STUDY SESSION 1 ETHICAL AND he rea"ings in this stu" session !

resent a frame(or6 for PROFESSIONAL STANDARDS ethi$al $on"u$t in the in#estment !rofession b fo$using on he !rin$i!les an" gui"an$e the CFA Institute Co"e of .thi$s en"

WV

Practice Handbook (SOPH) form the basis for the CFA Institute self-regulator !rogram to maintain the highest !rofessional stan"ar"s among in#estment !ra$titioners% &'ui"an$e& in the SOPH a""resses the !ra$ti$al a!!li$ation of the Co"e an" Stan"ar"s% The gui"an$e re#ie(s the !ur!ose an" s$o!e of ea$h stan"ar") !resents re$ommen"e" !ro$e"ures for $om!lian$e) an" !ro#i"es e*am!les of the

stan"ar" in !ra$ti$e% The 'IPS fa$ilitate effi$ient $om!a+ison of in#estment !erforman$e among in#estment managers an" a$ross $oun,r bor"ers b !res$ribing metho"olog an" stan"ar"s that are $onsistent (ith a $lear an" honest !resentation of returns% Ha#ing a global stan"ar" for re!orting in#estment !erforman$e minimi-es the !otential for ambiguous or mislea"ing !resentations% R.ADIN' ASSI'N/.NTS Rea"ing 0 Rea"ing 1 Rea"ing 3 Rea"ing 5 Co"e of .thi$s an" Stan"ar"s of Professional Con"u$t Standards of Practice Handbook, Ninth ."ition 'ui"an$e for Stan"ar"s l-2II Standards of Practice Handbook, Ninth ."ition Intro"u$tion to the 'obal In#estment Performan$e Stan"ar"s ('IPS4) 'lobal In#estment Performan$e Stan"ar"s ('IPS4)

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Stu" Session 0

LEARNING OUTCOMES Reading 1: Code of E !i"# and S anda$d# of P$ofe##iona% Cond&" The $an"i"ate shoul" be able to, a% "es$ribe the stru$ture of the CFA Institute Professional Con"u$t Program an" the !ro$ess for the enfor$ement of the Co"e an" Stan"ar"s: b% state the si* $om!onents of the Co"e of .thi$s an" the se#en Stan"ar"s of Professional Con"u$t: ; e*!lain the ethi$al res!onsibilities re<uire" b the Co"e an" Stan"ar"s) in$lu"ing the multi!le subse$tions of ea$h Stan"ar"%

Reading ': G&idan"e fo$ S anda$d# I(VII

WWW

The $an"i"ate shoul" be able to, a% "emonstrate a thorough 6no(le"ge of the Co"e of .thi$s an" Stan"ar"s of Professional Con"u$t b a!!l ing the Co"e an" Stan"ar"s to situations in#ol#ing issues of !rofessional integrit : b% "istinguish bet(een $on"u$t that $onforms to the Co"e an" Stan"ar"s an" $on"u$t that #iolates the Co"e an" Stan"ar"s: $% re$ommen" !ra$ti$es an" !ro$e"ures "esigne" to !re#ent #iolations of the Co"e of .thi$s an" Stan"ar"s of Professional Con"u$t% Reading ): In $od&" ion o !e G%o*a% In+e# ,en Pe$fo$,an"e S anda$d# -GIPS./ The $an"i"ate shoul" be able to, a% e*!lain (h the 'IPS stan"ar"s (ere $reate") (hat !arties the 'IPS stan"ar"s a!!l to) an" (ho is ser#e" b the stan"ar"s: b% e*!lain the $onstru$tion an" !ur!ose of $om!osites in !erforman$e re!orting: ; e*!lain the re<uirements for #erifi$ation of $om!lian$e (ith 'IPS stan"ar"s%

et

Reading 0: G%o*a% In+e# ,en Pe$fo$,an"e S anda$d# -GIPS./ The $an"i"ate shoul" be able to, a% "es$ribe the 6e $hara$teristi$s of the 'IPS stan"ar"s

an" the fun"amentals of $om!lian$e: b% "es$ribe the s$o!e of the 'IPS stan"ar"s (ith res!e$t to an in#estment firm+s "efinition an" histori$al !erforman$e re$or": ; e*!lain ho( the 'IPS stan"ar"s are im!lemente" in $ountries (ith e*isting stan"ar"s for !erforman$e re!orting an" "es$ribe the a!!ro!riate res!onse (hen the 'IPS stan"ar"s an" lo$al regulations $onfli$t: "% $hara$teri-e the eight ma=or se$tions of the 'IPS stan"ar"s%

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STUDY SESSION ' 1UANTITATIVE his intro"u$tor stu" session !resents the fun"amentals of some of those <uantitati#e te$hni<ues that are essential in almost an t !e of finan$ial anal sis) an" (hi$h (ill be use" throughout the remain"er of the CFA $urri$ulum% session intro"u$es t(o main buil"ing blo$6s of the <uantitati#e METHODS: 2a#i" Con"e3 #

anal>%%% This se:

T :

W 456

The time #alue of mone $on$e!t s one of the main !rin$i!les of finan$ial #aluation% The $al$ulations base" on this !rin$i!le (e%g%) !resent #alue) future #alue) an" internal rate of return) are the basi$ tools use" to su!!ort $or!orate finan$e "e$isions an" estimate the fair #alue of fi*e" in$ome) e<uit ) or an other t !e of se$urit or in#estment% Similarl ) the basi$ $on$e!ts of stalsties an" !robabilit theor $onstitute the essential tools use" in "es$ribing the main statisti$al !ro!erties of a !o!ulation an" un"erstan"ing an" a!!l ing #arious !robabilit $on$e!ts in !ra$ti$e% R.ADIN' ASSI'N/.NTS Rea"ing ? The Time 2alue of /one Quan tita tive Me thods for Investmen t Analysis, Se$on " ."iti on) b Ri$har" A% DeFus$o) CFA) Dennis @% /$Aea#e ) CFA) Beral" .% Pinto) CFA) an" Da#i" .% Run6le) CFA Rea"ing C Dis$ounte" Cash Flo( A!!li$ations Quan tita tive Me thods for Investmen t Analysis, Se$on " ."iti on) b Ri$har" A% DeFus$o) CFA) Dennis @% /$Aea#e ) CFA) Beral" .% Pinto) CFA)

an" Da#i" .% Run6le) CFA Rea"ing D Statisti$al Con$e!ts ai" /ar6et Returns Quan tita tive Me thods for Investmen t Analysis, Se$on " ."iti on) b Ri$har" A% DeFus$o) CFA) Dennis @% /$Aea#e ) CFA) Beral" .% Pinto) CFA) an" Da#i" .% Run6le) CFA Rea"ing E Probabilit Con$e!ts Quan tita tive Me thods for Investmen t Analysis, Se$on " ."iti on) b Ri$har" A% DeFus$o) CFA) Dennis @% /$Aea#e ) CFA) Beral" .% Pinto) CFA) an" Da#i" .% Run6le) CFA (((%$fafnstftute%org7tool6ft89our onlfne !re!aration resour$e

Stu" Session 1

LEARNING OUTCOMES Reading 7: T!e Ti,e Va%&e of Mone8 The $an"i"ate shoul" be able to, a% inter!ret interest rates as re<uire" rate of return) "is$ount rate) or o!!ortunit $ost: b% e*!lain an interest rate as the sum of a real ris6-free rate) e*!e$te" inflation) an" !remiums that $om!ensate in#estors for "istin$t t !es of ris6: ; $al$ulate an" inter!ret the effe$ti#e annual rate) gi#en the state" annual interest rate an" the fre<uen$ of $om!oun"ing: "% sol#e time #alue of mone !roblems (hen $om!oun"ing !erio"s are other than annual: e% $al$ulate an" inter!ret the future #alue (F2) an" !resent #alue (P2) of a single sum of mone ) an or"inar annuit ) an annuit "ue) a !er!etuit (P2 onl )) an" a series of une<ual $ash flo(s: f% "ra( a time line an" sol#e time #alue of mone a!!li$ations (for e*am!le) mortgages an" sa#ings for $ollege tuition or retirement)%

9:;9<=>?o@ ne
H $an"i"ate shoul" be able to, Reai

D: F a% $al$ulate an" inter!ret the net !resent #alue (NP2) an" the internal rate of return (IRR) of an in#estment) $ontrast the NP2 rule to the IRR rule) an" i"entif !roblems asso$iate" (ith the IRR rule:

b% "efine) $al$ulate) an" inter!ret a hol"ing !erio" return (total return): ; $al$ulate) inter!ret) an" "istinguish bet(een the mone (eighte" an" time-(eighte" rates of return of a !ortfolio an" a!!raise the !erforman$e of !ortfolios base" on these measures: "% $al$ulate an" inter!ret the ban6 "is$ount iel") hol"ing !erio" iel") effe$ti#e annual iel") an" mone mar6et iel" for a G%S% Treasur bill: e% $on#ert among hol"ing !erio" iel"s) mone mar6et iel"s) effe$ti#e annual iel"s) an" bon" e<ui#alent iel"s%

Reading A: S a i# i"a% Con"e3 # and Ma$@e Re &$n# The $an"i"ate shoul" be able to, a% "ifferentiate bet(een "es$ri!ti#e statisti$s an" inferential statisti$s) bet(een a !o!ulation an" a sam!le) an" among the t !es of measurement s$ales: b% e*!lain a !arameter) a sam!le statisti$) an" a fre<uen$ "istribution: ; $al$ulate an" inter!ret relati#e fre<uen$ies an" $umulati#e relati#e fre<uen$ies) gi#en a fre<uen$ "istribution: "% "es$ribe the !ro!erties of a "ata set !resente" as a histogram or a fre<uen$ !ol gon: e% "efine) $al$ulate) an" inter!ret measures of $entral ten"en$ ) in$lu"ing the !o!ulation mean) sam!le mean) arithmeti$ mean) (eighte" a#erage or mean (in$lu"ing a !ortfolio return #ie(e" as a (eighte" mean)) geometri$ mean) harmoni$ mean) me"ian) an" mo"e:

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Stu" Session 1

f% "es$ribe) $al$ulate) an" inter!ret <uartiles) <uintiles) "e$iles) an" !er$entiles: g% "efine) $al$ulate) an" inter!ret 0) a range an" a mean absolute "e#iation an" 1) the #arian$e an" stan"ar" "e#iation of a !o!ulation an" of a sam!le: h% $al$ulate an" inter!ret the !ro!ortion of obser#ations falling (ithin a s!e$ifie" number of stan"ar" "e#iations of the mean using Cheb she#+s ine<ualit : i% "efine) $al$ulate) an" inter!ret the $oeffi$ient of #ariation an" the Shar!e ratio: =% "efine an" inter!ret s6e(ness) e*!lain the meaning of a !ositi#el or negati#el s6e(e" return "istribution) an" "es$ribe the relati#e lo$ations of the mean) me"ian) an" mo"e for a nons mmetri$al "istribution: 6% "efine an" inter!ret measures of sam!le s6e(ness an" 6urtosis: I% "is$uss the use of arithmeti$ mean or geometri$ mean (hen "etermining in#estment returns% Reading B: P$o*a*i%i 8 Con"e3 # a% "efine a ran"om #ariable) an out$ome) an e#ent) mutuall e*$lusi#e e#ents) an" e*hausti#e e#ents: C CC11>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>....... %+Df%?4EC4ff444%F44%44%E GH :I% b% e*!lain the t(o "efining !ro!erties of !robabilit an" "istinguish among em!iri$al) sub=e$ti#e) an" a oriori orobabilities, The $an"i"ate shoul" be able to, a% "efine a ran"om #ariable) an out$ome) an e#ent) mutuall e*$lusi#e e#ents) an" em!iri$al) sub=e$ti#e) an" a !riori !robabilities: ; state the !robabilit of an e#ent in terms of o""s for or against the e#ent: "% "istinguish bet(een un$on"itional an" $on"itional !robabilities: e% "efine an" e*!lain the multi!li$ation) a""ition) an" total !robabilit rules: f% $al$ulate an" inter!ret 0) the =oint !robabilit of t(o e#ents) 1) the !robabilit that at least one of t(o e#ents (ill o$$ur) gi#en the !robabilit of ea$h an" the =oint !robabilit of the t(o e#ents) an" 3) a =oint !robabilit of an number of in"e!en"ent e#ents: g% "istinguish bet(een "e!en"ent an" in"e!en"ent e#ents: h% $al$ulate an" inter!ret) using the total !robabilit rule) an

un$on"itional !robabilit : i% e*!lain the use of $on"itional e*!e$tation in in#estment a!!li$ations: =% "iagram an in#estment !roblem using a tree "iagram: 6% $al$ulate an" inter!ret $o#arian$e an" $orrelation: I% $al$ulate an" inter!ret the e*!e$te" #alue) #arian$e) an" stan"ar" "e#iation of a ran"om #ariable an" of returns on a !ortfolio: m% $al$ulate an" inter!ret $o#arian$e gi#en a =oint !robabilit fun$tion: n% $al$ulate an" inter!ret an u!"ate" !robabilit using Ia es+ formula: o% i"entif the most a!!ro!riate metho" to sol#e a !arti$ular $ounting !roblem an" sol#e $ounting !roblems using the fa$torial) $ombination) an" !ermutation notations%

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STUDY SESSION ) 1UANTITATIVE METHODS: A!!li$ation finan$e) his stu" session intro"u$es some of the "is$rete an" $ontinuous for !robabilit "istributions most $ommonl use" #ariables%

Probabilit theor an" $al$ulations are (i"el a!!l e) in the fiel" of in#estment an" !ro=e$t #aluatior e*am!l ion an 8L

1JKL<M

Furthermore) this session tea$hes ho( to estimate "ifferent !arameters (e%g%) mean an" stan"ar" "e#iation) of a !o!ulation if onl a sam!le) rather than the (hole !o!ulation) $an be obser#e"% H !othesis testing is a $losel relate" to!i$ This session !resents the te$hni<ues that $an be a!!lie" to a$$e!t or re=e$t an assume" h !othesis (null h !othesis) about #arious !arameters of a !o!ulation Finall ) ou (ill also learn about the fun"amentals of te$hni$al anal sis% It is im!ortant that anal sts !ro!erl un"erstan" the assum!tions an" limitations (hen a!!l ing these tools as mis-s!e$ifie" mo"els or im!ro!erl use" tools $an result in mislea"ing $on$lusions% R.ADIN' ASSI'N/.NTS Rea"ing J Common Probabilit Distributions Quantitative Methods for Investment Analysis, Se$on" ."ition) b Ri$har" A% DeFus$o) CFA) Dennis @% /$Aea#e ) CFA) Beral" .% Pinto) CFA) an" Da#i" .% Run6le) CFA Rea"ing 0K Sam!ling an" .stimation Quantitative Methods for investment Analysis, Se$on" ."ition) b Ri$har" A% DeFus$o) CFA) Dennis @% /$Aea#e ) CFA) Beral" .% Pinto)

CFA) an" Da#i" .% Run6le) CFA Rea"ing 00 H !othesis Testing Quantitative Methods for Investment Analysis, Se$on" ."ition) b Ri$har" A% DeFus$o) CFA) Dennis @% /$Aea#e ) CFA) Beral" .% Pinto) CFA) an" Da#i" .% Run6le) CFA Rea"ing 01 Te$hni$al Anal sis Investment Analysis and Portfolio Management, .ighth ."itior) b Fran6 M% Reill ) CFA an" Meith N Iro(n) CFA

