CFA Level I terms: D

All contracts are then valued at that price. This process is called daily settlement, or mark to market (MTM).

Futures contracts, daily settlement and margin calls Derivatives

Daily valuation is the standard: the portfolio is valued every day, so a year's time-weighted rate links each day's return, $(1 + r_1)(1 + r_2)\cdots(1 + r_{365}) - 1$.

Money-weighted vs time-weighted rate of return Quantitative Methods

The second is data availability, meaning how much financial history exists and how good it is. The third is the analyst perspective: a new private investor, a minority shareholder or a controlling owner each looks at the company differently.

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

How data are collected and put into a usable format. Latency is the delay on a network.

Data science: processing, visualization and text analytics Quantitative Methods

Ensuring quality and accuracy through cleaning. Review all data, detect bad or inaccurate records and adjust for missing data where appropriate.

Data science: processing, visualization and text analytics Quantitative Methods

Data frequency is how often you observe the series: daily, weekly, monthly, yearly. Match it to the question: a trading desk managing overnight risk needs daily figures; a pension fund planning its contributions needs annual ones.

Scaling volatility over time: data frequency and the root-of-time law Quantitative Methods

A data lake is a central store that keeps structured, semi-structured and unstructured data in their original format.

Data science: processing, visualization and text analytics Quantitative Methods

Shuffling also helps prevent data leakage: information from outside the training data slipping into what the model learns, which makes test results look better than real-world performance.

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

Data mining is a subset of data science that searches large datasets for patterns with algorithms, for example ones built on Bayes' theorem.

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

Data science is an interdisciplinary field that combines statistical methods, mathematical approaches, computational tools and domain knowledge to handle and interpret big data.

Data science: processing, visualization and text analytics Quantitative Methods

How data are recorded, archived and accessed, including database design. A key point is whether data are structured or unstructured, and whether the analysis needs low latency.

Data science: processing, visualization and text analytics Quantitative Methods

How data move from the source or storage location to the analytical tool, for instance through a direct feed from an exchange.

Data science: processing, visualization and text analytics Quantitative Methods

Data visualization is how data are formatted, displayed and summarized graphically.

Data science: processing, visualization and text analytics Quantitative Methods

The day count convention states how days are counted and how many days a period has.

Accrued interest, flat price and full price Fixed Income

The day-count fraction τ converts an annual money-market rate into the rate for the period. Money-market rates use actual days over a 360-day year.

Covered interest rate parity: forward rates from interest rates Economics

Days of inventory times cost of sales, divided by 365, gives inventory.

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

Days of inventory on hand (DOH) is how long stock sits before it is sold, days sales outstanding (DSO) how long customers take to pay, days payable outstanding (DPO) how long the company takes to pay suppliers.

Operating profitability and working capital Equities

It is built from three day counts, called activity ratios: days of inventory on hand (DOH), days sales outstanding (DSO) and days payable outstanding (DPO). Inventory and receivables hold cash up, so they add days.

The cash conversion cycle Corporate Finance

Receivables turnover and days of sales outstanding (DSO) do the same for customer credit.

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

Days payable outstanding (DPO) times cost of sales, divided by 365, gives payables.

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

It is built from three day counts, called activity ratios: days of inventory on hand (DOH), days sales outstanding (DSO) and days payable outstanding (DPO). Inventory and receivables hold cash up, so they add days.

The cash conversion cycle Corporate Finance

Compare receivables with revenue over several years: if receivables rise as a share of revenue, the company may be stuffing channels or recording fictitious sales. Days sales outstanding measures that link.

Warning signs of earnings manipulation Financial Statement Analysis

It is built from three day counts, called activity ratios: days of inventory on hand (DOH), days sales outstanding (DSO) and days payable outstanding (DPO). Inventory and receivables hold cash up, so they add days.

The cash conversion cycle Corporate Finance

If you may trade at most a set percentage of ADV each day (a participation limit), divide the position, as a multiple of ADV, by that limit and round up to whole days. The result is the days to sell a position.

Liquidity: market float, average daily volume and turnover Equities

It has a fixed window, typically two years, to buy a private company that its shareholders approve. That purchase is the de-SPAC transaction.

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

The deadweight loss is what is left: B is the cost of domestic firms producing units that the world could supply for less, and D is the value of purchases that no longer happen.

Tariffs, quotas, export subsidies and their welfare effects Economics

The deal-by-deal (American) waterfall pays the GP deal by deal. The whole-of-fund (European) waterfall pays the GP only after the fund as a whole has returned LPs' capital and the hurdle.

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

Dealers make markets in OTC derivatives, take the other side of client trades, earn the spread and hedge their net position, in part through central clearing.

