It was posted by someone else and was useful when I took lv1 last december. good luck everyone… Though a list of common mistakes could help others. - Forgetting to take the calculator out of BGN mode - Computing a zero-coupon bond withouth semi-annual compounding - Forgetting to double the yield after calculating a semi-annual coupon bond when they clearly ask for annual yield - Getting number of discounting periods wrong! e.g. using 5 years instead of 4 because of question regarding beginning/end of period payments - Answering the question based on variance and not standard deviation!! - Being careless about questions that already give you the market premium… so you do not need to subtract the risk free rate. - Automatically assuming a distribution is normally distributed when the questions doesn’t say that at all!! - Forgetting about certain synonymous terms. e.g. coupon rate = nominal rate. Market maker = specialist. - Not being careful about whether the question provides a sample of data or a full population of data. - Getting overvalued/undervalued confused. Over/under term refers to position of SML relative to expected return. - Thinking that if one covariance is greater than another… that this automatically means there is a stronger relationship… when in fact you need to find the correlation to compare on standardized terms. - Forgetting that you must pay tax on implicit interest on a zero-coupon bond. (bit more specific, but important). - FAILING TO RECOGNIZE THAT SOME QUESTIONS THAT APPEAR TO REQUIRE COMPLEX MATH CAN BE SOLVED LOGICALLY IN 2 SECONDS. e.g… remember than the realized rate of return must fall between the YTM and the Reinvestment Rate. - Forgetting that in an FRA, the long position wants interest rates to rise! - Forgetting that swap payments are paid in arrears… i.e. you use the rate from the beginning of the period, not the end. - Equity margin = borrowing. Future margin = posting cash. - CFA considers anything related to real-estate to be real estate investing… e.g. MBS/CMOs - Market value of real estate does not equal investment value of real estate. Investment value with factor in user specific details such as plans for use and individual tax rates. - The cost of failure of a venture capital project is not 0. You still have all those costs to date to deal with! - Economic depreciation and accounting depreciation are VERY different. Economic deprecation is about value. Accounting depreciation is about allocation. - Duties to employers go out the window if you are protecting clients/capital markets. - Non-renewable resources have elastic supply (this still feels counter intuitive). - Land is not depreciated. - Do not confused the effects of capitalizing costs with capitalized leases! - Working capital is higher under an operating lease. In a capital lease, current liability will increase by the current portion of the lease obligation without an increase in current assets. - Market risk = systematic risk = non-diversifiable risk = risk you are compensated for. - Sinking fund provision is an OBLIGATION not a right to pay-down debt. - If OAS < z-volatility spread, then the option has a value to the issuer and it is a call. - The tax expense less DTL = Tax payable less DTA - Under GIPs: definition of firm asset should include all fee paying and non fee paying, discretionary and non-discretionary accounts. - Under GIPs: composite must include all fee-paying discretionary accounts. non-fee paying can be added if disclosed. non-discretionary cannot be added. - Fed primarily uses open market operations as their primary tool to obtain price stability as their primary goal. - Efficient frontier plots return v stddev. CML plots against total risk. CML plots against systematic risk measured by beta. - Beta is covariance of asset with market divided by market variance. This is NOT THE CORRELATION OF AS ASSET WITH THE MARKET. - Components of risk are CLEF-B. Country, liquidity, exchange rate, financial, and business. - TIPs have PRINCIPAL AND NOT COUPON that change with inflation. - Don’t screw up Dividend Payout Ratio and Retention Ratio. - Prices are quoted clean and settled dirty. - Performance results do not need to be audited or verified. - McCullum = Monetarist (new). Taylor = Keynesian (new) - Volatility always increases the value of an option. Whether or not it increase the value of a bond depends on whether the option benefits the issuer or the holder. - Dollar duration is calculated off current market price, not PAR. - When in doubt, use market prices and not book prices! - Frictional and structural unemployment are part of life. It’s cyclical unemployment that causes moves with the business cycle. - Wealth effect is not the same as income effect. Wealth effect argues that inflation will cause increased savings so people regain their original level of true buying power. Income effect argues people work less the more $$ they have. - In long run, increasing money supply will just increase prices all else equal. - Unanticipated inflation causes inefficient/poor decisions regarding wage rate and borrowing/lending decisions. Anticipated inflation also leads to mkt inefficiency as people waste time focusing on how to circumvent inflation, make fewer investments, etc. - Anticipated inflation simply looks like a movement up the LAS curve… real gdp stays in line with potential gdp. Unanticipated inflation mirrors the patters of demand pull inflation. - Book value of debt reported based on market rate at time of issuance… which can be very different over the life of the debt. - Receivables sales when a portion of risk is retained by seller is effectively a collateralized loan. - An arbitrage opportunity with abnormal return may still not be a positive return. - GIPS Standards: F.lawed I.nputs C.an C.ause D.oomed P.erformance Fundamentals of Compliance Input Data Calculation Composites Disclosure Performance (… and then Real Estate and Private Equity) - Industry Cycle: P.lease A.void M.y S.tupid D.eficiency Pioneering Growth Acceleration Mature Growth Stabalization Deceleration
Thanks!!
whoah thanks so much for this! this is golden…should be stickied!