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Stu" Session 3

LEARNING OUTCOMES Rea"ing J, Co,,on P$o*a*i%i 8 Di# $i*& ion# The $an"i"ate shoul" be able to, a% e*!lain a !robabilit "istribution an" "istinguish bet(een "is$rete an" $ontinuous ran"om #ariables: b% "es$ribe the set of !ossible out$omes of a s!e$ifie" "is$rete ran"om #ariable: ; inter!ret a !robabilit fun$tion) a !robabilit "ensit fun$tion) an" a $umulati#e "istribution fun$tion: "% $al$ulate an" inter!ret !robabilities for a ran"om #ariable) gi#en its $umulati#e "istribution fun$tion: e% "efine a "is$rete uniform ran"om #ariable an" a binomial ran"om #ariable: f% $al$ulate an" inter!ret !robabilities gi#en the "is$rete uniform an" the binomial "istribution fun$tions: g% $onstru$t a binomial tree to "es$ribe sto$6 !ri$e mo#ement: h% "es$ribe the $ontinuous uniform "istribution an" $al$ulate an" inter!ret robabilities) gi#en a $ontinuous uniform !robabilit "istribution: (=iuuauiiiii$s) i#en a IABNAI/GGG,O uiiiiunii P=iuuauiiii GISII IGGIGBII) i% e*!lain the 6e !ro!erties of the normal "istribution) "istinguish bet(een a uni#ariate an" a multi#ariate "istribution) an" e*!lain the role of $orrelation in the multi#ariate normal "istribution the multi#ariate normal "istribution: =% "etermine the !robabilit that a normall "istribute" ran"om #ariable lies insi"e a gi#en $onfi"en$e inter#al: 6% "efine the stan"ar" normal "istribution) e*!lain ho( to stan"ar"i-e a ran"om #ariable) an" $al$ulate an" inter!ret !robabilities using the stan"ar" normal "istribution: I% "efine shortfall ris6) $al$ulate the safet -first ratio) an" sele$t an o!timal !ortfolio using Ro +s safet -first $riterion: m% e*!lain the relationshi! bet(een normal an" lognormal "istributions an" (h the lognormal "istribution is use" to mo"el asset !ri$es: n% "istinguish bet(een "is$retel an" $ontinuousl $om!oun"e" rates of return an" $al$ulate an" inter!ret a $ontinuousl $om!oun"e" rate of return) gi#en a s!e$ifi$ hol"ing !erio" return:
-

o% e*!lain /onte Carlo simulation an" histori$al simulation an" "es$ribe their ma=or a!!li$ations an" limitations% Reading 1N: Sa,3%ing and E# i,a ion The $an"i"ate shoul" be able to, a% "efine sim!le ran"om sam!ling) sam!ling error) an" a sam!ling "istribution) an" inter!ret sam!ling error: b% "istinguish bet(een sim!le ran"om an" stratifie" ran"om sam!ling: ; "istinguish bet(een time-series an" $rossse$tional "ata: "% inter!ret the $entral limit theorem an" "es$ribe its im!ortan$e: e% $al$ulate an" inter!ret the stan"ar" error of the sam!le mean: f% "istinguish bet(een a !oint estimate an" a $onfi"en$e inter#al estimate of a !o!ulation !arameter:

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Stu" Session 3

g% i"entif an" "es$ribe the "esirable !ro!erties of an estimator: h% e*!lain the $onstru$tion of $onfi"en$e inter#als: i% "es$ribe the !ro!erties of Stu"ent+s t-"istribution an" $al$ulate an" inter!ret its "egrees of free"om: =% $al$ulate an" inter!ret a $onfi"en$e inter#al for a !o!ulation mean) gi#en a normal "istribution (ith 0) a 6no(n !o!ulation #arian$e) 1) an un6no(n !o!ulation #arian$e) or 3) an un6no(n #arian$e an" a large sam!le si-e: 6% "is$uss the issues regar"ing sele$tion of the a!!ro!riate sam!le si-e) "ata-mining bias) sam!le sele$tion bias) sur#i#orshi! bias) loo6-ahea" bias) an" time-!erio" bias% Reading 11: H83o !e#i# Te# ing The $an"i"ate shoul" be able to, a% "efine a h !othesis) "es$ribe the ste!s of h !othesis testing) inter!ret an" "is$uss the $hoi$e of the null h !othesis an" alternati#e h !othesis) an" "istinguish bet(een one-taile" an" t(o-taile" tests of h !otheses: b% "efine an" inter!ret a test statisti$) a T !e I an" a T !e II error) an" a signifi$an$e le#el) an" e*!lain ho( signifi$an$e le#els are use" in h !othesis testing: ; "efine an" inter!ret a "e$ision rule an" the !o(er of a test) an" e*!lain the relation bet(een $onfi"en$e inter#als an" h !othesis tests: "% "istinguish bet(een a statisti$al result an" an e$onomi$all meaningful result: e% e*!lain an" inter!ret the !-#alue as it relates to h !othesis testing: f% i"entif the a!!ro!riate test statisti$ an" inter!ret the results for a h !othesis test $on$erning the !o!ulation mean of both large an" small sam!les (hen the !o!ulation is normall or a!!ro*imatel "istribute" an" the #arian$e is 0) 6no(n or 1) un6no(n: g% i"entif the a!!ro!riate test statisti$ an" inter!ret the results for a h !othesis test $on$erning the e<ualit of the !o!ulation means of t(o at least a!!ro*imatel normall "istribute" !o!ulations) base" on in"e!en"ent ran"om sam!les (ith 0) e<ual or 1) une<ual assume" #arian$es: h% i"entif the a!!ro!riate test statisti$ an" inter!ret the results for a h !othesis test $on$erning the mean "ifferen$e of t(o normall "istribute" !o!ulations (!aire" $om!arisons test):

i% i"entif the a!!ro!riate test statisti$ an" inter!ret the results for a h !othesis test $on$erning 0) the #arian$e of a normall "istribute" !o!ulation) an" 1) the e<ualit of the #arian$es of t(o normall "istribute" !o!ulations) base" on t(o in"e!en"ent ran"om sam!les: =% "istinguish bet(een !arametri$ an" non!arametri$ tests an" "es$ribe the situations in (hi$h the use of non!arametri$ tests ma be a!!ro!riate% Reading 1': Te"!ni"a% Ana%8#i# The $an"i"ate shoul" be able to, a% e*!lain the un"erl ing assum!tions of te$hni$al anal sis: b% "is$uss the a"#antages of an" $hallenges to te$hni$al anal sis: ; list an" "es$ribe e*am!les of ea$h ma=or $ategor of te$hni$al tra"ing rules an" in"i$ators%

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e<uilibrium tii$i i, bet(een "eman" an" su!!l is elasti$it ) (hi$h measures the

0 IDI
'
STUDY SESSION 0 ECONOMICS: /i$roe$onomi$ Anal sis

WO

his stu" session fo$uses on mi$roe$onomi$ $on$e!ts an" ho( firms are affe$te" b these $on$e!ts% One of the main $on$e!ts relate" to the h meas 3!t is e0 $hanges on the e<uilibrium !ri$e le#el A se$on" 6e $on$e!t is effi$ien$ ) (hi a measure of the firm+s &o!timal& out!ut gi#en its $ost an" re#enue fun$tions Gn"erstan"ing these $on$e!ts enables anal sts to "ifferentiate among #ario $om!anies on an in"i#i"ual le#el an" to "etermine their attra$ti#eness for an in#estor% R.ADIN' ASSI'N/.NTS Rea"ing 03 .lasti$it Economics, .ighth ."ition) b /i$hael Par6in .ffi$ien$ an" .<uit Economics, .ighth ."ition) b /i$hael Par6in

Rea"ing 05

Rea"ing 0?

/ar6ets in A$tion Economics, .ighth ."ition) b /i$hael Par6in Rea"ing 0C Organi-ing Pro"u$tion Economics, .ighth ."ition) b /i$hael Par6in

R e a " i n g 0 D O u t ! u t a n "

ate shoul" be able to, a% $al$ulate an" inter!ret the elasti$ities of "eman" (!ri$e elasti$it ) $ross elasti$it ) an" in$ome elasti$it ) an" the elasti$it of su!!l an" "is$uss the fa$tors that influen$e ea$h measure: b% $al$ulate elasti$ities on a straight-line "eman" $ur#e) "ifferentiate among elasti$) inelasti$) an" unit elasti$ "eman") an" "es$ribe the relation bet(een !ri$e elasti$it of "eman" an" total re#en=e%

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C o s t s Economics, .ighth ."ition) b /i$hael Par6in A .ARNIN' OGTCO/. S R ea "i ng 03 , .l as ti$ it Th e $a n" i"

Stu" Session 5

Reading 10: Effi"ien"8 and EP&i 8 The $an"i"ate shoul" be able to, a% e*!lain the #arious means of mar6ets to allo$ate resour$es) "es$ribe marginal benefit an" marginal $ost) an" "emonstrate (h the effi$ient <uantit o$$urs (hen marginal benefit e<uals marginal $ost: b% "istinguish bet(een the !ri$e an" the #alue of a !ro"u$t an" e*!lain the "eman" $ur#e an" $onsumer sur!lus: ; "istinguish bet(een the $ost an" the !ri$e of a !ro"u$t an" e*!lain the su!!l $ur#e an" !ro"u$er sur!lus: "% "is$uss the relationshi! bet(een $onsumer sur!lus) !ro"u$er sur!lus) an" e<uilibrium: e% e*!lain 0) ho( effi$ient mar6ets ensure o!timal resour$e utili-ation an" 1) the obsta$les to effi$ien$ an" the resulting un"er!ro"u$tion or o#er!ro"u$tion) in$lu"ing the $on$e!t of "ea"(eight loss: f% e*!lain the t(o grou!s of i"eas about the fairness !rin$i!le (utilitarianism an" the s mmetr !rin$i!le) an" "is$uss the relation bet(een fairness an" effi$ien$ % Reading 17: Ma$@e # in A" ion

II

The $an"i"ate shoul" be a% e*!lain mar6et e<uilibrium) "istinguish bet(een long-term an" short-term effe$ts of outsi"e sho$6s) an" "es$ribe the effe$ts of rent $eilings on the e*isten$e of bla$6 mar6ets in the housing se$tor an" on the mar6et+s effi$ien$ : b% "es$ribe labor mar6et e<uilibrium an" e*!lain the effe$ts an" ineffi$ien$ies of a minimum (age abo#e the e<uilibrium (age: ; e*!lain the im!a$t of ta*es on su!!l ) "eman") an" mar6et e<uilibrium) an" "es$ribe ta* in$i"en$e an" its relation to "eman" an" su!!l elasti$it : "% "is$uss the im!a$t of subsi"ies) <uotas) an" mar6ets for illegal goo"s on "eman") su!!l ) an" mar6et e<uilibrium% Reading 1Q: O$ganiRing P$od&" ion The $an"i"ate shoul" be able to, a% e*!lain the t !es of o!!ortunit $ost an" their relation to e$onomi$ !rofit) an"

@>ne

$al$ulate e$onomi$ !rofit: b% "is$uss a $om!an +s $onstraints an" their im!a$t on a$hie#abilit of ma*imum !rofit: ; "ifferentiate bet(een te$hnologi$al effi$ien$ an" e$onomi$ effi$ien$ an" $al$ulate e$onomi$ effi$ien$ of #arious $om!anies un"er "ifferent s$enarios: "% e*!lain $omman" s stems an" in$enti#e s stems to organi-e !ro"u$tion) the !rin$i!al-agent !roblem) an" measures a firm uses to re"u$e the !rin$i!al-agent !roblem: e% "es$ribe the "ifferent t !es of business organi-ation an" the a"#antages an" "isa"#antages of ea$h: f% $al$ulate an" inter!ret the four-firm $on$entration ratio an" the Herfin"ahlHirs$hman In"e* an" "is$uss the limitations of $on$entration measures: g% e*!lain (h $om!anies are often more effi$ient than mar6ets in $oor"inating e$onomi$ a$ti#it %

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Stu" Session 5

Reading 1A: O& 3& and Co# # The $an"i"ate shoul" be able to, a% "ifferentiate bet(een short-run an" long-run "e$ision time frames: b% "es$ribe an" e*!lain the relations among total !ro"u$t of labor) marginal !ro"u$t of labor) an" a#erage !ro"u$t of labor) an" "es$ribe in$reasing an" "e$reasing marginal returns: ; "istinguish among total $ost (in$lu"ing both fi*e" $ost an" #ariable $ost)) marginal $ost) an" a#erage $ost) an" e*!lain the relations among the #arious $ost $ur#es: "% e*!lain the $om!an +s !ro"u$tion fun$tion) its !ro!erties of "iminishing returns an" "iminishing marginal !ro"u$t of $a!ital) the relation bet(een short-run an" long-run $osts) an" ho( e$onomies an" "ise$onomies of s$ale affe$t long-run $osts%

SSS> Vi+id 2oo@9 ne

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STUDY SESSION 7 ECONOMICS: Ma$@e S $&" &$e and Ma"$oe"ono,i" Ana%8#i# mar6et his stu" session first $om!ares an" $ontrasts the "ifferent mar6et stru$tures in (hi$h $om!anies o!erate% The mar6et en#ironment influen$es the !ri$e a $om!an $an "eman" for its goo"s or ser#i$es% The most im!ortant of these forms are mono!ol an" !erfe$t $om!etition) although mono!olisti$

tition an" ol go!ol

IU

The stu" session then intro"u$es the ma$roe$onomi$ $on$e!ts that ha#e an effe$t on all $om!anies in the same en#ironment be it a $ountr ) a grou! of relate" $ountries) or a !arti$ular in"ustr % The stu" session $on$lu"es b "es$ribing ho( an e$onom +s aggregate su!!l an" aggregate "eman" are "etermine"% R.ADIN' ASSI'N/.NTS Rea"ing 0E Perfe$t Com!etition Economics .ighth ."ition) b /i$hael Par6in Rea"ing 0J /ono!ol Economics .ighth ."ition) b /i$hael Par6in Rea"ing 1K Rea"ing 10 Rea"ing 11 /ono!olisti$ Com!etition an" Oligo!ol Economics .ighth ."ition) b /i$hael Par6in /ar6ets for Fa$tors of Pro"u$tion Economics .ighth ."ition) b /i$hael Par6in

DUU

/onitoring Bobs an" the Pri$e Ae#el Economics .ighth ."ition) b /i$hael Par6in Rea"ing 13 Aggregate Su!!l an" Aggregate Deman" Economics .ighth ."ition) b /i$hael Par6in

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Stu" Session ?