How investors use derivatives, compared with issuers Derivatives

Debt is borrowed for a finite term, with interest and principal promised on set dates. Equity is the owners' money, with no maturity and no promise of any payment.

Debt vs equity: lenders and shareholders Corporate Finance

Avoid covenant breaches. Debt covenants set financial tests the borrower must keep passing. Managers of highly leveraged or unprofitable companies may inflate earnings to stay inside them.

Why managers misreport, and what stops them Financial Statement Analysis

The debt coverage ratio is a leverage and risk gauge: the lower it is, the heavier the debt relative to the cash available to service it.

Cash flow performance and coverage ratios Financial Statement Analysis

Debt financing (loans, bonds, leases) must be repaid on a set date with interest.

Key features of corporate issuers Corporate Finance

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

The debt payment ratio does the same for long-term debt repayments, and the dividend payment ratio for dividends.

Cash flow performance and coverage ratios Financial Statement Analysis

The key measure for a revenue bond is the debt service coverage ratio. It compares the cash a project has left after running costs with the principal and interest due that year.

Agencies, supranationals and local government bonds Fixed Income

Interest is deductible, so a profitable company that borrows pays less tax. The saving is the debt tax shield.

Modigliani–Miller propositions Corporate Finance

Debt to EBITDA says how many years of EBITDA it would take to pay off the debt. Rating agencies often use it as a trigger for rating actions, and banks write it into loan covenants.

Financial ratios in credit analysis Fixed Income

The leverage measure is the debt to market value of equity (D/MVE): debt divided by the market value of equity, not by debt plus equity.

Industry betas, the market risk premium and country risk Equities

The first three ratios are the debt-to-assets ratio, the debt-to-capital ratio and the debt-to-equity ratio. Higher values of all of them mean more financial risk.

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

The first three ratios are the debt-to-assets ratio, the debt-to-capital ratio and the debt-to-equity ratio. Higher values of all of them mean more financial risk.

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

Debt-to-EBITDA estimates how many years of EBITDA, a rough proxy for operating cash flow, it would take to repay debt, and it is common in loan covenants.

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

The debt-to-equity ratio, long-term debt-to-equity, the total debt ratio and the financial leverage ratio all rise as the company borrows more.

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

The debt-to-GDP ratio: the stock of debt as a share of one year's national output.

Does the size of national debt matter? Economics

The debt-to-income ratio measures the borrower's ability to make the payments from income.

Residential mortgage loans: the features that matter Fixed Income

Some funds focus on debtor-in-possession (DIP) financing, which supplies operating funds to a firm that is already in bankruptcy.

Private debt: direct lending, mezzanine, venture and distressed debt Alternative Investments

A debut issuer is the bond equivalent of an initial public offering (IPO): the first chance for investors to buy that issuer's bonds.

Primary and secondary bond markets vs equity markets Fixed Income

A decentralized exchange works like the blockchain itself, on a distributed platform with no central coordination.

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

The movement to build financial dApps from open-source building blocks is decentralized finance (DeFi): a marketplace of applications that can act as money, store value, tokenize assets and keep records, with smart contracts handling lending, trading, settlement and payment.

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

Quartiles make four groups, quintiles five, deciles ten and percentiles one hundred. The second quartile, the 50th percentile and the median are the same value.

Quartiles, percentiles and box plots Quantitative Methods

The decision rule is the final step. Reject $H_0$ if the statistic falls beyond a critical value.

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

A decision tree lays out the outcomes in each branch with their probabilities and values the project as a probability-weighted average.

Real options Corporate Finance

High-quality reporting is decision-useful information: it shows the company's activities and financial condition as they really are.

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

The decisive fact is the single detail that turns a permitted act into a violation, or the reverse. Vignettes are written so that one such detail is present, often tucked into a subordinate clause.

How to answer Ethics vignettes: a five-step method Ethical and Professional Standards

The declaration date is the day the company announces the dividend, its amount and the dates that follow.

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

If the absence or weakness of a compliance system clearly means you cannot discharge your duty, the Standard says to decline in writing to accept supervisory responsibility until the firm adopts reasonable procedures. This declining supervisory responsibility is the remedy.

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

Increasing returns to scale mean output grows by a larger percentage than inputs. Decreasing returns to scale mean it grows by a smaller percentage.

Economies and diseconomies of scale Economics

A deductible temporary difference will reduce taxable income in future (less tax later), so it creates a deferred tax asset.

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

Deep learning uses neural networks with many hidden layers to process data in stages, building simple concepts into complex ones.

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

A deep-in-the-money option is very likely to be exercised, so its price moves almost one-for-one with the underlying.

Exercise value, moneyness and time value Derivatives

A deep-out-of-the-money option is very unlikely to be exercised and barely reacts. For an at-the-money option, a small move in the underlying often decides whether it is exercised at all.

