Title | Wiley Study Guide for 2015 Level I CFA Exam: Complete Set |
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File Size | 7.2 MB |

Total Pages | 1328 |

Cover Volume 1 Title Page Copyright Page Contents Study Session 1: Ethical and Professional Standards Reading 1: Code of Ethics and Standards of Professional Conduct LESSON 1: CODE OF ETHICS AND STANDARDS OF PROFESSIONAL CONDUCT CFA Institute Professional Conduct Program Adoption of the Code and Standards Why Ethics Matters CFA INSTITUTE CODE OF ETHICS AND STANDARDS OF PROFESSIONAL CONDUCT Preamble The Code of Ethics Standards of Professional Conduct Reading 2: Guidance for Standards I‐VII LESSON 1: STANDARD I: PROFESSIONALISM Standard I(A): Knowledge of the Law Standard I(B) Independence and Objectivity Standard I(C) Misrepresentation Standard I(D) Misconduct LESSON 2: STANDARD II: INTEGRITY OF CAPITAL MARKETS Standard II(A) Material Nonpublic Information Standard II(B) Market Manipulation LESSON 3: STANDARD III: DUTIES TO CLIENTS Standard III(A) Loyalty, Prudence, and Care Standard III(B) Fair Dealing Standard III(C) Suitability Standard III(D) Performance Presentation Standard III(E) Preservation of Confidentiality LESSON 4: STANDARD IV: DUTIES TO EMPLOTERS Standard IV(A) Loyalty Standard IV(B) Additional Compensation Arrangements Standard IV(C) Responsibilities of Supervisors LESSON 5: STANDARD V: INVESTMENT ANALYSIS, RECOMMENDATIONS AND ACTION Standard V(A) Diligence and Reasonable Basis Standard V(B) Communication with Clients and Prospective Clients Standard V(C) Record Retention LESSON 6: STANDARD VI: CONFLICTS OF INTEREST Standard VI(A) Disclosure of Conflicts Standard VI(B) Priority of Transactions Standard VI(C) Referral Fees LESSON 7: STANDARD VII: RESPONSIBILITIES AS A CFA INSTITUTE MEMBER OR CFA CANDIDATE Standard VII(A) Conduct as Participants in CFA Institute Programs Standard VII(B) Reference to CFA Institute, the CFA Designation, and the CFA Program Reading 3: Introduction to the Global Investment Performance Standards (GIPS®) LESSON 1: INTRODUCTION TO THE GLOBAL INVESTMENT PERFORMANCE STANDARDS (GIPS) The Structure of the GIPS Standards Reading 4: Global Investment Performance Standards (GIPS®) LESSON 1: GLOBAL INVESTMENT PERFORMANCE STANDARDS (GIPS) Fundamentals of Compliance Study Session 2: Quantitative Methods—Basic Concepts Reading 5: The Time Value of Money LESSON 1: INTRODUCTION, INTEREST RATES, FUTURE VALUE AND PRESNT VALUE The Financial Calculator Timelines Sign Convention The Future Value of a Single Cash Flow The Present Value of a Single Cash Flow FV and PV of a Series of Cash Flows Present Value of a Perpetuity Present and Future Value of Unequal Cash Flows LESSON 2: STATED ANNUAL INTEREST RATES, COMPOUNDING FREQUENCY, EFFECTIVE ANNUAL RATES AND ILLUSTRATIONS OF TVM PROBLEMS The Frequency of Compounding Loan Payments and Amortization The Cash Flow Additivity Principle Reading 6: Discounted Cash Flow Applications LESSON 1: NET PRESENT VALUE AND INTERNAL RATE OF RETURN Internal Rate of Return (IRR) LESSON 2: PORTFOLIO RETURN MEASUREMENT LESSON 3: MONEY MARKET YIELDS Market Yields Bond Equivalent Yield Reading 7: Statistical Concepts and Market Returns LESSON 1: FUNDAMENTAL CONCEPTS, FREQUENCY DISTRIBUTIONS AND THE GRAPHICAL PRESENTATION OF DATA Histograms and Frequency Polygons LESSON 2: MEASURES OF CENTRAL TENDENCY, OTHER MEASURES OF LOCATION (QUANTILES) AND MEASURES OF DISPERSION Properties of the Arithmetic Mean Quantiles Other Concepts of the Mean Population Variance and Standard Deviation Sample Variance and Standard Deviation Issues with the Sharpe Ratio LESSON 3: SYMMETRY, SKEWNESS AND KURTOSIS IN RETURN DISTRIBUTIONS AND ARITHMETIC VERSUS GEOMETRIC MEANS Reading 8: Probability Concepts LESSON 1: PROBABILITY, EXPECTED VALUE AND VARIANCE Methods of Estimating Probabilities Profiting from Inconsistent Probabilities Calculating the Probability that at Least One of Two Events Will Occur Dependent and Independent Events Expected Value Variance and Standard Deviation LESSON 2: COVARIANCE AND CORRELATION AND CALCULATING PORTFOLIO EXPECTED RETURN AND VARIANCE Properties of Covariance Limitations of Covariance Correlation Coefficient Properties of the Correlation Coefficient LESSON 3: TOPICS IN PROBABILITY: BAYES’ FORMULA AND COUNTING RULES Multiplication Rule of Counting Labeling Problems Combinations Permutations Study Session 3: Quantitative Methods— Application Reading 9: Common Probability Distributions LESSON 1: DISCRETE RANDOM VARIABLES, THE DISCRETE UNIFORM DISTRIBUTION AND THE BINOMIAL DISTRIBUTION The Binomial Distribution Binomial Trees Skewness and the Binomial Distribution Tracking Error LESSON 2: CONTINUOUS RANDOM VARIABLES, THE CONTINUOUS UNIFORM DISTRIBUTION, THE NORMAL DISTRIBUTION AND THE LOGNORMAL DISTRIBUTION Calculating Probabilities Using