail point-of-sale scanner data).

Big data, the four Vs and alternative data Quantitative Methods

A corporate restructuring (an acquisition, a disposal or a reorganization) changes the statements the model forecasts, and a leveraged buyout (LBO) is a takeover funded mainly with debt.

Why build a disaggregated model, and at what level of detail Equities

The correction of an error restates the prior periods affected and discloses the nature of the error. Do not confuse it with a change in estimate: an error is a mistake, not a better guess.

Non-recurring items, discontinued operations and accounting changes Financial Statement Analysis

With more, the same idea runs through a matrix, which is not examined at this level. The result is a set of correlated draws.

Simulating two correlated assets: the Cholesky step Quantitative Methods

Correlation is read straight from the number.

Covariance and correlation Quantitative Methods

The correlation coefficient divides the covariance by the product of the two standard deviations. The units cancel, and the result lies between −1 and +1.

Covariance and correlation Quantitative Methods

Fund selectors test every pair in a correlation matrix. Take four funds with 48 monthly returns each.

Is a correlation significant? The t-test of correlation Quantitative Methods

The gap appears when the correlation of futures prices with interest rates is not zero.

Why forward and futures prices differ Derivatives

The two changes move in opposite directions, so the correlation of spreads and benchmark yields is negative, especially in stressed markets.

Empirical vs analytical duration Fixed Income

Read a slope as "goes with", not "causes". This is the point of correlation versus causation.

The regression line: slope, intercept and least squares Quantitative Methods

Their correlation with equities and bonds shows what that means in practice. Correlation with investment-grade bonds has been low.

Hedge fund returns: market beta, strategy beta, alpha and diversification Alternative Investments

Average correlation with public markets is high: roughly 0.6 to 0.8 for private equity indexes against major public indexes, and a little higher for private debt.

Private capital in a portfolio: risk, return, vintage years and diversification Alternative Investments

Diversification potential is measured by correlation with stocks and bonds, not by return or volatility. Lower correlation, closer to zero, means more diversification.

Natural resources: risk, return, inflation hedging and diversification Alternative Investments

Serving customers at lower cost than an entrant could, usually together with proprietary technology, brand loyalty or scale.

Porter's Five Forces and economic moats Equities

Another way in is to break the cost structure into cost components as a share of sales, each as a percentage of sales, and follow them over time against peers.

Operating profitability and working capital Equities

Cost leadership means becoming the lowest-cost provider among all competitors in an industry. It is most common where products are commoditized or barely differ, the industry is mature with little innovation, and customers care mostly about price, as in commodity processing and refining or consumer staples.

Competitive strategy: cost leadership, differentiation and focus Equities

The cost model carries the asset at cost less amortization and impairment. The revaluation model carries it at fair value, and IFRS allows it only where an active market exists.

Intangible assets: finite vs indefinite lives Financial Statement Analysis

A company's cost of capital is the return its investors require for supplying money. It is the company's required rate of return on its own investments: a project that earns less than this destroys value, because shareholders could earn their required return elsewhere.

Weighted-average cost of capital (WACC) Corporate Finance

The cost of carry is the net of the costs and benefits of owning the asset from today until T. It is the reason a forward price differs from spot.

Cost of carry: income, storage and convenience yield Derivatives

Lower default risk goes with a lower cost of debt, because creditors ask for less when their money is better secured and their rights better protected.

Corporate governance risks and benefits Corporate Finance

Investors then see less risk in the company, the return they require falls, and the cost of equity falls with it.

Corporate governance risks and benefits Corporate Finance

The cost of financial distress is what that uncertainty costs, even before a bankruptcy filing.

Modigliani–Miller propositions Corporate Finance

Every formula splits the same pool of cost between the income statement and the balance sheet. That pool is the cost of goods available for sale: beginning inventory plus purchases.

FIFO, LIFO and weighted average when prices rise or fall Financial Statement Analysis

What is not sold stays as ending inventory, and what is sold becomes cost of sales (cost of goods sold).

FIFO, LIFO and weighted average when prices rise or fall Financial Statement Analysis

The simplest method is cost of sales as a percentage of revenue, using the recent ratio adjusted for what you expect (a richer mix lifts gross margin, for example).

