Things to know
1) What are the 6 components of code of ethics. What are the seven standards of professional
conduct. Schweser SS1 page 11. What are the 2 key principles of the Soft Dollar Standards?
Schweser SS1 page 102. What is the 3 level analysis under the Soft Dollar Standards.
Schweser SS1 page 105.
2) What are the requirements under the research objectivity policy? Schweser SS1 page 112.
What about the requirements under investment banking? Schweser SS1 page 114.
3) What are the two problems when allocating client trades on an ad hoc basis? Schweser SS2
page 129. 5 basic principles of the new prudent investor rule. Trustees must exercise what
when managing trust assets? Explain each. Schweser SS2 page 134.
4) 5 new changes to rules governing investment trust management under the new prudent
investor rule. Schweser SS2 page 135. 3 limitations of correlation analysis. Schweser SS2
page 145. How is the line of best fit determined? Schweser SS2 page 149. Go through
questions to see if you need to memorise test statistic formulas. What is the formula for
constructing a confidence interval for predicted values? Schweser SS2 page 156.
5) How can you calculate the coefficient of determination and standard error of estimate from an
ANOVA table? Schweser SS2 page 159. How would you interpret the slop coefficient under
multiple regression to be? Schweser SS2 page 177. What is the p-value and when can you
reject the hypothesis? Schweser SS2 page 179
6) What is the problem of overestimating the regression? How do you get around it? Schweser
SS2 page 187. How can you decide how many dummy variables to include in a regression
analysis? Schweser SS2 page 193. What is heteroskedasticity, unconditional
heteroskedasticity and conditional heteroskedasticity? Schweser SS2 page 196
7) What are the 4 effects of heteroskedasticity on regression? Two ways to detect it? Schweser
SS2 page 197. What is seriel correlation and its impact on regression analysis? Schweser SS2
page 200. How can you detect serial correlation? Schweser SS2 page 201. What is
multicollinearity, what effect it has on regression and how to detect it. Schweser SS2 page 203
8) What is autocorrelation? What is a second-order autoregressive model? Schweser SS3 page
229. How do you correct seasonality? Schweser SS3 page 233. What is in-sampling forecast
aiming to do? How does this differ with out-of-sample forecasts? Schweser SS3 page 236
9) Know how to calculate a mean-reverting level. Schweser SS3 page 239. What happens when
the value of the lag coefficient is equal to one? What is the dickey fuller test for? Schweser
SS3 page 241. Explain the dickey fuller test. Schweser SS3 page 242.
10) How is economic growth measured? What is the Rule of 70? Schweser SS4 page 10 what are
the 4 preconditions for economic growth? Schweser SS4 page 12. What is the productivity
curve and what are the two important properties that you can deduce from the chart? Schweser
SS4 page 13. What is the one third rule? Schweser SS4 page 14
11) What are the 3 factors required for economic growth to continue? Which one is the key factor?
Schweser SS4 page 15. What are the 3 economic growth theories, and explain each. Schweser
SS4 page 23
12) What are the two methods of regulating natural monopolies. What is the key assumption
underlying both? Schweser SS4 page 30 what is the theory of contestable markets? Schweser
SS4 page 34. When does a country gain from international trade? Schweser SS4 page 38.
What is consumer and producer surplus? At which point is the equilibrium quantity produced
and consumed? Schweser SS4 page 41.
13) Be able to explain the effects of a tariff. Schweser SS4 page 42. What about the effect of a
quota. Schweser SS4 page 43. What are the 3 arguments for trade restrictions, that have strong
support? Schweser SS4 page 44. What is the relationship between fixed and real exchange
rates? Schweser SS4 page 49. What are the 3 basic determinants of demand and supply for
any currency? Schweser SS4 page 50.
14) What does purchasing power parity imply? What is the balance of payment equation and
explain each component. Schweser SS4 page 54. What are the 3 exchange rate policies and
explain each. Schweser SS4 page 55.
15) What is the bid price and what is the ask price? Schweser SS4 page 63. What are the factors
which affect a foreign exchange spread? Know how to calculate cross exchange rates.
Schweser SS4 page 64. Know how to calculate cross rates when given bid-ask spreads.