Z-Scores LESSON 3: MONTE CARLO SIMULATION Investment Applications Limitations Reading 10: Sampling And Estimation LESSON 1: SAMPLING, SAMPLING ERROR, AND THE DISTRIBUTION OF THE SAMPLE MEAN Sampling Error Sampling Distribution LESSON 2: POINT AND INTERVAL ESTIMATES OF THE POPULATION MEAN, STUDENT’S T-DISTRIBUTION, SAMPLE SIZE AND BIASES Types of Biases Sample-Selection Bias Look-Ahead Bias Time-Period Bias Reading 11: Hypothesis Testing LESSON 1: INTRODUCTION TO HYPOTHESIS TESTING One-Tailed versus Two-Tailed Tests Rejection Rules for Two-Tailed Hypothesis Test Type I and Type II Errors Relation Between Confidence Intervals and Hypothesis Tests LESSON 2: HYPOTHESIS TESTS CONCERNING THE MEAN Hypothesis Tests Concerning the Mean Tests Relating to the Mean of Two Populations Tests for Means when Population Variances are Assumed Equal Tests for Means when Population Variances are Assumed Unequal LESSON 3: HYPOTHESIS TESTS CONCERNING THE VARIANCE AND NONPARAMETRIC INFERENCE Reading 12: Technical Analysis LESSON 1: TECHNICAL ANALYSIS: DEFINITION AND SCOPE Principles and Assumptions Technical Versus Fundamental Analysis Drawbacks of Technical Analysis LESSON 2: TECHNICAL ANALYSIS TOOLS: CHARTS, TREND AND CHART PATTERNS Charts Reversal Patterns Continuation Patterns LESSON 3: TECHNICAL ANALYSIS TOOLS: TECHNICAL INDICATORS AND CYCLES Price-Based Indicators Momentum Oscillators Sentiment Indicators Flow of Funds Indicators Cycles LESSON 4: ELLIOT WAVE THEORY AND INTERMARKET ANALYSIS Elliott Wave Theory Intermarket Analysis Volume 2 Title Page Copyright Page Contents Study Session 4: Economics— Microeconomic Analysis Reading 13: Demand and Supply Analysis: Introduction LESSON 1: DEMAND AND SUPPLY ANALYSIS: BASIC PRINCIPLES AND CONCEPTS Types of Markets The Demand Function and the Demand Curve Changes in Demand Versus Movements Along the Demand Curve The Supply Function and the Supply Curve Changes in Supply Versus Movements Along the Supply Curve Aggregating the Demand and Supply Functions Aggregating the Demand Function Aggregating the Supply Function Market Equilibrium LESSON 2: MARKET EQUILIBRIUM Iterating Toward Equilibrium: The Market Mechanism (See Figure 2-1) Auctions as a Way to Find Equilibrium Price LESSON 3: CONSUMER SURPLUS AND PRODUCER SURPLUS: INTRODUCTION AND APPLICATIONS The Demand Curve, Value (Utility), and Consumer Surplus Consumer Surplus The Supply Curve, Marginal Cost, and Producer Surplus Producer Surplus Total Surplus: Total Value (Utility) Minus Total Variable Cost Markets Maximize Society’s Total Surplus Market Intervention: Negative Impacts on Total Surplus Price Ceilings Price Floors Taxes Per-Unit Tax on Sellers Tax on Buyers Search Costs LESSON 4: DEMAND ELASTICITIES Demand Elasticities Own-Price Elasticity of Demand Factors Affecting Own-Price Elasticity of Demand Own-Price Elasticity of Demand and Total Expenditure Total Revenue and Price Elasticity Income Elasticity of Demand Cross-Price Elasticity of Demand Calculating Demand Elasticities from Demand Functions Reading 14: Demand And Supply Analysis: Consumer Demand LESSON 1: INDIFFERENCE CURVES AND THE OPPORTUNITY SET Axioms of the Theory of Consumer Choice The Utility Function Indifference Curves: The Graphical Portrayal of the Utility Function Indifference Curve Maps Gains from Voluntary Exchange: Creating Wealth Through Trade The Opportunity Set: Consumption, Production, and Investment Choice The Budget Constraint The Production Opportunity Set LESSON 2: CONSUMER EQUILIBRIUM Consumer Response to Changes in Income: Normal and Inferior Goods Consumer’s Demand Curve from Preferences and Budget Constraints LESSON 3: INCOME AND SUBSTITUTION EFFECTS Substitution and Income Effects for a Normal Good Income and Substitution Effects for an Inferior Good Giffen Goods Veblen Goods Reading 15: Demand and Supply Analysis: The Firm LESSON 1: TYPES OF PROFIT MEASURES Objectives of the Firm Types of Profit Measures Comparison of Profit Measures LESSON 2: ANALYSIS OF REVENUE AND COSTS Total, Average, and Marginal Revenue Factors of Production Total, Average, Marginal, Fixed, and Variable Costs The Firm’s Short Run Supply Curve LESSON 3: MAXIMIZING PROFITS AND OPTIMIZING PRODUCTIVITY Profit Maximization Under Perfect Competition Profit Maximization Under Imperfect Competition Productivity Total, Average, and Marginal Product of Labor LESSON 4: ECONOMIES AND DISECONOMIES OF SCALE AND PROFIT MAXIMIZATION IN THE SHORT RUN V. LONG RUN The Production Function Economies and Diseconomies of Scale Equilibrium in the Short Run Equilibrium in the Long Run Economic Profits Economic Losses LESSON 5: LONG RUN SUPPLY The Long Run Industry Supply Curve Reading 16: The Firm And Market Structures LESSON 1: MARKET STRUCTURE 1: PERFECT COMPETITION Perfect Competition Characteristics Demand in a Perfectly Competitive