CFA Level I terms: I

The I-spread uses a swap rate in place of a government yield: the standard swap rate in the same currency and with the same tenor.

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

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

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

The ideal currency regime would have three properties: exchange rates between any two currencies credibly fixed, all currencies fully convertible (so capital flows freely), and each country free to run its own monetary policy.

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

An identifiable intangible includes patents, licenses, trademarks, franchise rights, copyrights, customer lists and software.

Intangible assets: finite vs indefinite lives Financial Statement Analysis

An identifiable intangible asset under IFRS is separable or arises from legal or contractual rights, is controlled by the company, and is expected to produce future benefits.

Purchased, internally developed and acquired intangibles Financial Statement Analysis

Identifying the client is the first step, because you cannot be loyal to someone you have not identified. For an individual's personal assets the client is obvious.

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

Hedge funds try to limit market exposure and earn idiosyncratic return, return specific to the positions the manager picks.

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

Idiosyncratic risk (also called non-systematic risk) can be diversified away, so it earns nothing.

Estimating beta with a CAPM regression Quantitative Methods

The if-converted method pretends the convertible was converted at the start of the year. The payments you would no longer make go back into the numerator, and the new shares go into the denominator.

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

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

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

Illegal activity. The information concerns illegal activities on the part of the client (the illegal activity exception).

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

An illiquid borrower cannot raise the cash in time: it may be unable to draw a credit line or sell assets quickly, even though its assets are worth more than its debts.

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

They carry illiquidity: they are hard to sell, run for long horizons and need large capital outlays. Because the manager knows far more than the investor, the pay is built around results (incentive fees), and measuring performance is harder.

What makes an investment alternative: features and categories Alternative Investments

Investors earn an illiquidity premium, the extra return required for giving up liquidity.

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

The main risks are illiquidity risk (no easy way out), leverage risk (debt magnifies losses as well as gains), concentration in a few holdings, and valuation uncertainty.

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

Illusion of control is a cousin of overconfidence: the belief that gathering more opinions or splitting a model into ever finer pieces will make the forecast accurate.

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

Illusion of control bias is believing that you can control or influence outcomes when you cannot. It leads to inadequate diversification (a big stake in your own employer), too much trading, and forecasts and models that are overly detailed in the belief that detail controls uncertainty.

Cognitive errors: belief perseverance and information processing Portfolio Construction

Believing you know more than you do, for example that more information makes forecasts reliable.

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

Targets measurable social or environmental impact plus a financial return.

ESG considerations in portfolio planning and construction Portfolio Construction

Time for the measure to affect the economy.

Fiscal stance, structural deficits and policy lags Economics

Depreciation spreads cost over a life; impairment is an unexpected drop in value on top of that. Both frameworks require a write-down, but they define "recover" differently.

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

The implicit assumption of historical simulation is that past price changes are a reasonable guide to future ones.

Historical simulation and historical value at risk Quantitative Methods

explicit costs are out-of-pocket fees and commissions. implicit costs are indirect.

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

Controlling a large exposure with a small deposit gives a high degree of implicit leverage, even when the user borrows nothing.

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

Put the market price in place of $IV_t$ and solve for $g$. This is the implied constant growth rate.

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

Turn the formula around and it gives the implied exchange rate: the rate that the share price and the DR price together imply.

Investing across jurisdictions: dual listings and depositary receipts Equities

Every margin assumption implies an expense growth rate, so check the implied expense growth.

Expense models: margins, itemization and operating leverage Equities

The FCFF growth rate that would make the two match exactly is the implied FCFF growth: using lesson 3's formula at WACC on a firm value of 777.78 + 250, about 2.52%.

Discount rates and terminal values Equities

An implied forward rate is the rate agreed today for a loan that starts at one future date and ends at a later one, deduced from spot rates.

Cash flow additivity and implied forward rates Quantitative Methods

Suppose instead you know your required return and want the implied growth rate, the growth that the price needs.

