CFA Level I terms: F

The F-distribution is also non-negative and skewed right, with two degrees-of-freedom values: one for the numerator and one for the denominator.

Chi-square and F-tests of variance Quantitative Methods

The F-statistic is the ratio of the two mean squares. It uses mean squares, never the raw sums.

The ANOVA table and the standard error of the estimate Quantitative Methods

The F-test of the model asks whether the regression explains anything at all. In simple regression the null is that the slope is zero.

Goodness of fit and testing the regression coefficients Quantitative Methods

A preferred share with a maturity date repays its face or par value FV at maturity instead of a terminal value.

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

You must also keep fact versus opinion apart. Past results are fact.

Standard V(B): Communication with Clients and Prospective Clients Ethical and Professional Standards

In arbitrage pricing theory (APT), a general framework, expected returns depend on several systematic risk factors, each with its own sensitivity (a factor exposure, or beta) and its own expected factor risk premium.

Arbitrage pricing theory and multi-factor models Equities

Factor investing identifies statistical characteristics that matter for risk and return and groups companies by them.

Choosing a peer group for multiples Equities

In arbitrage pricing theory (APT), a general framework, expected returns depend on several systematic risk factors, each with its own sensitivity (a factor exposure, or beta) and its own expected factor risk premium.

Arbitrage pricing theory and multi-factor models Equities

The exposures are factor sensitivity coefficients (also called factor loadings).

Systematic vs nonsystematic risk and return-generating models Portfolio Construction

factor-based investing selects and weights shares by factors believed to drive performance, such as earnings growth or a strong balance sheet.

Types of equity indexes Equities

A factor-based peer group holds firms grouped by statistical characteristics that explain equity risk and return, and these firms may sit in different businesses.

Choosing a peer group for multiples Equities

In factoring, the company sells its receivables to a lender, the factor, usually at a discount. The factor takes over credit-granting and collection.

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

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

Raw land, timberland and farmland as investments Alternative Investments

Standard III(B), fair dealing, requires you to deal fairly and objectively with all clients when you provide analysis, make recommendations or take action.

Standard III(B): Fair Dealing Ethical and Professional Standards

Fair value is the price that would be received to sell an asset in an orderly market transaction. Amortized cost is the amount first recognized, less principal repaid, plus or minus amortization of any discount or premium, less impairment.

Financial instruments: amortized cost, FVOCI and FVPL Financial Statement Analysis

A fair value hedge offsets the fluctuation in the fair value of an asset or liability. Typical cases: a receive-fixed swap that turns fixed-rate bonds into floating-rate debt, or short futures against commodity inventory.

How companies use derivatives: hedge accounting Derivatives

The inputs used to get there follow a three-level fair value hierarchy.

Why alternative investment performance is hard to judge Alternative Investments

In one step: compare the carrying amount with the recoverable amount, the higher of two values. Fair value less costs to sell is what a sale would net.

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

A few liabilities are at fair value: those held for trading, derivative liabilities and any liability the company elects to measure that way under the fair value option.

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

Available-for-sale debt securities are measured at fair value with changes in OCI. The IFRS counterpart is fair value through other comprehensive income (FVOCI), used for debt when the business model is both to collect cash flows and to sell.

Financial instruments: amortized cost, FVOCI and FVPL Financial Statement Analysis

Trading securities are debt securities bought to be sold, measured at fair value with changes in profit. IFRS calls the broader group fair value through profit or loss (FVPL): everything not in the other two categories, plus anything the company irrevocably elects there.

Financial instruments: amortized cost, FVOCI and FVPL Financial Statement Analysis

When you communicate investment performance, you must make reasonable efforts to ensure it is fair, accurate and complete.

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

If $P_t > IV_t$, it is overvalued. If $P_t \approx IV_t$, it is fairly valued.

Market price, intrinsic value and perceived value Equities

Information is decision-useful when it has two fundamental characteristics. It has relevance, meaning it can affect a decision (omitting or misstating it would matter, which is the idea of materiality).

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

Fallen angels are former investment-grade issuers that have been downgraded to high yield. Their risk of distress looks like that of other high-yield issuers, but their outstanding bonds keep investment-grade features: typically non-callable, with few covenants and long maturities.