Market Elasticity of Demand Price Elasticity of Demand Income Elasticity of Demand Cross Elasticity of Demand Consumer Surplus: Value Minus Expenditure Supply Analysis in Perfectly Competitive Markets Optimal Price and Output in Perfectly Competitive Markets Changes in Plant Size Permanent Decrease in Demand for a Product Schumpeter’s Take on Perfect Competition LESSON 2: MARKET STRUCTURE 2: MONOPOLY Monopoly Characteristics Factors that Give Rise to Monopolies Demand Analysis in Monopoly Markets Supply Analysis in Monopoly Markets Optimal Price and Output in Monopoly Markets Regulation of Natural Monopolies Price Discrimination and Consumer Surplus Factors Affecting Long Run Equilibrium in Monopoly Markets LESSON 3: MARKET STRUCTURE 3: MONOPOLISTIC COMPETITION Monopolistic Competition Demand and Supply Analysis in Monopolistically Competitive Markets Factors Affecting Long-Run Equilibrium in Monopolistically Competitive Markets Monopolistic Competition Versus Perfect Competition LESSON 4: MARKET STRUCTURE 4: OLIGOPOLY Oligopoly Characteristics Demand Analysis and Pricing Strategies in Oligopoly Markets Factors Affecting Chances of Successful Collusion Supply Analysis in Oligopoly Markets Optimal Price and Output in Oligopoly Markets Factors Affecting Long-Run Equilibrium in Oligopoly Markets LESSON 5: IDENTIFICATION OF MARKET STRUCTURE Identification of Market Structure Other Measures Study Session 5: Economics— Macroeconomic Analysis Reading 17: Aggregate Output, Prices, And Economic Growth LESSON 1: AGGREGATE OUTPUT AND INCOME Gross Domestic Product (GDP) GDP Deflator The Components of GDP Expenditure Approach Income Approach Other GDP-Related Measures LESSON 2: AGGREGATE DEMAND, AGGREGATE SUPPLY AND EQUILIBRIUM: PART 1 (FUNDAMENTAL RELATIONSHIPS) LESSON 3: AGGREGATE DEMAND, AGGREGATE SUPPLY AND EQUILIBRIUM: PART 2 (IS-LM ANALYSIS AND THE AD CURVE) The IS Curve (Relationship Between Income and the Real Interest Rate) The LM Curve The Aggregate Demand Curve LESSON 4: AGGREGATE DEMAND, AGGREGATE SUPPLY AND EQUILIBRIUM: PART 3 (MACROECONOMIC CHANGES AND EQUILIBRIUM) Shifts in Aggregate Demand Shifts in Short-Run Aggregate Supply Shifts in Long-Run Aggregate Supply Short-Run Equilibrium Long-Run Full Employment Equilibrium Business Cycles Stagflation LESSON 5: ECONOMIC GROWTH AND STABILITY The Production Function and Potential GDP Sources of Economic Growth Measures of Sustainable Growth Reading 18: Understanding Business Cycles LESSON 1: THE BUSINESS CYCLE Overview of Business Cycles Phases of the Business Cycle Resource Use Through the Business Cycle Fluctuations in Capital Spending Fluctuation in Inventory Levels Consumer Behavior Housing Sector Behavior External Trade Sector Behavior Neoclassical School of Thought Austrian School of Thought Keynesian School of Thought Monetarist School of Thought The New Classical School (RBC Theory) Neo-Keynesian or New Keynesian Theory LESSON 2: UNEMPLOYMENT, INFLATION AND ECONOMIC INDICATORS The Unemployment Rate Overall Payroll Employment and Productivity Indicators Inflation Deflation Hyperinflation Disinflation Price Indices and their Usage Cost-Push Inflation Demand-Pull Inflation Monetarists’ Views on Inflation Inflation Expectations Reading 19: Monetary And Fiscal Policy LESSON 1: MONETARY POLICY (PART I) Problems with a Barter Economy The Functions of Money Paper Money and the Money-Creation Process Definitions of Money The Quantity Theory of Money The Demand for Money Supply and Demand for Money The Roles of the Central Bank Objectives of Monetary Policy Costs of Inflation LESSON 2: MONETARY POLICY (PART II) Monetary Policy Tools The Transmission Mechanism Monetary Policy Strategies Challenges to the Effectiveness of Monetary Policy in Developing Countries Contractionary and Expansionary Monetary Policies The Neutral Rate of Interest Limitations of Monetary Policy LESSON 3: FISCAL POLICY Fiscal Policy Roles and Objectives of Fiscal Policy Deficits and National Debt Fiscal Policy Tools and the Macroeconomy Advantages and Disadvantages of Different Fiscal Policy Tools The Fiscal Multiplier The Balanced Budget Multiplier Issues in Fiscal Policy Implementation The Relationships Between Monetary and Fiscal Policy Factors Influencing the Mix of Fiscal and Monetary Policy Study Session 6: Economics in a Global Context Reading 20: International Trade and Capital Flows LESSON 1: BASIC TERMINOLOGY, ABSOLUTE AND COMPARATIVE ADVANTAGE Ricardian Model LESSON 2: TRADE AND CAPITAL FLOWS: RESTRICTIONS AND AGREEMENTS Trade Restrictions Arguments for Trade Restrictions Quotas Voluntary Export Restraints Export Subsidies CAPITAL RESTRICTIONS Common Objectives Forms of Capital Controls Benefits of Free Movement of Financial Capital Effectiveness of Capital Controls Costs of Capital Controls Advantages of Trade Blocs Balance