Exercise value, moneyness and time value Derivatives

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

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

A reduced-form credit model treats default as an outside random event arriving at rate λ, the default intensity (also called the hazard rate).

Discrete distributions: uniform, binomial and Poisson Quantitative Methods

Bonds: the default risk premium (the borrower may not pay in full and on time), the liquidity premium (selling quickly costs you a discount) and the maturity risk premium (long bonds lose more value when rates rise).

Required return: risk-free rate, inflation and risk premia Quantitative Methods

defeasance lets the borrower prepay only by buying a portfolio of government securities that replicates all the remaining payments, including the balloon.

Commercial mortgage-backed securities (CMBS) Fixed Income

Defensive companies see their sales growth, profitability and valuations change much less with the economy, because they sell essentials with inelastic demand.

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

The defensive interval ratio takes a different view: how many days could the company keep paying its cash costs from its liquid assets if no cash came in?

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

Deferred coupon bonds pay nothing for the first few years and a higher coupon later. Issuers use them to conserve cash while a project is built or while a weak credit recovers.

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

A deferred tax asset arises when tax is paid early or a deduction is still to come, so less tax is owed later.

Deferred tax assets and liabilities Financial Statement Analysis

A deferred tax liability is tax the company expects to pay in future periods because of a taxable temporary difference.

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

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

Deferred taxes as liability or equity is an analyst's judgment: will the tax ever be paid? A DTL that is expected to reverse and be settled is a liability.

Deferred tax assets and liabilities Financial Statement Analysis

Define a firm's industry. Decide which companies sell comparable products or services to the same customers.

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

The balance sheet shows one net figure, the funded status: the fair value of plan assets minus the defined benefit obligation (the present value of the promised pensions, discounted at a high-quality corporate bond yield).

Defined contribution vs defined benefit pension plans Financial Statement Analysis

In a defined benefit pension plan (DB plan) the sponsoring company specifies the benefit owed to its employees, usually through a formula: years of service × final salary × an accrual rate.

Types of investors, and DB vs DC pension plans Portfolio Construction

In a defined benefit plan, the company promises a pension, for example 60% of final salary for life. The company carries the investment risk (assets may earn less than expected) and the actuarial risk (people may live longer or retire at different times than assumed).

Defined contribution vs defined benefit pension plans Financial Statement Analysis

In a defined contribution pension plan (DC plan) the account is in the employee's name, usually funded by both employee and employer.

Types of investors, and DB vs DC pension plans Portfolio Construction

In a defined contribution plan, the company pays an agreed amount into the plan, often a match of what the employee pays.

Defined contribution vs defined benefit pension plans Financial Statement Analysis

Deflation is a broad, sustained fall in the general price level. It is harder for conventional policy to handle than inflation, because nominal rates cannot be cut much below zero.

The neutral rate and the limits of monetary policy Economics

The income statement shows the effect of debt through the degree of financial leverage (DFL): the sensitivity of net income to changes in operating income.

Capital investments and capital structure Equities

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

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

Delay costs (slippage) arise when the order fills late, after the price has already moved as the trader expected.

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

Deleveraging shows as falling debt, a falling debt-to-equity ratio and rising interest coverage. A debt ratio that keeps rising, or coverage that keeps falling, means leverage is still going up, whatever happens to profits.

Capital investments and capital structure Equities

Derivative price change for a small change in the underlying.

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

A demand shock is a surge in confidence, consumption and investment. Inflation and output rise together, so tightening is the right response.

The neutral rate and the limits of monetary policy Economics

Demand-based infrastructure, such as a new port or toll road, builds on forecasts of economic growth and use, so it is riskier.

Infrastructure risk, return and diversification Alternative Investments

The cost of debt jumps with default risk and the required return on equity becomes unstable.

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

When the observations are linked, such as two funds over the same months, the two samples are dependent samples.

t-tests of a mean, a difference in means and paired differences Quantitative Methods

A simple linear regression explains the variation in one variable using one other variable and a straight line. The variable you want to explain is the dependent variable, Y.

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

The other way to hold a foreign share without opening foreign accounts is indirect investing, usually through a depositary receipt (DR).

Investing across jurisdictions: dual listings and depositary receipts Equities

The foreign company's shares are deposited with a domestic bank, the depository bank, which issues receipts that represent them.

Investing across jurisdictions: dual listings and depositary receipts Equities

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

The depreciation and amortization add-back is not a source of cash; it only reverses a deduction that never cost cash.

Cash flow from operations: the indirect method Financial Statement Analysis

If capex persistently exceeds depreciation, the excess is growth spending and the asset base is expanding. The depreciation forecast then rises with the larger asset base.