Implied return and implied growth Quantitative Methods

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

The implied market risk premium is a forward-looking MRP backed out of today's index level. Treat the index price as its value, solve the constant growth model for the expected return, and subtract today's government yield.

Industry betas, the market risk premium and country risk Equities

For a perpetual share, this gives the implied required return on preferred.

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

The answer is the implied return of the instrument, the return the market is accepting at that price.

Implied return and implied growth Quantitative Methods

The implied terminal multiple for Halvard is 1,151.74 ÷ 90.19 = 12.8 times year-3 EBIT. If peers or the company's own history sit around 9 to 11 times, the growth, return on capital or WACC assumptions deserve another look.

From the forecast model to an equity value Equities

Option prices reveal implied volatility, the market's estimate of the future risk of the underlying.

Why use derivatives: the four benefits Derivatives

An import quota caps the quantity that may be imported, usually through import licenses. A voluntary export restraint (VER) is like a quota, except that the exporting country imposes it on itself.

Tariffs, quotas, export subsidies and their welfare effects Economics

The rate is observed on a reset date at the start of the period and the interest is paid at the end. That timing is called paying in arrears.

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

An option is in the money (ITM) when exercising would pay, at the money (ATM) when S = X, and out of the money (OTM) when exercising would not pay.

Exercise value, moneyness and time value Derivatives

If exercising now would give a positive payoff, the option is in-the-money. If it would give nothing, the option is out-of-the-money.

Call and put options: payoff and profit at expiration Derivatives

Inappropriate risk appetite works in both directions. Pay dominated by shares and options can drive excessive risk, because an option holder shares only in upside moves.

Principal-agent problems and stakeholder conflicts Corporate Finance

Hedge funds, private equity and real estate funds usually charge a management fee (a percentage of assets under management) plus an incentive fee (a percentage of profit).

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

With an incentive fee net of the management fee, the manager is paid only on what is left after the management fee.

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

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

Six factors that move an option's value Derivatives

Income return is the rent collected, less operating costs, as a share of the price paid (net operating income, or NOI, over price).

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

The income statement reports performance over the period on an accrual basis, so revenue and expenses are recorded when earned or incurred, not when cash moves.

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

Income tax expense is the charge on the income statement. It equals taxes payable plus the change in deferred taxes (next lesson).

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

Income tax expense equation: expense is taxes payable plus the change in deferred taxes. First the bill (taxes payable), then the adjustment for what has been deferred.

Deferred tax assets and liabilities Financial Statement Analysis

Income tax paid is the cash actually handed over in the period, shown in the cash flow statement.

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

Income tax payable is the tax owed on this period's taxable income. It sits on the balance sheet until paid.

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

Any single measure can bias the value if it misses how the company returns or uses cash. This is the incomplete cash flow metric problem.

Where DCF and growth models break down Equities

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

Incremental cash flows are the difference between the company's cash flows with the project and without it.

Capital allocation principles and pitfalls Corporate Finance

An incurrence test is a ratio test that must be passed before the issuer takes a specific action, such as issuing debt or paying a dividend.

Bond indentures and covenants Fixed Income

Equity has an indefinite life: there is no maturity, and the shares stay outstanding until a restructuring (an acquisition or divestiture, in which holders receive shares or cash) or a liquidation.

Common shares and preference shares Equities

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

The indenture is the legal contract behind a bond. It describes the form of the bond, the issuer's obligations and the bondholders' rights.

Bond indentures and covenants Fixed Income

Independence and objectivity means your analysis and recommendations reflect your own honest view, free from pressure and from anything of value that could sway you.

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

The observations are independent, so the residuals are uncorrelated.

The four regression assumptions and what residual plots reveal Quantitative Methods

Independent business means competitive paid work: services the employer itself sells. The Standard does not forbid it outright, but you must abstain from it unless your employer agrees.

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

Boards mix inside directors (founders and current or former managers) and independent directors (no material tie such as employment or family), who can better represent minority shareholders.

Corporate stakeholders and their interests Corporate Finance

Market sets the rate; occasional intervention.