of Payment Components LESSON 3: THE BALANCE OF PAYMENTS AND TRADE ORGANIZATIONS National Economic Accounts and the Balance of Payments World Bank Group World Trade Organization (WTO) International Monetary Fund Reading 21: Currency Exchange Rates LESSON 1: THE FOREIGN EXCHANGE MARKET Nominal and Real Exchange Rates Spot and Forward Exchange Rates Functions of the Foreign Exchange Market Market Participants Sell Side Buy Side Market Size and Composition LESSON 2: CURRENCY EXCHANGE RATE CALCULATIONS: PART 1 Exchange Rate Quotations LESSON 3: CURRENCY EXCHANGE RATE CALCULATIONS: PART 2 LESSON 4: EXCHANGE RATE REGIMES AND THE IMPACT OF EXCHANGE RATES ON TRADE AND CAPITAL FLOWS Types of Exchange Rate Regimes Arrangements with No Separate Legal Tender Arrangements Where Countries Have Their Own Currency Exchange Rates and the Trade Balance The Elasticities Approach The Absorption Approach Volume 3 Title Page Copyright Page Contents Study Session 7: Financial Reporting and Analysis: An Introduction Reading 22: Financial Statement Analysis: An Introduction LESSON 1: FINANCIAL STATEMENT ANALYSIS: AN INTRODUCTION Statement of Comprehensive Income (or Income Statement plus Statement of Other Comprehensive Income) Balance Sheet Cash Flow Statement Statement of Changes in Owners’ Equity Financial Notes and Supplementary Information Management’s Discussion and Analysis (MD&A) Types of Audit Opinions Reading 23: Financial Reporting Mechanics LESSON 1: CLASSIFICATION OF BUSINESS ACTIVITIES AND FINANCIAL STATEMENT ELEMENTS AND ACCOUNTS Operating Activities Investing Activities Financing Activities Classification of Accounts into Financial Statement Elements LESSON 2: ACCOUNTING EQUATIONS LESSON 3: THE ACCOUNTING PROCESS LESSON 4: ACCRUALS, VALUATION ADJUSTMENTS, ACCOUNTING SYSTEMS AND USING FINANCIAL STATEMENTS IN SECURITY ANALYSIS Accrual Entries Valuation Adjustments Reading 24: Financial Reporting Standards LESSON 1: FINANCIAL REPORTING STANDARDS The Role of Standard.-Setting Bodies and Regulatory Authorities Standard -Setting Bodies International Accounting Standards Board (IASB) Financial Accounting Standards Board (FASB) Desirable Attributes of an Accounting Standards Board Regulatory Authorities The U.S. Securities and Exchange Commission Objective of Financial Statements Qualitative Characteristics Constraints on Financial Statements Reporting Elements Underlying Assumptions in Financial Statements Recognition and Measurement of Financial Statement Elements Required Financial Statements General Features of Financial Statements Structure and Content Requirements Characteristics of an Effective Financial Reporting Framework Barriers to Creating a Single Coherent Framework Study Session 8: Income Statements, Balance Sheets, and Cash Flow Statements Reading 25: Understanding Income Statements LESSON 1: INCOME STATEMENT: COMPONENTS AND FORMAT LESSON 2: REVENUE AND EXPENSE RECOGNITION Revenue Recognition in Special Cases Long -Term Contracts Installment Sales Barter Transactions Gross Versus Net Reporting Implications for Financial Analysis Inventory Methods Issues in Expense Recognition Doubtful Accounts Warranties Depreciation Amortization Demonstration of Depreciation Methods Implications for Financial Analysis LESSON 3: NON-RECURRING ITEMS, NON-OPERATING ITEMS Discontinued Operations Extraordinary Items Unusual or Infrequent Items Changes in Accounting Policies LESSON 4: EARNINGS PER SHARE, ANALYSIS OF THE INCOME STATEMENT AND COMPREHENSIVE INCOME Diluted EPS when a Company has Convertible Preferred Stock Outstanding Diluted EPS when a Company has Convertible Debt Outstanding Diluted EPS when a Company has Stock Options, Warrants, or their Equivalents Outstanding LESSON 5: ANALYSIS OF THE INCOME STATEMENT AND COMPREHENSIVE INCOME Analysis of the Income Statement Income Statement Ratios Items Classified as Other Comprehensive Income Reading 26: Understanding Balance Sheets LESSON 1: BALANCE SHEET: COMPONENTS AND FORMAT Assets Liabilities Equity LESSON 2: ASSETS AND LIABILITIES: CURRENT VERSUS NON-CURRENT IFRS and U.S. GAAP Balance Sheet Presentation Current Assets Current Liabilities Non-Current Assets Non-Current Liabilities LESSON 3: EQUITY Statement of Changes in Owners’ Equity Uses and Analysis of Balance Sheets LESSON 4: ANALYSIS OF THE BALANCE SHEET Common-Size Balance Sheets Balance Sheet Ratios Reading 27: Understanding Cash Flow Statements LESSON 1: THE CASH FLOW STATEMENT: COMPONENTS AND FORMAT The Direct Method Versus Indirect Method LESSON 2: THE CASH FLOW STATEMENT: LINKAGES AND PREPARATION Links Between the Cash Flow Statement and the Income Statement and Balance Sheet Sources Versus Uses of Cash The Direct Method The Indirect Method Conversion from Indirect to the Direct Method LESSON 3: CASH FLOW STATEMENT ANALYSIS Cash Flow Ratios Reading 28: