In this post I will cover some of the tutor help received for study session 10, the first two Readings of Corporate Finance and my attempt at the Phase 3 Hurdle Tests.
Reading 40: Financial Reporting Quality: Red Flags and Accounting Warning Signs – 60%
I realised the importance of not getting ahead of yourself here and writing out the basic accounting equation of A = L + E before trying to answer the question. Artificially boosting income increased E. So we’re then looking for an answer that has increases in A or decreases in L.
Reading 41: Accounting Shenanigans on the Cash Flow Statement – 80%
Better identification required on which Financial Statement we’re examining.
Reading 42: Financial Statement Analysis Applications – 100%
Despite the perfect score I was a little confused about the importance of different risks to Credit Analysts. The tutor helpdesk aided allowed me to see the predictive requirements of credit analysts, so survivorship bias would be of least interest, whilst business risk and financial risk would be of great(er) concern.
Reading 43: International Standards Convergence – 100%
My hesitancy from one of the questions arose from my difficulty in remembering revaluations and reversals, and categorising them correctly under their allowance under US GAAP and IFRS. Through tutor help I was able to construct an effective summary arrow diagram to first put reversals and revaluations into perspective, then add in the differences between the two accounting practices.
A couple of the above points lead into mistakes in the 3rd Workshop covering Study Sessions 8, 9 and 10. But I can see now how it’d have been better off writing out the Accounting Equation and drawing my Reversals and Revaluations arrow diagram.
Reading 44: Capital Budgeting – 53%
The tutor helpdesk provided me with the formula to help correctly calculate weightings from the Debt:Equity ratio. A flow diagram of the project though process helped put into perspective opportunity costs and repair costs.
Reading 45: Cost of Capital – 90%
The tutor helpdesk explained the thought process of taking earnings to retained equity to work out break points.
Workshop #4 – Corp Finance, Alt Investments and Fixed Income (SSs 11, 18, 15 and 16) – 88%
I was quite pleased with this score as it was a tough workshop. The recording I watched of it after attempting it made me realise that Macaulay Duration is just not sticking, maybe due to the uncertainty of it being tested in the exam.
Hurdle Test #5 – SSs 15 and 16 – 75%
I felt this was a tough hurdle test. They do tend to be tougher than the portal questions, in my opinion. Couple of silly mistakes but it helped bring out my lack of understanding regarding Cash Flow yields and spreads.
Hurdle Test #6 – SSs 11 and 18 – 60%
Again, I thought this was a tough hurdle test, but wisely so as I think it would be quite exam standard. It highlighted my confusion about the rate at which Cash Flows are reinvested. Another clear problem highlighted was not writing out the equation Nominal = Real + Inflation as part of the process of establishing if the WACC is over or understated. It also demonstrated some of the areas I hadn’t read in Schweser, such as overseas equity premium and stages of venture capital raising.
Monday 26 April 2010
Entry 7 – Fixed Income clarified and Capital Budgeting challenges
Hello all,
Since the last post I have been through the problems I encountered in the wordy stuff in fixed income with the tutor helpdesk, finished portal questions on Corporate Finance, and got a to a nice situation where I’m slightly ahead in the classroom recordings by now being up to Alternative Investments, compared to my question attempting.
However this is slight reflection on the lack of achievement this weekend in terms of workload. I’d hoped to quickly finish off Corporate Governance (the particularly wordy section in Corporate Finance), study session 14 Alternative Investments, attempt associated hurdle tests, attempt the associated workshop, and sit the 2 hour 7city Progress Test (a Mock exam on every topic covered so far up to and including Alternative Investments).
Sadly, I didn’t even start the portal questions on Alternatives due to quite the watchable weekend of football.
Following tutor helpdesk review on SS15:
Reading 66: Introduction to the Measurement of Interest Rate Risk – 81%
I don’t know how likely it will be that I’ll be examined on Floating Rate Notes, hence getting the question wrong, but it’s important to realise that its duration is simply equal to the time until it’s next coupon payment, expressed as a fraction of a year. So if coupon payments are semi-annual then it’s 0.5.
