CFA Level I terms: N

Naive or story-based valuation rests on a narrative about a company that is not tied to any in-depth economic or financial analysis.

Market price, intrinsic value and perceived value Equities

Narrow framing is a special case: attending to one or two points, such as a single product launch, and losing the big picture of industry, financial results and valuation.

Cognitive errors: belief perseverance and information processing Portfolio Construction

A Nash equilibrium is a set of strategies in which each firm's strategy is its best response to the others', so no firm can raise its profit by changing strategy alone.

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

The national debt is the stock of past deficits that has not been repaid. Governments run deficits far more often than surpluses, so the stock tends to build up.

Does the size of national debt matter? Economics

A country cooperates when doing so advances its national interest: its military, economic and cultural goals. Six forces shape how far it goes.

Geopolitics: cooperation vs competition Economics

National security tools use force or the threat of it, or the pooling of security. Armed conflict is the most extreme: a direct, active tool, internal or external.

Tools of geopolitics: national security, economic and financial Economics

Nationalism, or antiglobalization, is the promotion of a country's own economy at the expense of others, with limited trade, capital flows and currency exchange.

Globalization vs nationalism: gains, costs and rollback Economics

Transferring an activity or industry from private to state control, most common in sectors seen as vital, such as energy.

Tools of geopolitics: national security, economic and financial Economics

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

Natural resources are less developed land (farmland, timberland, land with mineral or energy rights) and standardized products that are harvested, extracted or refined.

What makes an investment alternative: features and categories Alternative Investments

The disclosure must cover the nature and value of consideration. Say what kind it is (flat fee or percentage, one-time or continuing, tied to performance, or a noncash benefit such as research) and its estimated dollar value.

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

The nature of employment decides how the Standard applies. Employees and independent contractors are both covered, but a contractor's duties come mainly from the written or oral agreement with each client.

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

The first covers the nature of services and costs, and the rest cover the process, risks, important factors, and the line between fact and opinion.

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

A negative beta means the asset tends to move against the market: if the market's excess return is −6% in a month, an asset with $\hat{\beta} = -0.30$ is expected (from the slope) to gain 1.8 points.

Estimating beta with a CAPM regression Quantitative Methods

Negative book value of equity can signal a higher risk of financial distress, but not always. Fast-growing firms or firms that wrote down assets can still create value.

Book value, market capitalization and enterprise value Equities

Past some point the curve bends the wrong way, and the effective convexity is negative convexity. The investor bears call risk: a called bond must be replaced at a lower rate.

Effective duration and effective convexity Fixed Income

Negative covenants say what the issuer must not do beyond set limits: take on extra debt, pledge assets to other lenders or issue debt that would rank ahead of this bond (a negative pledge clause, or limitation on liens), pay dividends or buy back shares, sell key assets, do a sale and leaseback, or merge.

Bond indentures and covenants Fixed Income

A loan with LTV above 100% is in negative equity, also called "underwater": the home is worth less than the debt.

Residential mortgage loans: the features that matter Fixed Income

The downside's computed equity value is negative because firm value falls below debt. Shareholders have limited liability, so equity cannot be worth less than zero (in practice the debt's market value would fall instead).

Scenario analysis with probability weights Equities

Environmental and social harms were once treated as negative externalities: costs borne by society rather than by the company and its investors.

ESG factors investors consider Corporate Finance

With negative interest rates the formula does not change. When r < 0, the factor (1 + r)^T is below 1, so the forward price is below spot.

Replication and the no-arbitrage forward price Derivatives

Negative covenants say what the issuer must not do beyond set limits: take on extra debt, pledge assets to other lenders or issue debt that would rank ahead of this bond (a negative pledge clause, or limitation on liens), pay dividends or buy back shares, sell key assets, do a sale and leaseback, or merge.

Bond indentures and covenants Fixed Income

A negative PVGO means the market expects reinvestment to destroy value, so the earnings would be better paid out.

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

Excludes companies, sectors or countries.

ESG considerations in portfolio planning and construction Portfolio Construction

A stable negative terminal growth rate describes a firm in slow decline that will eventually stop operating; it does not imply a negative share price.

Discount rates and terminal values Equities

Declining or negative working capital can be a significant source of funding, for example to repay debt. It is a strength when it comes from bargaining power, not from paying suppliers late because cash is short.

Operating profitability and working capital Equities

A yield can also be negative (a negative yield). A 2-year zero at a yield of −0.4% prices at 100 ÷ 0.996² = 100.80, above face value.

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

The neighboring Standards are the lookalikes that the question writer puts in the other options. A gift can raise I(B) (independence), IV(B) (employer consent) and VI(A) (disclosure).

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

The value of one share is the net asset value (NAV) per share, computed daily from the closing prices of the securities held.