Financial Analysis Techniques LESSON 1: ANALYTICAL TOOLS AND TECHNIQUES Uses of Ratio Analysis Common-Size Analysis Cross-Sectional Analysis Trend Analysis Uses of Charts in Financial Analysis Limitations of Ratio Analysis LESSON 2: COMMON RATIOS USED IN FINANCIAL ANALYSIS Interpretation and Context Activity Ratios Liquidity Ratios Solvency Ratios Profitability Ratios LESSON 3: DUPONT ANALYSIS, EQUITY ANALYSIS, CREDIT ANALYSIS, AND BUSINESS AND GEOGRAPHIC SEGMENTS Decomposition of ROE Two-Way DuPont Decomposition Three-Way DuPont Decomposition Five-Way DuPont Decomposition Equity Analysis Valuation Ratios Per Share Quantities that are Important in Equity Analysis Dividend Related Quantities Industry-Specific Ratios Credit Analysis Segment Analysis Study Session 9: Inventories, Long-Lived Assets, Income Taxes, and Non-Current Liabilities Reading 29: Inventories LESSON 1: COST OF INVENTORIES LESSON 2: INVENTORY VALUATION METHODS AND MEASUREMENT OF INVENTORY VALUE Inventory Valuation Methods (Cost Formulas) Balance Sheet Information: Inventory Account Income Statement Information: Cost of Goods Sold Periodic Versus Perpetual Inventory Systems LESSON 3: PRESENTATION AND DISCLOSURE AND EVALUATION OF INVENTORY MANAGEMENT Presentation and Disclosure Inventory Method Changes Reading 30: Long-Lived Assets LESSON 1: ACQUISITION OF LONG-LIVED ASSETS: PROPERTY, PLANT, AND EQUIPMENT, AND INTANGIBLE ASSETS Capitalized Costs Expensed Costs Costs Incurred at Acquisition Capitalization of Interest Costs Analytical Issues Relating to Capitalization of Interest Costs 1. Intangible Assets Acquired in Situations Other than Business Combinations (e.g., Buying a Patent) 2. Intangible Assets Developed Internally 3. Intangible Assets Acquired in a Business Combination LESSON 2: DEPRECIATION AND AMORTIZATION OF LONG-LIVED ASSETS, AND THE REVALUATION MODEL Comparison Between Straight-Line and Accelerated Depreciation Methods Estimates Used for Calculating Depreciation The Revaluation Model LESSON 3: IMPAIRMENT OF ASSETS, DERECOGNITION OF ASSETS, PRESENTATION AND DISCLOSURES AND INVESTMENT PROPERTY Impairment of Property, Plant, and Equipment Impairment of Intangible Assets with a Finite Life Impairment of Intangibles with Indefinite Lives Impairment of Long-Lived Assets Held for Sale Reversals of Impairments of Long-Lived Assets Sale of Long-Lived Assets Long-Lived Assets Disposed of Other than by a Sale Investment Property Reading 31: Income Taxes LESSON 1: KEY DEFINITIONS AND CALCULATING THE TAX BASE OF ASSETS AND LIABILITIES Determining the Tax Base of an Asset Determining the Tax Base of a Liability LESSON 2: CREATION OF DEFERRED TAX ASSETS AND LIABILITIES, RELATED CALCULATIONS AND CHANGES IN DEFERRED TAXES Deferred Tax Assets 1. Taxable Temporary Differences 2. Deductible Temporary Differences Temporary Differences at Initial Recognition of Assets and Liabilities Business Combinations and Deferred Taxes Investments in Subsidiaries, Branches, Associates, and Joint Ventures Unused Losses and Tax Credits Recognition and Measurement of Current and Deferred Tax LESSON 3: RECOGNITION AND MEASUREMENT OF CURRENT AND DEFERRED TAX AND PRESENTATION AND DISCLOSURE Recognition of a Valuation Allowance Recognition of Current and Deferred Tax Charged Directly to Equity Reading 32: Non-Current (Long-Term) Liabilities LESSON 1: BONDS PAYABLE Financing Liabilities: Terminology Effects on Financial Statements Effect on Financial Statements Zero-Coupon Bonds Treatment of Noncurrent Liabilities under U.S. GAAP and IFRS Fair Value Reporting Option Derecognition of Debt LESSON 2: LEASES Lessee’s Perspective Operating Lease (Lessee’s Perspective) Capital or Finance Lease (Lessee’s Perspective) Balance Sheet Income Statement Statement of Cash Flows Lessor’s Perspective Finance Leases Sales-Type Leases Disclosures LESSON 3: PENSIONS AND OTHER POST-EMPLOYMENT BENEFITS AND EVALUATING SOLVENCY Evaluating Solvency Ratios Study Session 10: Financial Reporting Quality and Financial Statement Analysis Reading 33: Financial Reporting Quality LESSON 1: CONCEPTIAL OVERVIEW AND QUALITY SPECTRUM OF FINANCIAL REPORTS CONCEPTUAL OVERVIEW QUALITY SPECTRUM OF FINANCIAL REPORTS GAAP, Decision-Useful, Sustainable, and Adequate Returns GAAP, Decision-Useful, but Sustainable? Within GAAP, but Biased Accounting Choices Within GAAP, but “Earnings Management” Departures from GAAP—Noncompliant Accounting Departures from GAAP—Fictitious Transactions Differentiate between Conservative and Aggressive Accounting LESSON 2: CONTEXT FOR ASSESSING FINANCIAL REPORTING QUALITY CONTEXT FOR ASSESSING FINANCIAL REPORTING QUALITY Motivations Conditions Conducive to Issuing Low-Quality Financial Reports Mechanisms that Discipline Financial Reporting Quality LESSON 3: DETECTION OF FINANCIAL REPORTING QUALITY ISSUES DETECTION OF FINANCIAL REPORTING