CFA Level I terms: W

Debt is a contractual, less risky claim, so its cost is below the cost of equity, and so WACC ≤ $r_e$. This is the rule of WACC at or below the cost of equity.

Discount rates and terminal values Equities

Management's choices bias either the timing of recognition (capitalizing a cost to defer it) or the location (putting a loss in other comprehensive income instead of profit). Those choices leave warning signs in the relationships among revenue, receivables, inventory, assets and cash.

Warning signs of earnings manipulation Financial Statement Analysis

A warrant is an option to buy shares that is attached to a bond but trades separately. It is not embedded, and is used to enhance the yield investors get.

Callable, putable and convertible bonds Fixed Income

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

Expense recognition: capitalizing vs expensing Financial Statement Analysis

Transaction-based manipulation covers trading where you knew, or should have known, that your actions could distort the price of a security.

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

Lists matter for the exam. A watch list and restricted list work differently.

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

Cash flows through a waterfall: payments go down from the senior class, and losses go up from the most junior class.

Credit enhancement and credit tranching Fixed Income

Waterfall structures serve investors with different claims on one pool of cash flows, such as the loans behind an asset-backed security.

Bullet, amortizing and sinking fund bonds Fixed Income

Weather and longevity derivatives, and those on cryptocurrencies, are less common and harder to price. Longevity matters to insurers and defined benefit pension plans that face longer lifespans.

What derivatives are written on: the main underlyings Derivatives

Revenue varies with weather risk: drought and flooding can wipe out a harvest. Weather is a unique and largely outside risk for these assets, unlike commercial buildings.

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

Web scraping, the automated extraction of data from websites with software tools or scripts, can capture personal data that are protected by data-protection rules or were published without the person's knowledge and consent.

Big data, the four Vs and alternative data Quantitative Methods

A few cryptocurrencies are used as substitutes for fiat money online, notably in Web3, the idea of an internet built on blockchains, decentralization and token-based economies.

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

One average cost per unit is used for both.

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

Free cash flow to the firm is discounted at the weighted average cost of capital (WACC), the blended cost of the firm's debt and equity financing, because it belongs to both groups of investors.

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

The weighted average coupon (WAC) is the average mortgage rate in the pool, weighted by balance. The weighted average maturity (WAM) is the average remaining term in months, also weighted by balance.

Mortgage pass-throughs and CMOs Fixed Income

The market works with the weighted average life (average life): the expected time until principal is repaid, given an assumed prepayment speed.

Prepayment risk and time tranching Fixed Income

The weighted average maturity (WAM) is the average remaining term in months, also weighted by balance. Large loans count for more than small ones, so a simple average is wrong.

Mortgage pass-throughs and CMOs Fixed Income

Weight every change in the share count by the part of the year it was outstanding. The result is the weighted average number of shares.

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

EPS is net income divided by the weighted average shares outstanding during the period. The trailing P/E uses the last four quarters of EPS, $EPS_t$.

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

The weighted-average cost of capital (WACC) weights each source of financing by its share of the total.

Weighted-average cost of capital (WACC) Corporate Finance

Concentration. Smaller cryptocurrencies are often held by very few owners. Whales are holders large enough to move the price on their own, which is easy in a thin market.

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

Whistle-blowing is where loyalty gives way. Your own interests and your employer's are secondary to protecting clients and the integrity of capital markets.

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

Whistleblowing is the disclosure of dishonest, corrupt or illegal activity by an organization. Depending on the place and facts, the whistleblower may break company policy or even a local law, so the act can be illegal yet considered ethical by many.

Challenges to ethical behavior, and ethical vs legal standards Ethical and Professional Standards

A whole-business securitization is backed by the future cash flows of an operating business, such as franchise fees or licensing royalties.

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

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

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

A simulation moves a price with geometric Brownian motion: $S_t = S_0 \times \exp\left[(\mu - \sigma^2/2)t + \sigma W_t\right]$. Here $W_t$ is a Wiener process (also called Brownian motion): normal noise with mean 0 and variance $t$.

Why asset prices are log-normal Quantitative Methods

The ability to pay is whether the government has the resources: a tax base, a budget it can adjust, foreign currency if it owes foreigners. The willingness to pay is whether it will choose to repay.

Sovereign credit analysis: qualitative factors Fixed Income

The willingness to take risk, also called the risk attitude, is more subjective and is gauged by talking to the client or with a questionnaire.

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

The winsorized mean keeps every observation, but replaces the extremes with the nearest values that stay (in practice, with a chosen percentile value). n is unchanged.

Mean, median, mode and what outliers do to them Quantitative Methods

Work completed for employer is the exception. Research and models built while employed are the firm's property.

Standard I(C): Misrepresentation Ethical and Professional Standards

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

The working capital forecast turns three ratios and two income statement lines into three balance sheet accounts, so the balance sheet follows the income statement.

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

Working capital investment (WCInv) is the cash tied up in receivables and inventory net of payables, the same quantity that appears as a working capital change in the indirect method.

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

Working capital turnover uses average working capital (current assets minus current liabilities). Fixed asset turnover uses average net property, plant and equipment, and total asset turnover uses average total assets.

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

The resulting balloon risk is the risk that the borrower cannot make that final payment, because it cannot refinance or cannot sell the property for enough. The lender may then extend the loan through a workout period.

Commercial mortgage-backed securities (CMBS) Fixed Income

The World Bank aims to fight poverty and promote environmentally sound growth in developing countries.

The IMF, the World Bank and the WTO Economics

The World Trade Organization (WTO) is the only global body that regulates trade between nations. Its rulebook grew from the General Agreement on Tariffs and Trade (GATT), signed in 1947 and covering goods only.

The IMF, the World Bank and the WTO Economics

Add the allowance back to get inventory at cost, and use the change in the allowance, together with the write-down disclosure of the charge for the year, to restate cost of sales.

Inventory disclosures, turnover and days of inventory Financial Statement Analysis

A write-off / liquidation happens when a deal has gone badly. The fund writes the investment down or liquidates the company and moves on.

How private equity exits: trade sale, IPO, SPAC and more Alternative Investments

Written consent means any communication that can be documented and retrieved, such as an email. A conversation in a corridor does not qualify, even if a senior person said yes.

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

Wrong-way risk is the extent to which exposure to a counterparty rises as that counterparty's credit quality falls.

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