LEARNING OUTCOMES Reading 1B: Pe$fe" Co,3e i ion The $an"i"ate shoul" be able to, a% "es$ribe the $hara$teristi$s of !erfe$t $om!etition) e*!lain (h $om!anies in a !erfe$tl $om!etiti#e mar6et are !ri$e ta6ers) an" "ifferentiate bet(een mar6et an" $om!an "eman" $ur#es: b% "etermine the !rofit ma*imi-ing (loss minimi-ing) out!ut for a !erfe$tl $om!etiti#e $om!an an" e*!lain marginal $ost) marginal re#enue) an" e$onomi$ !rofit an" loss: ; "es$ribe a !erfe$tl $om!etiti#e $om!an +s short-run su!!l $ur#e an" e*!lain the im!a$t of $hanges in "eman") entr an" e*it of $om!anies) an" $hanges in !lant si-e on the long-run e<uilibrium: "% "is$uss ho( a !ermanent $hange in "eman" or $hanges in te$hnolog affe$t !ri$e) out!ut) an" e$onomi$ !rofit% Reading 1T: Mono3o%8

>ne WWW

The $an"i"ate shoul" be able to, a% "es$ribe the $hara$teristi$s of a mono!ol ) in$lu"ing fa$tors that allo( a mono!ol to arise an" mono!ol !ri$e-setting strategies: b% e*!lain the relation bet(een !ri$e) marginal re#enue) an" elasti$it for a mono!ol an" "etermine a mono!ol +s !rofitma*imi-ing !ri$e an" <uantit : ; e*!lain !ri$e "is$rimination an" (h !erfe$t !ri$e "is$rimination is effi$ient: "% e*!lain ho( $onsumer an" !ro"u$er sur!lus are re"istribute" in a mono!ol ) in$lu"ing the o$$urren$e of "ea"(eight loss an" rent see6ing: e% e*!lain the !otential gains from mono!ol an" the regulation of a natural mono!ol % Reading 'N: Mono3o%i# i" Co,3e i ion and O%igo3o%8 The $an"i"ate shoul" be able to, a% "es$ribe the $hara$teristi$s of mono!olisti$ $om!etition an" an oligo!ol : b% "etermine the !rofit-ma*imi-ing (loss-minimi-ing) out!ut un"er mono!olisti$ $om!etition) e*!lain (h long-run e$onomi$ !rofit un"er mono!olisti$

$om!etition is -ero) an" "etermine if mono!olisti$ $om!etition is effi$ient: ; e*!lain the im!ortan$e of inno#ation) !ro"u$t "e#elo!ment) a"#ertising) an" bran"ing un"er mono!olisti$ $om!etition: "% e*!lain the 6in6e" "eman" $ur#e mo"el an" the "ominant firm mo"el an" "etermine the !rofit-ma*imi-ing (loss-minimi-ing) out!ut un"er ea$h mo"el: e% "es$ribe oligo!ol games in$lu"ing the Prisoners+ Dilemma% Reading '1: Ma$@e # fo$ Fa" o$# of P$od&" ion The $an"i"ate shoul" be able to, a% e*!lain (h "eman" for the fa$tors of !ro"u$tion is $alle" "eri#e" "eman") "ifferentiate bet(een marginal re#enue an" marginal re#enue !ro"u$t (/RP)) an" "es$ribe ho( the /RP "etermines the "eman" for labor an" the (age rate:

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Stu" Session ?

b% "es$ribe the fa$tors that $ause $hanges in the "eman" for labor an" the fa$tors that "etermine the elasti$it of the "eman" for labor: ; "es$ribe the fa$tors "etermining the su!!l of labor) in$lu"ing the substitution an" in$ome effe$ts) an" "is$uss the fa$tors relate" to $hanges in the su!!l of labor) in$lu"ing $a!ital a$$umulation: "% "es$ribe the effe$ts on (ages of labor unions an" of a mono!son an" e*!lain the !ossible $onse<uen$es for a mar6et that offers an effi$ient (age: e% "ifferentiate bet(een !h si$al $a!ital an" finan$ial $a!ital an" e*!lain the relation bet(een the "eman" for !h si$al $a!ital an" the "eman" for finan$ial $a!ital: f% e*!lain the fa$tors that influen$e the "eman" an" su!!l of $a!ital: g% "ifferentiate bet(een rene(able an" nonrene(able natural resour$es an" "es$ribe the su!!l $ur#e for ea$h: h% "ifferentiate bet(een e$onomi$ rent an" o!!ortunit $osts% Reading '': Moni o$ing Io*# and !e P$i"e Le+e% The $an"i"ate shoul" be able to, a% "efine an unem!lo e" !erson an" inter!ret the main labor mar6et in"i$ators: b% "efine annrenate hours an" real (ane rates an" e*nlain their relation to nross b% "efine aggregate hours an" real (age rates an" e*!lain their relation to gross "omesti$ !ro"u$t ('DP): ; e*!lain the t !es of unem!lo ment) full em!lo ment) the natural rate of unem!lo ment) an" the relation bet(een unem!lo ment an" real 'DP: "% e*!lain an" $al$ulate the $onsumer !ri$e in"e* (CPI) an" the inflation rate) "es$ribe the relation bet(een the CPI an" the inflation rate) an" e*!lain the main sour$es of CPI bias% Reading '): Agg$ega e S&33%8 and Agg$ega e De,and The $an"i"ate shoul" be able to, a% e*!lain the fa$tors that influen$e real 'DP an" long-run an" short-run aggregate su!!l ) e*!lain mo#ement along the long-run an" short-run aggregate su!!l $ur#es (AAS an" SAS)) an" "is$uss the reasons for $hanges in !otential 'DP an" aggregate su!!l :

b% e*!lain the $om!onents of an" the fa$tors that affe$t real 'DP "eman") "es$ribe the aggregate "eman" $ur#e an" (h it slo!es "o(n(ar") an" e*!lain the fa$tors that $an $hange aggregate "eman": ; "ifferentiate bet(een short-run an" long-run ma$roe$onomi$ e<uilibrium an" e*!lain ho( e$onomi$ gro(th) inflation) an" $hanges in aggregate "eman" an" su!!l influen$e the ma$roe$onomi$ e<uilibrium: "% $om!are an" $ontrast the $lassi$al) Me nesian) an" monetarist s$hools of ma$roe$onomi$s%

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0 IDI
'

his stu" session fo$uses on the monetar se$tor of an e$onom % It e*amines the fun$tions of mone an" ho( i, is $reate") highlighting the s!e$ial role of the $entral ban6 (ithin an e$onom % Su!!l an" "eman" for resour$es) su$h as labor an" $a!ital) an" goo"s are strongl interrelate"% This stu" session "es$ribes $ir$umstan$es (hen this relationshi! ma lea" to inflation or unem!lo ment ar" ho( these $on$e!ts relate to the business $ $le% Finall ) the goals an" im!li$ations

STUDY SESSION U ECONOMICS: /onetar an" Fis$al .$onomi$s

W%

R.ADIN' ASSI'N/.NTS Rea"ing 15 /one ) the Pri$e Ae#el) an" Inflation Economics, .ighth ."ition) b /i$hael Par6in Rea"ing 1? G%S% Inflati on) Gnem !lo m ent) an" Iusin ess C $le s Econ omic s, .ight h ."itio n) b /i$ha el Par6i

n R e a " i n g 1 C F i s $ a l P o l i $

b /i$hael Par6in Rea"ing 1D /onetar Poli$ Economics, .ighth ."ition) b /i$hael Par6in Rea"ing 1E An O#er#ie( of Central Ian6s intern ation al Econ omic Indic ators and entr al !ank s, b Anne Dolga nos Pi$6e r

c o n o m A.ARNIN' i OGTCO/.S c Rea"i s ng 15, , /one ) the . Pri$e i Ae#el) g an" h Inflati t on h The $an"i" . ate " shoul" i be t able i to, o n a% e*!lain the fun$tions ) of mone :

b% " es $ri b e th e $o m ! o n e nt s of th e / 0 a n " / 1 m e as ur es of m o n e a n " "i s$ us s ( h $h e$ 6s a n " $r e "it $a r" s ar e n ot

$ounte" as mone :

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Stu" Session C

$% "es$ribe the e$onomi$ fun$tions of an" "ifferentiate among the #arious "e!ositor institutions an" e*!lain the im!a$t of finan$ial regulation) "eregulation) an" inno#ation: "% e*!lain the goals of the G%S% Fe"eral Reser#e (Fe") in $on"u$ting monetar !oli$ an" ho( the Fe" uses its !oli$ tools to $ontrol the <uantit of mone ) an" "es$ribe the assets an" liabilities on the Fe"+s balan$e sheet: e% "is$uss the $reation of mone ) in$lu"ing the role !la e" b e*$ess reser#es) an" $al$ulate the amount of loans a ban6 $an generate) gi#en ne( "e!osits: f% "es$ribe the monetar base an" e*!lain the relation among the monetar base) the mone multi!lier) an" the <uantit of mone : g% e*!lain the fa$tors that influen$e the "eman" for mone an" "es$ribe the "eman" for mone $ur#e) in$lu"ing the effe$ts of $hanges in real 'DP an" finan$ial inno#ation: h% e*!lain interest rate "etermination an" the short-run an" long-run effe$ts of mone on real 'DP: i% "is$uss the <uantit theor of mone an" its relation to aggregate su!!l an" =regate "eman" aggregate "eman"%% QQQ

ne

ading '7: U>S> Inf%a ion9 Une,3%o8,en 9 and 2&#ine## C8"%e#

e $an"i"ate shoul" be able to,

a% "ifferentiate bet(een inflation an" the !ri$e le#el: b% "es$ribe an" "istinguish among the fa$tors resulting in "eman"-!ull an" $ost!ush inflation an" "es$ribe the e#olution of "eman"-!ull an" $ost-!ush inflationar !ro$esses:

; e*!lain the $osts of anti$i!ate" inflation: "% e*!lain the relation among inflation) nominal interest rates) an" the "eman" an" su!!l of mone : e% e*!lain the im!a$t of inflation on unem!lo ment an" "es$ribe the short-run an" long-run Philli!s $ur#e) in$lu"ing the effe$t of $hanges in the natural rate of unem!lo ment: f% e*!lain ho( e$onomi$ gro(th) inflation) an" unem!lo ment affe$t the business $ $le:

g% "es$ribe mainstream business $ $le theor an" real business $ $le (RIC) theor an" "istinguish bet(een them) in$lu"ing the role of !ro"u$ti#it $hanges% Reading 'Q: Fi#"a% Po%i"8 The $an"i"ate shoul" be able to, a% e*!lain su!!l si"e effe$ts on em!lo ment) !otential 'DP) an" aggregate su!!l ) in$lu"ing the in$ome ta* an" ta*es on e*!en"iture) an" "es$ribe the Aaffer $ur#e an" its relation to su!!l si"e e$onomi$s: b% "is$uss the sour$es of in#estment finan$e an" the influen$e of fis$al !oli$ on $a!ital mar6ets) in$lu"ing the $ro("ing-out effe$t: ; "is$uss the generational effe$ts of fis$al !oli$ ) in$lu"ing generational a$$ounting an" generational imbalan$e:

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Stu" Session C

"% "is$uss the use of fis$al !oli$ to stabili-e the e$onom ) in$lu"ing the effe$ts of the go#ernment e*!en"iture multi!lier) the ta* multi!lier) an" the balan$e" bu"get multi!lier: e% e*!lain the limitations of "is$retionar fis$al !oli$ an" "ifferentiate bet(een "is$retionar fis$al !oli$ an" automati$ stabili-ers% Reading 'A: Mone a$8 Po%i"8 The $an"i"ate shoul" be able to, a% "is$uss the goals of G%S% monetar !oli$ an" the Fe"+s means for a$hie#ing the goals) in$lu"ing ho( the Fe" o!erationali-es those goals: b% "es$ribe ho( the Fe" $on"u$ts monetar !oli$ an" e*!lain the Fe"+s "e$isionma6ing strateg ) in$lu"ing an instrument rule) a targeting rule) o!en-mar6et o!erations) an" the mar6et for reser#es: ; "is$uss monetar !oli$ +s transmission me$hanism ($hain of e#ents) bet(een $hanging the fe"eral fun"s rate an" a$hie#ing the ultimate monetar !oli$ goal (hen fighting either inflation or re$ession) an" e*!lain loose lin6s an" time lags in the a"=ustment !ro$ess:

S +i 6ML6MC6 ei

"% "es$ribe alternati#e monetar !oli$ strategies an" e*!lain (h the ha#e been

3 Vi n

Reading 'B: An O+e$+ieS of Cen $a% 2an@# The $an"i"ate shoul" be able to, a% i"entif the fun$tions of a $entral ban6: b% "is$uss monetar !oli$ an" the tools utili-e" b $entral ban6s to $arr out monetar !oli$ %

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STUDY SESSION A FINANCIAL REPORTING he rea"ings in this stu" session "is$uss the general !rin$i!les of thefinan$ia re!orting s stem) un"ers$oring AND ANALYSIS: An Intro"u$tion

re!orts in in#estment " The first rea"in ng intro"u$es the range of information that an anal st ma use in anal -ing the finan$ial !erforman$e of a $om!an ) in$lu"ing the !rin$i!al finan$ial statements (the in$ome statement) balan$e sheet) statement of $ash flo(s) an" statement of $hanges in o(ners+ e<uit )) notes to those statements) an" management+s "is$ussion an" anal sis of results% A general frame(or6 for a""ressing most finan$ial statement anal sis tas6s is also !resente"% A $om!an +s finan$ial statements are the en"-!ro"u$ts of a !ro$ess for re$or"ing the business transa$tions of the $om!an % The se$on" rea"ing illustrates this !ro$ess) intro"u$ing su$h basi$ $on$e!ts as the a$$ounting e<uation an" a$$ounting a$$ruals% The !resentation of finan$ial information to the !ubli$ b a $om!an must $onform to a!!li$able finan$ial re!orting stan"ar"s base" on fa$tors su$h as the =uris"i$tion in (hi$h the information is release"% The final rea"ing in this stu" e*!lores the role of finan$ial re!orting stan"ar"-setting bo"ies (orl"(i"e an" the International Finan$ial Re!orting Stan$ar"s frame(or6 !romulgate" b one 6e bo" ) the International A$$ounting Stan"ar"s Ioar"% The mo#ement to(ar"s (orl"(i"e $on#ergen$e of finan$ial re!orting stan"ar"s is also intro"u$e"%

Ne( rulings an"7or !ronoun$ements issue" after the !ubli$ation of the rea"ings in Stu" Sessions D through 0K in finan$ial statement a nal si s m a $ause some of the information in these rea"ings to be$ome "ate"% Can"i"ates are e*!e$te" to be familiar (ith the o#erall anal ti$al frame(or6 $ontaine" in the stu" session rea"ings) as (ell as the im!li$ations of alternati#e a$$ounting m etho"s for f i nan$i al anal sis an" #aluation) as !ro#i"e" in the assigne" rea"ings% For the !ur!ose of Ae#el I <uestions on finan$ial statement anal sis) (hen a ratio is "efine" an" $al$ulate" "ifferentl in #arious te*ts) $an"i"ates shoul" use the "efinitions gi#en in the CFA Institute $o! righte" rea"ings b Robinson) et al% 2ariations in ratio "efinitions are !art of the nature of !ra$ti$al finan$ial anal sis% ( ( ( % $ f a f n s t f t u t

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Stu" Session D READING ASSIGNMENTS Reading 'T Finan$ial Statement Anal sis, An Intro"u$tion International "inancial Statement Analysis, b Thomas R% Robinson) CFA) Ban Hen"ri6 #an 'reuning) CFA) R% .laine Henr ) CFA) an" /i$hael A% Iroihahn) CFA Reading )N Finan$ial Re!orting /e$hani$s International "inancial Statement Analysis, b Thomas R% Robinson) CFA) Ban Hen"ri6 #an 'reuning) CFA) R% .laine Henr ) CFA) an" /i$hael A% Iroihahn) CFA Reading )1 Finan$ial Re!orting Stan"ar"s International "inancial Statement Analysis, b Thomas R% Robinson) CFA) Ban Hen"ri6 #an 'reuning) CFA) R% .laine Henr ) CFA an" /i$hael A% Iroihahn% CFA LEARNING OUTCOMES )f finan$ial re!orting an" finan$ial Reading 'T: Finan"ia% S a e,en Ana%8#i#: An %n $od&" iW The $an"i"ate shoul" be able to,

