Financial Exam Help 123

Category: Level I

  • Leases I: Criteria for Classification

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    by

    Bill Campbell
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    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…

  • Arbitrage

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    Bill Campbell
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    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…

  • Covariance and Correlation

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    Bill Campbell
    in

    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\ –\…

  • Beta

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    Bill Campbell
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    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)…

  • Nominal vs. Effective Interest Rates

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    by

    Bill Campbell
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    The ideas behind nominal and effective interest rates are fairly simple, but you need to be sure that you understand the differences, and that you know which convention is used for which common rate quotes.  At the heart of the difference is the idea of compound interest, so let’s start there.  Throughout this article, we’ll…

  • Currency Exchange Rates

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    Bill Campbell
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    Many candidates find currency exchange rates to be confusing, and for good reason: the notation used is not intuitive at all (and, to boot, contradictory).  We’ll discuss the notation, how to use exchange rates in calculations to convert from one currency to another, how to invert exchange rates, and how to derive cross exchange rates.…

  • Calculating Spot Rates (from Forward Rates)

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    Bill Campbell
    in

    A spot interest rate is a discount rate that takes a single payment at one point in the future and discounts it back to today; a forward rate is a discount rate that takes a single payment at one point in the future and discounts it to another (nearer) time in the future; they each…

  • Yield Measures (Fixed Income)

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    Bill Campbell
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    There are a number of types of yield measures for bonds; you need to know how they are calculated, the assumptions that underlie them, and their strengths and weaknesses. The measures of interest are: Nominal yield Current yield Yield to maturity Yield to call Yield to refunding Yield to put Yield to worst Cash flow…

  • Comparing Yield Measures (Quant)

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    Bill Campbell
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    The article on yield measures mentions five measures of interest: Bank Discount Yield (BDY, or rBD) Holding Period Yield (HPY) Effective Annual Yield (EAY) Money Market Yield (MMY or rMM) Bond Equivalent Yield (BEY) Unfortunately, you cannot compare these to each other directly; for example, if one investment has a BEY of 6.125% and another…

  • Yield Measures (Quant)

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    by

    Bill Campbell
    in

    There are a variety of conventions for measuring the yield (or return) on an investment; you need to know the definitions of each of these yield measures and how to convert from one yield measure to another (to facilitate comparison of various investments). The measures of interest are: Bank Discount Yield (BDY, or rBD) Holding…