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

The depreciation method is a separate lever. An accelerated method such as double-declining balance charges more in early years, so straight-line gives higher early profit.

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

But it reduces taxable profit, and the tax it saves is cash in the company's pocket: the depreciation tax shield.

Capital allocation principles and pitfalls Corporate Finance

Derecognition means removing an asset from the books. It happens when the asset is disposed of or no future benefit is expected from using or selling it.

Impairment and derecognition of PP&E and intangibles Financial Statement Analysis

A derivative is an instrument whose value comes from an underlying asset or indicator, such as a share price, an exchange rate, an interest rate or an index.

Types of returns: assets, instruments and indicators Quantitative Methods

Derivatives such as futures, options and swaps let the fund take positions cheaply or hedge them. Not every hedge fund uses all three, and some use none.

What a hedge fund is, and how it differs from other funds Alternative Investments

Each listed share usually has one designated market maker: a dealer that buys, sells or holds shares to keep trading orderly, especially at the open and close and when orders are out of balance or prices swing.

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

The required return is what the client must earn to meet a goal, such as a retirement income. The desired return is what the client would like.

Risk and return objectives: willingness vs ability to take risk Portfolio Construction

Detection is part of supervision. You exercise reasonable supervision by putting written procedures in place and checking through periodic review that they are followed.

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

A developed market sovereign has a strong, stable, well-diversified economy. Its budget is mostly recurring outlays financed by broad individual and business taxes, so fiscal policy is stable and transparent.

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

Companies are assigned a country, then countries are collected into developed, emerging and frontier markets. The country is set by where the issuer is incorporated, where it has its primary listing, or where its headquarters is.

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

Developing markets add a problem: government debt may not be risk-free, and long-term government bond yields may not exist (developing market discount rates).

Where DCF and growth models break down Equities

Governments also sponsor banks and development banks to serve a market or a policy goal. Like agencies, they are created or supported by the state and usually carry a similar rating, especially when a statute makes the government liable for their debts.

Agencies, supranationals and local government bonds Fixed Income

Research costs are expensed under both standards. Development costs are where they split.

Expense recognition: capitalizing vs expensing Financial Statement Analysis

Investors also work alongside development finance institutions: specialized intermediaries that supply risk capital for development projects on a non-commercial basis.

Infrastructure: economic vs social, greenfield vs brownfield Alternative Investments

The development phase (designing and testing a prototype, say) is capitalized once the company can show technical feasibility, the intention and ability to complete and use or sell the asset, probable future economic benefits and a reliable measure of the cost.

Intangible assets: finite vs indefinite lives Financial Statement Analysis

Three things shape the model. The first is the company's development stage.

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

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

Differential voting rights (DVR) shares change both bundles at once. A DVR share carries a fraction of the ordinary vote and a higher dividend whenever a dividend is declared, and it is usually sold at a discount to the ordinary share.

Share classes and voting rights: dual class structures and differential voting shares Equities

Differentiation can rest on quality or features, a brand built by advertising, service and distribution, intellectual property (IP), the customer experience, premium pricing, or bundling the product with other services.

Competitive strategy: cost leadership, differentiation and focus Equities

A unique product for a niche, sold at a premium price. Lumen Ledger, which sells accounting software only to firms with fewer than 50 staff and ties it to their accountants, is an example.

Competitive strategy: cost leadership, differentiation and focus Equities

Diffuse prior is the name for equal priors: you have no basis to favor any scenario, so each gets the same probability.

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

Digital assets are assets that can be created, stored and transmitted electronically and carry ownership or use rights.

What makes an investment alternative: features and categories Alternative Investments

You must exercise diligence, independence and thoroughness when you analyze investments, make recommendations or take investment actions.

Standard V(A): Diligence and Reasonable Basis Ethical and Professional Standards

Diluted EPS is EPS if every security that could become a common share, and would lower EPS, had been converted or exercised.

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

Dilution is the fall in each existing owner's fractional ownership when a company issues new shares. Existing shareholders often prefer the company to borrow for growth, unless the new money earns enough to make up for sharing the profits among more owners.

Debt vs equity: lenders and shareholders Corporate Finance

If the company issues new shares, it is a dilutive (primary) follow-on offering: each existing share's claim on earnings and assets shrinks.

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

US GAAP labels finance leases for lessors as either a sales-type lease (selling profit at the start) or a direct financing lease (the lessor simply financed a purchase and earns interest only).

Lessor accounting: finance vs operating leases Financial Statement Analysis

Direct infrastructure investment means owning the underlying asset. It gives control and the chance to capture full value, but it needs large sums and brings concentration and liquidity risk during the long holding period.