Mutual funds, ETFs and other pooled investment products Portfolio Construction

Net borrowing is new debt raised minus debt repaid. When repayments exceed new borrowing it is negative, and FCFE falls.

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

So analysts watch net capital expenditure, capital expenditure minus D&A, as a measure of how much a company is adding to its productive capacity.

Capital investments and capital structure Equities

Net debt is what remains after liquid assets are set against borrowings. Debt-to-EBITDA estimates how many years of EBITDA, a rough proxy for operating cash flow, it would take to repay debt, and it is common in loan covenants.

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

Net debt issuance is additional borrowing minus debt repayment. The two measures differ by net debt issuance and after-tax interest.

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

Measure the target's identifiable assets and its liabilities, including contingent liabilities, at fair value.

Goodwill: how it is measured and tested Financial Statement Analysis

Net interest goes to profit. It is the passage of time on the opening net position: the discount rate times the opening net pension liability or asset.

Defined contribution vs defined benefit pension plans Financial Statement Analysis

The net interest margin is what the bank keeps: the return on its assets minus the cost of its liabilities.

How banks fund themselves short term Fixed Income

The equity holders then fund only $(1 - DR)$ of the net investment, the cash put into long-term assets and working capital beyond depreciation.

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

A net investment hedge offsets the exchange rate risk on the equity of a foreign operation, using a currency forward or swap or a foreign-currency bond.

How companies use derivatives: hedge accounting Derivatives

Everything: operating, financing and investing results and taxes.

Operating profitability and working capital Equities

The second measures whether the property's income covers the loan, and it starts with net operating income (NOI).

Commercial mortgage-backed securities (CMBS) Fixed Income

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

Start with net operating profit after taxes (NOPAT): revenue less cost of goods sold (COGS), selling, general and administrative expenses (SG&A) and depreciation and amortization (D&A) gives operating profit, and NOPAT is that profit after tax at rate t.

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

The two legs fall on the same dates, so the parties exchange only the net payment.

Interest rate swaps: fixed vs floating Derivatives

If assets are less than the obligation, the plan has a deficit and the company reports a net pension liability among non-current liabilities.

Defined contribution vs defined benefit pension plans Financial Statement Analysis

The net present value (NPV) of a project is the present value of its expected after-tax cash inflows less the present value of its outflows.

NPV and IRR in capital allocation Corporate Finance

Customer A may get an offer that customer B does not, and the firm adjusts the generosity of promotions rather than the published price. The price after these adjustments is the net price.

Pricing and revenue models Corporate Finance

Pretax margin is after interest, and it picks up the effect of leverage and non-operating items. Net profit margin is after tax.

Profitability ratios: margins and returns on capital Financial Statement Analysis

Net realizable value (NRV) is what the goods are expected to sell for in the ordinary course of business, minus what it still costs to finish and sell them.

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

Subtract the management fee (including performance and custody fees) and administrative expenses as well and you have the net return.

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

The price-to-sales ratio (P/S) divides the share price by annual net sales per share, where net sales are total sales minus returns and customer discounts.

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

The net tax rate $t$ is taxes less transfers as a share of income. It leaves households with disposable income $Y_D$.

Fiscal policy tools and the fiscal multiplier Economics

Net working capital removes the items that belong to financing rather than to day-to-day operations. On the asset side it leaves out cash and marketable securities.

The cash conversion cycle Corporate Finance

A product is worth more to each user as more households or businesses use it, a demand-side economy of scale that a newcomer cannot match.

Porter's Five Forces and economic moats Equities

Network effects are the increase in a network's value to its users as more users join. A telephone is useless alone and valuable when everyone you know has one.

Network effects and platform business models Corporate Finance

A neural network is layers of connected nodes (neurons). The input layer has one neuron per feature, for example one per financial ratio.

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

Compare the policy rate with the neutral rate of interest: the rate that neither stimulates nor holds back the economy.

The neutral rate and the limits of monetary policy Economics

The ideal sits between them. The reporting framework asks for neutrality: no tilt up or down.

Conservative vs aggressive accounting Financial Statement Analysis

New lines of business (with other investments outside the current business) are the riskiest. The company enters a market where it has no track record, and its forecasts are the least reliable.

Types of capital investments Corporate Finance

New media records carry the same duty: emails, text messages, blog posts and social media posts that support your analysis or were sent to clients must be retained.

Standard V(C): Record Retention Ethical and Professional Standards

With no growth and no terminal value, there is no growth rate to estimate: this is the point of no terminal value for preferred.

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

For an option it only builds a fence: a lower bound and an upper bound. These no-arbitrage bounds follow from the option's payoff.

Option price bounds and replication vs forwards Derivatives

The no-arbitrage condition says no one can earn a riskless profit without investing anything. If two strategies deliver identical cash flows on the same dates, additivity makes their present values equal, so they must cost the same.