Building a sales-based pro forma income statement Financial Statement Analysis

Cost pass-through means raising prices to recover input cost increases. The margin vs market share trade-off is the decision: pass on the cost and protect margin at the risk of volume, or absorb some of it to defend share.

Forecasting sales and costs with inflation or deflation Financial Statement Analysis

Cost per available seat kilometer (CASK) compares cost levels across airlines of different sizes.

Competitive strategy: cost leadership, differentiation and focus Equities

Cost structure. The cost structure is the balance of fixed and variable costs and the inputs behind them.

Choosing a peer group for multiples Equities

The lowest price within one narrow segment. Brightwash, a car-wash chain that offers only a basic wash at the lowest price in its city, is an example.

Competitive strategy: cost leadership, differentiation and focus Equities

The decision is always a trade-off of costs against benefits (the cost-benefit of risk modification), weighed against the organization's risk tolerance.

Modifying risk: prevention, acceptance, transfer and shifting Portfolio Construction

The costs of internal financing are ignored when managers treat operating cash flow as free but scarce, and allocate it by a budget tied to last year's.

Capital allocation principles and pitfalls Corporate Finance

Rebalancing an equal-weighted index is counter-trend trading: it sells recent winners and buys recent losers. A fundamental index does the same relative to its fundamentals: it trims shares whose price has risen faster than their earnings or sales.

Rebalancing, reconstitution and what indexes are used for Quantitative Methods

The counterparty is each legal entity that signs the contract, and at least one is usually a dealer.

What a derivative is Derivatives

Counterparty credit risk is the chance that the other side fails to perform. Unlike a loan, where the exposure is the amount lent plus interest, a derivative's exposure swings with the underlying price, so it needs frequent monitoring.

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

An importing country may respond with countervailing duties, which are extra duties on subsidized imports.

Tariffs, quotas, export subsidies and their welfare effects Economics

For a company in a less developed market, add a country risk premium (CRP) to a developed market's MRP before multiplying by beta in the capital asset pricing model (CAPM).

Industry betas, the market risk premium and country risk Equities

For an international company, apply country-level inflation to each market and weight it by that market's share of revenue.

Forecasting sales and costs with inflation or deflation Financial Statement Analysis

The coupon effect: for bonds with the same maturity, a lower coupon means a larger percentage price change for the same change in yield.

How price, coupon, maturity and yield are related Fixed Income

Holding a bond pays you in three ways. You receive the promised coupon income and principal.

The sources of return from a fixed-rate bond Fixed Income

A coupon instrument pays a fixed coupon every period and the face value at maturity. Discount each coupon and the face value, then add.

Pricing bonds: zero-coupon, coupon and perpetual Quantitative Methods

The coupon rate is applied to par, never to the price the bond trades at. The annual coupon is split evenly across the payment dates.

The features of a bond Fixed Income

Under the Cournot assumption each firm picks the output that maximizes its profit, taking its rivals' output as fixed, and all firms decide at the same time.

Oligopoly pricing: kinked demand, Cournot, Nash and Stackelberg Economics

Covariance measures joint variability: it is the two-variable version of the variance. For each pair, multiply how far X is from its mean by how far Y is from its mean, then average.

Covariance and correlation Quantitative Methods

The market's variance is the yardstick, so beta is the asset's covariance with the market divided by the market's variance.

How to calculate and interpret beta Portfolio Construction

Covenants are legally enforceable terms agreed when the bond is issued. Bondholders have no vote, so covenants are their main lever over the issuer.

Bond indentures and covenants Fixed Income

The pool is the cover pool: usually residential or commercial mortgages or loans to the public sector, sometimes ships or aircraft.

Covered bonds Fixed Income

Earnings or cash flow compared with interest or total debt service, including lease payments.

Assessing corporate creditworthiness Fixed Income

Coverage tests check that the pool's value and income are enough for the debt. If a test fails, the CLO diverts cash away from equity and junior debt and uses it to pay down the senior notes until the test passes.

Collateralized debt obligations and CLOs Fixed Income

A covered bond is a senior bond issued by a bank and backed by a pool of loans. The pool is the cover pool: usually residential or commercial mortgages or loans to the public sector, sometimes ships or aircraft.