Infrastructure: economic vs social, greenfield vs brownfield Alternative Investments

In direct investing the investor buys the asset itself with no intermediary: a stake in a private company, a building, a share of a project.

Fund investing vs co-investing vs direct investing Alternative Investments

In direct lending a private debt firm (or a private equity firm with a private debt arm) raises a fund from investors who want higher-yielding debt, then lends to borrowers.

Private debt: direct lending, mezzanine, venture and distressed debt Alternative Investments

A direct listing is rarer. No underwriter is involved and no new shares are issued, so no capital is raised.

Public vs private companies, going public and going private Corporate Finance

Direct method statements list six lines: cash from customers, cash paid to suppliers, to employees, for other operating expenses, for interest and for income taxes.

The direct method and converting indirect to direct Financial Statement Analysis

On format, both systems note direct method encouraged: the direct format is preferred but not required. US GAAP requires a reconciliation of net income to CFO even when the direct method is used.

Cash flow statements under IFRS vs US GAAP Financial Statement Analysis

Instead of forecasting each expense, an analyst can make a direct profit margin assumption: the margin on earnings before interest and taxes (EBIT), a driver of both free cash flow to the firm and free cash flow to equity, or, where direct costs dominate, the gross margin.

Expense models: margins, itemization and operating leverage Equities

A direct quote has the investor's domestic currency as the price currency (domestic per foreign): for an investor in Toronto, CAD/USD.

Exchange rate quotes and percentage change in a currency Economics

Direct real estate investment means buying a property (and arranging its finance) for your own account. If the title passes with no financing liens such as an outstanding mortgage, ownership is free and clear.

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

In a direct sales strategy the firm sells straight to the end customer. That is common for complex or high-margin products such as medical devices, industrial equipment and luxury goods, and for B2B models where the pool of buyers is small and easy to reach.

Business model features Corporate Finance

Direct taxes are levied on income, wealth and corporate profits. They include capital gains taxes, payroll (employment or national insurance) taxes, corporate taxes, local income and property taxes, and inheritance tax.

Fiscal policy tools and the fiscal multiplier Economics

When a client tells you which broker to use, that is directed brokerage. It is the client's choice and no breach of loyalty.

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

A disaggregated valuation model forecasts the income statement and the balance sheet, then computes free cash flow from the forecast.

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

The PCP works with the Disciplinary Review Committee (DRC), a volunteer committee of charterholders who sit on hearing panels and help staff set conduct policy.

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

The auditor cannot issue an opinion, for example from a scope limitation.

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

Make disclosure before engagement: before the client or prospect enters any formal agreement for services. A disclosure after the signature does not let them reconsider.

Standard VI(C): Referral Fees Ethical and Professional Standards

Required by law. Disclosure required by law, for example a court order or regulatory demand, overrides confidentiality.

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

Discontinued operations are net of tax so that income from continuing operations stays clean. They do not include restructuring charges or a loss on closing one plant, which stay in continuing operations.

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

A discount bond sells below par: with a 5% coupon when new bonds pay 6%, the bond is short 1 per year, and its price drops by the present value of that shortfall.

Pricing a bond from its yield to maturity Fixed Income

A discount factor turns each spot rate into the present value of one unit paid at that date.

Par rates from spot rates Fixed Income

A bill is a discount instrument: it pays no coupon, so its whole return is the gap between the price you pay and the face value you receive.

Types of returns: assets, instruments and indicators Quantitative Methods

The spread they want is the required margin, also called the discount margin (DM). The quoted margin is fixed at issue, so when the two drift apart the price leaves par.

Floating-rate notes: quoted margin and discount margin Fixed Income

In the money market, the discount rate has a special meaning. The interest is built into the face value: you pay less than face value today and receive the face value at maturity.

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

The discount rate assumption is a present-value rate: raise it and the obligation falls. 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

The rate must match the claim in the numerator. This is the discount rate consistent with the claim.

Discount rates and terminal values Equities

A bank that cannot borrow from other banks can borrow directly from the central bank as a last resort at the discount window.

How banks fund themselves short term Fixed Income

Present value models value expected future distributions and price gains at an appropriate discount rate. They are also called discounted cash flow models.

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

A discrete random variable has a countable set of distinct outcomes: the number of defaults in a loan book, or the number of quarters in which a fund beats its benchmark.

Random variables and distribution functions Quantitative Methods

A discrete uniform distribution has n equally spaced outcomes from a to b, each with probability 1/n. Throwing a fair die is the classic case: six outcomes, each 1/6.

Discrete distributions: uniform, binomial and Poisson Quantitative Methods

Discretionary fiscal policy is a deliberate change in tax rates or spending programs to steer demand, such as a stimulus package or a freeze on spending.