Cash flow additivity and implied forward rates Quantitative Methods

The no-arbitrage condition for rates says both routes must end with the same money. If they did not, a trader could borrow on one route and lend on the other.

Implied forward rates from spot rates Derivatives

The loan costs S₀(1 + r)^T at expiration, so that is what the forward must charge. The result is the no-arbitrage forward price.

Replication and the no-arbitrage forward price Derivatives

The result is the no-arbitrage option price. Any other price lets a trader lock in a riskless profit.

The one-period binomial tree and the hedge ratio Derivatives

The result is the no-arbitrage price. If a bond trades above it, an arbitrageur sells the bond and buys its cash flows as separate zeros for less.

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

With $g = 0$ the formula becomes a no-growth perpetuity: 2.50 ÷ 0.09 = 27.78. A higher $r_e$ always lowers the value, all else equal.

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

A no-load fund charges no sales fee, only an annual fee as a percentage of NAV. Load funds have become less important over time.

Mutual funds, ETFs and other pooled investment products Portfolio Construction

The condition $w_i \ge 0$ is the no-short-selling constraint. Short selling means borrowing a security and selling it, to buy it back later, which gives a negative weight.

The minimum-variance portfolio and the efficient frontier Quantitative Methods

A probability tree (also called a decision tree) shows an uncertainty that plays out in stages. Each point where the uncertainty resolves is a node.

Probability trees, conditional expectations and conditional variance Quantitative Methods

Nominal and real cash flows differ: nominal flows include inflation, real flows have it removed. Either works, but nominal cash flows go with a nominal discount rate and real flows with a real rate.

Capital allocation principles and pitfalls Corporate Finance

The nominal exchange rate is the price you see quoted: how many units of one currency buy a unit of another. It says nothing about what that money buys.

Nominal vs real exchange rates Economics

Second, it should not exceed the long-run nominal growth rate of the economy (growth that includes inflation), because a firm growing faster than the economy forever would eventually be the economy.

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

A nominal return is measured in current money. A real return strips out inflation and measures the gain in purchasing power.

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

The nominating/governance committee is usually independent. It appraises candidates for director and manager roles, sets nomination policy and criteria, and oversees the election process.

Corporate governance mechanisms Corporate Finance

non-agency RMBS (private label) have no guarantee, so they use credit enhancements to reach acceptable quality.

Residential mortgage loans: the features that matter Fixed Income

Auto loans and solar loans are amortizing. Non-amortizing loans have no scheduled principal repayment.

Credit card, auto loan and solar ABS Fixed Income

A non-binding shareholder proposal asks the company to act but cannot force it, and that is the typical case.

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

Non-cash charges (NCC) are depreciation, amortization and similar items that reduced net income without costing cash.

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

Examples are converting debt into shares, acquiring an asset with a finance lease, acquiring an asset by issuing shares, and exchanging one non-cash asset for another. These non-cash transactions change the balance sheet but not cash, so they never appear in operating, investing or financing totals.

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

You may use public information or your own memory to contact former clients, as long as the details do not come from the old firm's records and no valid non-compete agreement or non-solicitation agreement forbids it.

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

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

Government bond auctions and trading vs corporate bonds Fixed Income

Non-compliant accounting departs from the standards, so comparisons across periods and companies stop working and earnings quality is hard or impossible to assess.

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

A dividend discount model (DDM) assumes the shareholder's only access to the firm's value is the cash dividend, so it values the share from the non-controlling shareholder perspective: someone with no say over dividend policy.

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

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

Geopolitics: cooperation vs competition Economics

On non-cumulative preference shares, a missed dividend is gone for good. The company still may not pay common holders until the current preference dividend is paid, but it owes nothing for the past.

Common shares and preference shares Equities

If existing owners sell shares they already hold, it is a non-dilutive (secondary) follow-on offering: no new shares, so no dilution.

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

A non-fungible token (NFT) links a digital item to a certificate of authenticity. Unlike a cryptocurrency unit, each NFT and the item it certifies are unique.

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

Non-GAAP financial measures are performance or liquidity figures that differ from the ones the accounting standards produce.

Non-GAAP measures and other presentation choices Financial Statement Analysis

Contingent claims are non-linear derivatives: the payoff bends at the exercise price, and the buyer pays a premium for the right to choose.

Forward commitments vs contingent claims Derivatives

Non-operating assets such as marketable securities do not grow with the business, because cash changes come from the financing model.

Asset and financing models Equities

Three non-operating items finish the statement: interest, tax and the share count. These non-operating items each have a different driver.

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

Real curves rarely do that. A non-parallel shift moves some maturities more than others.

