Has anyone else out there got an area on the exam that they don’t really understand and, quite frankly, cannot be bothered to put the time into learning how to do it because the value-added at this point does not outweigh the time investment? I have - I still can’t confidently calculate spot rates and forwards rates… I would be interested to hear if you have any and if you can easily break down the above issue. There’s no shame in it! No problem is too stupid - it’s only easy when you know the answer…
I can’t get DTA/DTL and all that fun stuff… Expecially when there is a revaluation and depreciation increases from one year to the next, or tax rate changes. For Spot Rate: Just draw a time line. i.e. you have a 3 year period. Spot rates are for the exact period, i.e. 2 year spot is the rate for 2 years, anything in between are forward rates. I.e. for a two year period, your 2 year spot must! equal your 1 year spot (0-1) and your 1 year forward rate one year from now (1-2) therefore 2 year spot (squared for two periods) = 1 year spot * 1 year forward.
I did not even read the tax income chapter in Financial Accounting (only thing I did not read). When I was going through it the first time in CFA cirriculum I did not get it so I skipped it and have never found the time to review it. Hoping there is not more than a couple of questions on this, possibly will find a few minutes to take a look at it over the next couple of days. Believe I was also hurt by reading all the CFA books, would have had more time if I had used the Schweser as my base and would have had much more time to review.
best offer and ask price and all that jargon…always get confused, crossing my fingers it doesnt show up…
Thanks Matori - consider this… Occasionally, due to differences in accounting recognition practices, the income that is subject to tax (i.e. the income on the income statement) is lower than the amount that you actually end up paying (taxes payable) due to the fact that Uncle Sam doesn’t like companies to skip out on paying taxes. Companies will want to understate their earnings so that they don’t have to pay as much tax right? Consider a company like Best Buy, they sell loads of electrical products most of which is under warranty. The company will recognize warranty expenses (to the best of their judgement) even though the expenses haven’t been incurred yet. This will reduce Net Income. Uncle Sam thinks this is BS, and says, “hey! we’re not having any of that crap, you can’t recognize those expenses until they actually happen, you’ve got to pay taxes on the entire amount of income.” So what happens is you end up pay a load more taxes than the income tax expense requires you to and so they create a DTA and they will receive this future benefit when the electrical products are actually returned down the line. The deferred DTA will then be reduced be reduced over time. (vice versa for DTL) A valuation allowance is a contra account that will offset the DTA if you think the entire DTA or DTL will be realized. A change in tax rates simply adjusts the value of DTA and DTLs. Imagine a tax rate change from 50% to 40%, a reduction of 20%. DTA is $1000 and DTL is $2000 - they are both reduced by 20% (to $800 and $1600) and the future income tax expense falls by the net amount of decline in DTL and DTA which in this case would be 400 - 200 = 200. Does this help?
bapswarrior, what are you referring to exactly?
In equity section. Questions such as when an limit order is above the best offer, or above the best bid etc…is it behind the market? new market? i always end up confusing my self so all i have memorized is Best Bid is the highest a dealer would buy for and Best offer is the lowest he would sell.
robjames1984 Wrote: ------------------------------------------------------- > Thanks Matori - consider this… > > Occasionally, due to differences in accounting > recognition practices, the income that is subject > to tax (i.e. the income on the income statement) > is lower than the amount that you actually end up > paying (taxes payable) due to the fact that Uncle > Sam doesn’t like companies to skip out on paying > taxes. > > Companies will want to understate their earnings > so that they don’t have to pay as much tax right? > Consider a company like Best Buy, they sell loads > of electrical products most of which is under > warranty. The company will recognize warranty > expenses (to the best of their judgement) even > though the expenses haven’t been incurred yet. > This will reduce Net Income. Uncle Sam thinks this > is BS, and says, “hey! we’re not having any of > that crap, you can’t recognize those expenses > until they actually happen, you’ve got to pay > taxes on the entire amount of income.” > > So what happens is you end up pay a load more > taxes than the income tax expense requires you to > and so they create a DTA and they will receive > this future benefit when the electrical products > are actually returned down the line. The deferred > DTA will then be reduced be reduced over time. > (vice versa for DTL) > > A valuation allowance is a contra account that > will offset the DTA if you think the entire DTA or > DTL will be realized. > > A change in tax rates simply adjusts the value of > DTA and DTLs. Imagine a tax rate change from 50% > to 40%, a reduction of 20%. DTA is $1000 and DTL > is $2000 - they are both reduced by 20% (to $800 > and $1600) and the future income tax expense falls > by the net amount of decline in DTL and DTA which > in this case would be 400 - 200 = 200. > > Does this help? This is great! I am familiar with the creation of DTA and DTL. There was a questions where (along the lines): 2008: Carry Asset Tax = 7000 Purchased in 2005 Useful life = 10 Carry Asset Financial = 8000 Useful Life = 15 Now in 2009, the asset was revalued to 10,000 for financial purposes, what effect did this have on deferred, or like taxes payable/expense… When I see something like this, I hope my 1/3 guess is on the mark! thanks!!