Fiscal vs monetary policy and what fiscal policy is for Economics

Beyond 5,000 it rises: diseconomies of scale.

Economies and diseconomies of scale Economics

You must not engage in professional conduct involving dishonesty, fraud and deceit, and you must not commit any act that reflects adversely on your professional reputation, integrity or competence.

Standard I(D): Misconduct Ethical and Professional Standards

Disintermediation is the displacement of an established intermediary. An online travel platform is itself a two-sided network (travelers and hotels); by automating research, price comparison and booking, it displaced many traditional travel agents and shifted the balance of power between agencies and hotels.

Network effects and platform business models Corporate Finance

Dispersion says how far they stray from it, and for an investor that is the starting point for risk: it puts a number on how uncertain a return is around its average.

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

Dispersion of cash flows means how widely the payments are spread around their average timing. A bond that pays at many dates is more dispersed than one that pays everything at a single date, and at equal duration the more dispersed bond is more convex.

Convexity and the convexity adjustment Fixed Income

The result is the disposition effect: holding losers too long, in the hope of getting back to even, and selling winners too early, for fear the gain will vanish.

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

Creates a new market or redefines an existing one with a different value proposition that satisfied customers may ignore at first.

PESTLE and the innovation matrix Equities

If you believe the consensus has a reasonable and adequate basis and is independent and objective, you need not remove your name, even though it differs from your own opinion. You may record your dissenting opinion in the file.

Standard V(A): Diligence and Reasonable Basis Ethical and Professional Standards

If you find a violation, dissociation is required.

Standard I(A): Knowledge of the Law Ethical and Professional Standards

Weight the going-concern value and the distress sale value by their probabilities. Discount a future distress sale value to today first.

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

Distressed debt is the bonds of an issuer close to bankruptcy. They trade well below par.

Bond market segments, issuers and investors Fixed Income

Distressed/restructuring funds buy the securities of firms in or near bankruptcy, such as senior debt trading well below par, or debt expected to convert into equity in a restructuring (a fulcrum security).

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

A distributed computing framework is software that splits processing across many machines. For very large datasets, artificial intelligence (AI) techniques may find complex, non-linear relationships that traditional statistics miss.

Data science: processing, visualization and text analytics Quantitative Methods

A distributed ledger is the shared database at its heart: entries are recorded, stored and spread across the network so that every participant holds a matching, verified copy of all current and past transactions.

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

A distributed ledger technology (DLT) network lets many participants keep the same record of who owns what, with no single keeper.

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

In fact different views widen the range of expectations, which drives price discovery and keeps markets efficient. This divergence of opinion is healthy, and contrarian views, which run against the consensus (the activist short sellers of the previous lesson are the extreme case), challenge the status quo.

Why two analysts using the same model get different values Equities

Anywhere below +1 the portfolio's σ is below that average, and the lower the correlation, the lower the risk. Diversification is this reduction in risk from combining assets that do not move in lockstep.

Portfolio variance, covariance and correlation Portfolio Construction

The risk reduction from holding assets that do not move in step is the diversification benefit, and it grows as the correlation falls.

Portfolio expected return, variance and the role of correlation Quantitative Methods

The diversification ratio puts a number on the risk reduction.

Why invest through a portfolio Portfolio Construction

The diversification rule of thumb says that 20 to 30 assets capture most of the benefit, especially when correlations are low.

How many assets does diversification need? Quantitative Methods

Shareholders have a right to dividends if the board declares them, but no right to be repaid. Debt financing (loans, bonds, leases) must be repaid on a set date with interest.

Key features of corporate issuers Corporate Finance

Buying just before the ex-date and selling after the payment does not earn the dividend for free, because the price falls by about the dividend on the ex-date. That strategy is called dividend capture.

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

The dividend discount model says a share is worth the present value of all the dividends it will ever pay, discounted at the required return r.

Valuing a stock from its dividends Quantitative Methods

The dividend discount model (DDM) discounts dividends at the required return on equity, $r_e$. It suits mature firms with stable, consistent distributions.

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

Physical commodities add storage costs, insurance, transport and spoilage. Stocks and bonds add benefits: dividend income and coupons.

Cost of carry: income, storage and convenience yield Derivatives

The debt payment ratio does the same for long-term debt repayments, and the dividend payment ratio for dividends.

Cash flow performance and coverage ratios Financial Statement Analysis

The dividend payout ratio, D₁ ÷ E₁, is the share of earnings paid out as dividends. (Avoid calling it b: in Equities, b is the retention ratio, the share kept.)

Implied return and implied growth Quantitative Methods

The dividend rate is the most recent periodic dividend, annualized. The trailing dividend yield is the dividend rate divided by the current price, $Div_t \div P_t$.