WWW

a% "is$uss the roles of

b% "is$uss the role of 6e finan$ial statements (in$ome statement) balan$e sheet) statement of $ash flo(s) an" statement of $hanges in o(ners+ e<uit ) in e#aluating a $om!an +s !erforman$e an" finan$ial !osition: ; "is$uss the im!ortan$e of finan$ial statement notes an" su!!lementar information) in$lu"ing "is$losures of a$$ounting metho"s) estimates) an" assum!tions) an" management+s "is$ussion an" anal sis: "% "is$uss the ob=e$ti#e of au"its of finan$ial statements) the t !es of au"it re!orts) an" the im!ortan$e of effe$ti#e internal $ontrols: e% i"entif an" e*!lain information sour$es other than annual finan$ial statements an" su!!lementar information that anal sts use in finan$ial statement anal sis: f% "es$ribe the ste!s in the finan$ial statement anal sis frame(or6% Reading )N: Finan"ia% Re3o$ ing Me"!ani"# The $an"i"ate shoul" be able to, a% e*!lain the relationshi! of finan$ial statement elements an" a$$ounts) an"

"> ne

$lassif a$$ounts into the finan$ial statement elements: b% e*!lain the a$$ounting e<uation in its basi$ an" e*!an"e" forms: ; e*!lain the !ro$ess of re$or"ing business transa$tions using an a$$ounting s stem base" on the a$$ounting e<uations: "% e*!lain the nee" for a$$ruals an" other a"=ustments in !re!aring finan$ial statements: e% e*!lain the relationshi!s among the in$ome statement) balan$e sheet) statement of $ash flo(s) an" statement of o(ners+ e<uit : f% "es$ribe the flo( of information in an a$$ounting s stem: g% e*!lain the use of the results of the a$$ounting !ro$ess in se$urit anal sis%

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Stu" Session D

Reading )1: Finan"ia% Re3o$ ing S anda$d# The $an"i"ate shoul" be able to, a% e*!lain the ob=e$ti#e of finan$ial statements an" the im!ortan$e of re!orting stan"ar"s in se$urit anal sis an" #aluation: b% e*!lain the role of stan"ar"-setting bo"ies) su$h as the International A$$ounting Stan"ar"s Ioar" an" the G%S% Finan$ial A$$ounting Stan"ar"s Ioar") an" regulator authorities su$h as the International Organi-ation of Se$urities Commissions) the G%M% Finan$ial Ser#i$es Authorit ) an" the G%S% Se$urities an" .*$hange Commission in establishing an" enfor$ing finan$ial re!orting stan"ar"s: ; "is$uss the ongoing barriers to "e#elo!ing one uni#ersall a$$e!te" set of finan$ial re!orting stan"ar"s: "% "es$ribe the International Finan$ial Re!orting Stan"ar"s (IFRS) frame(or6) in$lu"ing the <ualitati#e $hara$teristi$s of finan$ial statements) the re<uire" re!orting elements) an" the $onstraints an" assum!tions in !re!aring finan$ial statements:

D@>ne

e% e*!lain the general re<uirements for finan$ial statements: f% $om!are an" $ontrast 6e $on$e!ts of finan$ial re!orting stan"ar"s un"er IFRS an" alternati#e re!orting s stems) an" "is$uss the im!li$ations for finan$ial anal sis of "iffering finan$ial re!orting s stems: g% i"entif the $hara$teristi$s of a $oherent finan$ial re!orting frame(or6 an" barriers to $reating a $oherent finan$ial re!orting net(or6: h% "is$uss the im!ortan$e of monitoring "e#elo!ments in finan$ial re!orting stan"ar"s an" of e#aluating $om!an "is$losures of signifi$ant a$$ounting !oli$ies%

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STGD9 S.SSION E FINANCIAL REPORTING AND ANALYSIS: The In$ome Statement) Ialan$e Sheet) an" Cash Flo( Statement

a$h rea"ing in this stu" session fo$uses on one of the three ma=or finan$ial statements, the balan$e sheet the in$ome statement an" the statement of $ash flo(s% For ea$h fin an" a il sta& tement) the $ha!ter "etails its !ur!ose) $onstru$tion) !ertinent ratios) an" $ommon-si-e anal sis% Gn"erstan"ing these $on$e!ts allo(s a finan$ial anal st to e#aluate tren"s in !erforman$e for se#era manR t"s a i measurement !erio"s an" to $om!arethe !erforman$e of "ifferent $om!anies "uring the same !erio"(s)% A""itional anal st tools) su$h as the earnings !er share $al$ulation) are also "es$ribe"%

WO

R.ADIN' ASSI'N/.NTS Rea"ing 31 Gn"erstan"ing the In$ome Statement International "inancial Statement Analysis, b Thomas R% Robinson) CFA) Ban Hen"ri6 #an 'reuning) CFA) R% .laine Henr ) N FA) an" /i$hael A% Iroihahn) CFA Rea"ing 33 Gn"erstan"ing the Ialan$e Sheet International "inancial Statement Analysis, b Thomas R% Robinson) CFA) Ban Hen"ri6 #an 'reuning) CFA) R% .laine Henr ) CFA) an" /i$hael A% Iroihahn) CFA Rea"ing 35 Gn"erstan"ing the Cash Flo( Statement International "inancial Statement Analysis, b Thomas R% Robinson) CFA) Ban Hen"ri6 #an 'reuning) CFA) R% .laine Henr ) CFA) an" /i$hael A% Iroihahn) CFA Rea"ing 3? Finan$ial Anal sis Te$ini<ues International "inancial Statement Analysis, b Thomas R% Robinson) CFA) Ban Hen"ri6 #an 'reuning) CFA) R% .laine Henr ) CFA) an" /i$hael A% Iroihahn) CFA

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Stu" Session E

LEARNING OUTCOMES

Reading )': Unde$# anding !e In"o,e S a e,en The $an"i"ate shoul" be able to, a% "es$ribe the $om!onents of the in$ome statement) an" $onstru$t an in$ome statement using the alternati#e !resentation formats of that statement: b% e*!lain the general !rin$i!les of re#enue re$ognition an" a$$rual a$$ounting) "emonstrate s!e$ifi$ re#enue re$ognition a!!li$ations (in$lu"ing a$$ounting for long-term $ontra$ts) installment sales) barter transa$tions) an" gross an" net re!orting of re#enue)) an" "is$uss the im!li$ations of re#enue re$ognition !rin$i!les for finan$ial anal sis: ; "is$uss the general !rin$i!les of e*!ense re$ognition) su$h as the mat$hing !rin$i!le) s!e$ifi$ e*!ense re$ognition a!!li$ations (in$lu"ing "e!re$iation of longterm assets an" in#entor metho"s)) an" the im!li$ations of e*!ense re$ognition !rin$i!les for finan$ial anal sis: "% "emonstrate the a!!ro!riate metho" of "e!re$iating long-term assets) a$$ounting for in#entor ) or amorti-ing intangibles) base" on fa$ts that might influen$e the "e$ision: e% =ting an" nono!erating $om!onents of the in$om "istinguish bet(e statement: f% "is$uss the finan$ial re!orting treatment an" anal sis of nonre$urring items (in$lu"ing "is$ontinue" o!erations) e*traor"inar items) an" unusual or infre<uent items) an" $hanges in a$$ounting stan"ar"s:

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g% "es$ribe the $om!onents of earnings !er share an" $al$ulate a $om!an +s earnings !er share (both basi$ an" "ilute" earnings !er share) for both a sim!le an" $om!le* $a!ital

stru$ture: h% "ifferentiate bet(een "iluti#e an" anti"iluti#e se$urities) an" "is$uss the im!li$ations of ea$h for the earnings !er share $al$ulation: i% "es$ribe an" $al$ulate $om!rehensi#e in$ome: =% state the a$$ounting $lassifi$ation for items that are e*$lu"e" from the in$ome statement but affe$t o(ners+ e<uit ) an" list the ma=or t !es of items re$ei#ing that treatment% Reading )): Unde$# anding !e 2a%an"e S!ee The $an"i"ate shoul" be able to, a% illustrate an" inter!ret the $om!onents of the balan$e sheet an" "is$uss the uses of the balan$e sheet in finan$ial anal sis: b% "es$ribe the #arious formats of balan$e sheet !resentation: ; e*!lain ho( assets an" liabilities arise from the a$$rual !ro$ess: "% $om!are an" $ontrast $urrent an" non$urrent assets an" liabilities: e% e*!lain the measurement bases (e%g%) histori$al $ost an" fair #alue) of assets an" liabilities) in$lu"ing $urrent assets) $urrent liabilities) tangible assets) an" intangible assets: f% "emonstrate the a!!ro!riate $lassifi$ations an" relate" a$$ounting treatments for mar6etable an" nonmar6etable finan$ial instruments hel" as assets or o(e" b the $om!an as liabilities:

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Stu" Session E

g% list an" e*!lain the $om!onents of o(ners+ e<uit : h% inter!ret balan$e sheets an" statements of $hanges in e<uit % Reading )0: Unde$# anding !e Ca#! F%oS S a e,en The $an"i"ate shoul" be able to, a% $om!are an" $ontrast $ash flo(s from o!erating) in#esting) an" finan$ing a$ti#ities an" $lassif $ash flo( items as relating to one of these three $ategories) gi#en a "es$ri!tion of the items: b% "es$ribe ho( non$ash in#esting an" finan$ing a$ti#ities are re!orte": ; $om!are an" $ontrast the 6e "ifferen$es in $ash flo( statements !re!are" un"er international finan$ial re!orting stan"ar"s an" G%S% generall a$$e!te" a$$ounting !rin$i!les: "% "emonstrate the "ifferen$e bet(een the "ire$t an" in"ire$t metho"s of !resenting $ash from o!erating a$ti#ities an" e*!lain the arguments in fa#or of ea$h: e% "emonstrate the ste!s in the !re!aration of "ire$t an" in"ire$t $ash flo( e% "emonstrate the ste!s in the !re!aration of "ire$t an" in"ire$t $ash flo( statements) in$lu"ing ho( $ash flo(s $an be $om!ute" using in$ome statement an" balan$e sheet "ata: f% "es$ribe the nro$ess of $on#ertinn a $ash flo( statement from the in"ire$t to the f% "es$ribe the !ro$ess of $on#erting a $ash flo( statement from the in"ire$t to the "ire$t metho" of !resentation: g% anal -e an" inter!ret a $ash flo( statement using both total $urren$ amounts an" $ommon-si-e $ash flo( statements: h% e*!lain an" $al$ulate free $ash flo( to the firm) free $ash flo( to e<uit ) an" other $ash flo( ratios% Reading )7: Finan"ia% Ana%8#i# Te"!niP&e# The $an"i"ate shoul" be able to, a% e#aluate an" $om!are $om!anies using ratio anal sis) $ommon-si-e finan$ial statements) an" $harts in finan$ial anal sis: b% "es$ribe the limitations of ratio anal sis:

; "es$ribe the #arious te$hni<ues of $ommon-si-e anal sis an" inter!ret the results of su$h anal sis: "% $al$ulate) $lassif ) an" inter!ret a$ti#it ) li<ui"it ) sol#en$ ) !rofitabilit ) an" #aluation ratios: e% "emonstrate ho( ratios are relate" an" ho( to e#aluate a $om!an using a $ombination of "ifferent ratios: f% "emonstrate the a!!li$ation of an" inter!ret $hanges in the $om!onent !arts of the DuPont anal sis (the "e$om!osition of return on e<uit ): g% $al$ulate an" inter!ret the ratios use" in e<uit anal sis) $re"it anal sis) an" segment anal sis: h% "es$ribe ho( ratio anal sis an" other te$hni<ues $an be use" to mo"el an" fore$ast earnings%

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STUDY SESSION T FINANCIAL REPORTING AND ANALYSIS: In#entories) Aong-Term Assets) Deferre" Ta*es) an" Onan" Off-Ialan$e Sheet Debt

alterna&

he rea"ings in this stu" session e*amine s!e$ifi$ $ategories of assets an" liabilities that are !arti$ularl sus$e!tible to the im!a$t of alternati#e a$$ounting !oli$ies an" estimates% Anal sts must un"erstan" the effe$ts of alternati#e !oli$ies on finan$ial statements an" ratios an" be able to e* e$u riate a"=ustments to enhan$e $om!arabilit bet(een $om!anies ion) anal sts must be alert to "ifferen$es bet(een a $om!an +s re!orte finan$ial statements an" e$onomi$ realit %

The "es$ri!tion an" measurement of in#entories re<uire $areful attention be$ause the in#estment in in#entories is fre<uentl the largest $urrent asset for mer$han"i-ing an" manufa$turing $om!anies% For these $om!anies) the measurement of in#entor $ost (i%e%) $ost of goo"s sol") is a $riti$al fa$tor in "etermining gross !rofit an" other measures of $om!an !rofitabilit % Aong-term o!erating assets are often the largest $ategor of assets on a $om!an +s balan$e sheet% The anal st nee"s to s$rutini-e management+s $hoi$es (ith res!e$t to re$ogni-ing e*!enses asso$iate" (ith the o!erating assets be$ause of the !otentiall large im!a$t su$h $hoi$es $an ha#e on re!orte" earnings an" the o!!ortunities for finan$ial statement mani!ulation "uring longer time !erio"s% A $om!an +s a$$ounting !oli$ies (su$h as "e!re$iation $hoi$es) $an $ause "ifferen$es in ta*es re!orte" in finan$ial statements an" ta*es re!orte" on ta* returns% The rea"ing &In$ome Ta*es& "is$usses se#eral issues that arise relating to "eferre" ta*es% Ioth on- an" off-balan$e sheet "ebt affe$t a $om!an +s li<ui"it an" sol#en$ an" ha#e $onse<uen$es for its long-term gro(th an" #iabilit % The notes of the finan$ial statements must be $arefull +e#ie(e" to ensure that all !otential liabilities (e%g%) leasing arrangements an" other $ontra$tual $ommitments) are

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Stu" Session J a!!ro!riatel e#aluate" for their $onformit to e$onomi$ realit % A"=ustments to the finan$ial statements ma be re<uire" to a$hie#e $om!arabilit (hen e#aluating se#eral $om!anies an" ma also be re<uire" to im!ro#e $re"it an" in#estment "e$ision-ma6ing% READING ASSIGNMENTS Reading )Q In#entories International "inancial Statement Analysis, b Thomas R% Robinson) CFA) Ban Hen"ri6 #an 'reuning) CFA) R% .laine Henr ) CFA) an" /i$hael A% Iroihahn) CFA Reading )A Aong-Ai#e" Assets International "inancial Statement Analysis, b Thomas R% Robinson) CFA) Ban Hen"ri6 #an 'reuning) CFA) R% .laine Henr ) CFA) an" /i$hael A% Iroihahn) CFA Reading )B In$ome Ta*es International "inancial Statement Analysis, b Thomas R% tobinson) CFA) Ban Hen"ri6 #an 'reuning) CFA) R% .laine Henr ) $+D&iii*&ii9 +;$+MO9 B"ii STSUVW #"ii uitruiiiii ) UXY) r# ni"iii$ neiii ) CFA9 an" /i$hael A% Iroihahn) CFA Reading )T Aong-Term Aiabilities an" Aeases BQA # International "inancial Statement At Robinson) CFA) Ban Hen"ri6 #an 'reuning) CFA) R% .laine Henr ) CFA% an" /i$hael A% Iroihahn% CFA LEARNING OUTCOMES Reading )Q: In+en o$ie# The $an"i"ate shoul" be able to, a% e*!lain IFRS an" G%S% 'AAP rules for "etermining in#entor $ost) in$lu"ing (hi$h $osts are $a!itali-e" an" metho"s of allo$ating $osts bet(een $ost of goo"s sol" an" in#entor : b% "is$uss ho( in#entories are re!orte" on the finan$ial statements an" ho( the lo(er of $ost or net reali-able #alue is use" an" a!!lie": ; $om!ute en"ing in#entor balan$es an" $ost of goo"s sol" using the FIFO) (eighte" a#erage $ost) an" AIFO metho"s to a$$ount for !ro"u$t in#entor an" e*!lain the relationshi! among an" the usefulness of in#entor an" $ost of goo"s sol" "ata !ro#i"e" b the FIFO) (eighte" a#erage $ost) an" AIFO metho"s (hen !ri$es are 0) stable) 1) "e$reasing) or 3) in$reasing:

"% "is$uss an" $al$ulate ratios useful for e#aluating in#entor management: e% anal -e the finan$ial statements of $om!anies using "ifferent in#entor a$$ounting metho"s b $om!aring an" "es$ribing the effe$t of the "ifferent metho"s on $ost of goo"s sol") in#entor balan$es) an" other finan$ial statement items: f% $om!ute an" "es$ribe the effe$ts of the $hoi$e of in#entor metho" on !rofitabilit ) li<ui"it ) a$ti#it ) an" sol#en$ ratios: g% $al$ulate a"=ustments to re!orte" finan$ial statements relate" to in#entor assum!tions to ai" in $om!aring an" e#aluating $om!anies:

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Stu" Session J

h% "is$uss the reasons that a AIFO reser#e might rise or "e$line "uring a gi#en !erio" an" "is$uss the im!li$ations for finan$ial anal sis% Reading )A: LongMLi+ed A##e # The $an"i"ate shoul" be able to, a% e*!lain the a$$ounting stan"ar"s relate" to the $a!itali-ation of e*!en"itures as !art of long-li#e" assets) in$lu"ing interest $osts: b% $om!ute an" "es$ribe the effe$ts of $a!itali-ing #ersus e*!ensing on net in$ome) sharehol"ers+ e<uit ) $ash flo( from o!erations) an" finan$ial ratios) in$lu"ing the effe$t on the interest $o#erage ratio of $a!itali-ing interest $osts: ; e*!lain the $ir$umstan$es in (hi$h soft(are "e#elo!ment $osts an" resear$h an" "e#elo!ment $osts are $a!itali-e": "% i"entif the "ifferent "e!re$iation metho"s for long-li#e" tangible assets) an" "is$uss ho( the $hoi$e of metho") useful li#es) an" sal#age #alues affe$t a $om!an +s finan$ial statements) ratios) an" ta*es: e% "is$uss the use of fi*e" asset "is$losures to $om!are $om!anies+ a#erage age of "e!re$iable assets an" $al$ulate) using su$h "is$losures) the a#erage age an" a#erage "e!re$iable life of fi*e" assets: f% "es$ribe amorti-ation of intangible assets (ith finite useful li#es an" the estimates that affe$t the amorti-ation $al$ulations: g% "is$uss the liabilit for $losure) remo#al) an" en#ironmental effe$ts of long-li#e" o!erating assets) an" "is$uss the finan$ial statement im!a$t an" ratio effe$ts of that liabilit : h% "is$uss the im!a$t of sales or e*$hanges of longli#e" assets on finan$ial statements: i% "efine im!airment of long-li#e" tangible an" intangible assets an" e*!lain (hat effe$t su$h im!airment has on a $om!an +s finan$ial statements an" ratios: =% $al$ulate an" "es$ribe both the initial an" long-li#e" effe$ts of asset re#aluations on finan$ial ratios% Reading )B: In"o,e TaXe# The $an"i"ate shoul" be able to, a% e*!lain the "ifferen$es bet(een a$$ounting !rofit an" ta*able in$ome) an" "efine 6e terms) in$lu"ing "eferre" ta* assets) "eferre" ta* liabilities) #aluation allo(an$e) ta*es !a able) an" in$ome ta* e*!ense: b% e*!lain ho( "eferre" ta* liabilities an" assets are $reate" an" the fa$tors that

"etermine ho( a $om!an +s "eferre" ta* liabilities an" assets shoul" be treate" for the !ur!oses of finan$ial anal sis: ; "etermine the ta* base of a $om!an +s assets an" liabilities: "% $al$ulate in$ome ta* e*!ense) in$ome ta*es !a able) "eferre" ta* assets) an" "eferre" ta* liabilities) an" $al$ulate an" inter!ret the a"=ustment to the finan$ial statements relate" to a $hange in the in$ome ta* rate: e% e#aluate the im!a$t of ta* rate $hanges on a $om!an +s finan$ial statements an" ratios: f% "istinguish bet(een tem!orar an" !ermanent items in !re-ta* finan$ial in$ome an" ta*able in$ome:

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Stu" Session J

g% "is$uss the #aluation allo(an$e for "eferre" ta* assets 8(hen it is re<uire" an" (hat im!a$t it has on finan$ial statements: h% $om!are an" $ontrast a $om!an +s "eferre" ta* items: i% anal -e "is$losures relating to "eferre" ta* items an" the effe$ti#e ta* rate re$on$iliation) an" "is$uss ho( information in$lu"e" in these "is$losures affe$ts a $om!an +s finan$ial statements an" finan$ial ratios: =% i"entif the 6e !ro#isions of an" "ifferen$es bet(een in$ome ta* a$$ounting un"er IFRS an" G%S% 'AAP% Reading )T: LongMTe$, Lia*i%i ie# and Lea#e# The $an"i"ate shoul" be able to, a% $om!ute the effe$ts of "ebt issuan$e an" amorti-ation of bon" "is$ounts an" !remiums on finan$ial statements an" ratios: b% e*!lain the role of "ebt $o#enants in !rote$ting $re"itors b restri$ting a $om!an +s abilit to in#est) !a "i#i"en"s) or ma6e other o!erating an" strategi$ "e$isions: ZZZZ "es$ribe the !resentation of) an" "is$losures >>>>>>> relating to) finan$ing liabilities: "etermine the effe$ts of $hanging interest rates on the mar6et #alue of "ebt an on finan$ial statements an" ratios: e% "es$ribe t(o t !es of "ebt (ith e<uit features ($on#ertible "ebt an" "ebt (ith (arrants) an" $al$ulate the effe$t of issuan$e of su$h instruments on a $om!an +s "ebt ratios: f% "is$uss the moti#ations for leasing assets instea" of !ur$hasing them an" the in$enti#es for re!orting the leases as o!erating leases rather than finan$e leases: g% "etermine the effe$ts of finan$e an" o!erating leases on the finan$ial statements an" ratios of the lessees an" lessors: h% "istinguish bet(een a sales-t !e lease an" a "ire$t finan$ing lease) an" "etermine the effe$ts on the finan$ial statements an" ratios of the lessors: i% "es$ribe the t !es an" e$onomi$ $onse<uen$es of offbalan$e sheet finan$ing an" "etermine ho( ta6e-or!a $ontra$ts) through!ut arrangements) an" the sale of re$ei#ables affe$t finan$ial statements an" sele$te" finan$ial ratios%

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Ie on" m[ STGD9 S.SSION 0K FINANCIAL REPORTING AND ANALYSIS: A!!li$ations an" International Stan"ar"s Con#ergen$e

he rea"ings in this stu" session "is$uss finan$ial statement anal sis a!!li$ations an" the international

se$tional anal sis) tren" anal sis) an" ratio anal sis ere 6no(le"ge of these tools) ho(e#er) the anal st must re$ogni-e t im!li$ations of a$$ounting $hoi$es on ,he <ualit of a $om!an +s re!orte" fin an" a results% Then the anal st $an a!!l these finan$ial anal sis te$hni<ues to ma=or anal st tas6s in$lu"ing the e#aluation of !ast an" future finan$ial !erforman$e) $re"it ris6) an" the s$reening of !otential e<uit in#estments% The rea"ings also "is$uss anal st a"=ustments to re!orte" finan$ials% Su$h a"=ustments are often nee"e" to !ut $om!anies+ re!orte" results on a $om!arable basis% This stu" session $on$lu"es (ith a rea"ing on $on#ergen$e of international an" G%S% a$$ounting stan"ar"s% Although there has been mu$h !rogress in harmoni-ing a$$ounting stan"ar"s globall ) as this rea"ing "is$usses) signifi$ant #ariations still e*ist among generall a$$e!te" a$$ounting !rin$i!les from one $ountr to another%

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Stu" Session 0K READING ASSIGNMENTS Reading 0N Finan$ial Re!orting \ualit , Re" Flags an" A$$ounting @arning Signs ommercial $ending %evie&, b Thomas R% Robinson) N FA an" Paul /unter Reading 50 A$$ounting Shenanigans on the Cash Flo( Statement 'he PA (ournal, b /ar6 A% Siegel Reading 51 Finan$ial Statement Anal sis, A!!li$ations International "inancial Statement Analysis, b Thomas R% Robinson) CFA) Ban Hen"ri6 #an 'reuning) CFA) R% .laine Henr ) CFA) an" /i$hael A% Iroihahn) CFA Reading 53 International Stan"ar"s Con#ergen$e International "inancial Statement Analysis, b Thomas R% Robinson) CFA) Ban Hen"ri6 #an 'reuning) CFA) R% .laine Henr ) CFA% an" /i$hael A% Iroihahn% CFA

L$ n The $an"i"ate shoul" be able to,

LEARNING OUTCOMES Reading 0N: Finan"ia% Re3o$ ing 1&a%i 8: Red F%ag# and A""o&n ing Wa$ning Sign#

a% "es$ribe in$enti#es that might in"u$e a $om!an +s management to o#erre!ort or un"erre!ort earnings: b% "es$ribe a$ti#ities that (ill result in a lo( <ualit of earnings: ; "es$ribe the &frau" triangle&: "% "es$ribe the ris6 fa$tors that ma lea" to frau"ulent a$$ounting relate" to 0) in$enti#es an" !ressures) 1) o!!ortunities) an" 3) attitu"es an" rationali-ations: e% "es$ribe $ommon a$$ounting (arning signs an" metho"s for "ete$ting ea$h: f% "es$ribe the a$$ounting (arning signs relate" to the .nron a$$ounting s$an"al: g% "es$ribe the a$$ounting (arning signs relate" to the Sunbeam a$$ounting s$an"al% Reading 01: A""o&n ing S!enanigan# on !e Ca#! F%oS S a e,en The $an"i"ate shoul" be able to anal -e an" "is$uss the follo(ing (a s to mani!ulate the $ash flo( statement, ] stret$hing out !a ables) ] finan$ing of !a ables)

] ]

se$uriti-ation of re$ei#ables) an" using sto$6 bu ba$6s to offset "ilution of earnings%

Reading 0': Finan"ia% S a e,en Ana%8#i#: A33%i"a ion# The $an"i"ate shoul" be able to, a% e#aluate a $om!an +s !ast finan$ial !erforman$e an" e*!lain ho( a $om!an +s strateg is refle$te" in !ast finan$ial !erforman$e:

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Stu" Session 0K

b% !re!are a basi$ !ro=e$tion of a $om!an +s future net in$ome an" $ash flo(: ; "es$ribe the role of finan$ial statement anal sis in assessing the $re"it <ualit of a !otential "ebt in#estment: "% "is$uss the use of finan$ial statement anal sis in s$reening for !otential e<uit in#estments: e% "etermine an" =ustif a!!ro!riate anal st a"=ustments to a $om!an +s finan$ial statements to fa$ilitate $om!arison (ith another $om!an % Reading 0): In e$na iona% S anda$d# Con+e$gen"e The $an"i"ate shoul" be able to, a% i"entif an" e*!lain the ma=or international a$$ounting stan"ar"s for ea$h asset an" liabilit $ategor on the balan$e sheet an" the 6e "ifferen$es from G%S% generall a$$e!te" a$$ounting !rin$i!les ('AAP): b% i"entif an" e*!lain the ma=or international a$$ounting stan"ar"s for ma=or re#enue an" e*!ense $ategories on the in$ome statement an" the 6e "ifferen$es from G%S% 'AAP: uiiieieineb ^UV U%H% R_YYX) ;% i"entif an" e*!lain the ma=or "ifferen$es bet(een international an" G%S% 'AAP a$$ounting stan"ar"s $on$erning the treatment of interest an" "i#i"en"s on the statement of $ash flo(s: "% inter!ret the effe$t of "ifferen$es bet(een international an" G%S% 'AAP a$$ounting stan"ar"s on the balan$e sheet) in$ome statement) an" the statement of $hanges in e<uit for some $ommonl use" finan$ial ratios%

(((%$fainstitute%org7tool6it89our online !re!aration resour$e

STUDY SESSION 11
CORPORATE FINANCE

the !rin$i!les that $or!orations use to ma6e their in#esting an" finan$ing "e$isions% Ca!ital bu"geting is the !ro$ess of ma6ing "e$isions about (hi$h long-term !ro=e$ts the $or!oration shoul" a$$e!t for in#estment an" (hi$h it shoul" re=e$t% Ioth the e*!e$te" return o0 the finan$ing $ost shoul" be ta6en into a$$ount% The $ost of $a!ital) or the XX of return re<uire" for a !ro=e$t) must be "e#elo!e" using e$onomi$all soun` metho"s% Cor!orate managers are also $on$erne" (ith shorter-term li<ui"it an" sol#en$ an" use finan$ial statements to e#aluate !erforman$e as (ell as to "e#elo! an" $ommuni$ate future !lans%

W% T

his stu" session $o#ers

The final rea"ing in this stu" session is on $or!orate go#ernan$e !ra$ti$es) (hi$h $an e*!ose the firm to a heightene" ris6 of ethi$al la!ses% Although these !ra$ti$es ma not be inherentl unethi$al) the $reate the !otential for $onfli$ts of interest to "e#elo! bet(een sharehol"ers an" managers) an" the e*tent of that $onfli$t affe$ts the $om!an +s #aluation%

R.ADIN' ASSI'N/.NTS Rea"ing 55 Rea"ing 5? Ca!ital Iu"geting b Bohn D% Sto(e) N FA an" Ba$<ues R% 'agne) N FA

Cost of Ca!ital b 9#es Courtois) N FA) 'ene C% Aai) an" Pamela R Peterson) C,A Rea"ing 5C @or6ing Ca!ital /anagement b ."gar A% Norton) Br%) CFA) Menneth A% Par6inson) an" Pamela P% Peterson) CFA Rea"ing 5D Finan$ial Statement Anal sis b Pamela P% Peterson) CFA Rea"ing 5E The Cor!orate 'o#ernan$e of Aiste" Com!anies, A /anual for In#estors

(((%$fafnstftute%org7tool6ft89our onlfne !re!aration resour$e

Stu" Session 00

LEARNING OUTCOMES Reading 00: Ca3i a% 2&dge ing The $an"i"ate shoul" be able to, a% e*!lain the $a!ital bu"geting !ro$ess) in$lu"ing the t !i$al ste!s of the !ro$ess) an" "istinguish among the #arious $ategories of $a!ital !ro=e$ts: b% "is$uss the basi$ !rin$i!les of $a!ital bu"geting) in$lu"ing the $hoi$e of the !ro!er $ash flo(s: ; e*!lain ho( the follo(ing !ro=e$t intera$tions affe$t the e#aluation of a $a!ital !ro=e$t, 0) in"e!en"ent #ersus mutuall e*$lusi#e !ro=e$ts) 1) !ro=e$t se<uen$ing) an" 3) unlimite" fun"s #ersus $a!ital rationing: "% $al$ulate an" inter!ret the results using ea$h of the follo(ing metho"s to e#aluate a single $a!ital !ro=e$t, net !resent #alue (NP2)) internal rate of return (IRR)) !a ba$6 !erio") "is$ounte" !a ba$6 !erio") an" !rofitabilit in"e* (PI): e% e*!lain the NP2 !rofile) $om!are an" $ontrast the NP2 an" IRR metho"s (hen e#aluating in"e!en"ent an" mutuall e*$lusi#e !ro=e$ts) an" "es$ribe the !roblems asso$iate" (ith ea$h of the e#aluation metho"s: eting f% "es$ribe an" a$$ount for the relati#e !o!ularit of the #arious $a!ital bu"get metho"s an" e*!lain the relation bet(een NP2 an" $om!an #alue an" sto$6 !ri$e%