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

Two random variables are independent random variables when the joint probability of any pair of outcomes is the product of the separate probabilities.

Covariance and correlation from a joint probability table Quantitative Methods

Start from two independent standard normal draws, Z₁ and Z₂ (independent standard normal draws: mean 0, standard deviation 1, no link between them).

Simulating two correlated assets: the Cholesky step Quantitative Methods

The variable you want to explain is the dependent variable, Y. The variable you use to explain it is the independent variable, X.

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

An index usually has a fixed number of index constituents, each represented by its common shares. Their prices, combined under a weighting method (by market capitalization, by price or by other factors), give the index value.

Types of equity indexes Equities

Building an index takes five index construction steps. Each one changes the number the index shows.

Index value, price return and total return Quantitative Methods

Change market exposure quickly.

How investors use derivatives, compared with issuers Derivatives

Index-linked bonds tie interest and/or principal to an index. In practice almost all use a broad consumer price index, so they are inflation-linked bonds (linkers).

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

Other countries have tried their own schemes, such as Indian and Chinese depositary receipts (IDR, CDR), with mixed success.

Investing across jurisdictions: dual listings and depositary receipts Equities

An indicator variable (also called a dummy variable) equals 1 when a condition holds and 0 when it does not. With an indicator as X, the intercept is the mean of Y in the 0 group, the slope is the difference between the two group means, and the mean of the 1 group is intercept plus slope.

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

The Handbook gives a non-exhaustive list of indicators of manipulation. They are warning signs that compliance teams and regulators look for.

Standard II(B): Market Manipulation Ethical and Professional Standards

An indifference curve joins every risk and return combination that gives one investor the same utility. Higher curves, up and to the left, mean more utility.

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

Indirect infrastructure investment goes through infrastructure funds (set up like private equity funds, closed end or open end), infrastructure exchange-traded funds (ETFs), or shares in listed infrastructure companies, including master limited partnerships that pass income through to investors.

Infrastructure: economic vs social, greenfield vs brownfield Alternative Investments

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

Indirect method is the name because it works indirectly, from net income, instead of listing cash receipts and payments.

Cash flow from operations: the indirect method Financial Statement Analysis

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

Exchange rate quotes and percentage change in a currency Economics

Indirect real estate investment pools money from several investors to buy one or more properties. The vehicle can be public or private: limited partnerships, mutual funds, listed shares, REITs and ETFs.

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

Indirect taxes are levied on spending: value-added taxes (VAT) or sales taxes and excise duties on fuel, alcohol and tobacco.

Fiscal policy tools and the fiscal multiplier Economics

This is the indirect-to-direct conversion. It gives an approximation of the direct statement because published statements rarely let you separate every account.

The direct method and converting indirect to direct Financial Statement Analysis

Individual investors (also called retail investors) invest for many reasons. Short-term goals include a child's education, a car or a house.

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

An industry is a group of firms that offer comparable products or services from the customer's point of view. Such firms tend to face similar competitive forces and value drivers, which is why the industry matters for every valuation approach, not only for choosing peers for a multiple.

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

The industry and competition around it set the limits: how cyclical demand is, how intense rivalry is and how long-term growth looks.

Assessing corporate creditworthiness Fixed Income

Industry and competitive analysis studies what drives an industry's size, growth, profitability and market shares, and where a company stands within it.

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

The industry beta is the beta of a group of similar companies, adjusted for the leverage difference.

Industry betas, the market risk premium and country risk Equities

The Industry Classification Benchmark (ICB), from FTSE Russell.

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

Industry concentration says how much of the industry sits with a few firms. Lower concentration usually means more intense competition, unless the industry is split into local segments or its products are highly differentiated.

Industry size, growth, profitability and concentration Equities

Industry experts. The Standard allows you to consult industry experts and expert networks and to pay them for their insight.

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

Industry size is the total revenue the industry earns from its own goods or services over a period. There are two ways to estimate it.

