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How do I convert a quoted annual rate into the rate I should use in a TVM problem?
First match the rate to the cash-flow period. If the cash flows are monthly, use a monthly periodic rate. If you need an annual return measure, convert to an effective annual rate.
How should I decide between NPV and IRR when both are available?
For an independent project with conventional cash flows, the accept/reject decision is usually the same. Accept the project when NPV is positive at the required return, or when IRR is above the required return.
Why does begin mode change an annuity answer so much?
Beginning-of-period payments are more valuable because each cash flow is received or paid one full period earlier. For present value, that means less discounting. For future value, it means one extra period of compounding.
When should I use the TVM keys instead of the cash-flow worksheet on CFA Level I?
Use a TVM structure when the cash flows are level, evenly spaced, and tied to one periodic rate. Use an uneven cash-flow structure when each period can have a different amount or when the problem is explicitly asking for project NPV or IRR.
Why can a fund earn a positive return but charge no performance fee?
A positive one-year return does not automatically mean the fund exceeded its prior high-water mark. The high-water mark looks back to the previous peak value, not just the current year's beginning value.
How are hard and soft hurdle rates different?
A hard hurdle excludes the hurdle return from the performance fee base. A soft hurdle acts more like a trigger: once the required return is met, the fee can apply to the full specified profit base.
Should I subtract management fees before applying the high-water mark?
Follow the stem. The exam question should tell you whether the performance fee is calculated on gross assets, net-of-management-fee assets, or another defined base. There is no single ordering rule that overrides the fee language.
What does a high-water mark actually do in a hedge fund fee calculation?
A high-water mark is the prior peak value on which performance fees have already been earned. It protects investors from paying a performance fee twice on the same recovery.
Why do CFA Ethics answers focus so much on the action taken?
Ethics questions usually ask what the member or candidate should do, not merely what the issue is. The correct answer must resolve the ethical problem in a way that satisfies the relevant standard.
Do conflicts have to be disclosed before making a recommendation?
Material conflicts should be disclosed clearly and in time for the client or employer to evaluate the conflict. A recommendation does not become clean simply because it was well researched or ultimately profitable.
When does a duty to clients override pressure from an employer?
Commercial pressure does not erase duties to clients. If the issue involves suitability, fair dealing, priority of client transactions, or full disclosure, the answer must protect the client duty first.
How do I map a CFA Ethics vignette to the right standard?
Start by identifying the duty at risk before reading the answer choices too closely. Ask who owes the duty, who is protected by the duty, and what action the standard requires.
Why does standard error show up in a hypothesis test instead of just using the sample standard deviation?
The sample standard deviation measures dispersion of individual observations. The standard error measures dispersion of the sample mean. A hypothesis test about a population mean asks whether the observed sample mean is unusually far from the hypothe
Are p-values and critical values two different hypothesis testing methods?
They are two ways to reach the same decision. With the critical value approach, compare the test statistic to the rejection cutoff. With the p-value approach, compare the p-value to the significance level. For a 5% test, a p-value of 2% means the res
What is the cleanest way to remember Type I and Type II errors for CFA Level I?
Tie the error to your decision. A Type I error happens when you reject a null hypothesis that is actually true. It is a false alarm. A Type II error happens when you fail to reject a null hypothesis that is actually false. It is a missed detection. F
How should I read a CFA hypothesis testing question without getting lost in the formulas?
Read it as a decision problem. First identify the null hypothesis, then identify the alternative hypothesis, because the alternative tells you whether the test is one-tailed or two-tailed. After that, use the p-value or critical value to decide wheth
How do I know whether to use key rate duration or spread duration?
Use key rate duration when the question changes one point or segment of the benchmark yield curve. For example, if the 10-year benchmark yield rises while the 2-year yield is unchanged, key rate duration isolates the price sensitivity to that maturit
Why is effective duration preferred for callable bonds?
Callable bonds can have expected cash flows that change when rates change. If rates fall, the issuer is more likely to call the bond, which shortens the investor's expected cash-flow horizon and limits price upside. Modified duration assumes cash flo
What is the practical difference between Macaulay duration and modified duration?
Macaulay duration is about timing. It is the present-value-weighted average time until the investor receives the bond's promised cash flows. It helps explain why a coupon bond has duration below maturity and why a zero-coupon bond has duration equal
Why is duration quoted in years if it measures bond price sensitivity?
Duration started as a timing measure. Macaulay duration is the present-value-weighted average time to receive a bond's promised cash flows, so years are natural. Modified duration is derived from that timing measure and is used as a sensitivity multi
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