Schweser SS4 page 65. What would the forward exchange rate reflect? Schweser SS4 page
68. What is the relationship between length of a forward exchange rate contract and the spread
between bid and ask prices? Schweser SS4 page 69.
16) What is forward discount and forward premium. How would you annualise them? Schweser
SS4 page 70. What is covered interest arbitrage and explain how it works. Schweser SS4 page
17) What are the 4 factors that cause a country’s currency to appreciate or depreciate? Schweser
SS4 page 84. What are the impacts on the currency, current account and financial account
from an expansionary monetary and fiscal policy? Schweser SS4 page 86. What is a pegged
exchange rate system? Schweser SS4 page 86.
18) What is the equation for relative PPP? Schweser SS4 page 88. What does the international
Fisher relation say? Schweser SS4 page 89. What is the formula for the real interest rate?
Schweser SS4 page 90.
19) What can we say about countries with high nominal interest rates? What is the economic
intuition behind it? Formula for the theory of uncovered interest rate parity? Schweser SS4
page 92. Define GDP, GNP and NNI. What is the relationship between GDP, GNP and NNI?
What is the GDP deflator Schweser SS4 page 106.
20) What are the four categories of intercorporate investments? how would you ultimately decide
which category is appropriate? What are the percentages of minority passive and minority
active? What are the relevant accounting treatment for all categories Schweser SS5 page 114.
21) Explain the classification held-to-maturity, held-for trading and available-for-sale. What is
amortised cost? Schweser SS5 page 116. What impact do these 3 classifications have on the
balance sheet and income statement? Schweser SS5 page 118. Know how to implement the
equity method. Schweser SS5 page 119.
22) Be able to explain how transactions between the investor and investee would work, under a
minority active investment set up. Schweser SS5 page 122. What is the purchase and pooling
method. Schweser SS5 page 128. Be able to show the impact of the purchase method and
pooling method on various financial items (reproduce Figure 9) Schweser SS5 page 130.
Know how to calculate goodwill. Schweser SS5 page 132
23) Know how to test goodwill for impairment under US GAAP. What are some of the
differences in applying the purchase method under US GAAP and IFRS. Be able to explain
each. Schweser SS5 page 134. What are the conditions that determine if an entity is a variable
interest entity? Schweser SS5 page 153. What happens if an entity is a variable interest entity?
Schweser SS5 page 154.
24) What are the 3 different measures of pension obligation under US GAAP? Schweser SS6 page
160. Know how to calculate the PBO. Formula for annuity? (lookup online) Schweser SS6
page 162. What are the 3 assumptions that a firm discloses in its pension calculations?
Schweser SS6 page 166. What is the effect of changing these assumptions on the 3 different
measures of pension obligation? Schweser SS6 page 167. How does the IFRS reduce pension
accounts volatility? Schweser SS6 page 169.
25) Know how to calculate the economic pension expense. Schweser SS6 page 172. If the plan
assets and PBO are not reported separately on the balance sheet, then what is reported?
Schweser SS6 page 174. Explain the fair value method for stock options. Schweser SS6 page
176. Explain what stock appreciation rights and phantom stocks are. Schweser SS6 page 177.
26) With accounting, how does currency risk come in to play? Schweser SS6 page 186. Know
when the 3 translation methods would be applied (Figure 1) Schweser SS6 page 189.
Reproduce figure 3 Schweser SS6 page 194.
27) Be familiar with the all current method and the temporal method. Schweser SS6 page 194 to
28) How does US GAAP and the IFRS differ in terms of inflation adjustment? Define a
hyperinflationary environment. Schweser SS6 page 205. What are the treatments for a
subsidiary in a hyperinflationary environment under US GAAPS and IFRS. Schweser SS6
page 210 How are derivatives reported on the balance sheet if it is for speculative purposes.
Schweser SS7 page 223. Explain the purpose of the 3 hedge types and also say how they are
treated in accounts Schweser SS7 page 224.
29) What are some of the mechanisms in place to prevent strategic manipulation? Schweser SS7
page 234. What is mean reversion with regards to earnings? Schweser SS7 page 239. What are
the 3 manipulation techniques when it comes to revenue? Schweser SS7 page 240.