" et v IUUVVIV
Reading 07: Co# of Ca3i a%

The $an"i"ate shoul" be able to, a% $al$ulate an" inter!ret the (eighte" a#erage $ost of $a!ital (@ACC) of a $om!an : b% "es$ribe ho( ta*es affe$t the $ost of $a!ital from "ifferent $a!ital sour$es: ; "es$ribe alternati#e metho"s of $al$ulating the (eights use" in the @ACC) in$lu"ing the use of the $om!an +s target $a!ital stru$ture: "% e*!lain ho( the marginal $ost of $a!ital an" the in#estment o!!ortunit s$he"ule are use" to "etermine the o!timal $a!ital bu"get: e% e*!lain the marginal $ost of $a!ital+s role in "etermining the net !resent #alue of

a !ro=e$t: f% $al$ulate an" inter!ret the $ost of fi*e" rate "ebt $a!ital using the iel"-tomaturit a!!roa$h an" the "ebt-rating a!!roa$h: g% $al$ulate an" inter!ret the $ost of non$aliable) non$on#ertible !referre" sto$6: h% $al$ulate an" inter!ret the $ost of e<uit $a!ital using the $a!ital asset !ri$ing mo"el a!!roa$h) the "i#i"en" "is$ount mo"el a!!roa$h) an" the bon"- iel"-!lus ris6!remium a!!roa$h: i% $al$ulate an" inter!ret the beta an" $ost of $a!ital for a !ro=e$t: =% e*!lain the $ountr e<uit ris6 !remium in the estimation of the $ost of e<uit for a $om!an lo$ate" in a "e#elo!ing mar6et: 6% "es$ribe the marginal $ost of $a!ital s$he"ule) e*!lain (h it ma be u!(ar"-slo!ing (ith res!e$t to a""itional $a!ital) an" $al$ulate an" inter!ret its brea6!oints: I% e*!lain an" "emonstrate the $orre$t treatment of flotation $osts%

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Stu" Session 00

Reading 0Q: Wo$@ing Ca3i a% Manage,en The $an"i"ate shoul" be able to, a% "es$ribe !rimar an" se$on"ar sour$es of li<ui"it an" fa$tors that influen$e a $om!an +s li<ui"it !osition: b% $om!are a $om!an +s li<ui"it measures (ith those of !eer $om!anies: ; e#aluate o#erall (or6ing $a!ital effe$ti#eness of a $om!an ) using the o!erating an" $ash $on#ersion $ $les) an" $om!are its effe$ti#eness (ith other !eer $om!anies: "% i"entif an" e#aluate the ne$essar tools to use in managing a $om!an +s net "ail $ash !osition: e% $om!ute an" inter!ret $om!arable iel"s on #arious se$urities) $om!are !ortfolio returns against a stan"ar" ben$hmar6) an" e#aluate a $om!an +s short-term in#estment !oli$ gui"elines: f% assess the !erforman$e of a $om!an +s a$$ounts re$ei#able) in#entor management) an" a$$ounts !a able fun$tions against histori$al figures an" $om!arable !eer $om!an #alues: g% e#aluate the $hoi$es of short-term fun"ing a#ailable to a $om!an an" re$ommen" a finan$ing metho"%

VVV+

Reading 0A: Finan"ia% S a e,en Ana%8#i# The $an"i"ate shoul" be able to "emonstrate the use of !ro forma in$ome an" balan$e sheet statements% Reading 0B: T!e Co$3o$a e Go+e$nan"e of Li# ed Co,3anie#: A Man&a% fo$ In+e# o$#

UDUUIVi%

IC%

The $an"i"ate shoul" be able to, a% "efine an" "es$ribe $or!orate go#ernan$e: b% "is$uss an" $riti<ue $hara$teristi$s an" !ra$ti$es relate" to boar" an" $ommittee in"e!en"en$e) e*!erien$e) $om!ensation) e*ternal $onsultants) an" fre<uen$ of ele$tions) an" "etermine (hether the are su!!orti#e of shareo(ner !rote$tion: ; "es$ribe boar" in"e!en"en$e an" e*!lain the im!ortan$e of in"e!en"ent boar" members in $or!orate go#ernan$e: "% i"entif fa$tors that in"i$ate a boar" an" its members !ossess the e*!erien$e re<uire" to go#ern the $om!an for the benefit of its shareo(ners:

e% e*!lain the !ro#isions that shoul" be in$lu"e" in a strong $or!orate $o"e of ethi$s an" the im!li$ations of a (ea6 $o"e of ethi$s (ith regar" to relate"-!art transa$tions an" !ersonal use of $om!an assets: f% state the 6e areas of res!onsibilit for (hi$h boar" $ommittees are t !i$all $reate" an" e*!lain the $riteria for assessing (hether ea$h $ommittee is able to a"e<uatel re!resent shareo(ner interests: g% e#aluate) from a shareo(ner+s !ers!e$ti#e) $om!an !oli$ies relate" to #oting rules) shareo(ner s!onsore" !ro!osals) $ommon sto$6 $lasses) an" ta6eo#er "efenses%

(((%$fainstitute%org7tool6it89our online !re!aration resour$e

As the first "is$ussion in the Nbc $urri$ulum on !ortfolio management) this stu" session !ro#i"es the $riti$al frame(or6 an" $onte*t for subse<uent Ae#el I stu" sessions $o#ering e<uities) fi*e" in$ome) "eri#ati#es) an" alternati#e n#estments% Furtherm$ re% this stu" session !ro#i"es the STUDY SESSION 1' PORTFOAIO /ANA'./.NT in#esta The first rea"ing "is$usses the asset allo$ation "e$ision an" the !ortfolio management !ro$ess8the are an integrate" set of ste!s un"erta6en in a $onsistent manner to $reate an" maintain an a!!ro!riate !ortfolio ($ombination of assets) to meet $lients+ state" goals% The last t(o rea"ings fo$us on the "esi$n of a !ortfolio an" intro"u$e the $a!ita asset !ri$ing mo"el (CAP/)) a $enter!ie$e of mo"ern finan$ial e$onomi$s that relates the ris6 of an asset to its e*!e$te" return% R.ADIN' ASSI'N/.NTS Rea"ing 5J The Asset Allo$ation De$ision Investment Analysis and Portfolio Management, .ighth ."itior) b Fran6 M% Reill ) CFAan" Meith N Iro(n) CFA Rea"ing ?K An Intro"u$tion to Portfolio /anagement Investment Analysis and Portfolio Management, .ighth ."itior) b Fran6 M% Reill ) CFAan" Meith N Iro(n) CFA Rea"ing ?0 An Intro"u$tion to Asset Pri$ing /o"els Investment Analysis and Portfolio Management, .ighth ."itior) b Fran6 M% Reill ) CFAan" Meith N Iro(n) CFA

WV

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Stu" Session 01

LEARNING OUTCOMES Reading 0T: T!e A##e A%%o"a ion De"i#ion The $an"i"ate shoul" be able to, a% "es$ribe the ste!s in the !ortfolio management !ro$ess an" e*!lain the reasons for a !oli$ statement: b% e*!lain (h in#estment ob=e$ti#es shoul" be e*!resse" in terms of ris6 an" return an" list the fa$tors that ma affe$t an in#estor+s ris6 toleran$e: ; "es$ribe the return ob=e$ti#es of $a!ital !reser#ation) $a!ital a!!re$iation) $urrent in$ome) an" total return: "% "es$ribe the in#estment $onstraints of li<ui"it ) time hori-on) ta* $on$erns) legal an" regulator fa$tors) an" uni<ue nee"s an" !referen$es: e% "es$ribe the im!ortan$e of asset allo$ation) in terms of the !er$entage of a !ortfolio+s return that $an be e*!laine" b the target asset allo$ation) an" e*!lain ho( !oliti$al an" e$onomi$ fa$tors result in "iffering asset allo$ations b in#estors in #arious $ountries% )e Reading 7N: An In $od&" ion o Po$ fo%io Manage,en i"en$e the a% "efine ris6 a#ersion an" "is$uss e#i"en$e that suggests that in"i#i generall ris6 a#erse:

"uals are

@>ne

b% list the assum!tions about in#estor beha#ior un"erl ing the /ar6o(itmo"el: ; $om!ute an" inter!ret the e*!e$te" return) #arian$e) an" stan"ar" "e#iation for an in"i#i"ual in#estment an" the e*!e$te" return an" stan"ar" "e#iation for a !ortfolio: "% $om!ute an" inter!ret the $o#arian$e of rates of return an" sho( ho( it is relate" to the $orrelation $oeffi$ient: e% list the $om!onents of the !ortfolio stan"ar" "e#iation formula: f% "es$ribe the effi$ient frontier an" e*!lain the im!li$ations for in$remental returns as an in#estor assumes more ris6: g% e*!lain the $on$e!t of an o!timal !ortfolio an" sho( ho( ea$h in#estor ma ha#e a "ifferent o!timal !ortfolio% Reading 71: An In $od&" ion o A##e P$i"ing Mode%#

The $an"i"ate shoul" be able to, a% e*!lain the $a!ital mar6et theor ) in$lu"ing its un"erl ing assum!tions) an" e*!lain the effe$t on e*!e$te" returns) the stan"ar" "e#iation of returns) an" !ossible ris6-return $ombinations (hen a ris6-free asset is $ombine" (ith a !ortfolio of ris6 assets: b% i"entif the mar6et !ortfolio an" "es$ribe the role of the mar6et !ortfolio in the formation of the $a!ital mar6et line (C/A): ; "efine s stemati$ an" uns stemati$ ris6 an" e*!lain (h an in#estor shoul" not e*!e$t to re$ei#e a""itional return for assuming uns stemati$ ris6: "% e*!lain the $a!ital asset !ri$ing mo"el) in$lu"ing the se$urit mar6et line (S/A) an" beta an" "es$ribe the effe$ts of rela*ing its un"erl ing assum!tions: e% $al$ulate) using the S/A) the e*!e$te" return on a se$urit an" e#aluate (hether the se$urit is o#er#alue") un"er#alue") or !ro!erl #alue"%

(((%$fainstitute%org7tool6it89our online !re!aration resour$e

STUDY SESSION 1) E1UITY: Se$urities /ar6ets his stu" session a""resses ho( se$urities are bought an" sol" an" (hat $onstitutes a (ellfun$tioning se$ulties mar6et% The rea"ing on mar6et in"i$es i" $al$ul: gi#es an un"erstan"ing of ho( in"i$es a re $onstru$te" an" $al$ulate" an" the biases inherent in ea$h of the (eighting s$hemes use"% el" Some of the most interesting an" im!ortant (or6 in the in#estment fie "uring the !ast se#eral "e$a"es re#ol#es aroun" the effi$ient mar6et h !othesis (./H) an" its im!li$ations for a$ti#e #ersus !assi#e e<uit !ortfolio managemert% The rea"ings on this sub=e$t !ro#i"e an un"erstan"ing of the ./H an" the seemingl !ersistent anomalies to the ,heor an un"erstan"ing that is ne$essar to =u"ge the #alue of fun"amental or te$hni$al se$urit anal sis%

Y:

S+

R.ADIN' ASSI'N/.NTS Rea"ing ?1 Organi-ation an" Fun$tioning of Se$urities /ar6ets Investment Analysis and Portfolio Management, .ighth ."itior) b Fran6 M% Reill CFAan" Meith N Iro(n) CFA Rea"ing ?3 Se$urit -/ar6et In"e*es Investment Analysis and Portfolio Management, .ighth ."itior) b Fran6 M% Reill CFAan" Meith N Iro(n) CFA Rea"ing ?5 .ffi$ient Ca!ital /ar6ets Investment Analysis and Portfolio Management, .ighth ."itior) b Fran6 M% Reill ) CFAan" Meith N Iro(n) CFA Rea"ing ?? /ar6et .ffi$ien$ an" Anomalies !eyond 'he %andom )alk: A *uide to Stock Market Anomalies and $o& %isk Investing, b 2i=a Singal) CFA

(((%$fafnstftute%org7tool6ft-9our onlfne !re!aration resour$e

Stu" Session 03

LEARNING OUTCOMES Reading 7': O$ganiRa ion and F&n" ioning of Se"&$i ie# Ma$@e # The $an"i"ate shoul" be able to, a% "es$ribe the $hara$teristi$s of a (ell-fun$tioning se$urities mar6et: b% "istinguish bet(een !rimar an" se$on"ar $a!ital mar6ets an" e*!lain ho( se$on"ar mar6ets su!!ort !rimar mar6ets: ; "istinguish bet(een $all an" $ontinuous mar6ets: "% $om!are an" $ontrast the stru$tural "ifferen$es among national sto$6 e*$hanges) regional sto$6 e*$hanges) an" the o#er-the-$ounter (OTC) mar6ets: e% $om!are an" $ontrast ma=or $hara$teristi$s of #arious e*$hange mar6ets) in$lu"ing e*$hange membershi!) t !es of or"ers) an" mar6et ma6ers: f% "es$ribe the !ro$ess of selling a sto$6 short an" "is$uss an in#estor+s li6el moti#ation for selling short: g% "es$ribe the !ro$ess of bu ing a sto$6 on margin) $om!ute the rate of return on a margin transa$tion) "efine maintenan$e margin) an" "etermine the sto$6 !ri$e 7hi$h the in#estor (oul" re$ei#e a margin $al at (hi$h the in#estor (oul" re$ei#e a margin $all% Reading 7): Se"&$i 8MMa$@e IndeXe#

oo@>ne

The $an"i"ate shoul" be able to, a% $om!are an" $ontrast the $hara$teristi$s of) an" "is$uss the sour$e an" "ire$tion of bias e*hibite" b ) ea$h of the three !re"ominant (eighting s$hemes use" in $onstru$ting sto$6 mar6et in"i$es an" $om!ute a !ri$e(eighte") a #alue(eighte") an" an un(eighte" in"e* series for three sto$6s: b% $om!are an" $ontrast ma=or stru$tural features of "omesti$ an" global sto$6 in"i$es) bon" in"i$es) an" $om!osite sto$6-bon" in"i$es: ; state ho( lo( $orrelations bet(een global mar6ets su!!ort global in#estment%

Reading 70: Effi"ien Ca3i a% Ma$@e # The $an"i"ate shoul" be able to, a% "efine an effi$ient $a!ital mar6et an" "es$ribe an" $ontrast the three forms of the effi$ient mar6et h !othesis (./H): b% "es$ribe the tests use" to e*amine ea$h of the three forms of the ./H) i"entif #arious mar6et anomalies an" e*!lain their im!li$ations for the ./H) an" e*!lain the o#erall $on$lusions about ea$h form of the ./H: ; e*!lain the im!li$ations of sto$6 mar6et effi$ien$ for te$hni$al anal sis) fun"amental anal sis) the !ortfolio management !ro$ess) the role of the !ortfolio manager) an" the rationale for in#esting in in"e* fun"s: "% "efine beha#ioral finan$e an" "es$ribe !ros!e$t theor ) o#er-$onfi"e nee bias) $onfirmation bias) an" es$alation bias% Reading 77: Ma$@e Effi"ien"8 and Ano,a%ie# The $an"i"ate shoul" be able to, a% e*!lain the three limitations to a$hie#ing full effi$ient mar6ets:

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Stu" Session 03

b% "es$ribe four !roblems that ma !re#ent arbitrageurs from $orre$ting anomalies: ; e*!lain (h an a!!arent anomal ma be =ustifie" an" "es$ribe the $ommon biases that "istort testing for mis!ri$ings: "% e*!lain (h a mis!ri$ing ma !ersist an" (h #ali" anomalies ma not be !rofitable%