For LIFO - COGS and FISH (First In Stays Here) for Ending Inventory FIFO - COGS and LISH (Last In Stays Here ) for Ending Inventory Notice for EI the opposite of letters. It will help remembering it Negative/ Contango & Positive Backwardation ("New Century Probable Bancruptcy) Define remember NOIR! If i think of more, Ill add them later
Volume 4, page 48, example 4: If you put in your calculator : PV: 1025 FV: -1000 PMT: 25 N: 20 you will not get the correct answer, you get -2.5938%, wtf? you need to switch the signs, put PV: -1025 and FV:1000 and ban you get correct answer: 2.342% as after tax cost of debt this is the same as IRR, the sign matters so be careful also: Reading 68: problem 1 c: you need to put your calculator to display 5 decimal places to get correct answer…
Precious!!
timotimo Wrote: ------------------------------------------------------- > Volume 4, page 48, example 4: > > If you put in your calculator : > > PV: 1025 > FV: -1000 > PMT: 25 > N: 20 > > you will not get the correct answer, you get > -2.5938%, wtf? > > you need to switch the signs, put PV: -1025 and > FV:1000 and ban you get correct answer: 2.342% as > after tax cost of debt > > this is the same as IRR, the sign matters so be > careful > > also: > > Reading 68: problem 1 c: you need to put your > calculator to display 5 decimal places to get > correct answer… or you can add a “-” sign to PMT… this is another way of inputting… PV: 1025 FV: -1000 PMT: -25 N: 20 FV and PMT always have the same sign FV and PV - always opposite
thanks alot i printed 
to keept it on my hand to read it more and more:)
LIFO - L = (L)ess, I = (I)nventory, (I)ncome F = (F)or O (just remember that O stands for inflation somehow The point of this is to speeden up the process. Instead of thinking whether income and inventory are higher or lower for LIFO, just remember the above. ie. in an inflationary environment, using LIFO would cause ending inventory and net income to be lower than FIFO (due to higher COGS)
Adding to the list: - Diluted EPS numerator still subtracts preferred dividends if they aren’t convertible. If all preferred can be converted (assuming not antidilutive) then just go with Net Income (plus any interest payments net of tax). - Trading securities’ unrealized gains/losses are included in Net Income. Available for sale securities’ unrealized gains/losses are not (they flow through to equity). - Under GAAP, the direct method has to include an indirect method reconciliation, not the other way around. I remember this because a. it’s very rare for a company to use the direct method and b. everyone wants to see how OCF is derived from NI, so they want the disclosure. - GE (I think of General Electric as an EXTRAORDINARY company, at least under Jack Welch, anyways) so G & E are together… meaning extraordinary items are only permitted under GAAP. - Income tax expense (nobody likes taxes, and nobody likes that you have to add the change in DTL and subtract the change in DTA) so taxes payable + deltaDTL + deltraDTA = income tax expense. - Flotation costs “float” to the top, to the very first CF (cash outlay) where they should be added. - Net Operating Cycle means the Cash Conversion Cycle! - Treat the income RE method like valuing a preferred stock. NOI is assumed to continue into perpetuity, so you divide by the discount rate (cap rate) like you would a preferred dividend. Also, a couple helpful (at least I find them helpful) thoughts for the first group: - Non-renewable resources have perfectly elastic supply. For this one, I think about how a renewable resource (use water as the example) has perfectly inelastic supply, and the graph looks just like a well going into the ground. Then I remember that non-renewable is the opposite: perfectly elastic. - OAS < z-volatility spread for a call option, because you need to be compensated for the prepayment risk inherent in a call. Whereas if there’s a put, you’re willing to “give up” some yield for the option to sell the bond.
Sticky this please!
Thanks a lot …
bump!
bump! bump!
tldr
Comprehensive Income = Net Income plus OCI ( PUFE ) P ension o/u funded status U. nrealized Gain/Loss on AFS Sec F. oregign translation adjustment E. ffective portion of a cash flow hedge
Hey Everyone! Don’t forget to reread this thread before the exam! Many useful tips ! Thanks dhyun3 for posting this
Bump, for those of us studying for December.
Yes, why couldn’t I have found this forum before I took the exam in June. 
Good resources; printing for later use! Thanks!
you say "remember than the realized rate of return must fall between the YTM and the Reinvestment Rate. " Where is that in the curriculum? Isn’t the reinvestment rate equal to the YTM if you discount the bonds with the YTM?