Covered bonds Fixed Income

Covered bonds are the simplest structure. A bank, mostly in Europe, segregates a pool of mortgage loans on its balance sheet and uses it as collateral ("cover") for bonds it issues.

Why securitize? Benefits for issuers, investors and markets Fixed Income

A covered call is a long share plus a short call on it. Parity says S − c = PV(X) − p, which is a long bond and a short put.

Building synthetic positions with put–call parity Derivatives

Equal risk means equal return. That is covered interest rate parity.

Covered interest rate parity: forward rates from interest rates Economics

Band widens over time: a gradual exit from a peg.

Exchange rate regimes and their effects on trade and capital flows Economics

Rate adjusted in small steps: passive (to match inflation) or active (pre-announced to steer expectations)

Exchange rate regimes and their effects on trade and capital flows Economics

New innovations that make existing products obsolete, called creative destruction, threaten most businesses at every stage, whether a firm is trying to scale up or is downsizing.

Company life cycle and the addressable market Equities

Credibility is the public's belief that the bank will hit its goal. If everyone expects 2% inflation, they build 2% into wage claims and other contracts, and the belief turns self-fulfilling.

Inflation targeting vs exchange rate targeting Economics

a lender, a bond investor or a rating agency is doing credit analysis: can the company pay interest and repay principal?

What financial statement analysis is for Financial Statement Analysis

A credit card receivable ABS is backed by card balances. The pool earns finance charges (interest on balances, often floating with a cap), plus late and annual fees, and cardholders repay principal.

Credit card, auto loan and solar ABS Fixed Income

A credit cycle is the rise and fall in the availability and price of credit. Business cycles are measured with gross domestic product (GDP), while credit cycles are measured with financial variables: the growth of private-sector credit, credit relative to GDP, and often house prices.

Credit cycles Economics

A credit default swap (CDS) is based on the default risk of one issuer or of an index of issuers. It lets an investor change credit exposure separate from the bond market, or lets a bank offset the risk that a borrower defaults.

What derivatives are written on: the main underlyings Derivatives

It lets an investor manage the risk of loss from default separately from owning the bond. The most common one is the credit default swap (CDS).

Credit default swaps Derivatives

A credit derivative is based on the default risk of one borrower, or of a group of borrowers in an index. It lets an investor manage the risk of loss from default separately from owning the bond.

Credit default swaps Derivatives

Credit enhancement is any feature that absorbs losses before they reach the investors. It is what lets bonds backed by risky loans earn high ratings.

Credit enhancement and credit tranching Fixed Income

Collateral and guarantees are credit enhancements. They lower the issuer's borrowing cost but reduce its operating flexibility.

Bond indentures and covenants Fixed Income

The seller pays only if a credit event occurs.

Credit default swaps Derivatives

Credit facilities are loan agreements with a pre-agreed limit and a balance that moves with the borrower's needs, like a credit card.

Bond market segments, issuers and investors Fixed Income

A downgrade matters because of credit migration risk, also called downgrade risk: the risk that an issuer's creditworthiness deteriorates and its rating migrates lower.

Credit ratings: uses and limitations Fixed Income

Bond markets are cut along three standard dimensions: issuer type (often called the sector), credit quality and time to maturity.

Bond market segments, issuers and investors Fixed Income

A credit rating is a letter grade for an issuer's ability to meet its debt obligations. It reflects both the probability of default and the expected loss if default happens.

Bond market segments, issuers and investors Fixed Income

Credit rating agencies such as Standard & Poor's (S&P), Moody's and Fitch assign and maintain ratings, for short-term and long-term debt, and for issuers and for individual bond issues.

Bond market segments, issuers and investors Fixed Income

Keep the rating process independent; policies shield analysts from commercial pressure.

Standard I(B): Independence and Objectivity Ethical and Professional Standards

Credit risk is the risk of loss because a borrower does not pay interest or principal in full and on time. A borrower that misses a promised payment is in default.

Credit risk: probability of default and loss given default Fixed Income

The coupon rate is a market reference rate (MRR) plus a credit spread.