SSS> Vi+id 2oo@9 ne

(((%$fainstitute%org7tool6it89our online !re!aration resour$e

STUDY SESSION 10 E1UITY: In"ustr an" Com!an Anal sis

T
This stu" sess

his stu" session fo$uses on in"ustr an" $om!an anal sis an" "es$ribes the tools use" in forming an o!inion about in#esting in a !arti$ular sto$6 or grou! of sto$6s%

ith the session begins (ith the essential tools of e<uit #aluation the o( te$hni<ue an" the relati#e #aluation a!!roa$h% Thed te$hni<ues !ro#i"e the means to estimate a reasonable !ri$e for a sto$6% The rea"ings about in"ustr anal sis are an im!ortant element in the #aluation !ro$ess) !ro#i"ing the to!"o(n $on,e*t $ru$ial to estimating a $om!an +s !otential% Also a""resse" is estimating a $om!an +s earnings !er share b fore$asting sales an" !rofit margins% The last rea"ing in This stu" session fo$uses on !ri$e multi!les) one of The most familiar an" (i"el use" tools in estimating the #alue of a $om!an ) an" intro"u$es the a!!li$ation of four $ommonl use" !ri$e multi!les to #aluation% R.ADIN' ASSI'N/.NTS Rea"ing ?C An Intro"u$tion to Se$urit 2aluation Investment Analysis and Portfolio Management, .ighth ."ition) b Fran6 M% Reill ) CFA an" Meith N Iro(n) CFA Rea"ing ?D In"ustr Anal sis Investment Analysis and Portfolio Management, .ighth ."ition) b Fran6 M% Reill ) CFA an" Meith N Iro(n) CFA Rea"ing ?E Com!an Anal sis an" Sto$6 2aluation Invest+ nent Analysis add Portfolio Management, .ighth ."ition) b Fran6 M% Reill ) CFA an" Meith N Iro(n) CFA Rea"ing ?J Intro"u$tion to Pri$e /ulti!les b Bohn D% St o(e) CFA) Thomas R% Robinson) CFA) Beral" .% Pinto) CFA) an" Dennis @% /$Aea#e ) CFA

(((%$fafnstftute%org7tool6ft89our onlfne !re!aration resour$e

Stu" Session 05

LEARNING OUTCOMES Reading 7Q: An In $od&" ion o Se"&$i 8 Va%&a ion The $an"i"ate shoul" be able to, a% e*!lain the to!-"o(n a!!roa$h) an" its un"erl ing logi$) to the se$urit #aluation !ro$ess: b% state the #arious forms of in#estment returns: ; $al$ulate an" inter!ret the #alue of both a !referre" sto$6 an" a $ommon sto$6 using the "i#i"en" "is$ount mo"el (DD/): "% sho( ho( to use the DD/ to "e#elo! an earnings multi!lier mo"el an" e*!lain the fa$tors in the DD/ that affe$t a sto$6+s !ri$e-toearnings (P7.) ratio: e% e*!lain the $om!onents of an in#estor+s re<uire" rate of return (i%e%) the real ris6free rate) the e*!e$te" rate of inflation) an" a ris6 !remium) an" "is$uss the ris6 fa$tors to be assesse" in "etermining an e<uit ris6 !remium for use in estimating the re<uire" return for the in#estment in ea$h $ountr : f% estimate the "i#i"en" gro(th rate) gi#en the $om!onents of the re<uire" rate of return in$or!orating the earnings retention rate an" $urrent sto$6 !ri$e:

>ne

g% "es$ribe a !ro$ess for "e#elo!ing estimate" in!uts to be use" in the DD/) in$lu"ing the re<uire" rate of return an" e*!e$te" gro(th rate of "i#i"en"s C S I S IVI %:OiE:Z%[ Reading 7A: Ind&# $8 Ana%8#i# The $an"i"ate shoul" be able to "es$ribe ho( stru$tural e$onomi$ $hanges (e%g%) "emogra!hi$s) te$hnolog ) !oliti$s) an" regulation) ma affe$t in"ustries% Reading 7B: Co,3an8 Ana%8#i# and S o"@ Va%&a ion

The $an"i"ate shoul" be able to, a% "ifferentiate bet(een 0) a gro(th $om!an an" a gro(th sto$6) 1) a "efensi#e $om!an an" a "efensi#e sto$6) 3) a $ $li$al $om!an an" a $ $li$al sto$6) 5) a s!e$ulati#e $om!an an" a s!e$ulati#e sto$6) an" ?) a #alue sto$6 an" a gro(th sto$6: b% "es$ribe an" estimate the e*!e$te" earnings !er share (.PS) an" earnings

multi!lier for a $om!an an" use the multi!le to ma6e an in#estment "e$ision regar"ing the $om!an % Reading 7T: In $od&" ion o P$i"e M&% i3%e# The $an"i"ate shoul" be able to, a% "is$uss the rationales for) an" the !ossible "ra(ba$6s to) the use of !ri$e-toearnings ratio (P7.)) !ri$e-to-boo F #alue (P7I2)) !ri$e-to-sales ratio (P7S)) an" !ri$e-to-$ash flo( (P7CF) in e<uit #aluation: b% $al$ulate an" inter!ret P7.) P7I2) P7S) an" P7CF%

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0 IDI
STUDY SESSION 17 FI\ED INCOME: 2a#i" Con"e3 # his stu" session !resents the foun"ation for fi*e"in$ome in#estments) one of the largest an" fastest gro(ing segments of global finan$ial mar6ets% It begins (ith an intro"u$tion to the basi$ features an" $hara$teristi$s of fi*e"in$ome se$urities an" the asso$iate" ris6s The session then buil"s b "es$ribing the (ith ai e issuers) se$tors) an" t !es of bon"s% Finall ) the stu" session $on$lu"es an intro"u$tion to iel"s an" s!rea"s an" the effe$t of monetar !oli$ on finan$ial mar6ets% These rea"ings $ombine" are the !rimar buil"ing blo$6s for mastering the anal sis) #aluation) an" management of fi*e"-in$ome se$urities%

'

T :

R.ADIN' ASSI'N/.NTS Rea"ing CK Features of Debt Se$urities "i,ed Income Analya-s for the hartered "inancial Analyst. Program, be$on" ."ition) b Fran6 B% Fabo--i) CFA) e"itor Rea"ing C0 Ris6s Asso$iate" (ith In#esting in Ion"s "i,ed Income Analya-s for the hartered "inancial Analyst. Program, Se$on" ."ition) b Fran6 B% Fabo--i) CFA) e"itor Rea"ing C1 O#er#ie( of Ion" Se$tors an" Instruments "i,ed Income Analysis for the hartered "inancial Analyst. Program, Se$on" ."ition) b Fran6 B% Fabo--i) CFA) e"itor Rea"ing C3 Gn"erstan"ing 9iel" S!rea"s "i,ed Income Analysis for the hartered "inancial Analyst. Program, Se$on" ."ition) b Fran6 B% Fabo--i) CFA) e"itor LEARNING OUTCOMES Rea"ing CK, Features of Debt

Se$urities The $an"i"ate shoul" be able to, a% e*!lain the !ur!oses of a bon"+s in"enture an" "es$ribe affirmati#e an" negati#e $o#enants: b% "es$ribe the basi$ features of a bon") the #arious $ou!on rate stru$tures) an" the stru$ture of floating-rate se$urities:

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Stu" Session 0?

$% "efine a$$rue" interest) full !ri$e) an" $lean !ri$e: "% e*!lain the !ro#isions for re"em!tion an" retirement of bon"s: e% i"entif the $ommon o!tions embe""e" in a bon" issue) e*!lain the im!ortan$e of embe""e" o!tions) an" state (hether su$h o!tions benefit the issuer or the bon"hol"er: f% "es$ribe metho"s use" b institutional in#estors in the bon" mar6et to finan$e the !ur$hase of a se$urit (i%e%) margin bu ing an" re!ur$hase agreements)% Reading Q1: Ri#@# A##o"ia ed Si ! In+e# ing in 2ond# The $an"i"ate shoul" be able to, a% e*!lain the ris6s asso$iate" (ith in#esting in bon"s: b% i"entif the relations among a bon"+s $ou!on rate) the iel" re<uire" b the mar6et) an" the bon"+s !ri$e relati#e to !ar #alue (i%e%) "is$ount) !remium) or e<ual to !ar): ; e*!lain ho( features of a bon" (e%g%) maturit ) $ou!on) an" embe""e" o!tions) i" the le#el of a bon"+s iel" affe$t the bon"+s interest rate ris6: an" the le#el _f a bon" s iel" gffT;f the bon" s interest rate ris6: "% i"entif the relationshi! among the !ri$e of a $allable bon") the !ri$e of an o!tion-free bon") an" the !ri$e of the embe""e" $all o!tion: e% e*nlain the interest rate ris6 of a floatinn-rate se$urit an" (h# su$h a se$urit +s e% e*!lain the interest rate ris6 of a floating-rate se$urit an" (h su$h a se$urit +s !ri$e ma "iffer from !ar #alue: f% $om!ute an" inter!ret the "uration an" "ollar "uration of a bon": g% "es$ribe iel"-$ur#e ris6 an" e*!lain (h "uration "oes not a$$ount for iel"$ur#e ris6 for a !ortfolio of bon"s: h% e*!lain the "isa"#antages of a $allable or !re!a able se$urit to an in#estor: i% i"entif the fa$tors that affe$t the rein#estment ris6 of a se$urit an" e*!lain (h !re!a able amorti-ing se$urities e*!ose in#estors to greater rein#estment ris6 than nonamorti-ing se$urities: =% "es$ribe the #arious forms of $re"it ris6 an" "es$ribe the meaning an" role of $re"it ratings:

6% e*!lain li<ui"it ris6 an" (h it might be im!ortant to in#estors e#en if the e*!e$t to hol" a se$urit to the maturit "ate: I% "es$ribe the e*$hange rate ris6 an in#estor fa$es (hen a bon" ma6es !a ments in a foreign $urren$ : m% e*!lain inflation ris6: n% e*!lain ho( iel" #olatilit affe$ts the !ri$e of a bon" (ith an embe""e" o!tion an" ho( $hanges in #olatilit affe$t the #alue of a $allable bon" an" a !utable bon": o% "es$ribe the #arious forms of e#ent ris6% Reading Q': O+e$+ieS of 2ond Se" o$# and In# $&,en # The $an"i"ate shoul" be able to, a% "es$ribe the features) $re"it ris6 $hara$teristi$s) an" "istribution metho"s for go#ernment se$urities: b% "es$ribe the t !es of se$urities issue" b the G%S% De!artment of the Treasur (e%g% bills) notes) bon"s) an" inflation !rote$tion se$urities)) an" "ifferentiate bet(een on-the-run an" of f-t he-run Treasur se$urities:

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Stu" Session 0?

$% "es$ribe ho( stri!!e" Treasur se$urities are $reate" an" "istinguish bet(een $ou!on stri!s an" !rin$i!al stri!s: "% "es$ribe the t !es an" $hara$teristi$s of se$urities issue" b G%S% fe"eral agen$ies: e% "es$ribe the t !es an" $hara$teristi$s of mortgage-ba$6e" se$urities an" e*!lain the $ash flo() !re!a ments) an" !re!a ment ris6 for ea$h t !e: f% state the moti#ation for $reating a $ollaterali-e" mortgage obligation: g% "es$ribe the t !es of se$urities issue" b muni$i!alities in the Gnite" States an" "istinguish bet(een ta*-ba$6e" "ebt an" re#enue bon"s: h% "es$ribe the $hara$teristi$s an" moti#ation for the #arious t !es of "ebt issue" b $or!orations (in$lu"ing $or!orate bon"s) me"ium-term notes) stru$ture" notes) $ommer$ial !a!er) negotiable CDs) an" ban6ers a$$e!tan$es): i% "efine an asset-ba$6e" se$urit ) "es$ribe the role of a s!e$ial !ur!ose #ehi$le in an asset-ba$6e" se$urit +s transa$tion) state the moti#ation for a $or!oration to issue an assetba$6e" se$urit ) an" "es$ribe the t !es of e*ternal $re"it enhan$ements for asset-ba$6e" se$urities: =% "es$ribe $ollaterali-e" "ebt obligations: "ifferentiate es$ribe the me$hanisms the !rimar an" a#ailable se$on"ar for !la$ing mar6ets bon"s in bon"s in the Reading Q): Unde$# anding Yie%d S3$ead# The $an"i"ate shoul" be able to, a% i"entif the interest rate !oli$ tools a#ailable to a $entral ban6 (e%g%) the G%S% Fe"eral Reser#e): b% "es$ribe a iel" $ur#e an" the #arious sha!es of the iel" $ur#e: ; e*!lain the basi$ theories of the term stru$ture of interest rates an" "es$ribe the im!li$ations of ea$h theor for the sha!e of the iel" $ur#e: "% "efine a s!ot rate: e% $om!ute) $om!are) an" $ontrast the #arious iel" s!rea" measures: f% "es$ribe a $re"it s!rea" an" "is$uss the suggeste" relation bet(een $re"it s!rea"s an" the (ell-being of the e$onom : g% i"entif ho( embe""e" o!tions affe$t iel" s!rea"s: h% e*!lain ho( the li<ui"it or issue-si-e of a bon" affe$ts its iel" s!rea" relati#e to ris6-free se$urities an" relati#e to

OXJ

other se$urities: i% $om!ute the after-ta* iel" of a ta*able se$urit an" the ta*-e<ui#alent iel" of a ta*-e*em!t se$urit : =% "efine AIIOR an" e*!lain its im!ortan$e to fun"e" in#estors (ho borro( short term%

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0 IDI
STUDY SESSION 1Q This stu" session illustrates the !rimar tools for #aluation an" anal sis of fi*e" in$ome se$urities an" mar6ets% It begins (ith a stu" of basi$ #aluation theor an" te$hni<ues for bon"s an" $on$lu"es (ith a more in-"e!th e*!lanation of the !rimar tools for fi*e"-in$ome in#estment #aluation) s!e$ifi$all ) FI\ED INCOME: Anal sis an" 2aluation

'

R.ADIN' ASSI'N/.NTS Rea"ing C5 Intro"u$tion to the 2aluation of Debt Se$urities "i,ed Income Analya-s for the hartered "inancial Analyst. Program, Se$on" ."ition) b Fran6 B% Fabo--i) CFA) e"itor Rea"ing C? 9iel" /easures) S!ot Rates) an" For(ar" Rates "i,ed Income Analya-s for the hartered "inancial Analyst. Program, Se$on" ."ition) b Fran6 B% Fabo--i) CFA) e"itor Rea"ing CC Intro"u$tion to the /easurement of Interest Rate Ris6 "i,ed Income Analysis for the hartered "inancial Analyst. Program, Se$on" ."ition) b Fran6 B% Fabo--i) CFA) e"itor LEARNING OUTCOMES Rea"ing C5, Intro"u$tion to the 2aluation of Debt Se$urities The $an"i"ate shoul" be able to, a% e*!lain the ste!s in the bon" #aluation !ro$ess: b% i"entif the t !es of bon"s for (hi$h estimating the e*!e$te" $ash flo(s is "iffi$ult an" e*!lain the !roblems en$ountere" (hen estimating the $ash flo(s for these bon"s: $% $om!ute the #alue of a bon" an" the $hange in #alue that is attributable to a $hange in the "is$ount rate: "% e*!lain ho( the !ri$e of a bon" $hanges as the bon" a!!roa$hes its maturit

S+

"ate an" $om!ute the $hange in #alue that is attributable to the !assage of time: e% $om!ute the #alue of a -ero-$ou!on bon":

