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CFA Level I Updated
What are the key differences between monetary and fiscal policy, and how do they affect financial markets?
Monetary policy (central bank) uses interest rates and asset purchases, while fiscal policy (government) uses spending and taxation. They transmit differently to markets: monetary policy primarily affects yields and discount rates, while fiscal policy drives growth and deficit dynamics.
How do I interpret z-scores in hypothesis testing — and when should I use a z-test vs. a t-test?
A z-score measures how many standard deviations an observation falls from the population mean. Use a z-test when the population variance is known or when the sample size is large (n ≥ 30). Here's a decision framework and a worked example.
What's the relationship between spot rates and forward rates, and how do you derive one from the other?
Spot rates and forward rates are two sides of the same coin — they're just different ways of expressing the term structure of interest rates. The no-arbitrage relationship links them: investing for n years at the n-year spot rate must equal rolling over shorter investments at implied forward rates.
How do you calculate a bond's full price from its yield to maturity, and what's the difference between full price and clean price?
Bond pricing from YTM is the foundation of fixed income analysis at CFA Level I. The core idea is that a bond's price equals the present value of all future cash flows, discounted at the yield to maturity. Here's a step-by-step walkthrough with the distinction between full price and clean price.
What's the real difference between accrual and cash basis accounting, and how does accrual enable earnings manipulation?
Accrual accounting recognizes revenue when earned and expenses when incurred, regardless of cash timing. While this matches economic activity to the correct period, the inherent judgment in revenue timing, expense capitalization, and reserve estimates creates opportunities for earnings manipulation.
How do you calculate the cash conversion cycle and why does it matter for liquidity analysis?
The cash conversion cycle measures how many days a company's cash is tied up in operations before it comes back as cash from sales. CCC = DOH + DSO - DPO, where DOH measures inventory holding time, DSO measures collection time, and DPO reflects how long the company takes to pay suppliers.
Why do financial regulators require explainability in AI models, and what are the main techniques for making black-box models interpretable?
Financial regulators require AI explainability because consumers deserve to understand decisions affecting them. SHAP values, LIME, and partial dependence plots provide post-hoc explanations for complex models without sacrificing accuracy. Adverse action notices must cite specific factors.
What are the disclosure requirements for referral fees under CFA Standard VI(C), and when must disclosure occur?
Standard VI(C) requires disclosure of all referral fees -- cash, non-monetary, and reciprocal arrangements -- at the time of referral, before the client acts on it. Both the referrer and the receiving party must disclose, and all forms of compensation must be included.
Why must EPS be retrospectively adjusted for stock splits, and how does this affect prior period comparisons?
Stock splits must be retrospectively adjusted in EPS calculations because they change share count without altering economic value. All prior-period weighted average shares are multiplied by the split factor to maintain comparability across reporting periods.
What is volume profile analysis, and how do the point of control and value area help identify trading levels?
Volume profile displays traded volume at each price level rather than per time period, revealing where institutional activity concentrated. The point of control (highest volume price) acts as a fair value magnet, while the value area (70% of volume) defines the core trading range.
How do Bollinger Bands work, and what does a band squeeze indicate about upcoming price movement?
Bollinger Bands place upper and lower boundaries at 2 standard deviations from a 20-period SMA, adapting to volatility. A squeeze (narrow bandwidth) signals compressed volatility likely to expand into a significant move, but supplementary indicators are needed to determine breakout direction.
What is the difference between bullet maturity and amortizing bond structures, and which has higher interest rate risk?
Bullet bonds repay all principal at maturity while amortizing bonds return principal gradually. This structural difference means bullet bonds have significantly higher duration and interest rate risk, as the largest cash flow is concentrated at the end.
When is revenue recognized under the completed contract method, and how does it compare to percentage of completion?
Under the completed contract method, all revenue and profit are deferred until the contract is substantially complete. This contrasts with percentage of completion which recognizes revenue proportionally. Total revenue and profit are identical over the contract life — only timing differs.
How does the percentage-of-completion method recognize revenue on long-term construction contracts?
The percentage-of-completion method recognizes revenue proportionally as work progresses on long-term contracts. The percentage complete is typically calculated as costs incurred to date divided by estimated total costs, and revenue for each period is the incremental amount.
How does the gross profit method estimate inventory, and when is it used in practice?
The gross profit method estimates ending inventory by subtracting estimated COGS (calculated from sales and historical gross profit margin) from goods available for sale. It is commonly used for insurance claims after inventory destruction and for interim estimates.
How does the retail inventory method work for estimating ending inventory?
The retail inventory method estimates ending inventory at cost by calculating a cost-to-retail ratio from goods available for sale data, then applying that ratio to ending inventory measured at retail selling prices. It is commonly used for interim reporting.
How do I construct a bull spread with call options, and when is it better than buying a naked call?
A bull call spread combines buying a lower-strike call and selling a higher-strike call on the same underlying. It reduces cost versus a naked call but caps the upside. Max gain equals the strike difference minus net premium, and max loss equals the net premium paid.
What is yield to worst, and why is it the most conservative yield measure for callable bonds?
Yield to worst is the minimum yield across all possible call dates and maturity, representing the most conservative return estimate for callable bonds. For premium bonds, YTW is typically the yield to the nearest call date.
What is the real difference between GDRs and ADRs, and when would a company choose one over the other?
Both ADRs and GDRs are negotiable certificates representing shares in a foreign company, but they differ in where they trade, how they're regulated, and which investors they target. ADRs trade on US exchanges under SEC oversight, while GDRs typically list in London or Luxembourg with lighter regulation.
What is an onerous contract under IAS 37, and how is the provision calculated when a company is locked into a loss-making agreement?
An onerous contract under IAS 37 exists when the unavoidable costs of fulfilling a contract exceed the economic benefits expected. The unavoidable cost is the lower of the cost to fulfill or the penalty to exit. A provision for the net loss is recognized immediately when the contract becomes onerous.
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