Macaulay’s duration came up. I don’t think it’s likely to be tested but given the formula’s simplicity, it’s probably worth learning just I case. [Modified Duration = Macaulay duration / (1 + (yield / k)), where k = number of coupon paying periods].
Reading 60: Features of Debt Securities – 100%
Clarified that if a bond is in default, it means they don’t pay a coupon (break a positive covenant).
Reading 62: Overview of Bond Sectors and Instruments – 62%
As discussed last post, the value add from the tutor helpdesk and getting through the classroom recordings is gaining as much logic to help distinguish between the different features that categorise the various debt instruments. Starting with Mortgage Passthrough securities as a ‘simple’ instrument helps when asking well when does that become a more complex CMO.
Reading 63: Understanding Yield Spreads – 90%
Important to see the logic through the investor’s eyes when asking about ‘biased’ expectation theory. Liquidity as they’ll want some more return for longer dated bonds, despite interest rate expectations, and they’ll want some extra return for investing outside their comfort zoneof ‘preferred habitat’.
First attempt at portal questions for SS11
Reading 44: Capital Budgeting – 53%
It’s very important to use a debt:equity RATIO properly in terms of your WACC weightings. 33.33% for every $1 of debt there is $3 of equity, hence debt weighting = ¼ and equity weighting = ¾.
Correct application is required of opportunity costs and repair costs. Average Accounting Rate of Return wasn’t covered in Schweser, but was eventually in the classroom recordings. I didn’t understand the implications of cash flow direction before the classroom recording and how that related to the IRR for non-mutually exclusive projects. Had to go back into Schweser to check how NPVs of projects affect the stock price.
Reading 45: Cost of Capital – 90%
Pretty solid here due to previous study of the DDM and the CAPM, however struggled on Break Points.
Reading 46: Working Capital Management – 92%
Nice, comfortable repetition of liquidity ratios from FR&A. Couple of complications in Money Market Yield calculations based on previous understanding in SS2 (quants).
Reading 47: Financial Statement Analysis – 88%
Some confusion here about the various compositions of the DuPont model, such as the ‘two step’ model. But apart from that another nice repetition of FR&A.
Reading 48: The Corporate Governance of Listed Companies: A Manual for Investors – 86%
This is quite a wordy section but I think game for a fair few questions. I adopted a question based approach, whereby I must admit, I wasn’t sure of quite a lot of the answer, which resulted in quite a purposeful reading of the Schweser text.
Since the last post I have been through the problems I encountered in the wordy stuff in fixed income with the tutor helpdesk, finished portal questions on Corporate Finance, and got a to a nice situation where I’m slightly ahead in the classroom recordings by now being up to Alternative Investments, compared to my question attempting.
However this is slight reflection on the lack of achievement this weekend in terms of workload. I’d hoped to quickly finish off Corporate Governance (the particularly wordy section in Corporate Finance), study session 14 Alternative Investments, attempt associated hurdle tests, attempt the associated workshop, and sit the 2 hour 7city Progress Test (a Mock exam on every topic covered so far up to and including Alternative Investments).
Sadly, I didn’t even start the portal questions on Alternatives due to quite the watchable weekend of football.
Following tutor helpdesk review on SS15:
Reading 66: Introduction to the Measurement of Interest Rate Risk – 81%
I don’t know how likely it will be that I’ll be examined on Floating Rate Notes, hence getting the question wrong, but it’s important to realise that its duration is simply equal to the time until it’s next coupon payment, expressed as a fraction of a year. So if coupon payments are semi-annual then it’s 0.5.
Macaulay’s duration came up. I don’t think it’s likely to be tested but given the formula’s simplicity, it’s probably worth learning just I case. [Modified Duration = Macaulay duration / (1 + (yield / k)), where k = number of coupon paying periods].
Reading 60: Features of Debt Securities – 100%
Clarified that if a bond is in default, it means they don’t pay a coupon (break a positive covenant).