Long-term funding: investment-grade vs high-yield issuers Fixed Income

A Type II error is failing to reject a false null hypothesis: a false negative, or missed signal.

Type I and Type II errors and the power of a test Quantitative Methods

A Type I error is rejecting a true null hypothesis: a false positive, or false alarm. Its probability is the significance level, α.

Type I and Type II errors and the power of a test Quantitative Methods

The Fama–French model explains returns with three factors: the market, size (small companies against large) and value (high book-to-market against low).

Systematic vs nonsystematic risk and return-generating models Portfolio Construction

The family accounts rule is the one the exam likes most: treat a fee-paying relative exactly like any other client.

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

For raw land, farmland and timberland it is the soil, the climate, the geology (for mineral and drilling rights) and the location.

Raw land, timberland and farmland as investments Alternative Investments

US GAAP are developed by the Financial Accounting Standards Board (FASB). 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

Fat tails: extreme moves happen more often than a normal distribution predicts, so a model built on the normal distribution underestimates risk (see statistical distributions).

Data science: processing, visualization and text analytics Quantitative Methods

A leptokurtic distribution is fat-tailed (also called long-tailed). A platykurtic one is thin-tailed (short-tailed).

Skewness and kurtosis Quantitative Methods

FCFE from forecast statements is net income minus net investment plus net borrowing, as in lesson 4.

From the forecast model to an equity value Equities

The FCFE sustainable growth rate replaces dividends with FCFE; the FCFF sustainable growth rate uses net operating profit after tax (NOPAT), which is operating income × (1 − tax rate), and the return on capital (ROC) on book value of total capital (book debt plus book equity) at the start of the year.

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

Here $\Delta$Debt is net debt issuance: debt issued minus debt repaid. This is the FCFF and FCFE relationship.

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

FCFF from forecast statements is net operating profit after taxes (NOPAT) minus net investment, as in lesson 1.

From the forecast model to an equity value Equities

The FCFE sustainable growth rate replaces dividends with FCFE; the FCFF sustainable growth rate uses net operating profit after tax (NOPAT), which is operating income × (1 − tax rate), and the return on capital (ROC) on book value of total capital (book debt plus book equity) at the start of the year.

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

The mixes of the available assets that you could hold are the feasible portfolios. With two assets the mixes lie on one curve.

The minimum-variance portfolio and the efficient frontier Quantitative Methods

Two names to know: the refinancing rate is how some central banks label their policy rate (the Bank of England uses the two-week repo rate), and the federal funds rate is the US interbank rate on overnight lending of reserves, which the Federal Open Market Committee steers to a target by adding or draining reserves.

Monetary policy tools and the transmission mechanism Economics

The feedback step keeps the portfolio on track. It has two parts.

The three steps of the portfolio management process Portfolio Construction

With fees calculated independently, the incentive fee is on the whole gross gain and the management fee is simply added.

Calculating returns after fees: management, incentive, hurdle and high-water mark Alternative Investments

Funds from operations (FFO) starts from net income from continuing operations and adds back the non-cash items. FFO to debt uses gross debt, and again higher is better.

Financial ratios in credit analysis Fixed Income

Monopoly supplier of the currency. Modern money is fiat money: it cannot be converted into gold or anything else.

The role of central banks Economics

Fictitious transactions are the bottom: revenue, assets or cash that do not exist.

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

A fidelity bond: a variation that covers losses from employee dishonesty.

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

The fiduciary call is a long call plus a risk-free bond paying X at expiry, where X is the exercise price. Both options are European options with the same strike and expiry.

Put–call parity: fiduciary call = protective put Derivatives

A fiduciary duty is imposed by law or regulation on someone charged with acting for another party, such as managing their assets, and it sits in an enhanced position of trust.

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

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

Meet any one of five tests and it is a finance lease; meet none and it is an operating lease. These five classification criteria are identical under IFRS and US GAAP and are applied the same way by lessees and lessors.

Leases: finance vs operating and lessee accounting (IFRS vs US GAAP) Financial Statement Analysis

Financial analysis means reading a company's results and balance sheet against the backdrop of its industry and the economy, and judging what they say.