Industry size, growth, profitability and concentration Equities

Evaluate the industry structure with Porter's Five Forces: the threat of new entrants, the threat of substitutes, the bargaining power of suppliers and of customers, and rivalry among existing competitors.

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

Run the industry survey. Gather data on its size, growth and profitability (operating margin, or return on invested capital (ROIC) against the weighted average cost of capital (WACC)), and on which firms make it up, how their market shares are moving and how concentrated the industry is, measured with the Herfindahl-Hirschman Index…

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

An industry-based peer group holds firms with the same principal business activity. 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

Some sectors use industry-specific multiples, which divide by an operating measure such as output, reserves or users.

Enterprise value multiples Equities

Because what matters differs by business. Industry-specific ratios track the drivers generic ratios miss.

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

That lower part is inefficient, because a portfolio on the upper part has the same risk and a higher return. Such a dominated mix is an inefficient portfolio.

The minimum-variance portfolio and the efficient frontier Quantitative Methods

Inelastic demand means use barely changes when conditions change. People use water, power and roads in good times and bad.

Infrastructure risk, return and diversification Alternative Investments

Inertia means anchoring this year's budget to last year's. Capital spending by segment tends to track the prior year closely.

Capital allocation principles and pitfalls Corporate Finance

The infant industry argument asks for protection until a new industry is strong enough to compete. The risk is that protection never ends.

Tariffs, quotas, export subsidies and their welfare effects Economics

Inflation in unit costs is what separates the formulas: with no change in costs, all three give the same answer.

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

An inflation hedge is an asset whose returns rise with inflation, so it protects purchasing power. The argument for commodities is direct: energy and food are components of consumer prices, so commodity price changes are partly the inflation being measured.

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

Inflation linkage comes from regulation, concession agreements and fee contracts whose rates rise with, or above, inflation.

Infrastructure risk, return and diversification Alternative Investments

Inflation protection comes from the leases. When rents step up on a schedule or reset to market, income rises with prices.

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

Short-term government bills, for example a 30-day Treasury bill, stand in for it. It is made of the real risk-free rate, the reward for delaying real consumption (time preference), and the inflation rate, the expected loss of purchasing power.

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

Many central banks publish regular inflation reports covering, usually in this order, money and credit, financial markets, the real economy (such as the labor market) and prices, followed by a growth and inflation forecast about two years ahead.

Inflation targeting vs exchange rate targeting Economics

Inflation risk is the risk that returns miss expectations because of inflation (or deflation). The goal is a positive real return, so every investor cares about it.

Macro and micro risk and the risk-return trade-off Quantitative Methods

Inflation targeting is now the dominant approach in developed and many emerging economies.

Inflation targeting vs exchange rate targeting Economics

In practice almost all use a broad consumer price index, so they are inflation-linked bonds (linkers). A fixed bond pays nominal cash flows whose buying power erodes with inflation.

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

Inflection points are moments when the future will look very different from the recent past. They are among the hardest things for an analyst to anticipate, because a trend-based forecast misses them.

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

Infrastructure that stores, broadcasts and transmits data, such as telecom towers and data centers.

Infrastructure: economic vs social, greenfield vs brownfield Alternative Investments

The trouble is information asymmetry: directors and managers know more about performance, risks and opportunities than shareholders or lenders do.

Principal-agent problems and stakeholder conflicts Corporate Finance

Information security is part of the duty because accidental disclosure is as damaging as deliberate sharing. You are not expected to become a security expert, but you must understand and follow your employer's policies on electronic communication and on storing client data on laptops, phones and portable drives.

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

Information-based manipulation means spreading false or misleading information to induce trading by others. The classic form is the pump and dump: issue misleading positive information or over-optimistic projections to push a price up, then sell into it.

Standard II(B): Market Manipulation Ethical and Professional Standards

An information-processing bias is a flaw in how facts and numbers are used, with less to do with beliefs or memory.

Cognitive errors vs emotional biases Portfolio Construction

Infrastructure is long-lived assets for public use that provide essential services, such as toll roads and bridges.