30) 3 techniques for manipulating expenses. Schweser SS7 page 240. What are the conditions for
a capital lease, according to US GAAP? How is operating lease different from this? Schweser
SS7 page 242. 3 ways firms can manipulate cashflows. Schweser SS7 page 243.
31) How is revenue related to the balance sheet, and when is revenue considered low quality?
Schweser SS7 page 244. What are the 5 other revenue issues listed by the notes that may
impact earnings quality? Schweser SS7 page 245.
32) What is days inventory on hand (DOH) and what does an increasing DOH mean? Schweser
SS7 page 246. What are the other balance sheet issues that may impact earnings? Schweser
SS7 page 250.
33) What is the appropriate adjustment for SPEs that are not consolidated with the primary
beneficiary’s accounts? How do you adjust the balance sheet for operating leases? Schweser
SS7 page 259. In terms of inventories, what do FIFO and LIFO do well and do badly in?
Formula for LIFO reserve and COGS FIFO. Schweser SS7 page 260. Which treatment is
preferred on the balance sheet? Schweser SS7 page 261. What is the formula for adjusting
FIFO COGS to LIFO COGS? In what two instances will the LIFO reserve decline? Schweser
SS7 page 266.
34) What are the 5 key principles with the capital budgeting process? Schweser SS8 page 12.
Know how to compute the initial investment outlay, after tax operating cash flow and terminal
year after-tax non-operating cashflows. Schweser SS8 page 17. Be familiar with the least
common multiple of lives approach and the equivalent annual annuity approach. Schweser
SS8 page 22 to page 25.
35) What is the key difference between scenario analysis and sensitivity analysis? Schweser SS8
page 28. When would be using the CAPM be important to determine the discount rate to be
used in a NPV exercise? What would happen if you used WACC instead? Schweser SS8 page
31. What are the 5 types of real options? Schweser SS8 page 31.
36) Define economic income and accounting income. Schweser SS8 page 35. Know how to
calculate economic profit and residual income. Schweser SS8 page 40. Define business risk.
Schweser SS8 page 59. Be able to calculate the degree of operating leverage, degree of
financial leverage and the degree of total leverage. Schweser SS8 page 60 to 63. What is the
formula for calculating the breakeven quantity of sales? Schweser SS8 page 64
37) What is the formula for WACC? Schweser SS8 page 69. Explain the two MM propositions.
Schweser SS8 page 70. What happens when there are taxes involved? Schweser SS8 page 71
What does the pecking order theory say? Schweser SS8 page 76. Why would a firm’s actual
capital structure fluctuate around the firm’s target capital structure? Schweser SS8 page 77.
How does the strength of the legal system affect the capital structre? Schweser SS8 page 79.
Reproduce figure 9. Schweser SS8 page 80
38) What do companies use stock splits and stock dividends for? What do academics have to say
about that? Schweser SS8 page 94. Know how to calculate the earnings per share effect of a
share repurchase, when the repurchase is made using borrowed funds. Schweser SS8 page 97.
What are the 3 ways of repurchasing shares? Schweser SS8 page 99. What is the formula for
effective tax rate (for dividend payments) Schweser SS8 page 101. Decide if dividend
initiation, unexpected dividend increase and unexpected dividend decreases or omissions are
positive or negative signals. Schweser SS8 page 103.
39) Be able to explain the residual dividend model (have a look at the example on page 104)
Schweser SS8 page 104. Advantages and disadvantages of the residual dividend model.
Schweser SS8 page 105. 5 rationales for share repurchaes. Schweser SS8 page 107. Explain
the dividend preference theory. Schweser SS8 page 108.
40) Two major objectives of corporate governance. Schweser SS9 page 123. What are the 3 forms
of integration and merger? Schweser SS9 page 140. What are the merger motivations and
common type of mergers associated with the different industry life cycles? Schweser SS9
page 146. What are the key differences between the 2 forms of acquisition? Schweser SS9
41) 3 factors to consider when negotiating over an acquisition method of payment. Schweser SS9
page 148. Be able to explain each of the pre-offer and post-offer defence mechanism.
Schweser SS9 page 150. What is the formula for the Herfindahl-Hirschman Index (HHI)?