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Stu" Session 0C

f% e*!lain the arbitrage-free #aluation a!!roa$h an" the mar6et !ro$ess that for$es the !ri$e of a bon" to(ar" its arbitrage-free #alue an" e*!lain ho( a "ealer $an generate an arbitrage !rofit if a bon" is mis!ri$e"% Reading Q7: Yie%d Mea#&$e#9 S3o Ra e#9 and Fo$Sa$d Ra e# The $an"i"ate shoul" be able to, a% e*!lain the sour$es of return from in#esting in a bon": b% $om!ute an" inter!ret the tra"itional iel" measures for fi*e"-rate bon"s an" e*!lain their limitations an" assum!tions: ; e*!lain the im!ortan$e of rein#estment in$ome in generating the iel" $om!ute" at the time of !ur$hase) $al$ulate the amount of in$ome re<uire" to generate that iel") an" "is$uss the fa$tors that affe$t rein#estment ris6: "% $om!ute an" inter!ret the bon" e<ui#alent iel" of an annual-!a bon" an" the annual-!a iel" of a semiannual-!a bon": e% "es$ribe the metho"olog for $om!uting the theoreti$al Treasur s!ot rate $ur#e an" $om!ute the #alue of a bon" using s!ot rates:

IT

f% "ifferentiate bet(een the nominal s!rea") the -ero-#olatilit s!rea") an" the o!tion-a"=uste" s!rea": g% "es$ribe ho( the o!tion-a"=uste" s!rea" a$$ounts for the o!tion $ost in a bon" (ith an embe""e" o!tion: h% e*!lain a for(ar" rate an" $om!ute s!ot rates from for(ar" rates) for(ar" rates from s!ot rates) an" the #alue of a bon" using for(ar" rates% Reading QQ: In $od&" ion o !e Mea#&$e,en of In e$e# Ra e Ri#@ The $an"i"ate shoul" be able to, a% "istinguish bet(een the full #aluation a!!roa$h (the s$enario anal sis a!!roa$h) an" the "uration7$on#e*it a!!roa$h for measuring interest rate ris6 an" e*!lain the a"#antage of using the full #aluation a!!roa$h: b% "emonstrate the !ri$e #olatilit $hara$teristi$s for o!tion-free) $allable) !re!a able) an" !utable bon"s (hen interest rates $hange: ; "es$ribe !ositi#e $on#e*it ) negati#e $on#e*it ) an" their relation to bon" !ri$e an" iel": "% $om!ute an" inter!ret the effe$ti#e "uration of a bon") gi#en information about

ho( the bon"+s !ri$e (ill in$rease an" "e$rease for gi#en $hanges in interest rates) an" $om!ute the a!!ro*imate !er$entage !ri$e $hange for a bon") gi#en the bon"+s effe$ti#e "uration an" a s!e$ifie" $hange in iel": e% "istinguish among the alternati#e "efinitions of "uration an" e*!lain (h effe$ti#e "uration is the most a!!ro!riate measure of interest rate ris6 for bon"s (ith embe""e" o!tions: f% $om!ute the "uration of a !ortfolio) gi#en the "uration of the bon"s $om!rising the !ortfolio) an" e*!lain the limitations of !ortfolio "uration: g% "es$ribe the $on#e*it measure of a bon" an" estimate a bon"+s !er$entage !ri$e $hange) gi#en the bon"+s "uration an" $on#e*it an" a s!e$ifie" $hange in interest rates: h% "ifferentiate bet(een mo"ifie" $on#e*it an" effe$ti#e $on#e*it : i% $om!ute the !ri$e #alue of a basis !oint (P2IP)) an" e*!lain its relationshi! to "uration%

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STGD9 S.SSION 0D DERIVATIVE INVESTMENTS

eri#ati#es8finan$ial instruments that offer a return base" on the return e*!osures to of some un"erl ing asset8ha#e be$ome in$reasingl asset $lass im!ortant an" fun"amental in effe$ti#el managing finan$ial ris6 an" $reating s ntheti$ h in other se$urit mar6ets)

Stu" Session 0D

LEARNING OUTCOMES Reading QA: De$i+a i+e Ma$@e # and In# $&,en # The $an"i"ate shoul" be able to, a% "efine a "eri#ati#e an" "ifferentiate bet(een e*$hangetra"e" an" o#er-the$ounter "eri#ati#es: b% "efine a for(ar" $ommitment an" a $ontingent $laim: ; "ifferentiate the basi$ $hara$teristi$s of for(ar" $ontra$ts) futures $ontra$ts) o!tions ($alls an" !uts)) an" s(a!s: "% "is$uss the !ur!oses an" $riti$isms of "eri#ati#e mar6ets: e% e*!lain arbitrage an" the role it !la s in "etermining !ri$es an" !romoting mar6et effi$ien$ % Reading QB: Fo$Sa$d Ma$@e # and Con $a" # The $an"i"ate shoul" be able to, e*!lain "eli#er 7settlement an" "efault ris6 for both long an" short !ositions in a for(ar" $ontra$t: for(ar" $ontra$t: b% "es$ribe the !ro$e"ures for settling a for(ar" $ontra$t at e*!iration an" "is$uss ho( termination alternati#es !rior to e*!iration $an affe$t $re"it ris6: ; "ifferentiate bet(een a "ealer an" an en" user of a for(ar" $ontra$t: "% "es$ribe the $hara$teristi$s of e<uit for(ar" $ontra$ts an" for(ar" $ontra$ts on -ero-$ou!on an" $ou!on bon"s: e% "es$ribe the $hara$teristi$s of the .uro"ollar time "e!osit mar6et an" "efine AIIOR an" .uribor: f% "es$ribe the $hara$teristi$s an" $al$ulate the gain7loss of for(ar" rate agreements (FRAs): g% $al$ulate an" inter!ret the !a off of an FRA) an" e*!lain ea$h of the $om!onent terms: h% "es$ribe the $hara$teristi$s of $urren$ for(ar" $ontra$ts% Reading QT: F& &$e# Ma$@e # and Con $a" # The $an"i"ate shoul" be able to, a% " es$ ri be th e ; ha ra $te ri st i$s of f u t u res ;_ nt ra $ts:

b% "istinguish bet(een futures $ontra$ts an" for(ar" $ontra$ts: ; "ifferentiate bet(een margin in the se$urities mar6ets an" margin in the futures mar6ets) an" e*!lain the role of initial margin) maintenan$e margin) #ariation margin) an" settlement in futures tra"ing: "% "es$ribe !ri$e limits an" the !ro$ess of mar6ing to mar6et an" $om!ute an" inter!ret the margin balan$e) gi#en the !re#ious "a +s balan$e an" the $hange in the futures !ri$e: e% "es$ribe ho( a futures $ontra$t $an be terminate" at or !rior to e*!iration: f% "es$ribe the $hara$teristi$s of the follo(ing t !es of futures $ontra$ts, .uro"ollar) Treasur bon") sto$6 in"e*) an" $urren$ %

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Stu" Session 0D

Reading AN: O3 ion Ma$@e # and Con $a" # The $an"i"ate shoul" be able to, a% "efine .uro!ean o!tion) Ameri$an o!tion) an" the $on$e!t of mone ness of an o!tion: b% "ifferentiate bet(een e*$hange-tra"e" o!tions an" o#erthe-$ounter o!tions: ; i"entif the t !es of o!tions in terms of the un"erl ing instruments: "% $om!are an" $ontrast interest rate o!tions (ith for(ar" rate agreements (FRAs): e% "efine interest rate $a!s) floors) an" $ollars: f% $om!ute an" inter!ret o!tion !a offs) an" e*!lain ho( interest rate o!tion !a offs "iffer from the !a offs of other t !es of o!tions: g% "efine intrinsi$ #alue an" time #alue an" e*!lain their relationshi!: h% "etermine the minimum an" ma*imum #alues of .uro!ean o!tions an" Ameri$an o!tions: i% $al$ulate an" inter!ret the lo(est !ri$es of .uro!ean an" Ameri$an $alls an" !uts base" on the rules for minimum #alues an" lo(er boun"s: =% e*!lain ho( o!tion !ri$es are affe$te" b the e*er$ise !ri$e an" the time to

eX3

%Af 1

6% e*!lain !ut-$all !arit for .uro!ean o!tions) an" relate !ut-$all !arit to arbitrage an" the $onstru$tion of s ntheti$ o!tions: I% $ontrast Ameri$an o!tions (ith .uro!ean o!tions in terms of the lo(er boun"s on o!tion !ri$es an" the !ossibilit of earl e*er$ise: m% e*!lain ho( $ash flo(s on the un"erl ing asset affe$t !ut$all !arit an" the lo(er boun"s of o!tion !ri$es: n% in"i$ate the "ire$tional effe$t of an interest rate $hange or #olatilit $hange on an o!tion+s !ri$e% Reading A1: SSa3 Ma$@e # and Con $a" # The $an"i"ate shoul" be able to, a% "es$ribe the $hara$teristi$s of s(a! $ontra$ts an" e*!lain ho( s(a!s are terminate": b% "efine) $al$ulate) an" inter!ret the !a ment of $urren$ s(a!s) !lain #anilla interest rate s(a!s) an" e<uit s(a!s% Reading A': Ri#@ Manage,en A33%i"a ion# of O3 ion S $a egie# The $an"i"ate shoul" be able to,

Ai$ ]^K

a% "etermine the #alue at e*!iration) !rofit) ma*imum !rofit) ma*imum loss) brea6e#en un"erl ing !ri$e at e*!iration) an" general sha!e of the gra!h of the strategies of bu ing an" selling $alls an" !uts) an" in"i$ate the mar6et outloo6 of in#estors using these strategies: b% "etermine the #alue at e*!iration) !rofit) ma*imum !rofit) ma*imum loss) brea6e#en un"erl ing !ri$e at e*!iration) an" general sha!e of the gra!h of a $o#ere" $all strateg an" a !rote$ti#e !ut strateg ) an" e*!lain the ris6 management a!!li$ation of ea$h strateg %

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STUDY SESSION 1B ALTERNATIVE INVESTMENTS

I VOT E

e$ause of "i#ersifi$ation benefits an" higher e*!e$tations of in#estment returns) in#estors are in$reasingl turning to alternati#e in#estments% This stu" session "es$ribes the $ommon t !es of alternati#e in#estments) metho"s their #aluation) uni<ue ris6s an" o!!ortunities asso$iate" (ith them) an" the n bet(een alternati#e in#estments an" tra"itional in#estments% ,ern:

Although fin"ing a single "efinition of an &alternati#e& in#estment is "iffi$ult) $ertain features (e%g%) limite" li<ui"it ) nfre<uent #aluations) an" uni<ue legal stru$tures) are t !i$all asso$iate" (ith alternati#e in#estments% This stu" session "is$usses these features an" ho( to e#aluate their im!a$t on e*!e$te" returns an" in#estment "e$isions in more "etail% The rea"ing !ro#i"es an o#er#ie( of the ma=or $ategories of alternati#e in#estments) in$lu"ing real estate) !ri#ate e<uit % #enture $a!ital) he"ge fun"s) $losel hel" $om!anies) "istresse" se$urities) an" $ommo"ities% .a$h of these $ategories has se#eral uni<ue $hara$teristi$s) an" the rea"ings "is$uss #aluation metho"s for illi<ui" assets (su$h as "ire$t real estate or $losel hel" $om!anies)) !erforman$e measures for !ri#ate e<uit an" #enture $a!ital in#estments) "ifferen$es bet(een #arious he"ge fun" strategies) an" im!lementation #ehi$les for in#estments in alternati#e assets% R.ADIN' ASSI'N/.NTS Rea"ing D3 Alternati#e In#estments *lobal Investments, Si*th ."ition) b Iruno Solni6 an" Dennis /$Aea#e ) CFA Rea"ing D5 In#esting in Commo"ities *lobal Pers/ectives on Investment Management: $earning from the $eaders, e"ite" b Ro"ne N% Sulli#an) CFA

(((%$fafnstftuta%org7tool6ft89our onlfne !re!aration resour$e

Stu" Session 0E

LEARNING OUTCOMES Reading A): A% e$na i+e In+e# ,en # The $an"i"ate shoul" be able to, a% "ifferentiate bet(een an o!en-en" an" a $lose"-en" fun") an" e*!lain ho( net asset #alue of a fun" is $al$ulate" an" the nature of fees $harge" b in#estment $om!anies: b% "istinguish among st le) se$tor) in"e*) global) an" stable #alue strategies in e<uit in#estment an" among e*$hange tra"e" fun"s (.TFs)) tra"itional mutual fun"s) an" $lose"-en" fun"s: ; e*!lain the a"#antages an" ris6s of .TFs: "% "es$ribe the forms of real estate in#estment an" e*!lain their $hara$teristi$s as an in#estable asset $lass: e% "es$ribe the #arious a!!roa$hes to the #aluation of real estate: f% $al$ulate the net o!erating in$ome (NOI) from a real estate in#estment) the #alue of a !ro!ert using the sales $om!arison an" in$ome a!!roa$hes) an" the after ta* $ash flo(s) net !resent #alue) an" iel" of a real estate in#estment:

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g% e*!lain the stages in #enture $a!ital in#esting) #enture $a!ital in#estment $hara$teristi$s an" $hallenges to #enture $a!ital #aluation an" !erforman$e measurement: h% $al$ulate the net !resent #alue (NP2) of a #enture $a!ital !ro=e$t) gi#en the !ro=e$t+s !ossible !a off an" $on"itional failure !robabilities: i% "efine he"ge fun" in terms of ob=e$ti#es) legal stru$ture) an" fee stru$ture) an" "es$ribe the #arious $lassifi$ations of he"ge fun"s: =% e*!lain the benefits an" "ra(ba$6s to fun" of fun"s in#esting: 6% "is$uss the le#erage an" uni<ue ris6s of he"ge fun"s: I% "is$uss the !erforman$e of he"ge fun"s) the biases !resent in he"ge fun" !erforman$e measurement) an" e*!lain the effe$t of sur#i#orshi! bias on the re!orte" return an" ris6 measures for a he"ge fun" "atabase:

m% e*!lain ho( the legal en#ironment affe$ts the #aluation of $losel hel" $om!anies: n% "es$ribe alternati#e #aluation metho"s for $losel hel"

$om!anies an" "istinguish among the bases for the "is$ounts an" !remiums for these $om!anies: o% "is$uss "istresse" se$urities in#esting an" $om!are #enture $a!ital in#esting (ith "istresse" se$urities in#esting: !% "is$uss the role of $ommo"ities as a #ehi$le for in#esting in !ro"u$tion an" $onsum!tion: <% e*!lain the moti#ation for in#esting in $ommo"ities) $ommo"ities "eri#ati#es) an" $ommo"it -lin6e" se$urities: r% "is$uss the sour$es of return on a $ol lateral i-e" $ommo"it futures !osition% Reading A0 In+e# ing in Co,,odi ie# The $an"i"ate shoul" be able to, a% e*!lain the relationshi! bet(een s!ot !ri$es an" e*!e$te" future !ri$es in terms of $ontango an" ba$6(ar"ation:

(((%$fainstitute%org7tool6it89our online !re!aration resour$e

Stu" Session 0E

*> de#"$i*e !e #o&$"e# of $e &$n and $i#@ fo$ a "o,,odi 8 in+e# ,en and !e effe" on a 3o$ fo%io of adding an a%%o"a ion o "o,,odi ie#_ ` eX3%ain S!8 a "o,,odi 8 indeX # $a eg8 i# gene$a%%8 "on#ide$ed an a" i+e in+e# ,en >

SSS> Vi+id 2oo@9 ne

(((%$fainstitute%org7tool6it89our online !re!aration resour$e