QUALITY ISSUES Presentation Choices Accounting Choices and Estimates WARNING SIGNS Warning Signs Related to Revenue Warning Signs Related to Inventories Warning Signs Related to Capitalization Policies and Deferred Costs Warning Signs Related to the Relationship between Cash Flow and Income Other Potential Warning Signs Reading 34: Financial Statement Analysis: Applications LESSON 1: EVALUATING PAST FINANCIAL PERFORMANCE AND PROJECTING FUTURE PERFORMANCE LESSON 2: ASSESSING CREDIT RISK AND SCREENING FOR POTENTIAL EQUITY INVESTMENTS LESSON 3: ANALYST ADJUSTMENTS TO REPORTED FINANCIALS Volume 4 Title Page Copyright Page Contents Study Session 11: Corporate Finance Reading 35: Capital Budgeting LESSON 1: CAPITAL BUDGETING Net Present Value (NPV) Decision Rules for IRR Discounted Payback Period Average Accounting Rate of Return (AAR) Profitability Index Decision Rules for PI NPV Profiles NPV and IRR Applied to Independent Projects NPV and IRR Applied to Mutually Exclusive Projects Problems with the IRR Reading 36: Cost of Capital LESSON 1: COST OF CAPITAL LESSON 2: COSTS OF THE DIFFERENT SOURCES OF CAPITAL 1. Yield-to-Maturity Approach 2. Debt-Rating Approach Issues in Estimating Cost of Debt 1. Capital Asset Pricing Model (CAPM) 2. Dividend Discount Model Approach 3. Bond Yield Plus Risk Premium Approach LESSON 3: TOPICS IN COST OF CAPITAL ESTIMATION Correct Treatment of Flotation Costs Reading 37: Measures of Leverage LESSON 1: MEASURES OF LEVERAGE Business Risk and Financial Risk Business Risk Financial Risk Total Leverage Breakeven Points and Operating Breakeven Points Reading 38: Dividends and Share Repurchases: Basics LESSON 1: DIVIDENDS Cash Dividends Regular Cash Dividends Dividend Reinvestment Plans (DRPs) Extra or Special (Irregular) Dividends Liquidating Dividends Stock Dividends LESSON 2: SHARE REPURCHASES Share Repurchases Versus Cash Dividends Arguments for Share Repurchases Share Repurchase Methods Share Repurchases Using Excess Cash Share Repurchases Using Borrowed Funds Concluding Remarks Reading 39: Working Capital Management LESSON 1: WORKING CAPITAL MANAGEMENT Investing Short-Term Funds Yields on Short-Term Investments Yields on Short-Term Investments Cash Management Investment Strategies Cash Management Investment Policy Key Elements of the Trade Credit Granting Process Managing Customers’ Receipts Evaluating Management of Accounts Receivable Evaluating Inventory Management Evaluating Management of Accounts Payable Reading 40: The Corporate Governance of Listed Companies: A Manual for Investors LESSON 1: THE CORPORATE GOVERNANCE OF LISTED COMPANIES: A MANUAL FOR INVESTORS Compensation and Related-Party Transactions Remuneration Committee Other Board Committees Board Communication with Shareowners Management Communication with Shareowners Voting Rules Shareowner Proposals Other Shareholder Rights Issues Study Session 12: Portfolio Management Reading 41: Portfolio Management: An Overview LESSON 1: PORTFOLIO MANAGEMENT: AN OVERVIEW Reasons for Taking the Portfolio Perspective Individual Investors Institutional Investors Planning Execution Feedback Pooled Investments Other Investment Products Reading 42: Portfolio Risk and Return: Part I LESSON 1: INVESTMENT CHARACTERISTICS OF ASSETS Return Variance and Covariance of Returns Other Investment Characteristics LESSON 2: RISK AVERSION, PORTFOLIO SELECTION AND PORTFOLIO RISK The Concept of Risk Aversion Important Notes Regarding the Risk Aversion Coefficient, “A” Indifference Curves Application of Utility Theory to Portfolio Selection The Risk-Free Asset Expected Return for a Portfolio Containing a Risky Asset and the Risk-Free Asset Standard Deviation of a Portfolio Containing a Risky Asset and the Risk-Free Asset Portfolio Risk Implications Constant Correlation with Changing Weights Portfolios of Many Risky Assets Avenues for Diversification LESSON 3: EFFICIENT FRONTIER AND INVESTOR’S OPTIMAL PORTFOLIO A Risk-Free Asset and Many Risky Assets The Two-Fund Separation Theorem Optimal Investor Portfolio Reading 43: Portfolio Risk and Return: Part II LESSON 1: CAPITAL MARKET THEORY The Capital Market Line Leveraged Positions with Different Lending and Borrowing Rates LESSON 2: PRICING OF RISK AND COMPUTATION OF EXPECTED RETURN Systematic and Nonsystematic Risk Return-Generating Models The Market Model Calculation and Interpretation of Beta Important Points Regarding Beta Estimating Beta Using Regression Analysis LESSON 3: THE CAPITAL ASSET PRICING MODEL The Capital Asset Pricing Model Applications of the CAPM Security Characteristic Line Security Selection: Identifying Mispriced Securities Constructing a Portfolio Beyond the CAPM Reading 44: Basics of Portfolio Planning and Construction LESSON 1: PORTFOLIO PLANNING The Investment Policy Statement Risk Objectives Return Objectives Liquidity Time