What is the range for HHI for a moderately concentrated industry and a highly concentrated
industry? Schweser SS9 page 154.
42) Advantages and disadvantages of using the comparable company analysis method for valuing
a target firm? Schweser SS9 page 169. What is the mathematical formula for describing the
gains to the acquirer? Schweser SS9 page 171. What are spin-offs and split-offs? Schweser
SS9 page 175.
43) What are the 4 assumptions behind the mean-variance portfolio theory? Schweser SS18 page
196. Formula for the variance of a two asset portfolio. Schweser SS18 page 197. Portfolio
diversification is affected by? Schweser SS18 page 205. What is the formula for the variance
of an equally weighted portfolio? What is the important result from the formula? Schweser
SS18 page 208. What is the capital allocation line? Schweser SS18 page 212.
44) What is the capital market line? And what is the market portfolio? A key conclusion of the
capital market line? Equation for the capital market line? Schweser SS18 page 217.
Differences between the capital allocation line and the capital market line? Assumptions of the
CAPM? What is the security market line? Schweser SS18 page 219. Formula for beta of a
stock? Schweser SS18 page 222. What are the key differences between the security market
line and the capital market line? Schweser SS18 page 223.
45) What is the beta instability problem? Schweser SS18 page 229. What are the 3 types of
multifactor models and explain each. Schweser SS18 page 231. How does the number of
factors and intercept term differ between the macroeconomic factor model and the
fundamental factor model? Schweser SS18 page 235. What is a pure factor portfolio?
Schweser SS18 page 243. Main benefit of using the arbitrage pricing model over the CAPM
model? Schweser SS18 page 244.
46) What are the two key assumptions of CAPM and their implications. What happens when the
two key assumptions of the CAPM is violated? Schweser SS18 page 263. Why is international
flow of capital important? 6 factors that restrict international flow of capital. Schweser SS18
page 267. What are real exchange rate movements? Formula? Schweser SS18 page 272.
47) What does the ICAPM separation theorem assert? Schweser SS18 page 278. How does the
ICAPM difer from the domestic CAPM? Schweser SS18 page 279 What is local currency
sensitivity? Schweser SS18 page 282. What are the two theories that relates GDP growth with
exchange rate movements? Explain each. Schweser SS18 page 285. What are the two
relationships which explain exchange rates and interest rates? Explain each. Schweser SS18
48) What is the premise of the Treynor-Black model? Objective of the model? Schweser SS18
page 301. Summary of how the model allocates within the actively managed portfolio?
Schweser SS18 page 302. What are some factors that affect the ability to accept risk?
Schweser SS18 page 354. What are the 3 common approaches to implement the strategic asset
allocation? Schweser SS18 page 359.
49) What are the 8 uses of valuation? Schweser SS10 page 15. What are the formulas for ex ante
alpha and ex post alpha? Schweser SS10 page 18. What are the 3 origins of modern stock
exchanges? Schweser SS10 page 28. How is income tax treated for international investments?
Schweser SS10 page 31. Benefits of program trading Schweser SS10 page 33. Explain
internal crossing and agency trades. Schweser SS10 page 34. What are ADRs and what levels
are there? Schweser SS10 page 35.
50) Advantages of international ETFs. What are the two roles of exchange specialists? Schweser
SS10 page 37. How is the equity risk premium usually defined? Schweser SS10 page 50. How
does the Gordon Growth model estimate the risk premium? Two weakness of this model?
Schweser SS10 page 52. What is the required return under the build-up method? Schweser
SS10 page 59.What is beta drift and how to adjust for it? How to get beta estimates for thinly
traded stocks or non public companies Schweser SS10 page 61.
51) What are the two economic growth theories? Schweser SS11 page 76. Formula for Herfindahl
index and the various ranges that the index can hold Schweser SS11 page 78. Know how to
calculate tangible P/E, franchise P/E and intrinsic P/E. Schweser SS11 page 83. Know how to
apply the full-flow-through firm method. Schweser SS11 page 85 what are porter’s five
factors? Schweser SS11 page 98. How can managers alter the firm’s existing position?
