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CFA Level II Updated
How do I bootstrap a swap curve from par swap rates?
Bootstrapping converts par swap quotes into zero-coupon discount factors sequentially, shortest to longest. A par swap has PV of zero at inception...
What's the income statement difference between trading and available-for-sale securities?
Trading securities flow unrealized gains through P&L each period. AFS gains sit in OCI until disposal, then recycle into P&L.
How do option books manage vega across the volatility surface?
Net vega can look flat while term-structure vega is dangerously exposed. Aurelia Szabo's desk splits vega into buckets by maturity...
How does a terms-of-trade shock affect a country's currency?
Favorable terms of trade shocks raise national income, lift non-tradable prices, and appreciate the real exchange rate. Commodity exporters show this strongly.
What is a Type 2 non-adjusting subsequent event?
Type 2 events (post-year-end conditions) require disclosure but no adjustment. Summit Peak's February 2026 earthquake at Osaka plant disclosed with $68M estimate.
What is the corporate capital allocation process and how do firms prioritize projects?
Corporate capital allocation: maintenance, growth, M&A, R&D, dividends, buybacks. Prestwick Manufacturing allocates $340M FY26 with 10.4% hurdle, automation at 22% IRR prioritized...
How does the Hausman test choose between fixed and random effects in panel data?
Fixed effects and random effects both estimate panel data models, but they rest on different assumptions. The Hausman test formalizes the trade-off.
How are mining restoration costs capitalized?
Initial ARO recognized at PV of expected restoration costs; capitalized to the mine asset. Accretion expense grows liability; depreciation expenses the asset.
How do I evaluate whether a public company's audit committee is effective?
Evaluate independence, financial expertise, meeting frequency, tenure, auditor oversight (non-audit fees below 30%), and restatement history.
What is veta and how does it affect long-dated option valuation?
Veta is the derivative of vega with respect to time, describing how a position's vol exposure decays as time passes.
How do returns and allowances affect inventory reporting?
Under ASC 606 and IFRS 15, expected returns reduce revenue at the time of sale through a refund liability, and the estimated cost of returned goods is recognized as a right-of-return asset.
How do transfer pricing adjustments affect multinational financial statements?
Transfer pricing is cross-border intercompany pricing required to be at arm's length. Northwind's $94M IRS adjustment likely triggers ~$30-35M total cash tax, interest, and penalties. Check MAP and APA status...
How do you compute the breakeven on a zero-coupon inflation swap?
A ZC inflation swap settles (1+K)^N vs CPI growth ratio once at maturity; K is the pure breakeven.
Can a company reclassify held-to-maturity securities and what are the consequences?
Impermissible sales taint the entire HTM portfolio, forcing reclassification to AFS and blocking new HTM designations for two fiscal years under US GAAP.
How do I construct a gamma-neutral portfolio?
Gamma neutrality requires another option, since the underlying has zero gamma. The recipe: offset your portfolio's gamma using a liquid option, then rebalance Delta back to zero...
What is the Balassa-Samuelson effect and how does it affect exchange rates?
Balassa-Samuelson says tradable productivity growth raises wages economy-wide, lifting non-tradables prices and real exchange rate. Key driver for convergence economies.
What is a Type 1 adjusting subsequent event?
Type 1 events provide evidence of year-end conditions and require adjustment. Willowbrook Foods adjusts $4.2M bad debt for BayMarket's February 2026 bankruptcy.
How do I test for a structural break using the Chow test?
The Chow test evaluates whether a regression's coefficients are stable across two known subsamples. Rejecting the null means the structural relationship changed.
How do you test groups of long-lived assets for impairment?
Group assets at lowest level with independent cash flows. Test recoverability using undiscounted flows, then measure against fair value.
How do companies game days payable outstanding to boost cash flow?
DPO extension helps CFO once. Gaming shows as 30+ day jumps, supply chain finance hiding debt, and CFO growth entirely from payables stretch.
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