What makes an investment alternative: features and categories Alternative Investments

A share or a bond has inherent value from the dividends or interest it is expected to pay. Most digital assets have no underlying asset and no cash flow.

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

An initial coin offering (ICO) is an unregulated sale of newly created tokens for money or another cryptocurrency, typically tokens that can be used for products or services the issuer is developing.

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

The initial margin is the ratio of the security's price to the cash lent. At 100% the loan is fully collateralized; above 100% it is over-collateralized.

Repurchase agreements (repos) Fixed Income

An initial public offering (IPO) is the first time a private company sells shares to the public. The company usually hires investment banks for underwriting: the banks manage the sale of the new shares and find the buyers.

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

Initiating coverage is the thorough introduction. A periodic report is shorter, because its readers already know the company.

Equity research reports: contents, ratings and price targets Equities

The innovation matrix sorts technological change on those two questions.

PESTLE and the innovation matrix Equities

A company's input cost inflation is a blend of its inputs, so use a weighted average.

Forecasting sales and costs with inflation or deflation Financial Statement Analysis

Boards mix inside directors (founders and current or former managers) and independent directors (no material tie such as employment or family), who can better represent minority shareholders.

Corporate stakeholders and their interests Corporate Finance

Insider trading laws vary, but the Standard applies regardless of whether the local law has caught up, and I(A) means you follow the stricter rule.

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

When V_T < D the firm is in insolvency: lenders take all the assets and shareholders get nothing. Shareholders never owe more than they put in, because of limited liability.

Equity and debt as options on the firm Derivatives

An insolvent borrower is a deeper problem: its assets are worth less than its liabilities. Either one can lead to default.

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

Institutions. An institution is an established set of rules and organizations. Strong rule of law and accountability make agreements dependable, so cooperation lasts.

Geopolitics: cooperation vs competition Economics

Institutional investors pool money for a defined purpose. The main kinds are below.

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

Institutions and policy covers the legal and political setting: rule of law, property rights, transparency, reliable financial data, political stability and a culture of repaying debt.

Sovereign credit analysis: qualitative factors Fixed Income

Insufficient effort covers managers who are unable or unwilling to make investments, control costs or take hard decisions such as closing a business line.

Principal-agent problems and stakeholder conflicts Corporate Finance

Risk transfer passes a risk to another party, most often through insurance. In an insurance contract the insurer agrees to cover some part of a loss from a specific event, in return for a premium paid by the insured.

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

An insurance company invests premiums to pay claims. Life insurers have long-term liabilities and long horizons; property and casualty (P&C) insurers have short horizons.

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

An intangible acquired in a business combination is an asset at fair value, including items the target itself never recorded.

Purchased, internally developed and acquired intangibles Financial Statement Analysis

Intangible assets are identifiable, non-monetary assets with no physical substance. "Identifiable" is the test: the asset can be separated from the company and sold, or it arises from contractual or legal rights.

Intangible assets: finite vs indefinite lives Financial Statement Analysis

Intangible collateral ("soft" collateral) is patents, intellectual property rights and goodwill, whose value tends to fall just when the company is struggling.

Assessing corporate creditworthiness Fixed Income

Identical economics produce different statements depending on the route. A intangible purchased separately is an asset at cost.

Purchased, internally developed and acquired intangibles Financial Statement Analysis

Integrated ratio analysis means no single ratio settles the question. Use the DuPont tree as the frame and the other ratios as evidence.

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

Act with integrity, competence, diligence and respect, and in an ethical manner, toward the public, clients, employers, colleagues and other market participants.

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

Promote the integrity and viability of global capital markets for the ultimate benefit of society.

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

You must not engage in practices that distort prices or artificially inflate trading volume with the intent to mislead market participants.

Standard II(B): Market Manipulation Ethical and Professional Standards

An unintentional strategy is what results when managers chase their own incentives, keep doing what they did before or imitate the industry leader. That is the difference between intentional and unintentional strategy.

Competitive strategy: cost leadership, differentiation and focus Equities

Yes. Inter-departmental referrals are covered.