Schweser SS11 page 102. What are the four life cycles of an industry? Schweser SS11 page
52) What are 5 external forces that can have an impact on an industry’s fortune? Schweser SS11
page 119. What are the two ways of incorporating emerging market risks in to the valuation
process? Which one is better? Arguments for using the better method. Schweser SS11 page
53) How would you estimate the risk free rate for an emerging market country? Schweser SS11
page 139. How would you estimate the pre-tax cost of debt for an emerging market company?
Schweser SS11 page 140. What is the primary disadvantage of using dividends as a cashflow
measure? A second disadvantage? Schweser SS11 page 149. So using dividends as a measure
of cashflow is appropriate in which cases? Schweser SS11 page 150.
54) What is free cash flow? And when would it be appropriate to use a free cash flow model?
Schweser SS11 page 151. Know the formulas for a one period, two period and multi period
dividend discount model. Schweser SS11 page 152. Simplified formula for Gordon’s growth
model? Schweser SS11 page 155. Explain the 2 stage dividend discount model. Schweser
SS11 page 163. How does the H model differentiate to this? Schweser SS11 page 164.
55) How would you estimate terminal value for a dividend discount model using the Gordon
growth model? Schweser SS11 page 167. Know how to calculate the value of a firm using the
H model. Schweser SS11 page 171. Formula for the sustainable growth rate and formula for
ROE. Schweser SS11 page 177. What is free cash flow to equity (FCFE)? Schweser SS12
56) Using discounting cash flow methods, what is the value of the firm? What about value of
equity? Schweser SS12 page 199. How would you calculate FCFF from net income?
Schweser SS12 page 201. How would you calculate FCFF from EBIT and CFO? Schweser
SS12 page 205. How can you calculate FCFE from FCFF? Schweser SS12 page 206. Formula
for single stage FCFF model. Schweser SS12 page 213. And single stage FCFE model?
Schweser SS12 page 214. What are the two major sources of error in valuation analysis?
Schweser SS12 page 223.
57) What is a justified price multiple and how can a justified price multiple be justified? Schweser
SS12 page 242. How do trailing P/E and leading P/E ratio differ? Schweser SS12 page 244.
Formula for P/B ratio. Schweser SS12 page 246. Formula for P/S ratio. Schweser SS12 page
248. What is the dividend yield most often used for? Advantages and disadvantages of using
the dividend yield. Difference between leading and trailing D/P? Schweser SS12 page 252
58) What is the E/P and what does a low or high E/P mean? Schweser SS12 page 255. What is the
relationship between the justified P/E ratio with the expected growth rate and require return?
Schweser SS12 page 256. What are the justified P/B and justified P/S formulas? Schweser
SS12 page 257. Justified dividend yield formula. Schweser SS12 page 259. What are some of
the common P/E benchmarks? Schweser SS12 page 261. What is the PEG ratio and what is
the implied valuation rule? Schweser SS12 page 265. Formula for earnings surprise. Schweser
SS12 page 267.
59) What is the general rule of PEG? Schweser SS12 page 287. Formula for EVA. Schweser SS12
page 293. Formula for MVA and what does it measure? Schweser SS12 page 294. How can
you forecast residual income? Schweser SS12 page 295. What is then the residual income
valuation model? Schweser SS12 page 296. Weakness of residual income model? When is it
appropriate and when is it not appropriate? Schweser SS12 page 298.
60) Describe the main value determinant, investment characteristic, principal risks and most likely
investor of raw land. Schweser SS13 page 328. What about rented apartments? Schweser
SS13 page 329. Know how to calculate recaptured depreciation. Schweser SS13 page 335.
Explain the market extraction method. Schweser SS13 page 347. What is market value under
the direct income capitalisation approach and the gross income multiplier technique?
Schweser SS13 page 350.
61) What are the 3 sources of ‘increased value’ from private equity? Schweser SS13 page 360.
What are some of the mechanisms used to ensure that the interests of the private equity firm
and that of management are aligned? Schweser SS13 page 361. What are 6 methods to value
private equity portfolio companies? Schweser SS13 page 364. What is the exit value under a
leverage buyout? Schweser SS13 page 366.
62) What is the relationship between pre-money and post-money valuation for venture capital?
