Community Q&A
Expert-verified answers to your financial certification questions. Ask, learn, and connect with fellow candidates.
CFA Level II Updated
How do I compute effective duration for a callable bond?
EffDur = (V_minus - V_plus) / (2 * V_0 * delta_y). Shift tree rates up and down, revalue with call rules, compute. Callable duration is lower than straight because the call caps upside, dampening V_minus and flattening the price-yield curve...
How does volatility affect the value of callable and putable bonds?
Higher volatility widens the tree, making both call and put options more valuable. Callable bond price falls; putable bond price rises. Straight bond is unchanged. OAS is sensitive to volatility assumption — report at multiple vols for robustness...
How does a CDS auction work and what's the difference vs physical settlement?
CDS settle either via auction (cash-settle at auction-determined price) or physical settlement (deliver defaulted bonds for par). The 2009 Big Bang made auction standard...
How is the efficient frontier computed in mean-variance optimization?
The efficient frontier is the set of portfolios minimizing variance for each target return. Solved via a family of quadratic programs with closed-form parabola when unconstrained...
How do I evaluate earnings persistence for forecasting RNOA?
Orchard's 24% RNOA faces mean reversion absent durable moats (IP, scale, regulation). Test persistence empirically; typical industry persistence 0.6-0.7. Fade assumption from 22% to 14% over 10 years balances current premium with competitive erosion.
How do lookback options work with minimum and maximum references?
Lookback options reference the best price observed. Floating-strike uses min/max as strike; fixed-strike uses preset K with max/min as reference. Most expensive path-dependent options.
What is the competitive advantage period (CAP) and how is it used in valuation?
Competitive Advantage Period (CAP) is the number of years over which a firm sustains ROIC above WACC...
How do I assess if a firm's growth is truly sustainable in steady state?
Sustainable steady-state growth requires three things to hold simultaneously...
What is effective annual yield and when do I use it?
EAY = (1 + periodic rate)^m − 1. The true annualized yield accounting for intra-year compounding. Use for apples-to-apples comparison across different compounding conventions.
How do catastrophe-linked (cat) bonds work?
Cat bonds: SPV invests collateral, pays SOFR+spread, writes down principal on defined trigger. Coral Reef Re covers FL Cat 4+ hurricanes at $300M, SOFR+725.
How are partial durations (key rate durations) computed and used for targeted hedging?
Key rate durations measure sensitivity to individual points on the curve via tent-function shifts — essential for hedging barbells, butterflies, and curve-shape views.
What restrictive covenants appear in bond indentures?
Covenants cap leverage, restrict payments, require liens/affiliate discipline, trigger change-of-control puts. Cov-lite deals reduce protection.
What's random effects in panel data and when is it appropriate?
Random effects treats entity effects as random draws, offering efficiency gains over FE when unobserved heterogeneity is uncorrelated with regressors—tested via Hausman.
When should I use fixed effects in panel regression?
Fixed effects absorbs time-invariant unobserved heterogeneity by including entity dummies—use it when you suspect omitted variable bias from unobservable firm characteristics.
Explain the Fama-MacBeth two-step procedure
Fama-MacBeth runs time-series regressions to get betas, then monthly cross-sectional regressions to estimate risk premia, averaging across time with Newey-West standard errors.
How do cross-sectional regressions estimate factor returns?
Cross-sectional regression estimates factor returns by regressing asset returns on characteristics each period—the monthly slope IS that period's factor return.
How is scenario analysis different from sensitivity analysis?
Sensitivity analysis flexes inputs one at a time and treats them as independent. Scenario analysis changes a coherent set of inputs together...
What are Euro Medium-Term Notes (EMTNs) and how does the EMTN program structure work?
EMTNs are debt instruments issued under a pre-established program allowing continuous, flexible issuance. The program structure reduces time-to-market from weeks to days, allows any currency or structure, and supports reverse-inquiry deals tailored to specific investor needs.
Why do some companies maintain stable payout ratios while others let them fluctuate with earnings?
Payout ratio stability is explained by Lintner's dividend smoothing model, signaling theory, and clientele effects. Stable-dividend companies trade at higher multiples, while cyclical firms with volatile payouts are better valued using FCF models rather than constant-growth DDMs.
How are deferred taxes handled for undistributed earnings of a foreign subsidiary?
A deferred tax liability may be required for undistributed earnings of a foreign subsidiary when the parent will owe additional domestic tax upon repatriation. However, both IFRS and US GAAP allow an exception when earnings are considered indefinitely reinvested. This creates an off-balance-sheet liability that analysts must consider when assessing financial position.
Want unlimited access?
You've browsed several pages. Sign in to save your spot, bookmark questions, and unlock all 1,384 CFA Level II community questions plus expert-verified study materials.
Have a Question? Ask Our Experts
Register to ask questions, get expert-verified answers, and connect with fellow certification candidates preparing for CFA, FRM, CIA, CPA, and EA exams.