Table of Contents
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
