Financial Exam Help 123

Category: Level II

  • CPR vs. SMM vs. PSA

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    Bill Campbell
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    All of these TLAs (Three-Letter Abbreviations) refer to measurements of the amount of prepayment on a mortgage-backed security (MBS, yet another TLA): CPR abbreviates Conditional Prepayment Rate, an annual measure of the prepayments on an MBS SMM abbreviates Single-Month Mortality, a monthly (duh!) measure of the prepayments on an MBS PSA abbreviates Public Securities Association,…

  • Current Rate vs. Temporal: Why Two Methods?

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    Bill Campbell
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    Truth be told, I have no idea what the exact reasons are that we use two strikingly different methods – the current rate method and the temporal method – for changing the values from those in one currency (the local currency) to those in another currency (the presentation currency).  However, I have developed (i.e., stumbled…

  • Amortization Tables

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    Bill Campbell
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    Although you are not allowed to use Excel (or any other spreadsheet program) on the exam – you have to survive with your lowly financial calculator – it’s still useful to be able to create amortization tables in a spreadsheet, to help you visualize the cash flows and account balances in a variety of financial…

  • Justified Ratios (Price Multiples)

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    Bill Campbell
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    In general, price multiples – P/E ratio, price-to-book-value, and so on – are used for relative value comparison,  not absolute value.  That is, a company’s price multiples are generally compared to those of similar companies to determine whether the company’s stock is overpriced, fairly priced, or underpriced compared to the stock of its peers.  The…

  • Mark-to-Market Value of a Currency Forward Contract

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    Bill Campbell
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    In Level II economics we’re given the formula for the mark-to-market value of a currency forward contract.  Similarly, in Level II derivatives we’re given the formula for the value of a currency forward contract.  These two formulae look rather different from each other. In fact, they are identical (after accounting for the difference between nominal…

  • Cash (Currency): the Wonky Commodity

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    Bill Campbell
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    Throughout Level II and Level III – and a little bit at Level I – we see calculations that involve commodities; e.g., calculating the price or value of a forward or futures contract on an underlying commodity. In all of those calculations, the quantity of the commodity is constant; for example, if you’re given the…

  • Leases: General

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    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…

  • Endogenous Growth Theory

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    Bill Campbell
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    There are four articles on economic growth theories: Synopsis Classical growth theory Neoclassical growth theory Endogenous growth theory (you are here) Endogenous Growth Unlike the exogenous growth theories (classical growth and neoclassical growth), endogenous growth theory views technological advancement as a result of investment in physical capital and human capital (as opposed to an external…

  • Neoclassical Growth Theory

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    Bill Campbell
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    There are four articles on economic growth theories: Synopsis Classical growth theory Neoclassical growth theory (you are here) Endogenous growth theory Neoclassical Growth Neoclassical growth theory is more complicated than classical growth theory, but it’s not too bad. (OK, maybe it is; I’m just trying to encourage you to keep reading.)  It does require a…

  • Classical Growth Theory

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    Bill Campbell
    in

    There are four articles on economic growth theories: Synopsis Classical growth theory (you are here) Neoclassical growth theory Endogenous growth theory Classical Growth Theory Classical growth theory is pretty easy (and a bit depressing); the basic idea, in a nutshell, is that when wages rise above the subsistence level (the minimum amount people need to…