@robjames You seem to have a pretty solid understanding of taxes. I wish I could take some classes from you. This definitely helped. I don’t have to memorize that warranty is a DTA…lol
robjames1984 Wrote: ------------------------------------------------------- > I have - I still can’t confidently calculate spot > rates and forwards rates… > http://www.youtube.com/watch?v=UPuqjYz0KwA
I have pretty much given up on taxes and corporate governance (ZZZzzzzzzzzzzz…) The rest of it I think I know pretty well.
The tax section isn’t too hard. Its just the CFA book and all the third party books do an absolutely horrendous job of explaining it. I really don’t get why people have given up on explaining accounting concepts through journal entries. With journal entries, you don’t even need to memorize anything – just get familiar with setting up problems with the journal entries and you barely need to think about it. Its like abandoning the vertical method of doing addition, subtraction, multiplication, etc, and doing it horizontally instead.
give up technical analysis in Quants. Whenever happens there will be a complete guess unless it’s so obvious
jawz Wrote: ------------------------------------------------------- > I have pretty much given up on taxes and corporate > governance (ZZZzzzzzzzzzzz…) The rest of it I > think I know pretty well. i definitely agree with you. Writing journal entries is the best thing to understand accounting concepts!
People, I simply cannot get the connection between: Call/put option price and volatility (increase/decrease). Call/put option and interest rate rise (rise/fall). I saw the word risk aversion coefficient for the first time in life. I also saw my first question involving wrap account. P
prodigal Wrote: ------------------------------------------------------- > People, > I simply cannot get the connection between: > Call/put option price and volatility > (increase/decrease). Call/put option and interest > rate rise (rise/fall). > I saw the word risk aversion coefficient for the > first time in life. > I also saw my first question involving wrap > account. > P Just remember that when volatility increases, both call and put options increase in price. Risk aversion coefficient is the ‘A’ value in the utility function: U = E® - 1/2 x A x Variance A is high for risk averse people, 0 for risk neutral, and negative for risk seeking…kind of makes sense when you plug it into the utility function. Wrap account is the same thing as a Specially Managed Account (SMA)…or a individually managed account for really rich people.
Prodigal, just remember this: 1). Calls and puts increase in value with volatility because volatility means uncertainty, and in uncertain times, people want options (literally) right? 2). Callable bond price therefore decreases with volatility (since price = price of option-free bond - value of call option (which is now higher)) and putable bond increases in value (price = price of option free + put option (which is also now higher due to volatility) 3) With increasing rates the price of a call rises and the price of a put falls. My understanding is that options are essentially priced according to what the expected rate of return on the market is. If you have a stock worth 100 and the RFR is 5%, then you would expect the call to raise to the price of 105. If the RFR then increases to 10%, you would at least expect a call to be worth 110 and 105 is clearly more than 110. With a higher level of expected growth and interest, the put will now be worth less.
Oh and a wrap account, like thisisbrianly said, is a separately managed account (SMA) that is managed by an advisor. The advisor will charge an annual-based fee, say 1%, on the assets in the portfolio - commissions etc are usually not included. The total cost is literally ‘wrapped’ up inside the 1% management fee,
miss yiota what do you mean by technical analysis in Quants exactly?
robjames1984 Wrote: ------------------------------------------------------- > miss yiota what do you mean by technical analysis > in Quants exactly? Reading 12!