The features of a bond Fixed Income

Credit spread risk is the risk of greater expected loss because credit conditions change, through macroeconomic, market or issuer-related factors.

What drives credit spreads Fixed Income

This lets the borrower obtain debt at a lower starting spread. Credit-linked notes tie the coupon to a covenant or a credit rating.

Floating, step-up, inflation-linked and zero-coupon bonds Fixed Income

Creditworthiness. A firm's creditworthiness decides whether a loan is approved, the rate, and whether the loan carries restrictions, such as limits on selling or using assets.

Cost of trade credit Corporate Finance

For listed companies the report also describes the basis for the opinion and discusses key audit matters (international) or critical audit matters (United States): areas of higher misstatement risk or significant management judgment, such as revenue recognition estimates or impairment tests.

Regulatory filings, notes, MD&A and the audit report Financial Statement Analysis

Once a network reaches enough users, it becomes attractive to marginal users too, which further speeds growth. That threshold is its critical mass.

Network effects and platform business models Corporate Finance

The critical t-value comes from the t-table with $n-2$ degrees of freedom. The standard error of the forecast measures the uncertainty in predicting one new Y.

Predicting Y and building a prediction interval Quantitative Methods

The level of significance (α) is the probability of rejecting a true null that you are willing to accept, usually 5%. It fixes the critical values: the cut-off points that separate the rejection region from the rest.

How a hypothesis test works: four steps from claim to decision Quantitative Methods

How far it reaches on each side is set by a critical Z-value and the standard error.

Confidence intervals for a mean return Quantitative Methods

One default is every default. A cross-default clause makes a default on one obligation a default on the others, so all of an issuer's unsubordinated debt has the same probability of default.

Seniority, recovery rates and notching Fixed Income

A cross-default clause treats the issuer as in default on this bond if it defaults on another debt.

Bond indentures and covenants Fixed Income

Cross-departmental conflicts. Banking, sales or marketing may press an analyst for a favorable view of a company that is, or could become, a client of the firm.

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

A cross-rate is the exchange rate between two currencies that is worked out from each currency's rate against a third, instead of being quoted directly.

Currency cross-rates and triangular arbitrage Economics

Cross-sectional analysis (also called relative analysis) compares one metric across companies at the same date, even when they differ in size or currency.

Analysis tools: common-size, trend, cross-sectional and the limits of ratios Financial Statement Analysis

Cross-sectional data are many entities observed in the same period (indexed by $i$). Time-series data follow one entity over many periods (indexed by $t$).

The regression line: slope, intercept and least squares Quantitative Methods

Crowding out happens because there is a limited pool of savings. When the government borrows more of it, interest rates rise and some private projects that would have gone ahead are canceled.

Does the size of national debt matter? Economics

Network business models often include crowdsourcing, in which users contribute directly to the product or service.

Network effects and platform business models Corporate Finance

Crypto hedge funds include discretionary long-only, long/short, quantitative and multi-strategy funds. Some mine Bitcoin as well, and they may trade derivatives and lend or borrow coins.

Ways to invest in digital assets: direct and indirect Alternative Investments

A cryptocurrency ETF is bought in a brokerage account, so no exchange account or wallet is needed. Typically it does not hold the coins.

Ways to invest in digital assets: direct and indirect Alternative Investments

Cryptocurrency futures are agreements to buy or sell a set amount at a set price on a future date. They are exchange traded, usually cash settled (no coins change hands) and inherently leveraged.

Ways to invest in digital assets: direct and indirect Alternative Investments

Cryptocurrency stocks give indirect exposure through businesses tied to digital assets: exchanges, payment firms, companies that accept, hold or mine crypto, and makers of the hardware used to run blockchains.

Ways to invest in digital assets: direct and indirect Alternative Investments

A cryptocurrency wallet (on a website or a mobile app) stores the public and private digital codes needed to reach the holdings.

Ways to invest in digital assets: direct and indirect Alternative Investments

Cryptography is the algorithmic scrambling of data so that it is useless to anyone not authorized to read it. DLT uses it to prove who the participants are and to protect the data, which gives the network its security and integrity.