Schweser SS13 page 368. Reproduce Figure 3 to show valuation issues for buyout and venture
capital investments. Schweser SS13 page 369. What are the 4 types of exit routes used by
private equity firms and explain each. Schweser SS13 page 370. Be able to explain the general
risk factors for private equity (no need to memorise risk, just be able to explain) Schweser
SS13 page 372. Define hurdle rate and carried interest with respect to private equity.
Schweser SS13 page 374
63) What are the issues in calculating NAV for a private equity fund? Schweser SS13 page 377.
Describe the venture capital method. Schweser SS13 page 384. Describe the IRR approach.
Schweser SS13 page 391. 3 ways of exiting an LBO. Schweser SS13 page 399. Explain the
target IRR approach. Schweser SS13 page 402.
64) What drives contango and backwardation? Which is the normal state for commodities
markets? Schweser SS13 page 432. What is the collateral yield? And roll yield? What happens
to the roll yield when the market is in backwardation or in contango? Schweser SS13 page
433. Shortcomings of using VaR to measure hedge fund risk? Schweser SS13 page 457.
65) What are the 3 types of risk within credit risk? Schweser SS14 page 10. What are the 4 C’s for
credit analysis? Schweser SS14 page 11. Current ratio and acid test ratios? Schweser SS14
page 14. What about capitalisation and coverage ratios? Schweser SS14 page 15. What are the
4 factors involved in the risk assessment of tax-backed debt? Schweser SS14 page 22. What
are the two general categories used to assess sovereign ratings? How are these two categories
split? Schweser SS14 page 23.
66) What are the 3 common yield curve shapes? Schweser SS14 page 48. Explain the two types of
nonparallel yield curve shifts. Schweser SS14 page 49. What are the 3 factors that explain
historical Treasury returns? Schweser SS14 page 50. Why would investors prefer the swap
rate curve as a benchmark interest rate curve over a government bond yield curve? Schweser
SS14 page 54. Be able to explain the 3 term structure theories. Schweser SS14 page 55.
67) Define key rate duration. Schweser SS14 page 58. Know how to calculate continuously-
compounded yield changes. Schweser SS14 page 62. Know how to value an option free bond
using the binomial model. Schweser SS14 page 77. Explain what the terms nominal spread, Z-
spread and OAS spread mean. Schweser SS14 page 79. Know how to value a callable bond
using the interest rate tree. Schweser SS14 page 81.
68) Know how to calculate OAS. Schweser SS14 page 84. Formula for effective duration and
effective convexity. Schweser SS14 page 88. Know how to value a putable bond. Schweser
SS14 page 90. How can the issuer of convertible bonds ‘force’ conversion? Schweser SS14
page 91. Conversion value and minimum value of the convertible bond? Schweser SS14 page
69) CPR, SMM and PSA? Schweser SS15 page 114. 3 factors that affect prepayments. Schweser
SS15 page 117. Two types of prepayment risk. Schweser SS15 page 118. What is a sequential
pay CMO. How does this tackle the two prepayment risks? Schweser SS15 page 119 Know
how to calculate principal payments on a sequential pay tranche. Schweser SS15 page 121.
Explain how a support tranche works. Schweser SS15 page 124. 3 investment characteristics
of interest only and principal only mortgage securities. Schweser SS15 page 128. 2 main
reasons why the European mortgage-backed market is slow to grow. Schweser SS15 page
70) What are external credit enhancements and what does it include? Schweser SS15 page 149.
Explain how overcollateralisation and subordinated structure enhance creditworthiness.
Schweser SS15 page 150. What are the 3 phases of a cash flow CDO? Schweser SS15 page
158. What is the value of a forward contract when the asset provides a discrete income?
Schweser SS16 page 204. What about one with continuous income stream? Schweser SS16
71) Be familiar with FRA notation. Know how to calculate the price of an FRA. How many days
basis is used? Schweser SS16 page 210. Know how to value an FRA at maturity and prior to
maturity. Schweser SS16 page 212. Price of a currency forward. How many days basis is
used? Value of the currency forward contract to the long party at any time prior to maturity?
Schweser SS16 page 215. What is a futures price, allowing for net costs and net benefit?
