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CFA Level II Updated
How do I compute Net Borrowing Cost and use it in spread analysis?
NBC = (Interest Expense - Interest Income) x (1-t) / Average NFO. Calypso's 5.04% vs RNOA 11% yields 5.96% spread, amplifying ROE via leverage. Validate against treasury + credit spread; watch for capitalized interest distortions.
What happens when a hedge relationship is discontinued?
Discontinuation of hedge accounting is common when the derivative expires or is sold...
What qualifies a derivative for hedging designation under ASC 815?
ASC 815 imposes strict designation criteria at hedge inception...
What is the T-forward measure and why is it useful?
The T-forward measure uses the zero-coupon bond P(t,T) as numeraire instead of the money-market account.
How does the Libor Market Model (BGM) differ from HJM?
BGM models discrete forward LIBOR rates L_i(t) — the rates underlying caps, floors, and swaptions — rather than instantaneous forwards.
What is the Heath-Jarrow-Morton framework for forward rates?
HJM models the entire forward rate curve directly. The drift alpha(t,T) is uniquely determined by the volatility structure sigma(t,T).
Auction vs dealer markets — how do they compare on cost and transparency?
Auction markets match buyers and sellers directly via competitive bidding; dealer markets use intermediaries who buy/sell from inventory. Equities favor auctions; bonds, FX, and swaps favor dealers.
What's the difference between general obligation and revenue bonds?
GOs: full taxing power. Revenue bonds: project-specific cash flows only. Cascadia issues both; revenue spread is higher reflecting project risk and rate covenants.
What is effective duration and when must I use it instead of modified duration?
Effective duration numerically reprices bonds after parallel curve shifts using an option model — required for callables, putables, and MBS where cash flows depend on rates.
Can fine wine actually work as a serious investment?
Fine wine is a small but established alternative asset class. Returns come from scarcity, quality evolution, critic scores, and fashion cycles.
What disclosures do issuers of municipal bonds provide?
Rule 15c2-12 requires official statement at issuance plus annual financials, operating data, and 10-day material event notices filed to EMMA.
How are interest-only (IO) strips priced and why do they behave inversely to most bonds when rates fall?
IO strips receive only interest payments whose value depends on outstanding principal. When rates fall, prepayments accelerate, shrinking the principal base and reducing future interest — causing IO values to drop. This creates negative duration, meaning IOs move in the same direction as rates.
What are the specific criteria for deep value investing and how does it differ from regular value investing?
Deep value investing targets companies trading at extreme discounts using screens like P/E below 8x, P/B below 0.7x, and price below net current asset value. It differs from regular value investing through uglier business profiles, higher value trap frequency, and the need for portfolio diversification.
How should analysts adjust financial ratios for off-balance-sheet items?
Analysts should adjust for off-balance-sheet items by capitalizing operating leases, consolidating unconsolidated entities, and adding back factored receivables to get accurate leverage, return, and efficiency ratios. The most common adjustment is adding the present value of future lease payments to both assets and liabilities, which typically increases leverage ratios and decreases return metrics.
How does the cumulative translation adjustment (CTA) work under the current rate method, and what happens when you sell the subsidiary?
Under the current rate method, the CTA accumulates in equity as a component of AOCI. When the subsidiary is sold or disposed of, the accumulated CTA is reclassified from equity to the income statement as part of the gain or loss on disposal.
What are the most important IFRS vs US GAAP differences tested at CFA Level II?
The most important IFRS vs US GAAP differences at Level II span inventory (LIFO/reversals), long-lived assets (revaluation/impairment reversals), leases (single vs dual lessee model), pensions (net interest vs expected return), R&D (capitalization vs expensing), and consolidation (goodwill options).
What is a convolutional neural network and does it have finance applications?
CNNs slide filters over inputs to detect local patterns. Used in finance for chart recognition, satellite imagery, document OCR, and alt-data.
What is the precise goodwill calculation formula including NCI treatment?
Goodwill = (Consideration + NCI + Previously held equity) minus Fair value of identifiable net assets. Two NCI methods: full goodwill (mandatory US GAAP) uses NCI% × FV of whole target; partial goodwill (IFRS option) uses NCI% × identifiable net assets...
How does VECM handle cointegrated time series?
A Vector Error Correction Model is a restricted VAR for cointegrated series, adding an error correction term that measures adjustment toward long-run equilibrium.
How does a VAR model capture multivariate dynamics?
A VAR treats each of k variables as a linear function of its own lags and lags of all other system variables, enabling Granger causality, IRFs, and multivariate forecasting.
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