Community Q&A
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CFA Level I Updated
What are yankee bonds and what additional requirements must foreign issuers meet to issue them?
Yankee bonds are USD bonds issued in the US by non-US entities, requiring SEC registration, GAAP/IFRS reconciliation, and ongoing reporting. Despite higher issuance costs than Eurodollar bonds, the deep US investor base often results in tighter spreads and better liquidity.
Why do zero-coupon bonds have higher convexity than coupon bonds with the same duration?
For the same duration, zero-coupon bonds actually have lower convexity than coupon bonds because convexity is driven by the dispersion of cash flows. A zero-coupon bond concentrates all cash flow at a single point (zero dispersion), while coupon bonds spread payments across time.
Is the small-cap size premium still valid, or has it disappeared in recent decades?
The small-cap size premium is real but has significantly diminished since its initial discovery — from about 5% annually before 1980 to near zero in recent decades. The premium survives primarily when combined with quality screens, filtering out unprofitable speculative small-cap names.
How does commodity index roll methodology work, and what are the three components of commodity returns?
Commodity index returns comprise three components: spot return from price changes, roll yield from rolling expiring futures into new contracts, and collateral yield from investing margin-free capital in T-bills. Roll yield is positive in backwardation and negative in contango.
What are the Global Investment Performance Standards (GIPS) and why were they created?
GIPS is a voluntary global standard for investment performance reporting that prevents cherry-picking, ensures consistent calculation methods, and requires composites that include all discretionary portfolios. Compliance applies to the entire firm and cannot be partial.
What is the difference between winsorization and trimming for handling outliers?
Trimming removes extreme observations entirely, reducing sample size. Winsorization replaces extreme observations with the nearest non-extreme value, keeping sample size constant. Winsorization is generally preferred in quantitative finance.
How does the fair value model for investment property work under IAS 40?
Under IAS 40, investment property held under the fair value model records all fair value changes directly in profit or loss, and no depreciation is taken. This contrasts with the IAS 16 revaluation model for PP&E where gains go to OCI. Investment property is property held for rental income or capital appreciation rather than owner-occupied use.
How do you derive the justified trailing P/E ratio from the Gordon Growth Model?
The justified trailing P/E is derived from the Gordon Growth Model by dividing intrinsic value by trailing earnings: Justified Trailing P/E = payout ratio x (1 + g) / (r - g). The leading version omits the (1 + g) factor: Justified Leading P/E = payout ratio / (r - g).
How are asset retirement obligations recorded, and what happens to the balance sheet over time?
An asset retirement obligation is recorded at inception as a liability equal to the present value of expected future cleanup costs, with a corresponding increase in the long-lived asset's carrying value. Each year, accretion expense increases the liability and the added asset cost is depreciated.
Can someone explain put-call parity with a real arbitrage example? I don't get why it must hold.
Put-call parity is one of the most elegant relationships in finance, and once you see the arbitrage logic, it clicks permanently. The formula c + PV(X) = p + S means that a portfolio of a call plus a risk-free bond must equal a portfolio of a put plus the underlying stock, because both produce identical payoffs in every scenario.
When exactly does a company recognize revenue under the IFRS 15 five-step model?
Revenue recognition under IFRS 15 follows a five-step model that replaced the older 'risks and rewards' framework. The key concept is 'transfer of control' which determines whether revenue is recognized over time or at a point in time.
How do I analyze accounts receivable using aging schedules, allowance methods, and DSO?
Accounts receivable analysis uses aging schedules to estimate bad debts, the allowance method to record provisions, and DSO to measure collection efficiency. Key red flags include rising DSO, declining allowance ratios, and receivables growing faster than revenue.
When does a client gift become a violation of independence and objectivity?
Standard I(B) requires professionals maintain independence in judgment. Gifts from clients can compromise that independence if significant enough to influence behavior...
When should borrowing costs be capitalized under IAS 23?
IAS 23 requires capitalizing borrowing costs for qualifying assets that take a substantial period to prepare for use. For specific borrowings, capitalize the actual interest cost. For general borrowings, calculate a weighted average capitalization rate and apply it to expenditures on the qualifying asset.
Why is the P/B ratio linked to ROE, and how do I use this relationship?
The justified P/B ratio equals (ROE - g) / (r - g), derived from the Gordon Growth Model. When ROE exceeds the cost of equity, the justified P/B exceeds 1.0, indicating the company creates shareholder value. When ROE equals the cost of equity, P/B should equal 1.0.
When should a company capitalize interest costs instead of expensing them, and how does it affect financial ratios?
Both IFRS and US GAAP require capitalization of borrowing costs for qualifying assets that take a substantial period to prepare for use. Capitalizing interest increases assets and current-period income, but shifts costs to future periods through higher depreciation.
What does Standard V require for investment analysis? How do I demonstrate 'reasonable basis'?
Standard V requires diligence, reasonable basis for recommendations, clear communication distinguishing fact from opinion, and record retention. You can use third-party research but must evaluate it independently.
How do margin accounts work? When do you get a margin call?
Margin trading lets you amplify returns and losses by borrowing from your broker. The margin call trigger price = Loan / (Shares x (1 - Maintenance Margin)). Leverage doubles percentage gains and losses.
Why do zero-coupon bonds always trade at a deep discount, and how do you price them?
Zero-coupon bonds are simpler to price than coupon bonds because there's only one cash flow — the face value at maturity. The entire return comes from buying at a discount and receiving par at maturity.
What are common-size financial statements and how do I use them for analysis?
Common-size financial statements express each line item as a percentage of a base figure -- revenue for the income statement and total assets for the balance sheet. This enables cross-company comparison regardless of size and highlights trends over time.
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