Schweser SS16 page 230. What is a fiduciary call? Schweser SS17 page 245
72) Formula for put call parity for European options. Schweser SS17 page 246. Risk neutral
probability of an up move in a binomial tree model? Schweser SS17 page 250. If you are
valuing an American option, what would the value at each node be? Schweser SS17 page 261.
Know how to value an interest rate cap using the binomial tree model. Schweser SS17 page
262. Reproduce figure 10. Schweser SS17 page 269. Formula for delta neutral hedging.
Schweser SS17 page 272.
73) What is gamma and when is gamma the largest? What are the effects of cash flows from the
underlying asset on the price of an option? Why? Schweser SS17 page 274. How can a swap
be viewed as a series of options? Schweser SS17 page 290. know how to calculate the fix rate
on a swap. Schweser SS17 page 292. know how to calculate the fixe rate and notional
principal on a currency swap. Schweser SS17 page 298.
74) Difference between payer swaption and receiver swaption? What are the 3 primary uses of
swaptions? Schweser SS17 page 303. What is the value of an interest rate swaption at expiry?
Schweser SS17 page 304. How does credit risk vary over the life of a swap? Schweser SS17
page 305. What are the two types of interest rate collar? Schweser SS17 page 320.
75) What are the advantages of using credit derivatives over normal credit instruments? Schweser
SS17 page 326. Explain basis trade and curve trade. What are the two types of curve trade?
Schweser SS17 page 328.
1. Interest rates: when dealing with interest rates in questions, be careful of the convention
used. Sometimes it would be a simple interest rate, and to adjust for annual just do (360/x).
Sometimes it would be geometric, so you would need to do to the power of (360/x).
2. exchange rates: when it quotes exchange rates in say (in $ per £) 0.951 - 0.952, then you buy
dollars at 0.952 per pound but you sell dollars at 0.951 per pound.
1) Brokerage: refers to the amount given to a broker as payment for execution services.
2) Soft Dollars: refers to the research and other benefits provided to the client or the client’s
investment manager by the broker for directing the trade to the broker.
3) Standard Error of Estimate: is the standard deviation of the error terms in the regression.
4) Coefficient of determination: is the percentage of total variation in the dependent variable
explained by the independent variable.
5) Cointegration: means that two time series are economically linked (related to the same macro
6) Autoregressive conditional heteroskedasticity (ARCH): exists if the variance of the
residuals in one period is dependent on the variance of residuals in a previous period.
7) Tariff: is a tax imposed on imported goods
8) Quota: is a limitation on the quantity of goods imported.
9) Interest rate parity: is the idea that exchange rates must change so that the return on
investments with identical risk will be the same in any currency.
10) Purchasing Power Parity: is the idea that the same goods should cost the same amount in
different countries once we have factored in the current exchange rate.
11) Earnings Quality: usually refers to the persistence and sustainability of a firm’s earnings, ie
more persistent and sustainable earnings are considered higher quality.
12) Corporate Governance: the system of principles, policies, procedures and clearly defined
responsibilities and accountabilities used by stakeholders to overcome conflicts of interests
inherent in the corporate form.
13) Basis (futures): the difference between the spot price and the futures price.
14) Cash flow yield: the discount rate that makes the price of a MBS or ABS equal the present
value of its cash.
1) What analysts must assess to determine effectiveness of a board of directors
Independent legal counsel
Elected process of board
Separate sessions (for independent directors)
Composition of board
Statement of governance policies
Qualification of directors
2) 8 uses of valuation
Communicating (starting point)
Valuation of private firms
Planning & consulting
Project impact from corporate actions
3) Advantages of international ETF
Active management complementary
Diversification with higher liquidity and low cost
4) Porter's 5 factors
Threat of new entrants
Threat of substitutes
Bargaining power of suppliers
Bargaining power of clients
Rivalry among existing competitors
5) 5 external factors that impact an industry's future
For I (Foreign investments)
6) Mechanisms to prevent strategic manipulation
Board of directors
Certification by senior management
7) 5 rationales for share repurchases
Earnings (dilution prevention)
Supplement (dividend policy)
Convey (future is good)
Change (capital structure)
8) Advantages of using credit derivatives over normal credit instruments