What financial statement analysis is for Financial Statement Analysis

The financial analysis process exists to move from the first to the second, and the purpose set in phase 1 decides which tools you pick.

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

The main financial asset classes are cash, equity and bonds, plus hybrids that mix equity and debt features. Each leans on a different mix of price return and distributions.

Types of returns: assets, instruments and indicators Quantitative Methods

Finance has three building blocks: financial assets, instruments and indicators.

Holding period return Quantitative Methods

Financial data science is a specialized branch of data science (third lesson) that applies its principles to financial data: prices, rates and returns; accounting information and disclosures; and economic data.

Big data, the four Vs and alternative data Quantitative Methods

A negative growth rate can model a slow decline (lesson 5), but financial distress (bankruptcy, restructuring, liquidation) often arrives suddenly.

Where DCF and growth models break down Equities

A financial guarantee from a bank or insurer pays if the pool falls short. A letter of credit is a bank's promise to provide funds up to a limit.

Credit enhancement and credit tranching Fixed Income

Accountants audit the pool. Financial guarantors sometimes add a guarantee.

The securitization process and its parties Fixed Income

A financial indicator is a market variable such as an interest rate, an exchange rate or an index. It generates no cash flows of its own.

Types of returns: assets, instruments and indicators Quantitative Methods

A financial instrument is the standardized legal agreement behind an asset (a share, a bond), a derivative or a piece of securitized debt.

Types of returns: assets, instruments and indicators Quantitative Methods

Financial intermediaries complete the picture. 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

A financial investor holds a non-controlling stake and has no influence on operations, so the analyst values the company as its current management runs it.

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

Financial leverage is the use of debt, often measured as debt (or debt net of cash) relative to a profit measure or to equity.

Factors affecting capital structure and the cost of capital Corporate Finance

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

Financial performance is what happened over a period: how much revenue and profit the company earned and how much cash it generated.

What financial statement analysis is for Financial Statement Analysis

Financial performance is what happened over a period: how much revenue and profit the company earned and how much cash it generated. Financial position is what the company owns and owes on one date.

What financial statement analysis is for Financial Statement Analysis

Financial reporting quality is about the information a company discloses. 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

Financial risk is the risk that poor governance, including weak handling of creditors' interests, damages a company's financial position and its ability to pay its debts.

Corporate governance risks and benefits Corporate Finance

The financial statement analysis framework is the same for an equity analyst valuing a share and a credit analyst rating a bond.

The six-step financial statement analysis framework Financial Statement Analysis

A financial statement model is a spreadsheet that projects a company's statements from a few assumptions, and it is the starting point for most valuations.

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

Financial tools work through money and investment. Cooperative ones are free exchange of currencies and open foreign investment.

Tools of geopolitics: national security, economic and financial Economics

Financing activities cover debt and equity raised or repaid, plus dividends paid.

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

The financing model covers the mix of debt and equity and the tenor and type of debt.

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

The financing model asks who pays for the growth. Three steps give the financing needs.

Asset and financing models Equities

A positive figure means the company must raise money or run down cash. A negative figure is a financing surplus.

Asset and financing models Equities

Adaptation. Fine-tuning or transfer learning then adapts the trained model to a specific task, such as summarizing credit reports.

Large language models and generative AI in finance Quantitative Methods

A manufacturer holds raw materials, work in progress and finished goods, and the mix moves with the flow of production and sales.

Inventory disclosures, turnover and days of inventory Financial Statement Analysis

A finite useful life means the asset is used up over a limited period, so it is amortized. An indefinite useful life means there is no foreseeable limit, so it is not amortized and is tested for impairment at least annually.

Intangible assets: finite vs indefinite lives Financial Statement Analysis

Fintech is technological innovation in the design and delivery of financial services and products. In everyday use the word also means the companies that build these tools, and their sector.

Big data, the four Vs and alternative data Quantitative Methods

Firms should adopt compliance procedures, and the main control is a firewall, an information barrier that limits confidential information to those who need it.