Key rate duration Fixed Income

A parametric test assumes the data follow a particular distribution, often the normal, and meet conditions on randomness, sample size and variance; it uses parameters such as the mean and variance. A non-parametric test makes no assumption about the distribution.

Parametric vs non-parametric tests Quantitative Methods

Non-price competition means competing through quality, features, branding, advertising and service rather than a lower price.

The four market structures compared Economics

Non-probability sampling depends on access or on the analyst's judgment, so it carries a significant risk of an unrepresentative sample.

Sampling methods and sampling error Quantitative Methods

In a recourse loan, the lender can claim the shortfall from the borrower. In a non-recourse loan, the lender can look only to the property.

Residential mortgage loans: the features that matter Fixed Income

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

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

The level of government funding differs by country, depending on whether public goods are provided and financed nationally, regionally or locally. A non-sovereign government is a regional or local government.

Agency, municipal and supranational bonds Fixed Income

Non-sovereign government debt is issued by bodies that sit below, beside or above the national government: agencies, government banks, supranational organizations and regional and local governments.

Agencies, supranationals and local government bonds Fixed Income

Non-state actors are companies, nongovernmental organizations (NGOs), charities and influential individuals. They operate across borders but do not command an army or own a nation's resources.

Geopolitics: cooperation vs competition Economics

Noise and non-stationarity: random errors and irrelevant data hide patterns, and with non-stationarity the patterns themselves shift over time.

Data science: processing, visualization and text analytics Quantitative Methods

Price levels are usually non-stationary: their mean and variance drift over time, so statistics computed on them describe no stable distribution.

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

Price levels that trend for years break that: their histogram can have two humps, the long-run average price says little about today, and an interval around it is not meaningful. These are non-stationary data.

Confidence intervals for a mean return Quantitative Methods

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

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

In a non-voting share class structure, the public holds shares with no vote while the founders keep the voting class.

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

Nonsystematic risk is specific to one company or industry: a chief executive resigns, a factory floods, a drug trial fails.

Systematic vs nonsystematic risk and return-generating models Portfolio Construction

When n is large and both np and n(1 − p) are above 5, the normal approximation to the binomial is reasonable: X is approximately normal with mean np and variance np(1 − p).

Discrete distributions: uniform, binomial and Poisson Quantitative Methods

The normal distribution is a symmetric bell fully described by its mean μ and variance σ², written N(μ, σ²). Mean, median and mode are equal.

Continuous distributions: uniform, normal and logistic Quantitative Methods

A firm that earns exactly zero economic profit earns normal profit: its owners get the return their capital would earn elsewhere at the same risk, and no more.

Breakeven and shutdown points Economics

There, market is built from replacement cost, the amount it would cost to buy or make the same goods now, and a normal profit margin.

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

The residuals (not X or Y) are normally distributed.

The four regression assumptions and what residual plots reveal Quantitative Methods

Normalized earnings are the expected level of mid-cycle earnings for a company, without any unusual or temporary factors that push profit up or down.

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

For a cyclical firm, normalized EPS is EPS under mid-cycle conditions.

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

Some schemes are regional: the North American Industry Classification System (NAICS) and the European Nomenclature of Economic Activities (NACE) are used within those regions.

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

Decide on a consistent rule for outliers, and leave out peers whose multiple is one of the not meaningful multiples, such as a negative P/E after a net loss.

Valuing with multiples: comparables and forecasted fundamentals Equities

Adjusting an issue's rating up or down from the issuer rating to reflect that is called notching.

Seniority, recovery rates and notching Fixed Income

The notes to the financial statements are part of the audited statements and explain the numbers. They state the basis of preparation, the accounting policies, methods and estimates, and detail behind almost every line item.

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

A notice period (typically 30 to 90 days) is the advance warning an investor must give, so the manager can sell positions in an orderly way.

Leverage, redemptions, lockups and gates Alternative Investments

Both payments are calculated on the same notional principal. In a plain interest rate swap this amount is never exchanged.

Interest rate swaps: fixed vs floating Derivatives

The details go to the CCP, and then novation replaces the original contract with two identical contracts, each facing the CCP.

OTC vs exchange-traded derivatives and central clearing Derivatives

Nowcasting estimates the current state of the economy in real time, before official figures arrive. It uses data as they are released, such as financial market transactions, internet searches and electronic payments, to estimate GDP growth, inflation or unemployment for the current period.

Leading, coincident and lagging economic indicators Economics

The null hypothesis ($H_0$) is the statement we try to reject. It is assumed true until the sample gives convincing evidence otherwise, and it always contains the equals sign (=, ≤ or ≥).

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

The N² − N covariance terms keep their weight. As the number of assets grows, covariances take over.

How many assets does diversification need? Quantitative Methods

Payables turnover converts into the number of days of payables by 365 ÷ turnover, the average time the company takes to pay suppliers.

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