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

The interbank market is short-term borrowing and lending among financial institutions, on a secured or unsecured basis.

How banks fund themselves short term Fixed Income

The regression coefficients are the intercept, $b_0$, and the slope coefficient, $b_1$. The error term, $\varepsilon_i$, is everything about $Y_i$ that the line does not capture.

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

The intercept as the fixed cost component, a, estimates growth that has nothing to do with revenue. The slope as the variable component, b, estimates how much the expense moves per unit of revenue change.

Expense models: margins, itemization and operating leverage Equities

Interdependence. Interdependence means countries and firms rely on one another, so one disrupted supplier can stall a whole industry.

Globalization vs nationalism: gains, costs and rollback Economics

The tax burden is the share of pretax profit the company keeps. The interest burden is the share of EBIT left after interest.

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

Second, it never appears in interest expense, so reported interest coverage looks stronger than the true burden.

Expense recognition: capitalizing vs expensing Financial Statement Analysis

Interest income accrues on the opening receivable, and the rest of the receipt reduces the receivable. A lessor whose main business is leasing, such as a bank or leasing company, reports that interest as revenue.

Lessor accounting: finance vs operating leases Financial Statement Analysis

You reinvest each coupon you receive, which earns reinvestment income: the interest on interest that makes a bond's realized return differ from its coupon rate.

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

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

An interest rate is read from government bond prices, because prices and rates move in opposite directions. A one-year government bond that repays 100 and trades at 96 implies a rate of 100 ÷ 96 − 1 = 4.17%.

Types of returns: assets, instruments and indicators Quantitative Methods

Interest rate derivatives reference bonds or rates. An interest rate is not an asset, but it is a fixed-income underlying.

What derivatives are written on: the main underlyings Derivatives

Subtract spot from the parity forward and the gap, the forward points, depends on the interest rate differential ($r_A - r_B$).

Covered interest rate parity: forward rates from interest rates Economics

interest rate futures are contracts on a market reference rate (MRR) for a future period, such as a three-month rate starting in three months.

Interest rate futures: the 100 minus rate convention Derivatives

Interest rate risk is the uncertainty of returns because rates change. Asset prices generally fall when rates rise and rise when rates fall, because future cash flows are worth less at higher rates.

Macro and micro risk and the risk-return trade-off Quantitative Methods

The most common type is the interest rate swap, which exchanges a fixed rate for a floating rate.

Interest rate swaps: fixed vs floating Derivatives

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

An interest-indexed bond keeps the principal fixed and puts the inflation adjustment in the coupon, like an FRN whose reference rate is inflation.

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

An interest-only (IO) security receives only interest and has no par value. When prepayments rise, the balance on which interest is paid shrinks, and the IO loses value.

Mortgage pass-throughs and CMOs Fixed Income

Constraints come in two kinds, internal and external constraints: internal ones are set by the client, external ones by law or regulation.

IPS constraints: liquidity, time horizon, taxes, legal and unique circumstances Portfolio Construction

The Sarbanes–Oxley Act of 2002 set up the Public Company Accounting Oversight Board (PCAOB) as the auditors' overseer, barred auditors from selling certain other services to the companies they audit, made senior executives sign off on the reports personally, and made management assess and report on internal control over financial…

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

An internal credit enhancement is built into the structure of the deal. An external credit enhancement comes from a third party, so the deal also depends on that party's own credit.

Credit enhancement and credit tranching 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

The internal rate of return (IRR) is the discount rate that makes the NPV equal to zero. It is the project's own rate of return on the money invested.

NPV and IRR in capital allocation Corporate Finance

A intangible purchased separately is an asset at cost. An internally developed intangible is mostly an expense.

Purchased, internally developed and acquired intangibles Financial Statement Analysis

The International Bank for Reconstruction and Development (IBRD) raises money in the bond market, where its top-rated bonds are cheap to fund, and lends at low rates to creditworthy developing countries.

The IMF, the World Bank and the WTO Economics

Foreign bonds, Eurobonds and global bonds together are international bonds.