Standard II(A): Material Nonpublic Information Ethical and Professional Standards

In a firm commitment both parties are obliged to settle on the agreed terms. Forwards, futures and swaps are firm commitments.

What a derivative is Derivatives

Never add them. The firm value is the market value of debt plus the market value of equity, without the cash deduction.

Enterprise value multiples Equities

Firms in decline can end in a sale, a restructuring under new management or liquidation. If asset sales do not cover the debt, shareholders lose everything.

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

So $IV_{t+n}$, applied at period $n$, values cash flows from period $n+1$ on, and it needs the first cash flow of the stable stage.

Two-stage (multistage) growth models Equities

The oldest costs go to cost of sales. Ending inventory carries the newest costs.

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

The lender holds a first lien: a legal claim on the property that ranks ahead of other claims. If the borrower stops paying, the lender can start foreclosure, take possession of the property and sell it to recover the debt.

Residential mortgage loans: the features that matter Fixed Income

First lien debt is a pledge of certain assets that could include buildings, equipment, licenses, patents, brands or inventory.

Seniority, recovery rates and notching Fixed Income

Among secured lenders, first mortgage debt is a pledge of specific property (a power plant for a utility, say).

Seniority, recovery rates and notching Fixed Income

The yearly fiscal deficit (or surplus) as a percentage of GDP tells you which way the burden is heading: a deficit adds to debt, so a persistent deficit raises the ratios over time.

Sovereign credit analysis: the key ratios Fixed Income

Fiscal flexibility asks how well the government keeps discipline over time and can adjust revenue and spending, judged mainly by what it has done in past downturns.

Sovereign credit analysis: qualitative factors Fixed Income

The rounds add up to a geometric series, which sums to the fiscal multiplier.

Fiscal policy tools and the fiscal multiplier Economics

Fiscal policy is the government's decisions about spending and taxation. Monetary policy is the central bank's activity aimed at influencing the quantity of money and credit in the economy.

Fiscal vs monetary policy and what fiscal policy is for Economics

The fiscal stance is the direction in which the government is pushing demand. 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

Any line gives a fitted value, $\hat{Y}_i = \hat{b}_0 + \hat{b}_1X_i$, for each observation. The miss, $e_i = Y_i - \hat{Y}_i$, is the residual: actual minus fitted.

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

Meet any one of five tests and it is a finance lease; meet none and it is an operating lease. These five classification criteria are identical under IFRS and US GAAP and are applied the same way by lessees and lessors.

Leases: finance vs operating and lessee accounting (IFRS vs US GAAP) Financial Statement Analysis

The five-step valuation process is the same whichever measure you choose.

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

When some costs do not scale with volume, split them. This is the fixed and variable costs approach.

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

How much revenue each unit of PP&E supports. A higher fixed asset turnover is usually read as greater efficiency.

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

A fixed capital distribution return is set in advance and stays the same through the investment period. It is the most common return on debt, because most bonds pay a fixed coupon.

Types of returns: assets, instruments and indicators Quantitative Methods

The fixed capital investment is capital expenditures net of what the company received from selling long-term assets.

Free cash flow to the firm (FCFF) and to equity (FCFE) Financial Statement Analysis

Fixed charge coverage also includes lease payments: they were deducted in arriving at earnings before interest and taxes (EBIT), so they go back on top, and they are a fixed charge, so they join the bottom.

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

Fixed costs, stated as a total, do not change within a normal output range in the short run: salaries, D&A, software, insurance and some utilities.

Operating profitability and working capital Equities

Peg to a currency or basket, band up to ±1%; no legal commitment; reserves discretionary; can still be lender of last resort.

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

The dividend is a fixed preferred dividend D every period.

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

A fixed supply only helps if demand holds up, and there is no economic consensus on how to value these assets.

Digital assets: risk, return and diversification Alternative Investments

Fixed-income arbitrage looks for relative value among government bonds, corporate credit, asset-backed and mortgage-backed securities and high-yield debt.

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

Together they are fixed-income instruments. All of them are liabilities of the borrower, but not every liability is fixed income: accounts payable, deferred revenue and taxes payable are obligations to suppliers, customers and the tax authority, not borrowing from investors.