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

A dividend carries a signal, which is dividend signaling: keeping it steady says management is confident the payout will not hurt future growth and profitability.

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

A company that keeps a steady payout but returns more and more through buybacks will look too cheap in a dividend model compared with a model based on free cash flow to equity (FCFE). This is the dividend versus FCFE valuation gap.

Where DCF and growth models break down Equities

In some jurisdictions the company must withhold tax from the gross dividend and pay out only the net amount, which is dividend withholding tax.

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

For a share, the capital distribution return is the dividend yield: annual dividends divided by the price at the start of the period.

Holding period return Quantitative Methods

A dividend-paying stock forward is the standard case. Take a share at EUR 85 that pays EUR 1.80 in eight months, with r = 6% and a one-year forward.

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

What is left is net income, which the company either keeps and reinvests or pays out as dividends. Dividends are discretionary: a company may pay them regularly, occasionally or never.

Common shares and preference shares Equities

Dividends cut retained earnings, so with dividends and financing needs linked one for one, a higher dividend raises the financing needs by the same amount.

Asset and financing models Equities

On cumulative preference shares, a missed dividend accrues and must be paid in full before any common dividend. The unpaid amount is called dividends in arrears.

Common shares and preference shares Equities

Dividends paid are a financing outflow under US generally accepted accounting principles (GAAP). The other financing lines: debt issued and repaid (shown separately), and share issuance less buybacks.

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

Learn the interest received classification, the dividends received classification, the interest paid classification and the dividends paid classification as a set of four.

Cash flow statements under IFRS vs US GAAP Financial Statement Analysis

Learn the interest received classification, the dividends received classification, the interest paid classification and the dividends paid classification as a set of four.

Cash flow statements under IFRS vs US GAAP Financial Statement Analysis

Every index divides an aggregate reference value by a divisor. The aggregate depends on the weighting: the sum of one share of each constituent for a price-weighted index, the total market value for a cap-weighted one, and so on.

Index value, price return and total return Quantitative Methods

For a position it uses the market value of the holding, never the par amount. In the US the same idea is called dollar duration.

Money duration and PVBP Fixed Income

The money-weighted rate of return (also called the dollar-weighted rate of return) is an internal rate of return applied to a portfolio.

Money-weighted vs time-weighted rate of return Quantitative Methods

A stronger step than a peg is dollarization: adopting another country's currency outright, which then replaces the national currency.

Inflation targeting vs exchange rate targeting Economics

A domain is the area where an innovation is applied: a product, a business process or a market segment. The problem an innovation addresses may be distinct (clearly defined, a need people already recognize) or indistinct (not yet clearly defined).

PESTLE and the innovation matrix Equities

Domestic bonds are issued in a country by an issuer incorporated there. Foreign bonds are issued by an outside issuer in that country's market, normally in its currency and under its rules.

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

Domestic content provisions require a share of a product's value or parts to be local.

Tariffs, quotas, export subsidies and their welfare effects Economics

A set share or type of local input must go into a good.

Tools of geopolitics: national security, economic and financial Economics

domestic debt is issued in the local currency and held mostly by local banks, funds and other domestic investors.

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

The curriculum calls the price currency's rate the foreign risk-free rate, r_f, and the base currency's rate the domestic risk-free rate, r_d.

Currency forward prices and the interest rate differential Derivatives

A company weighs the costs and benefits of issuing in the domestic, foreign and global equity markets: at home, in a foreign market that matters more for its sales or investors, or globally through several listings that use DRs to reach investors without draining liquidity from its main venue.

Investing across jurisdictions: dual listings and depositary receipts Equities

The lower branch is not efficient: for each portfolio on it, the portfolio directly above has the same risk and a higher return. We say the lower one is a dominated portfolio.

The efficient frontier and the global minimum-variance portfolio Portfolio Construction

A fund of funds invests in other funds, so it has its own management and incentive fees on top of the fees the underlying hedge funds charge. This is a double layer of fees.

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

Many also tax shareholders on the dividends they receive, so profit that is paid out is taxed twice. This is double taxation.

Key features of corporate issuers Corporate Finance

A longer useful life, a higher salvage value, straight-line instead of accelerated depreciation, a smaller allowance for doubtful accounts and a smaller warranty expense provision all lift current profit.

Expense recognition: capitalizing vs expensing Financial Statement Analysis

The difference is the down payment, and it is the borrower's equity on day one. Everything else in this lesson is about how much of a cushion the lender has, and what rights each side holds.

Residential mortgage loans: the features that matter Fixed Income

When an issuer suffers a downgrade, its spreads widen. Duration multiplies the spread change, so a bond with twice the duration loses about twice as much for the same move.

