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Month: January 2014
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Investments in Financial Assets
When one company buys securities (stock or bonds) issued by another company, the accounting treatment for those investments depends on the amount of influence/control that the investing company has over the issuing company. When the investor has no influence (generally assumed when the investment represents less than 20% ownership), then the investment is treated as…
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Leases III: Effect on Financial Statements and Ratios
A lease is a contract that lets one party use an asset owned by another party, in exchange for periodic payments. The owner of the asset is the lessor; the user of the asset is the lessee. For the purposes of financial reporting, leases are divided into two categories, based on the economic substance of…
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Leases II: Calculations
A lease is a contract that lets one party use an asset owned by another party, in exchange for periodic payments. The owner of the asset is the lessor; the user of the asset is the lessee. For the purposes of financial reporting, leases are divided into two categories, based on the economic substance of…
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Leases I: Criteria for Classification
A lease is a contract that lets one party use an asset owned by another party, in exchange for periodic payments. The owner of the asset is the lessor; the user of the asset is the lessee. For the purposes of financial reporting, leases are divided into two categories, based on the economic substance of…
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Arbitrage
Arbitrage means the ability to earn a profit without risk. One method by which arbitrage is commonly accomplished by buying an asset in one market, and simultaneously selling an identical asset in another market at a higher price (e.g., T-Notes or T-Bonds). Another is by borrowing an asset (e.g., a currency) and investing it at…
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Covariance and Correlation
Covariance Covariance is just an extension of the idea of variance: instead of looking at how numbers in one data set deviate from their mean, you look at how numbers in two data sets deviate from their respective means together. We start with the formula for variance (of a population): \[\sigma^2\ =\ \frac{\sum_{i=1}^N \left(X_i\ –\…
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Beta
It is not surprising that many CFA candidates (at all levels, not just Level I) have a poor understanding of beta, because a survey of a number of financial websites with glossaries (not the little, obscure ones; the big boys, such as Charles Schwab, Citibank, Deutsche Bank, E-Trade, Investopedia, Putnam Investments, TD Ameritrade, and others)…