The features of a bond 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. This is a fixed-price call.

Callable, putable and convertible bonds Fixed Income

The fixed-rate payer makes fixed payments, like the issuer of a fixed-rate bond, and receives floating payments, like the holder of a floating-rate note (FRN) that pays the MRR.

A swap as a series of forwards: what is the same and what is different Derivatives

The fixed-rate payer pays the swap rate and receives floating, so it is also the floating-rate receiver.

Interest rate swaps: fixed vs floating Derivatives

The full price has two parts, the flat price and the accrued interest.

Accrued interest, flat price and full price Fixed Income

Two common cases are steepening, where long rates rise relative to short rates (the gap between them widens), and flattening, where short rates rise relative to long rates (the gap narrows).

Key rate duration Fixed Income

A flexibility option concerns how the project is run. With a price-setting option, a firm facing demand beyond its capacity raises prices instead of output.

Real options Corporate Finance

In a crisis, investors sell risky assets and buy government bonds. This flight to quality pushes government yields down and, because default risk is now a bigger worry, pushes credit spreads on risky bonds up.

Empirical vs analytical duration Fixed Income

Most broad-based indexes hold a market's largest listed companies, adjusted for market float and weighted by market capitalization. That approach is float-adjusted market-cap weighting.

Types of equity indexes Equities

Float-adjusted market-capitalization weighting multiplies each market value by the float fraction $f_i$ before weighting.

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

Drawn as horizontal bars on one price axis, this is a floating bar valuation chart, also called a football field chart.

Market price, intrinsic value and perceived value Equities

The coupon is a floating rate: it moves up and down with the reference rate.

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

In the last group, floating-rate and inverse floater tranches have coupons linked to a reference rate, often with a cap and a floor.

Mortgage pass-throughs and CMOs Fixed Income

A floating-rate bond resets its coupon each period to a reference rate (a short-term market rate, such as a 3-month interbank rate) plus a fixed margin that reflects the issuer's risk.

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

A floating-rate note (FRN) has a coupon that resets. The coupon rate is a market reference rate (MRR) plus a credit spread.

The features of a bond Fixed Income

The fixed-rate payer makes fixed payments, like the issuer of a fixed-rate bond, and receives floating payments, like the holder of a floating-rate note (FRN) that pays the MRR.

A swap as a series of forwards: what is the same and what is different Derivatives

Floating-rate notes (FRNs) and most loans pay a coupon of a market reference rate (MRR) plus a credit spread. The MRR resets each period and the spread is fixed at issue.

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

The floating-rate payer pays MRR and receives the fixed rate.

Interest rate swaps: fixed vs floating Derivatives

Focus usually combines elements of cost leadership and differentiation and applies them to one area: a region, a narrower range of products or one customer group.

Competitive strategy: cost leadership, differentiation and focus Equities

Here $IV_t$ is the intrinsic value today, $E(CF_{t+i})$ is the expected cash flow in period $i$ and $E(P_{t+n})$ is the terminal value: the expected price at the end of the forecast horizon, which stands in for every cash flow after it. The horizon $n$ is how far the analyst can forecast with confidence; it has nothing to do with how…

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

In step 2, the forecast method matters: a cyclical company's cash flow can rise and fall with the business cycle, which constant growth ignores (Learning Module 8 builds detailed forecasts).

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

Keep forecast records: write down every forecast, share it, and review it regularly, noting the hits and the misses.

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

If the borrower stops paying, the lender can start foreclosure, take possession of the property and sell it to recover the debt.

Residential mortgage loans: the features that matter Fixed Income

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

The drivers are volume growth (more or fewer units), price/mix (price changes plus a shift toward pricier or cheaper products) and the foreign currency effect (translating foreign sales into the reporting currency).

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

Most central banks also manage the country's foreign currency reserves and gold. Large gold sales by central banks could push the gold price down, which is one reason the holdings matter.

The role of central banks Economics

Foreign direct investment (FDI) is a long-term stake in productive capacity abroad, such as a factory or a controlling share in a foreign business.

