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CFA Level II Updated
What is a cash-secured put and why do income investors prefer it over buying stock directly?
Selling a cash-secured put lets you collect premium while committing to buy shares at a lower strike — you get paid to wait with a defined entry price.
How does a covered call strategy generate income and what are the trade-offs?
A covered call pairs long stock with a short OTM call to collect premium, capping upside at the strike while lowering effective cost basis by the premium received.
What is the most advantageous market and when does it apply?
Most advantageous market maximizes net proceeds after transaction and transportation costs, used only when principal market is not identifiable. Fair value uses the gross price; transaction costs inform selection only.
How are potential voting rights assessed for control and influence?
Potential voting rights are considered only if substantive: currently exercisable, no financial barriers, and economic incentive to exercise. Deeply in-the-money warrants exercisable within 30 days are substantive...
What triggers the 20% significant influence presumption for associates?
IAS 28 sets a rebuttable presumption of significant influence at 20% of voting rights. Below 20%, evidence like board representation, policy participation, material transactions, personnel interchange, or technical exchange can establish influence...
How does a credit default swap actually work from inception to credit event?
A CDS is a bilateral contract where the protection buyer pays a periodic premium to the seller in exchange for compensation if the reference entity defaults...
What is varimax rotation and why apply it to factor loadings?
Varimax is an orthogonal factor rotation that preserves orthogonality while maximizing the variance of squared loadings. Goal is to make each variable load heavily on one factor...
What is one-sided convexity and which instruments exhibit it?
One-sided convexity means curvature is asymmetric — putable bonds have upside-yield positive convexity, callable bonds have downside-yield negative convexity.
What is a conjugate prior and why is it useful?
A conjugate prior is one where the posterior is in the same family as the prior. This gives closed-form posterior updating — no MCMC needed...
How do I calculate and interpret RNOA in the Penman framework?
RNOA = NOPAT / Average NOA. Lattice's 14.1% isolates core business performance from financing effects. Decomposes into Operating Profit Margin x Net Operating Asset Turnover (8.57% x 1.647 = 14.1%) — cleaner than ROA.
What are the journal entries for a cash flow hedge under US GAAP?
Cash flow hedges defer the effective portion of derivative gains/losses in OCI until the hedged transaction...
How do I assess hedge effectiveness for a foreign currency forward under ASC 815?
ASC 815 requires both prospective and retrospective assessment of whether the derivative is highly effective...
Why does the Cox-Ingersoll-Ross model use a square-root diffusion?
The square-root diffusion term sigma*sqrt(r) solves Vasicek's biggest flaw: negative rates.
How do you derive analytical bond prices under the Vasicek model?
Vasicek assumes the short rate follows a mean-reverting Ornstein-Uhlenbeck process with constant volatility.
What are the main categories of interest rate models used in fixed income?
Interest rate models fall into two philosophical camps. Equilibrium models (Vasicek, CIR) derive the term structure from assumptions about the short rate process.
What is the 'constraint' on variable consideration and how do I apply it?
The constraint limits variable consideration to amounts where significant reversal is not probable. Factors include external volatility, long uncertainty, and limited historical experience.
Expected value vs most likely amount — when to use each for variable consideration?
Expected value (probability-weighted) suits contracts with many similar outcomes; most likely amount suits binary outcomes. The method must best predict entitlement and be consistently applied.
How do I calculate a municipal bond's taxable-equivalent yield?
TEY = tax-free yield / (1 - marginal rate). Jalen Rodriguez's 3.4% CA GO bond = 5.77% TEY at combined 41% rate — beats 5.1% corporate.
How does the convexity adjustment improve on duration-based price estimates?
Convexity adjustment adds ½ × C × (Δy)² to the duration estimate, correcting for curvature — material for large yield moves and long-duration bonds.
What makes timberland unique as an investment and how does biological growth work?
Timberland returns decompose into biological growth, timber price changes, and land appreciation. This combination gives timberland its unusual return profile.
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