Horizon Tax Concerns Legal and Regulatory Factors Unique Circumstances LESSON 2: PORTFOLIO CONSTRUCTION Portfolio Construction Capital Market Expectations The Strategic Asset Allocation Steps Toward an Actual Portfolio Additional Portfolio Organizing Principles Study Session 13: Market Organization, Market Indices, and Market Efficiency Reading 45: Market Organization and Structure LESSON 1: THE FUNCTIONS OF THE FINANCIAL SYSTEM, ASSETS, CONTRACTS, FINANCIAL INTERMEDIARIES AND POSITIONS 1. Helping people achieve their purposes in using the financial system 2. Determining rates of return 3. Allocating capital efficiently Securities Real Assets Brokers, Exchanges, and Alternative Trading Systems Dealers Depository Institutions and Other Financial Corporations Settlement and Custodial Services Short Positions Levered Positions LESSON 2: ORDERS, PRIMARY AND SECONDARY SECURITY MARKETS, AND MARKET STRUCTURES Execution Instructions Exposure Instructions Validity Instructions Clearing Instructions Primary Markets Public Offerings Private Placements Other Primary Market Transactions Secondary Markets Trading Sessions Execution Mechanisms Market Information Systems LESSON 3: WELL-FUNCTIONING FINANCIAL SYSTEMS AND MARKET REGULATION Reading 46: Security Market Indices LESSON 1: INDEX DEFINITION, CALCULATIONS, CONSTRUCTION AND MANAGEMENT Calculation of Single Period Returns Price Return Total Return Calculation of Index Returns over Multiple Time Periods Target Market and Security Selection Price Weighting Equal Weighting Market-Capitalization Weighting Float-Adjusted Market-Capitalization Weighting Fundamental Weighting Rebalancing Reconstitution LESSON 2: USES OF MARKET INDICES AND TYPES OF INDICES Types of Fixed-Income Indices Reading 47: Market Efficiency LESSON 1: THE CONCEPT OF MARKET EFFICIENCY AND FORMS OF MARKET EFFICIENCY Factors Contributing to and Impeding a Market’s Efficiency Weak-Form Efficient Market Hypothesis Semi-Strong Form Efficient Market Hypothesis Strong-Form Efficient Market Hypothesis Implications of Efficient Market Hypothesis Efficient Markets and Technical Analysis Efficient Markets and Fundamental Analysis Efficient Markets and Portfolio Management LESSON 2: MARKET PRICING ANOMALIES AND BEHAVIORAL FINANCE 1. Time-Series Anomalies 2. Cross-Sectional Anomalies 3. Other Anomalies Study Session 14: Equity Analysis and Evaluation Reading 48: Overview of Equity Securities LESSON 1: OVERVIEW OF EQUITY SECURITIES Common Shares Preference Shares Types of Private Equity Investments Advantages of Private Companies Advantages of Public Companies Methods for Investing in Nondomestic Equity Securities Return Characteristics of Equity Securities Risks of Equity Securities Equity Securities and Company Value Accounting Return on Equity The Cost of Equity and Investors’ Required Rates of Return Reading 49: Introduction To Industry And Company Analysis LESSON 1: INTRODUCTION TO INDUSTRY AND COMPANY ANALYSIS Products and/or Services Supplied Business-Cycle Sensitivities Statistical Similarities Industry Classification Systems Strengths and Weaknesses of Current Systems Steps in constructing a preliminary list of peer companies Porter’s Five Forces Framework Barriers to Entry Industry Capacity Market Share Stability Limitations of Industry Life-Cycle Analysis Price Competition Macroeconomic Influences Technological Influences Demographic Influences Governmental Influences Social Influences Product/Service Differentiation Elements that Should be Considered in a Company Analysis Spreadsheet Modeling Reading 50: Equity Valuation: Concepts and Basic Tools LESSON 1: INTRODUCTION LESSON 2: PRESENT VALUE MODELS Examples of DDM in Valuing Common Stock Multiple-Year Holding Period DDM Infinite Period DDM (Gordon Growth Model) Valuation of Common Stock with Temporary Supernormal Growth The Free-Cash-Flow-to-Equity (FCFE) Model LESSON 3: MULTIPLIER MODELS AND ASSET-BASED VALUATION Multiples Based on Fundamentals Multiples Based on Comparables Price to Earnings Ratio Price to Cash Flow Price to Sales Price to Book Value Volume 5 Title Page Copyright Page Contents Study Session 15: Fixed Income—Basic Concepts Reading 51: Fixed-Income Securities: Defining Elements LESSON 1: OVERVIEW OF A FIXED-INCOME SECURITY OVERVIEW OF A FIXED-INCOME SECURITY THE BOND INDENTURE LESSON 2: LEGAL, REGULATORY AND TAX CONSIDERATIONS Legal and Regulatory Considerations Tax Considerations LESSON 3: STRUCTURE OF A BOND’S CASH FLOWS PRINCIPAL REPAYMENT STRUCTURES LESSON 4: BONDS WITH CONTINGENCY PROVISIONS BONDS WITH CONTINGENCY PROVISIONS Reading 52: Fixed‐Income Markets: Issuance, Trading, And Funding LESSON 1: OVERVIEW OF GLOBAL FIXED-INCOME MARKETS OVERVIEW OF GLOBAL FIXED-INCOME MARKETS LESSON 2: PRIMARY AND SECONDARY BOND MARKETS Primary Bond Markets Public Offerings Private Placements