Globalization vs nationalism: gains, costs and rollback Economics

The foreign exchange market is where one currency is exchanged for another. It is the largest financial market in the world, and it exists so that trade and cross-border investment can happen: an importer must pay in the exporter's currency, and a fund buying foreign bonds must first buy the currency they are priced in.

The foreign exchange market and who trades in it Economics

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

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

Form 10-K is the annual report for US registrants, with audited statements, notes, risk factors and management's discussion and analysis (MD&A).

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

Form 10-Q is the quarterly report for US companies, with unaudited statements and an MD&A. Many non-US companies file a semiannual Form 6-K instead.

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

Form 10-K is the annual report for US registrants, with audited statements, notes, risk factors and management's discussion and analysis (MD&A).

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

Form 8-K is the current report for material events: acquisitions or disposals, a change of auditor, management changes.

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

The duty does not depend on the client's status. It protects former and prospective clients as well as current ones, and it continues after the relationship ends.

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

No. The Standard applies to every one of the forms of communication: a printed report, a phone call, a broadcast, an email or a social media post.

Standard V(B): Communication with Clients and Prospective Clients Ethical and Professional Standards

In a forward commitment (forward, futures or swap) both sides must perform. In a contingent claim, usually an option, the buyer chooses whether the trade happens, and the seller must go along.

Forward commitments vs contingent claims Derivatives

A forward contract is an over-the-counter (OTC) agreement in which one party, the buyer, will purchase an underlying from the other, the seller, on a set future date at a price fixed today.

Forward contracts: payoff for the long and the short Derivatives

The par curve holds the coupon rates that price par bonds off the spot curve. The forward curve holds rates for periods that start in the future.

How the spot, par and forward curves relate Fixed Income

If the forward is below spot, the points are negative and the base currency is at a forward discount. The price currency has the opposite position.

Forward points, forward premiums and discounts Economics

A forward exchange rate is a rate agreed today for exchanging currencies at a future date. The same principle as the forward interest rate fixes it: two ways to turn one unit of money today into money at the future date must give the same result.

Forward exchange rates and option values by no arbitrage Quantitative Methods

$\text{FCFE}_{t+n+1}$ divided by that value is the forward FCFE yield at the end of the horizon. So the implied long-run growth rate is the cost of equity minus that yield.

Why two analysts using the same model get different values Equities

A forward multiple uses the next 12 months. Lesson 5 goes into the time bases.

Valuing with multiples: comparables and forecasted fundamentals Equities

The forward P/E uses analysts' consensus EPS for the next 12 months, $EPS_{t+1}$.

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

They rescue the comparison for a forward P/E of a loss-making firm, whose trailing P/E is not meaningful.

Trailing, current and forward multiples Equities

They quote the spot rate and the gap between the forward and the spot, in forward points (also called swap points or pips).

Forward points, forward premiums and discounts Economics

If the forward rate is above spot, the points are positive and the base currency is at a forward premium: a unit of it costs more for forward delivery.

Forward points, forward premiums and discounts Economics

Like every firm commitment, it names a contract size, an underlying, a date T for the exchange and the agreed price. The agreed price is the forward price, written F₀(T).

Forward contracts: payoff for the long and the short Derivatives

Divide the Gordon value by next year's earnings and you get the forward price-to-earnings ratio, the price divided by expected earnings.

Implied return and implied growth Quantitative Methods

A forward rate agreement (FRA) is an over-the-counter contract in which two counterparties agree to apply a specific interest rate to a future period.

Forward rate agreements (FRAs): settlement and uses Derivatives

A stock split (also called a forward split) raises the number of shares and lowers the price in proportion, as in a 3-for-2 split.

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

The forward price and the forward value are two different numbers, and the exam checks that you can tell them apart.

Forward price vs forward value: at initiation, during the life, at expiry Derivatives

The rate that would make the two routes pay the same is the implied forward rate, also called the forward yield.

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

An endowment is a fund held by a non-profit institution, such as a university, to support its services. A foundation is a grant-making entity.

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

The founders class shares of a new fund entice early investors into a start-up fund with a lower fee structure (for example 1% and 10% instead of 2% and 20%), often only for the first slice of assets.

