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CFA Level II Updated
What is Market Value Added (MVA) and how does it relate to EVA?
Market Value Added (MVA) equals the market value of capital minus the book value of invested capital.
How does basis risk arise when a corporate treasurer hedges floating-rate debt with FRAs?
Yes, and it's the textbook definition of basis risk. Basis risk is the residual exposure that remains when the hedge instrument's reference rate doesn't move in perfect lockstep with the exposure.
What's the practical difference between an FRA and a short-dated interest rate futures contract?
FRAs and short-dated interest rate futures target the same economic exposure but have different plumbing that matters for hedging accuracy.
How do I calculate the Gordon growth model implied ERP?
Gordon implied ERP backs out required return from current prices. For S&P 500 at 5,840, with $82 dividends + $96 buybacks per index unit and 4.25% growth: ke = 7.3%, ERP = 3.05%. Two-stage model often yields 4-5%...
What does highest and best use mean for fair value of non-financial assets?
Highest and best use requires measuring non-financial assets at the value a market participant would derive from the use that maximizes value, screening physical, legal, and financial feasibility.
When are subsidiaries excluded from consolidation and how do I adjust?
IFRS 10 requires consolidation of all controlled subsidiaries with no exemption for hyperinflation or capital restrictions alone. Only narrowly-defined investment entities measure subsidiaries at FVTPL...
How do I map a consolidated group structure from the notes?
Start with the subsidiaries note and build a tree: parent, first-tier, second-tier. Three questions: where is the cash, where are the losses, where is the goodwill...
What is an accreting swap and why use one?
An accreting swap has a notional that grows over time according to a pre-agreed schedule. Useful for construction loans, pension funding, and indexed products...
How does method of moments estimation compare to MLE?
Method of moments equates sample moments to population moments and solves for parameters. If your model has k parameters, you match k moments...
What red flags indicate inventory manipulation or channel stuffing?
Inventory growth (28%) outpacing sales (6%) plus 62% DSI jump signals potential manipulation. Check finished-goods composition, peer comparisons, AR concurrently growing (channel stuffing), and subsequent write-downs to confirm.
What's the difference between a service-type and assurance-type warranty, and how do I account for each?
Assurance-type warranties accrue cost at sale as a liability; service-type warranties are separate performance obligations with revenue allocated and recognized over the service period.
How do I account for sales with a right of return under ASC 606?
When customers have a right of return, recognize revenue only for amounts not expected to be returned, book a refund liability for estimated returns, and an asset for the right to recover products.
How does publication bias affect the anomalies literature?
Journals favor significant results. McLean-Pontiff show 58% decline post-publication; Hou-Xue-Zhang find only 36% of anomalies survive robust replication.
What does a declining interest burden ratio tell me and how do I benchmark it?
A falling interest burden reflects rising interest cost relative to EBIT — diagnose via debt level, rate environment, coverage ratio, and EBIT cyclicality.
How does commercial paper issuance work mechanically?
Commercial paper is unsecured short-term debt issued by high-quality corporations at a discount to face value. Maturities run from 1 to 270 days.
Can you make money investing in declining industries?
Declining industries reward disciplined capital returners — high FCF conversion, concentrated share, and buybacks can compound returns despite revenue decline.
How does a total return swap on bonds work and why is it called 'unfunded' credit exposure?
A total return swap passes all bond economics (coupons plus price changes) to the receiver in exchange for a funding rate. It is 'unfunded' because the receiver gains full economic exposure without purchasing the bond, enabling leveraged investors to obtain 10:1 or higher leverage ratios.
Can someone walk through EVA (Economic Value Added) with a detailed calculation and explain the accounting adjustments?
EVA measures profit after deducting the full cost of capital, including equity. Key accounting adjustments include capitalizing R&D, adjusting for operating leases, and excluding one-time charges. These adjustments can significantly change the EVA figure and improve cross-company comparability.
How do you determine whether a company should report revenue gross (as principal) or net (as agent)?
A company reports revenue gross as a principal if it controls the good or service before transfer to the customer. If it merely arranges for another party to provide the good/service, it is an agent and reports only its commission as revenue. Net income is unaffected.
How do I compute a forward swap rate from the discount factor curve?
Forward swap rate = (DF_start - DF_end) / sum of tau x DF. Derived from the discount factor curve; it's the ATM forward strike.
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