Reading 62: Overview of Bond Sectors and Instruments – 62%
As discussed last post, the value add from the tutor helpdesk and getting through the classroom recordings is gaining as much logic to help distinguish between the different features that categorise the various debt instruments. Starting with Mortgage Passthrough securities as a ‘simple’ instrument helps when asking well when does that become a more complex CMO.
Reading 63: Understanding Yield Spreads – 90%
Important to see the logic through the investor’s eyes when asking about ‘biased’ expectation theory. Liquidity as they’ll want some more return for longer dated bonds, despite interest rate expectations, and they’ll want some extra return for investing outside their comfort zoneof ‘preferred habitat’.
First attempt at portal questions for SS11
Reading 44: Capital Budgeting – 53%
It’s very important to use a debt:equity RATIO properly in terms of your WACC weightings. 33.33% for every $1 of debt there is $3 of equity, hence debt weighting = ¼ and equity weighting = ¾.
Correct application is required of opportunity costs and repair costs. Average Accounting Rate of Return wasn’t covered in Schweser, but was eventually in the classroom recordings. I didn’t understand the implications of cash flow direction before the classroom recording and how that related to the IRR for non-mutually exclusive projects. Had to go back into Schweser to check how NPVs of projects affect the stock price.
Reading 45: Cost of Capital – 90%
Pretty solid here due to previous study of the DDM and the CAPM, however struggled on Break Points.
Reading 46: Working Capital Management – 92%
Nice, comfortable repetition of liquidity ratios from FR&A. Couple of complications in Money Market Yield calculations based on previous understanding in SS2 (quants).
Reading 47: Financial Statement Analysis – 88%
Some confusion here about the various compositions of the DuPont model, such as the ‘two step’ model. But apart from that another nice repetition of FR&A.
Reading 48: The Corporate Governance of Listed Companies: A Manual for Investors – 86%
This is quite a wordy section but I think game for a fair few questions. I adopted a question based approach, whereby I must admit, I wasn’t sure of quite a lot of the answer, which resulted in quite a purposeful reading of the Schweser text.
Monday 12 April 2010
Entry 6 - Fixed Income: Technical components explained and don’t discount the wordy section
Hello CFA lovers,
I think from where we left off, I’ve since not been through much new material, but have been through some of the earlier fixed income material with the 7city tutor faculty and realised a coupe of important conceptual points.
Reading 64: Introduction to the Valuation of Debt Securities
There was an interesting portal question that concerned ending wealth as opposed to pricing a bond. I now see how this had to be viewed a little differently from ‘lets plug in an I/Y, FV, N and PMT and press CPT PV’. End wealth is what you get at par plus an annuity of coupons + Interest on Coupons.
Reading 65: Yield Measures, Spot Rates, and Forward Rates
I think spot and forward rates is a tricky concept. I found it essential to draw a time line of when say 8% is being achieved and when 9% is being achieved. That helps you to see intuitively what the forward rate might have to be to bring the geometric average up.
Another interesting concept thrown up by the portal questions was how the realised compound yield might be adjusted. This can be better seen by categorising the bond into:
1. Coupons received
2. Ability to reinvest coupons at the YTM
3. Assurance of making a capita gain/loss
In the particular question YTM was 12% but then interest payments would only be invested at 10%. So one of the 3 components above came under threat meaning the realised compound yield would only adjust downwards by a small amount.
Calculating the yield of a zero coupon bond as a HPR was a helpful skill explained and how the HPR formula is broken down into End/Start – Start/Start
In terms of new questions attempted I went quite quickly through Study Session 15, which is the wordy section of fixed income. I think this is game for quite a few questions in the exam but I decided to go straight into the portal questions:
Reading 60: Features of Debt Securities – 100%
This is quite intuitive following the technical coverage in SS16. Only query was that trading at full = dirty price.
Reading 61: Risks Associated with Investing in Bonds – 100%
There are a lot of different risks but pretty intuitive here.