Calculating returns after fees: management, incentive, hurdle and high-water mark Alternative Investments

The four moments of a distribution are its mean (center), variance (spread), skewness (lopsidedness) and kurtosis (tail weight).

Continuous distributions: uniform, normal and logistic Quantitative Methods

The four-factor model is a widely used multi-factor model with the market plus three factors built from stock market and accounting data: firm size, value and price momentum.

Arbitrage pricing theory and multi-factor models Equities

A company that routinely disappoints or overachieves in the final quarter with no seasonality may be shifting profit between quarters.

Warning signs of earnings manipulation Financial Statement Analysis

The FRA buyer is the long position. It is the fixed-rate payer: it pays interest at the agreed FRA rate and receives interest at the reference rate.

Forward rate agreements (FRAs): settlement and uses Derivatives

An FRA gives the same exposures from the other direction, which is the FRA equivalence: a long FRA (pay fixed, receive floating) behaves like a short future.

Interest rate futures: the 100 minus rate convention Derivatives

Fractional ownership, in the form of time-shares, created a category between the hotel and the vacation home. Loyalty programs rewarded high-value frequent travelers.

Types of business models Corporate Finance

Reinvesting, like a reverse split, can leave you with fractional share ownership (0.024 of a share here), with a proportional claim on dividends and net assets.

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

Framing bias means answering a question differently depending on how it is posed. "Seven in ten new restaurants survive their first year" and "three in ten new restaurants close within a year" say the same thing, yet they draw different answers.

Cognitive errors: belief perseverance and information processing Portfolio Construction

Leasing, licensing arrangements and franchising are different, but all are like subscriptions in that they involve recurring payments for the transfer of property or access to it, not a product.

Pricing and revenue models Corporate Finance

Scam initial coin offerings (ICOs), pump and dump schemes, theft and phishing, helped by venues that are largely unregulated.

Digital assets: risk, return and diversification Alternative Investments

When three conditions come together. That triangle is the fraud triangle, and the exam asks you to name the side from a short scenario.

Why managers misreport, and what stops them Financial Statement Analysis

If the title passes with no financing liens such as an outstanding mortgage, ownership is free and clear. Buying has up-front costs: legal fees, surveys, engineering and environmental studies, and appraisal fees.

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

Free cash flow is cash left over after the business has paid its way and invested. FCFF is the version for everyone who funds the company, lenders and shareholders together.

Free cash flow to the firm (FCFF) and to equity (FCFE) Financial Statement Analysis

Free cash flow (FCF) appears in the curriculum as net income less working capital increases, investment in fixed assets and net interest paid.

Financial ratios in credit analysis Fixed Income

Debt forces them to pay interest and principal, which leaves less to waste, so higher debt disciplines managers and cuts the agency costs of equity. This is the free cash flow hypothesis, and it argues for more debt, not less.

Optimal and target capital structure, pecking order and agency costs Corporate Finance

Free cash flow to equity goes one step further: it also takes out what lenders receive (interest and principal, net of any new borrowing), leaving only what common shareholders could be paid.

Free cash flow to the firm (FCFF) and to equity (FCFE) Financial Statement Analysis

Free cash flow to equity (FCFE) is available to common shareholders only.

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

Free cash flow to the firm is what the business throws off once it has paid its running costs and taxes and funded the plant and working capital it needs, before anything goes to lenders or owners.

Free cash flow to the firm (FCFF) and to equity (FCFE) Financial Statement Analysis

Free cash flow to the firm (FCFF) is available to lenders and shareholders together. Free cash flow to equity (FCFE) is available to common shareholders only.

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

The free float is the part of a company's shares that actually trades: shares not held by insiders, strategic investors or sponsors.

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

A free float-adjusted index goes one step further and also leaves out shares that foreign investors are not allowed to buy, so it shows what an international investor can actually hold.

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

A free trade area removes tariffs and quotas on trade among members. Each member keeps its own trade policy toward everyone else.

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

The freemium business model gives customers a level of usage or functionality at no charge (or with ads), for example a note-taking app with free basic notes and paid sync.

Pricing and revenue models Corporate Finance

Front running is trading for your own account before trading for clients, using your knowledge of what clients are about to do.