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

Analysts organize the questions they ask into the Cs of credit analysis. Five look at the borrower itself (bottom-up) and three at the world it operates in (top-down).

Credit risk: probability of default and loss given default Fixed Income

Naive or story-based valuation rests on a narrative about a company that is not tied to any in-depth economic or financial analysis. It drives meme stocks, shares whose buyers are swayed mainly by social media posts, and cult companies, which are bought out of loyalty to a product rather than expected performance.

Market price, intrinsic value and perceived value Equities

Preferred shares may also have cumulative dividends (missed dividends must be paid before common dividends) or participating dividends (an extra share in profits), as well as call, put or conversion rights. These cumulative and participating dividends are only named here; Learning Module 1 defines them.

Valuing preferred stock, and how call, put and conversion features change value Equities

The cumulative distribution function (CDF) gives F(x) = P(X ≤ x). It never falls, starts at 0 far to the left and reaches 1 far to the right.

Random variables and distribution functions Quantitative Methods

A cumulative frequency table lists each bin with a running total of the share of observations at or below its upper edge.

Quartiles, percentiles and box plots Quantitative Methods

The cumulative MTM gain or loss over the whole life is approximately the same for a futures contract and a comparable forward.

Futures price at inception and how daily settlement changes value Derivatives

The result is the cumulative portfolio return. The geometric average portfolio return turns it into a constant annual rate.

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

On cumulative preference shares, a missed dividend accrues and must be paid in full before any common dividend.

Common shares and preference shares Equities

Legal commitment to exchange at a fixed rate; monetary base 100% backed by the anchor currency; cannot be lender of last resort; earns seigniorage.

Exchange rate regimes and their effects on trade and capital flows Economics

Currency derivatives manage exchange rate risk. An exporter sells foreign currency forward to match a delivery contract; an investor can sell currency futures against a securities portfolio.

What derivatives are written on: the main underlyings Derivatives

The currency forward value follows the same logic with two interest rates. In a quote f/d, the long buys the base currency d.

Valuing a forward when the asset pays income or has costs Derivatives

A foreign exchange rate is the price of one currency in terms of another. A currency pair names the two currencies being exchanged, such as the Swiss franc (CHF) and the US dollar (USD).

Types of returns: assets, instruments and indicators Quantitative Methods

Current government spending buys goods and services on a regular, recurring basis: health, education and defense.

Fiscal policy tools and the fiscal multiplier Economics

A current multiple sets today's price or enterprise value against the most recently reported figures, typically for the latest quarter.

Trailing, current and forward multiples Equities

The current ratio counts all current assets, the quick ratio excludes inventory and prepaid expenses, and the cash ratio counts only cash and marketable securities.

Common-size balance sheets, liquidity and solvency ratios Financial Statement Analysis

For a bond, it is the current yield: annual coupons divided by the bond's market price. Together the two pieces make the total return, and the holding period return is simply that total return measured over whatever period you held.

Holding period return Quantitative Methods

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. That is effective duration, and because it is defined by a move in the curve it is a curve duration, not a yield duration.

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

Providers also build a custom index for particular objectives and risk levels, which blends passive tracking with active choices.

Rebalancing, reconstitution and what indexes are used for Quantitative Methods

A customs union adds a common external trade policy, normally one tariff schedule for imports from outside.

Trading blocs: free trade areas, customs unions, common markets and economic unions Economics

All non-competitive bids are accepted first. Competitive bids are ranked from the lowest yield (highest price) upward until the offering is filled.

Government bond auctions and trading vs corporate bonds Fixed Income

Systems and cyber. Cyber risk is the disruption or failure of information technology: hacking, data theft and breaches, which bring reputational and compliance consequences.

Financial and non-financial risks, and how they interact Portfolio Construction

Cyclical companies see bigger swings in revenue and profitability over the business cycle. Typical sources: discretionary goods and services; durable goods such as housing, cars, appliances and capital equipment; commodity inputs such as lumber, steel and copper; and some business services, such as renting out heavy equipment.

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

Cyclicality. The industry's cyclicality matters because the forecast must be long enough for sales and profit to reach a mid-cycle level.

The forecast horizon, normalized earnings and long-term forecasts Financial Statement Analysis