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

The International Development Association (IDA) gives interest-free loans and grants to the poorest countries.

The IMF, the World Bank and the WTO Economics

The International Monetary Fund (IMF) exists to keep the international monetary system stable: the system of exchange rates and international payments that lets countries buy goods and services from each other.

The IMF, the World Bank and the WTO Economics

Sensors are devices such as phones, cameras, radio-frequency identification (RFID) chips and satellites. Their data are mostly unstructured and many orders of magnitude larger than the other two.

Big data, the four Vs and alternative data Quantitative Methods

The interquartile range (IQR) is the distance from the first to the third quartile. It covers the middle half of the data, so extreme values cannot move it.

Quartiles, percentiles and box plots Quantitative Methods

Wrap a range around it and you have an interval estimate, the subject of the next lesson. The sample mean is an unbiased and consistent estimator of μ, and its precision is the standard error.

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

Variety and intra-industry trade. Many industries are monopolistically competitive: firms sell differentiated products.

Benefits and costs of international trade Economics

An intrinsic gain is a benefit that is not a profit: a better quality of life, new ideas, and closer cross-cultural ties.

Globalization vs nationalism: gains, costs and rollback Economics

Intrinsic value, written $IV_t$ and also called fundamental value, is what the share is truly worth: the present value of its expected future cash flows at an appropriate discount rate.

Market price, intrinsic value and perceived value Equities

An inventory cost flow assumption changes profit without changing the business. When prices rise, FIFO gives lower cost of goods sold and higher profit and inventory than weighted average or last in, first out (LIFO).

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

They tell you how inventory is measured, how much there is and of what kind, what was written down and what is pledged. These inventory disclosures are the analyst's first source, because the balance sheet shows only one line.

Inventory disclosures, turnover and days of inventory Financial Statement Analysis

In the inventory roll-forward, purchases are the addition and cost of goods sold (COGS) is the deduction. In the accounts payable roll-forward, purchases on credit are the addition and cash paid to suppliers is the deduction.

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

Inventory turnover says how many times a year the stock is sold and replaced. Days of inventory on hand says how long a unit sits before it is sold.

Inventory disclosures, turnover and days of inventory Financial Statement Analysis

An inventory valuation allowance lets you do this from the published notes. The allowance is the total of write-downs still held against the inventory, and the balance sheet shows inventory net of it.

Inventory disclosures, turnover and days of inventory Financial Statement Analysis

The loss is an expense in that period, usually inside cost of sales, though it may be shown separately. This is an inventory write-down.

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

Inventories are small relative to GDP, but firms build and run them down quickly, so they can move measured growth a lot. The key gauge is the inventory–sales ratio.

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

A bond's price is the present value of fixed cash flows, so a higher discount rate means a lower price. This is the inverse relationship between price and yield.

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

Draw u between 0 and 1, then find the outcome whose cumulative probability equals u. That is the inverse of the cumulative distribution function, and the method is called inverse transform sampling.

Continuous distributions: uniform, normal and logistic Quantitative Methods

Sometimes short maturities yield more than long ones, an inverted yield curve.

Spot rates and pricing a bond with the spot curve Fixed Income

Long-term funding only. Invested capital is long-term liabilities plus equity. Short-term liabilities (working capital items) are not included, because invested capital measures the total capital investment.

Return on invested capital (ROIC) Corporate Finance

Investing activities cover buying and selling property, plant and equipment, intangibles and securities of other companies, and lending to others.

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

The investing and financing ratio is the widest test: can operating cash pay for all asset purchases, debt repayments and distributions together?

Cash flow performance and coverage ratios Financial Statement Analysis

Investment action means trades and allocations: general purchases, new issues and secondary offerings, and block trades that serve several accounts.

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

How you do and communicate your work.

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

Resist; keep firewalls between banking and research; the analyst's view must stand.

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

An investment company runs pooled funds such as mutual funds. Horizon and risk tolerance depend on the fund, but liquidity needs are high because investors can redeem.

