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CFA Level II Updated
What are the limitations of the Gordon growth terminal value?
The Gordon growth terminal value has four principal limitations...
How does yield to put work and when does it matter?
YTP = IRR assuming holder puts the bond back at first put date at put price. When rates rise and price falls below par, YTP exceeds YTM, making the put attractive and defining yield-to-best.
What is yield to worst and when is it the right metric?
YTW = minimum of YTM and all call/put yields. Assumes issuer acts optimally. Industry-standard conservative yield for callable and puttable bonds, required for retail disclosures.
How are social impact bonds structured?
SIBs: outcome-contingent contracts, not bonds. Harborlight Recidivism SIB pays investors 0-115% based on 4-year recidivism drop vs thresholds.
How do I manage curve risk beyond parallel-shift duration?
Duration captures only parallel shifts — curve risk requires key rate durations across maturities. Steepening/flattening crush portfolios with good 'parallel' match but poor shape match.
What are the UN Principles for Responsible Investment and how do they affect asset managers?
The UN Principles for Responsible Investment are a voluntary framework to integrate ESG factors into investment decisions, with over 5,000 global signatories.
Use of proceeds vs general obligation bonds — how do they differ?
GO bonds backed by full issuer credit; UoP bonds earmark proceeds for specific projects. In munis, UoP often means revenue bonds with narrower pledge; in corporate ESG, UoP keeps full recourse.
How do I run sensitivity and breakeven analysis on a capital project?
Sensitivity analysis changes one input at a time and records the NPV response. Breakeven analysis finds the input value at which NPV = 0...
How do covered bonds provide dual recourse and what makes the cover pool special?
Covered bonds provide dual recourse — investors have claims on both the issuer and a segregated cover pool. The dynamic pool requires continuous replacement of defaulted assets, and over-collateralization provides an additional buffer. No covered bond has ever defaulted in 250+ years.
Can you walk through the retention rate and ROE relationship to sustainable growth with a detailed example?
The sustainable growth rate g = b x ROE connects to DuPont decomposition, showing how profit margins, asset turnover, and leverage each contribute to growth. Increasing leverage boosts sustainable growth mathematically but also raises financial risk and cost of equity.
How does IFRS 15 distinguish between a 'right to access' and a 'right to use' for IP licensing revenue?
Under IFRS 15, a license that gives the customer a right to access IP is recognized over time because the entity's ongoing activities significantly affect the IP throughout the license period. A right to use license is recognized at a point in time because the customer receives static IP with no ongoing entity involvement. The distinction depends on whether the licensor has continuing obligations that affect the licensed IP.
How does an auto loan ABS work and what is the credit enhancement waterfall?
Auto loan ABS are among the most straightforward securitization structures. The credit enhancement waterfall uses subordination, excess spread, reserve accounts, and overcollateralization to protect senior tranche investors.
What criteria should I use to select comparable companies for relative valuation?
Select comparable companies based on industry and business model similarity first, then match on size, growth profile, profitability margins, leverage, and geography. If no perfect comps exist, use the closest available set and adjust qualitatively or use regression to normalize for differences.
When can a company keep a securitization off-balance sheet, and what red flags should analysts look for?
A securitization can be kept off-balance sheet only if specific derecognition criteria are met, including legal isolation and no retained effective control. Analysts should watch for red flags like retained subordinated interests, above-market servicing fees, and total return swaps.
What is the difference between pension service cost and interest cost, and where do they appear on the income statement?
Service cost is the present value of benefits earned in the current period and appears in operating income. Interest cost is the growth of the pension obligation due to the passage of time. Under IFRS, net interest (on the net liability) appears below operating income and remeasurements go to OCI permanently. Under GAAP, interest cost and expected return are separate P&L items.
How do I identify non-recurring items and calculate adjusted earnings for analysis?
Analysts must critically evaluate non-GAAP adjusted earnings by testing frequency, magnitude, and direction of adjustments. Items that recur annually (like restructuring) or represent real costs (like stock-based compensation) should generally not be excluded from core earnings analysis.
Can someone walk me through the IFRS 15 / ASC 606 five-step revenue recognition model?
The IFRS 15 / ASC 606 five-step model requires identifying the contract, performance obligations, transaction price, allocating that price based on standalone selling prices, and recognizing revenue when each obligation is satisfied — either at a point in time or over time.
How does GPT differ from BERT, and what are generative pre-trained transformers good at?
GPT is decoder-only Transformer trained autoregressively. Generates text, answers questions. Used in research summarization, coding, compliance. Beware hallucinations.
What determines the optimal dividend payout ratio?
The optimal payout balances capital needs against shareholder preferences. Frameworks include residual model, stable dividend policy, target payout (Lintner), and industry benchmarks. Determinants include growth rate, cost of retained capital, FCFE sustainability, and tax wedges...
How does GRI differ from SASB and TCFD, and who is the audience?
GRI uses double materiality targeting broad stakeholders; SASB/TCFD (now ISSB) uses single materiality targeting investors; both can be used together.
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