LESSON 3: ISSUERS OF BONDS CORPORATE DEBT Sovereign Bonds Nonsovereign Government Bonds Quasi-Government Bonds Supranational Bonds LESSON 4: SHORT-TERM FUNDING ALTERNATIVES AVAILABLE TO BANKS SHORT-TERM FUNDING ALTERNATIVES AVAILABLE TO BANKS Reading 53: Introduction to Fixed-Income Valuation LESSON 1: BOND PRICES AND THE TIME VALUE OF MONEY BOND PRICES AND THE TIME VALUE OF MONEY LESSON 2: PRICES AND YIELDS (PART I): CONVENTIONS FOR QUOTES AND CALCULATIONS PRICES AND YIELDS: CONVENTIONS FOR QUOTES AND CALCULATIONS LESSON 3: PRICES AND YIELDS (PART II): MATRIX PRICING AND YIELD MEASURES FOR BONDS Yield Measures for Fixed-Rate Bonds Yield Measures for Floating-Rate Notes Yield Measures for Money Market Instruments LESSON 4: PRICES AND YIELDS (PART III): THE MATURITY STRUCTURE OF INTEREST RATES AND CALCULATING SPOT RATES AND FORWARD RATES The Maturity Structure of Interest Rates The Spot Rate Curve Yield Curve for Coupon Bonds Par Curve Forward Curve LESSON 5: YIELD SPREADS YIELD SPREADS Reading 54: Introduction to Asset-Backed Securities LESSON 1: INTRODUCTION, THE BENEFITS OF SECURITIZATION AND THE SECURITIZATION PROCESS INTRODUCTION BENEFITS OF SECURITIZATION FOR ECONOMIC AND FINANCIAL MARKETS THE SECURITIZATION PROCESS LESSON 2: RESIDENTIAL MORTGAGE LOANS AND RESIDENTIAL MORTGAGE‐BACKED SECURITIES (RMBS) RESIDENTIAL MORTGAGE LOANS RESIDENTIAL MORTGAGE-BACKED SECURITIES COLLATERALIZED MORTGAGE OBLIGATIONS NONAGENCY RESIDENTIAL MORTGAGE-BACKED SECURITIES LESSON 3: COMMERCIAL MORTGAGE‐BACKED SECURITIES (CMBS) AND NONMORTGAGE ASSET-BACKED SECURITIES (ABS) COMMERCIAL MORTGAGE-BACKED SECURITIES (CMBS) NONMORTGAGE ASSET-BACKED SECURITIES LESSON 4: COLLATERALIZED DEBT OBLIGATIONS (CDOs) COLLATERALIZED DEBT OBLIGATIONS Study Session 16: Fixed Income— Analysis of Risk Reading 55: Understanding Fixed-Income Risk and Return LESSON 1: SOURCES OF RISK SOURCES OF RETURN LESSON 2: INTEREST RATE RISK ON FIXED-RATE BONDS INTEREST RATE RISK OF FIXED‐RATE BONDS LESSON 3: YIELD VOLATILITY, INTEREST RATE RISK AND THE INVESTMENT HORIZON, AND CREDIT AND LIQUIDITY RISK INTEREST RATE RISK AND THE INVESTMENT HORIZON CREDIT AND LIQUIDITY RISK Reading 56: Fundamentals of Credit Analysis LESSON 1: CREDIT RISK, CAPITAL STRUCTURE, SENIORITY RANKING, AND RECOVERY RATES Seniority Ranking Recovery Rates Priority of Claims: Not Always “Absolute” LESSON 2: RATING AGENCIES, CREDIT RATINGS, AND THEIR ROLE IN DEBT MARKETS Credit Ratings Issuer vs. Issue Ratings Notching Risks in Relying on Agency Ratings LESSON 3: TRADITIONAL CREDIT ANALYSIS The Four Cs of Credit Analysis: A Useful Framework Capacity Collateral Covenants Character Ratios and Ratio Analysis Issuer Liquidity LESSON 4: CREDIT RISK VERSUS RETURN: YIELDS AND SPREADS LESSON 5: SPECIAL CONSIDERATIONS OF HIGH YIELD, SOVEREIGN AND MUNICIPAL CREDIT ANALYSIS High-Yield Corporate Debt Equity‐like Approach to High‐Yield Analysis Sovereign Debt Municipal Debt Study Session 17: Derivatives Reading 57: Derivative Markets and Instruments LESSON 1: DERIVATIVE MARKETS, FORWARD COMMITMENTS, AND CONTINGENT CLAIMS INTRODUCTION FORWARD COMMITMENTS CONTINGENT CLAIMS LESSON 2: BENEFITS AND CRITICISMS OF DERIVATIVES, AND ARBITRAGE Purposes and Benefits of Derivatives Criticisms and Misuses of Derivatives Reading 58: Basics of Derivative Pricing and Valuation LESSON 1: FUNDAMENTAL CONCEPTS AND PRICE VERSUS VALUE FUNDAMENTAL CONCEPTS OF DERIVATIVE PRICING LESSON 2: FORWARD CONTRACTS FORWARD CONTRACTS LESSON 3: FUTURES CONTRACTS FUTURES CONTRACTS LESSON 4: SWAP CONTRACTS SWAPS LESSON 5: OPTION CONTRACTS PART 1: EUROPEAN OPTION PRICING OPTIONS PUT OPTIONS LESSON 6: OPTION CONTRACTS PART 2: BINOMIAL OPTION PRICING Binomial Valuation of Options The One-Period Binomial Model One-Period Binomial Arbitrage Opportunity Binomial Put Option Pricing LESSON 7: OPTION CONTRACTS PART 3: AMERICAN OPTION PRICING American Option Pricing Reading 59: Risk Management Applications of Option Strategies LESSON 1: OPTION STRATEGIES Call Holder’s Perspective Call Writer’s Perspective Put Holder’s Perspective Put Writer’s Perspective Protective Put Strategy Summary Study Session 18: Alternative Instruments Reading 60: Introduction to Alternative Investments LESSON 1: ALTERNATIVE INVESTMENTS Portfolio Context: Integration of Alternative Investments with Traditional Investments LESSON 2: MAJOR TYPES OF ALTERNATIVE INVESTMENTS PART I: HEDGE FUNDS Hedge Funds Hedge Fund Strategies Hedge Funds and Diversification Benefits Other Considerations Due Diligence for Investing in Hedge Funds LESSON 3: MAJOR TYPES OF ALTERNATIVE INVESTMENTS PART 2: PRIVATE EQUITY, REAL ESTATE, AND COMMODITIES LESSON 4: RISK MANAGEMENT Risk Management Risk Management Issues Risk Issues for Implementation Risk-Return Measures Due Diligence Overview EULA

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