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

The sections closest to the client's distinctive needs, and the most important from a planning perspective, are the investment objectives and the investment constraints.

The investment policy statement (IPS) Portfolio Construction

The line to memorize sits between BBB− and BB+. Investment grade means BBB− (S&P, Fitch) or Baa3 (Moody's) and above.

Bond market segments, issuers and investors Fixed Income

Investment guidelines describe how the policy is to be carried out: whether leverage or derivatives may be used, and which assets are excluded.

The investment policy statement (IPS) Portfolio Construction

The weight of each channel depends on the investor's investment horizon, the date the cash is needed. A long horizon gives reinvestment income time to build.

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

Investment intensity. Assets growing faster than revenue mean more investment per unit of revenue and lower free cash flow now.

From the forecast model to an equity value Equities

The investment life cycle of an alternative investment is longer than that of a stock or bond and runs through three phases with different cash flow patterns.

Why alternative investment performance is hard to judge Alternative Investments

The sections closest to the client's distinctive needs, and the most important from a planning perspective, are the investment objectives and the investment constraints.

The investment policy statement (IPS) Portfolio Construction

The investment opportunity set is the collection of all portfolios you can actually build.

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

During the investment period, usually about the first five years, capital is drawn from limited partners and invested in companies.

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

The output is the investment policy statement (IPS): a written planning document describing the client's investment objectives and the constraints on the portfolio.

The three steps of the portfolio management process Portfolio Construction

Explain the investment process disclosure: the basic format and general principles you use to analyze investments, select securities and build portfolios.

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

An investment recommendation is any opinion about buying, selling or holding an investment. It may be a full report, a short update, an addition to or deletion from a recommended list, or an oral comment.

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

Investment strategy. The investment strategy and holding period matter because the horizon should correspond to how long the investor expects to hold.

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

The investment thesis is a short statement of why the analyst believes the stock is mispriced, covering company-specific drivers and the economic and industry backdrop.

Equity research reports: contents, ratings and price targets Equities

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

Comparing money market instruments: bond equivalent yield Fixed Income

Issuer sources outside the filings: earnings calls (webcast presentations and questions, not legally required), investor days (ad hoc, in-depth sessions), press releases, conversations with management and investor relations, the company website, and experiencing the products as a customer.

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

IOSCO, the International Organization of Securities Commissions, is the club of securities regulators: its members oversee more than 95% of the world's capital markets.

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

IPO participation. A hot IPO taken by staff looks like taking an opportunity from clients, or like a reward for future favors.

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

IPO underpricing is that first-day rise measured from the offer price.

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

An issue rating speaks to one specific obligation and takes its seniority into account.

Seniority, recovery rates and notching Fixed Income

The issuer can be any legal entity: a national or local government, a supranational such as the World Bank, a government-owned agency, a corporation or a special purpose entity that holds loans.

The features of a bond Fixed Income

Issuer pressure does not have to be a threat. Hospitality, fees and flattering access can bend a rating as surely as a demand.

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

An issuer rating speaks to the company's overall creditworthiness and usually applies to its senior unsecured debt.

Seniority, recovery rates and notching Fixed Income

Issuer risk, also called specific risk, covers a firm's business and financial risks. Business risk comes from the nature of the firm's operations.

Macro and micro risk and the risk-return trade-off Quantitative Methods

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

Bond market segments, issuers and investors Fixed Income

Acceptable for a flat fee not tied to the conclusion, with full disclosure of the payment.

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

Under the issuer-pay model, the issuer pays for the rating. To prepare it, the agency often meets management and may receive material non-public information, such as financial projections.

Credit ratings: uses and limitations Fixed Income

When a cost follows its own driver (fuel prices are not set by the company's revenue), find it in the as-reported statements or the annual report and give it its own line. That is the itemization of economically significant expenses.

Expense models: margins, itemization and operating leverage Equities

An itemized asset forecast grows each line on its own. Apply two tests to every asset or liability: does it arise from operations, and does it involve cash payments or receipts?

Asset and financing models Equities