Price impact of spread changes Fixed Income

Downside protection, the guarantee of limited losses when markets fall, is not something diversification delivers.

Why invest through a portfolio Portfolio Construction

Downside risk is the risk of returns falling below a level you care about, such as a minimum return needed to meet a liability.

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

Cutting out distributors, retailers and other intermediaries that deal with end users, to keep more of the value chain behind the final price, improve efficiency or offer customers one integrated service.

Porter's Five Forces and economic moats Equities

The DR ratio, quoted as shares to DRs, sets how much of a share each receipt represents. "One share to five DRs" means each DR is worth one-fifth of a share.

Investing across jurisdictions: dual listings and depositary receipts Equities

A drag on liquidity is a lag in cash inflows. The longer receipts stay outstanding, the greater the chance they never arrive.

Liquidity sources and liquidity ratios Corporate Finance

As asset-class returns differ, the actual weights wander from the policy weights. This is drift.

Asset classes, strategic asset allocation and portfolio construction Portfolio Construction

If the expected return (the drift) is $\mu$ and the volatility is $\sigma$, the log of the price grows by $\mu - \sigma^2/2$ a year. The drift adjustment $\sigma^2/2$ is subtracted.

Why asset prices are log-normal Quantitative Methods

So four things set $s_f$ (the drivers of forecast uncertainty): the standard error of the estimate (fit), the sample size, the distance of $X_f$ from $\bar{X}$, and the spread of X (more spread pins the slope down better).

Predicting Y and building a prediction interval Quantitative Methods

Divide the constant growth model by trailing EPS and the drivers of P/E appear: payout, growth and the cost of equity.

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

A dual class share structure gives different share classes different economic and/or voting rights. The usual form has two classes.

Share classes and voting rights: dual class structures and differential voting shares Equities

Others choose a dual listing: the same shares are listed and traded in two or more markets at once. A fictional Danish shipping group, for example, might list its shares in both Copenhagen and London, so investors in either city can buy the same shares in their own market.

Investing across jurisdictions: dual listings and depositary receipts Equities

The dual listing vs dual class question comes down to one line: a founder who wants to go public and keep control uses a dual class structure, not a dual listing. The next lesson covers dual listings and depositary receipts.

Share classes and voting rights: dual class structures and differential voting shares Equities

Investors have dual recourse. They look first to the cover pool.

Covered bonds Fixed Income

In a dual-class structure one share class (Class A) carries one vote per share and is publicly traded, while another (Class B) carries several votes per share and is held only by insiders or founders.

Principal-agent problems and stakeholder conflicts Corporate Finance

Due diligence follows the method. A fund investor examines the manager.

Fund investing vs co-investing vs direct investing Alternative Investments

DuPont analysis (the return on equity decomposition) shows whether ROE comes from earning a good margin, using assets efficiently, borrowing, or paying little tax.

DuPont analysis: three-step and five-step ROE Financial Statement Analysis

Consumer spending. It follows income and confidence. Durable goods such as cars and appliances swing the most; services and staples the least.

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

Sensitivity of a bond's price to yields.

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

The duration gap compares the bond's Macaulay duration with the investor's horizon, and its sign names the dangerous direction of rates.

Investment horizon, price risk vs reinvestment risk, and duration gap Fixed Income

The duration of a floating-rate note is the fraction of the period left to the next reset, converted to years.

What makes duration higher or lower Fixed Income

Payments far into the future are discounted so heavily that they carry almost no weight. The duration of a perpetual bond depends only on the yield.

What makes duration higher or lower Fixed Income

The duration of a zero-coupon bond equals its time to maturity, and its modified duration is that time divided by one plus the yield.

What makes duration higher or lower Fixed Income

Separate facts from opinions and biases, and note the facts you lack. List the stakeholders and the duties owed to each.

A framework for ethical decision making Ethical and Professional Standards

What you owe the people you serve.

The seven Standards of Professional Conduct at a glance Ethical and Professional Standards

What you owe the firm you work for.

The seven Standards of Professional Conduct at a glance Ethical and Professional Standards

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.

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

In matters related to your employment, you must act for your employer's benefit and not deprive it of the advantage of your skills and abilities, divulge its confidential information or otherwise harm it. This is the duty of loyalty to the employer.

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

PVBP is a price in currency per 100 of par, not a percentage. It is also called PV01, and in the US DV01.

Money duration and PVBP Fixed Income

The pool is a dynamic cover pool. A third party monitors it, and the bank must replace loans that prepay or stop performing so that cash flows last until maturity.

Covered bonds Fixed Income

Price varies with time, supply and demand.

Pricing and revenue models Corporate Finance

Does the mix change over time?

Option price bounds and replication vs forwards Derivatives