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

The buyer then pays the full price: the present value of the remaining cash flows on the trade settlement date, which is the day the buyer pays and the seller delivers.

Accrued interest, flat price and full price Fixed Income

A fully amortizing loan has level payments that leave a balance of zero at maturity. A partially amortizing bond has level payments too, but they leave part of the principal outstanding, which is repaid as a balloon payment with the final payment.

Bullet, amortizing and sinking fund bonds Fixed Income

The remedy is to change the functional form: replace Y, X or both with their logarithms. The natural logarithm transformation turns multiplicative growth into additive steps, which a straight line handles.

Functional forms: log-lin, lin-log and log-log models Quantitative Methods

Through functional separation, branding and marketing, property ownership and management became different companies, so the largest hotel brands often own few or none of their hotels.

Types of business models Corporate Finance

In fund investing the investor contributes capital to a fund. The fund, not the investor, finds, selects, makes and monitors the investments.

Fund investing vs co-investing vs direct investing Alternative Investments

A fund of funds is a multi-manager fund that invests in other hedge funds, which is covered in the next lesson.

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

A fund of hedge funds pools investor money and invests it across many hedge funds. It offers diversification across strategies, regions and styles, lower minimums, shorter lockups and typically better exit terms than a single fund.

How to invest in hedge funds: master-feeder, SMAs, funds of funds Alternative Investments

A fund of one is a fund created for a single investor. A separately managed account (SMA) goes one step further: the investor sets up its own account, the assets are held and registered in its name, and the manager is given authority to trade.

How to invest in hedge funds: master-feeder, SMAs, funds of funds Alternative Investments

Fundamental factor weighting sets weights by a measure of company size that does not depend on the share price: assets, book value, cash flow, revenue, earnings, dividends or even the number of employees.

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

fundamental factors are measures other than market capitalization, such as revenue, earnings, dividends or book value.

Types of equity indexes Equities

Within it, fundamental growth funds go long companies expected to grow fast and short those under pressure. Fundamental value funds go long unloved companies where a turnaround could lift revenue and cash flow.

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

A fundamental long/short fund buys shares it thinks are undervalued and shorts those it thinks are overvalued.

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

A fundamental option is different: the entire value of the investment depends on factors outside the firm's control.

Real options Corporate Finance

Fundamental value funds go long unloved companies where a turnaround could lift revenue and cash flow. Both tend to end up long biased, so their returns carry a non-zero beta.

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

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

Funds from operations (FFO) starts from net income from continuing operations and adds back the non-cash items.

Financial ratios in credit analysis Fixed Income

The future value (FV) of an amount today is what it grows to at the interest rate. The present value (PV) of a later amount is that growth undone.

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

A futures contract is a forward with standardized size, dates and underlying that trades on a futures exchange.

Futures contracts, daily settlement and margin calls Derivatives

The futures contract basis point value (BPV) is the cash gained or lost per basis point (0.01%) of rate movement.

Interest rate futures: the 100 minus rate convention Derivatives

A futures contract is a forward with standardized size, dates and underlying that trades on a futures exchange. The agreed price is the futures price, f₀(T).

Futures contracts, daily settlement and margin calls Derivatives

This is the futures price 100 minus rate convention. A quote of 96.40 implies a rate of 100 − 96.40 = 3.60%.

Interest rate futures: the 100 minus rate convention Derivatives

An FX forward, where FX means foreign exchange, is an agreement to exchange two currencies at a fixed rate on a future date.

Currency forward prices and the interest rate differential Derivatives

Higher FX reserves to GDP and a higher reserve ratio are stronger. A higher external debt burden and a higher share of debt falling due within 12 months are weaker.

Sovereign credit analysis: the key ratios Fixed Income

An FX swap is a spot trade combined with an offsetting forward trade in the opposite direction, and it is the biggest product by turnover.

The foreign exchange market and who trades in it Economics

The FY1 and FY2 multiples, from fiscal year 1 (FY1) and fiscal year 2 (FY2), use forecasts for the next fiscal year and the one after.

Trailing, current and forward multiples Equities