Reading 62: Overview of Bond Sectors and Instruments – 62%
This was a good wake-up call and a reason to go back into the textbook. There are a lot of different types of instruments and knowing the subtle differences between them requires some reading greatly aided by logical explanations and example from the 7city classroom recordings.
Reading 63: Understanding Yield Spreads – 90%
This again is quite intuitive and helpful if you’ve studies economics and can remember the differences between TSIRs.
As a big picture update, I feel I’m a little behind where I need to be with 5th June in mind. I had earmarked an extended Easter break to dedicate a lot of study time to, however I got landed with a particularly large work project and deadline that unfortunately had to take priority. I managed to finished the fixed income questions and do an FR&A workshop that I’d somehow missed, which was good.
By the end of the weekend 17th / 18th April I’d have like to have completed the Alternatives, Corporate finance, all associated hurdle tests and workshops and having completed the Progress test. (The progress test is a 2 hour Mock exam set by 7city on the first 3 (out of 5) phases of material).
A next longer term goal is to have completed all study sessions questions, etc. by the end of April, which would leave the month of May to do Mock exams and more questions from the CFAI Assigned Readings.
I think from where we left off, I’ve since not been through much new material, but have been through some of the earlier fixed income material with the 7city tutor faculty and realised a coupe of important conceptual points.
Reading 64: Introduction to the Valuation of Debt Securities
There was an interesting portal question that concerned ending wealth as opposed to pricing a bond. I now see how this had to be viewed a little differently from ‘lets plug in an I/Y, FV, N and PMT and press CPT PV’. End wealth is what you get at par plus an annuity of coupons + Interest on Coupons.
Reading 65: Yield Measures, Spot Rates, and Forward Rates
I think spot and forward rates is a tricky concept. I found it essential to draw a time line of when say 8% is being achieved and when 9% is being achieved. That helps you to see intuitively what the forward rate might have to be to bring the geometric average up.
Another interesting concept thrown up by the portal questions was how the realised compound yield might be adjusted. This can be better seen by categorising the bond into:
1. Coupons received
2. Ability to reinvest coupons at the YTM
3. Assurance of making a capita gain/loss
In the particular question YTM was 12% but then interest payments would only be invested at 10%. So one of the 3 components above came under threat meaning the realised compound yield would only adjust downwards by a small amount.
Calculating the yield of a zero coupon bond as a HPR was a helpful skill explained and how the HPR formula is broken down into End/Start – Start/Start
In terms of new questions attempted I went quite quickly through Study Session 15, which is the wordy section of fixed income. I think this is game for quite a few questions in the exam but I decided to go straight into the portal questions:
Reading 60: Features of Debt Securities – 100%
This is quite intuitive following the technical coverage in SS16. Only query was that trading at full = dirty price.
Reading 61: Risks Associated with Investing in Bonds – 100%
There are a lot of different risks but pretty intuitive here.
Reading 62: Overview of Bond Sectors and Instruments – 62%
This was a good wake-up call and a reason to go back into the textbook. There are a lot of different types of instruments and knowing the subtle differences between them requires some reading greatly aided by logical explanations and example from the 7city classroom recordings.
Reading 63: Understanding Yield Spreads – 90%
This again is quite intuitive and helpful if you’ve studies economics and can remember the differences between TSIRs.
As a big picture update, I feel I’m a little behind where I need to be with 5th June in mind. I had earmarked an extended Easter break to dedicate a lot of study time to, however I got landed with a particularly large work project and deadline that unfortunately had to take priority. I managed to finished the fixed income questions and do an FR&A workshop that I’d somehow missed, which was good.
By the end of the weekend 17th / 18th April I’d have like to have completed the Alternatives, Corporate finance, all associated hurdle tests and workshops and having completed the Progress test. (The progress test is a 2 hour Mock exam set by 7city on the first 3 (out of 5) phases of material).
A next longer term goal is to have completed all study sessions questions, etc. by the end of April, which would leave the month of May to do Mock exams and more questions from the CFAI Assigned Readings.
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