CFA Level I: Common Mistakes & Exam Traps

Breakeven point = minimum ATC; shutdown point = minimum AVC. With fixed costs sunk, a firm keeps operating in the short run whenever price is between minimum AVC and minimum ATC, because it covers all variable cost and part of fixed cost. It shuts down only if price is below minimum AVC. In the long run, a firm that cannot earn at least zero economic profit exits. [CFA curriculum, Vol 2 LM1]

Entry drives economic profit to zero, but output is set where MR = MC on a downward-sloping demand curve, so the firm produces less than the output that minimizes average cost and at a higher average cost. Economic cost also includes product-differentiation costs such as advertising. [CFA curriculum, Vol 2 LM1]

The concentration ratio (sum of top-N shares) tends to be unaffected by mergers among the top incumbents. Shares 35/25/20/10: CR3 moves from 80% to only 90% after the top two merge, but the HHI (sum of squared shares) of the top three rises from 0.225 to 0.410. Neither measure accounts for entry or demand elasticity. [CFA curriculum, Vol 2 LM1]

The inventory to sales ratio is a lagging indicator, together with average duration of unemployment, change in unit labor costs, inflation, and the average prime lending rate. Average weekly hours (manufacturing) is leading, alongside building permits, the stock market and the long–short interest spread. Industrial production and real personal income are coincident. [CFA curriculum, Vol 2 LM2]

In the curriculum’s four phases (recovery, expansion, slowdown, contraction), during the slowdown output is at its highest level relative to potential (largest positive output gap); growth slows and the gap starts to narrow. In contraction, actual output falls below potential. The classical cycle tracks the level of activity; the growth cycle tracks deviations from trend. [CFA curriculum, Vol 2 LM2]

With a proportional tax rate t and MPC c, the multiplier is 1/[1 − c(1 − t)]. With c = 0.9 and t = 0.2: 1/[1 − 0.9(0.8)] = 1/0.28 = 3.57, so a USD1 billion rise in G raises income by USD3.57 billion. [CFA curriculum, Vol 2 LM3]

Output rises. Spending of USD200 financed by USD200 of taxes with MPC 0.9 cuts consumption by only USD180, so the initial boost is USD20, which is then multiplied. For a genuinely balanced change (spending adjusted to offset exactly the eventual total change in tax revenue), the balanced budget multiplier always takes the value unity. [CFA curriculum, Vol 2 LM3]

A recession automatically lowers tax revenue and raises transfers (automatic stabilizers), widening the deficit with no policy change. Judge the stance with the structural (cyclically adjusted) deficit: the deficit that would exist if the economy were at full employment. [CFA curriculum, Vol 2 LM3]

Compare the policy rate with the neutral rate = real trend growth + long-run expected inflation (target). With trend growth 2.5% and a 2% target, neutral = 4.5% [CFA curriculum, Vol 2 LM4]. A 4% rate is below neutral, so policy is expansionary; above 4.5% it would be contractionary. [Illustrative]

With rigid wages and prices, easy fiscal/tight monetary gives higher output and higher interest rates, and government spending becomes a larger share of national income. It is tight fiscal/easy monetary that makes the private sector rise as a share of GDP while the public sector shrinks. [CFA curriculum, Vol 2 LM4]

Event risk evolves around set dates known in advance (e.g., elections, Brexit). Exogenous risk is sudden or unanticipated (uprisings, invasions, aftermath of natural disasters). Thematic risks are known risks that evolve and expand over time (climate change, cyber threats, terrorism). [CFA curriculum, Vol 2 LM5]

IMF: main mandate is to ensure the stability of the international monetary system (exchange rates and international payments). World Bank: help developing countries fight poverty and enhance environmentally sound growth. WTO: the legal and institutional foundation of the multinational trading system. [CFA curriculum, Vol 2 LM5]

Consumer surplus falls by A+B+C+D, but A goes to domestic producers and C is tariff revenue. The net loss is the deadweight loss B+D. Curriculum paper example: CS loss USD185,000; PS gain USD120,000; revenue USD40,000; deadweight loss USD25,000. [CFA curriculum, Vol 2 LM6]

Both give the same domestic price, but under a quota area C becomes quota rents. If foreign producers or governments capture them, the importing country’s loss is B+C+D, larger than the tariff’s B+D. If the government auctions import licenses, the loss is similar to the tariff’s. Under a VER (imposed by the exporter), the exporter captures the quota rent. [CFA curriculum, Vol 2 LM6]

FTA: barriers among members removed, but each country keeps its own policies against non-members. Customs union: FTA + common trade policy against non-members. Common market: + free movement of factors of production. Economic union: + common economic institutions and policy coordination. Adopting a common currency makes it also a monetary union. [CFA curriculum, Vol 2 LM6]

In A/B, A is the price currency and B the base currency (always one unit): USD/EUR = 1.1700 means EUR1 costs USD1.1700. In market codes the base currency is named first, opposite to the ratio: EURJPY is quoted as JPY/EUR, yen per euro. A direct quote has the domestic currency as the price currency. [CFA curriculum, Vol 2 LM7]

The base currency (euro) appreciates 1.2000/1.1500 − 1 = +4.35%. For the dollar, invert: 1.1500/1.2000 − 1 = −4.17%. The two percentages will always be different. [CFA curriculum, Vol 2 LM7]

Real exchange rated/ f = Sd/ f × (Pf /Pd ). A higher real rate means foreign goods cost more in real terms, so domestic purchasing power falls. Curriculum example: INR/USD up about 6.7%, US inflation 2.5%, India 4.7%; real INR/USD rose about 6.7 + 2.5 − 4.7 ≈ 4.5%, reducing Indian purchasing power in USD terms. [CFA curriculum, Vol 2 LM7]

Dollarization gives currency credibility, not creditworthiness; local dollar interest rates generally differ from US rates. Under dollarization, seigniorage goes to the issuing authority (e.g., the US); a currency board can earn seigniorage. A dollarized country also gives up its own monetary policy. [CFA curriculum, Vol 2 LM7]

Arrange the quotes so the common currency cancels. For JPY/CAD, invert CAD/USD to USD/CAD: (1/1.3020) × 111.94 = 0.7680 × 111.94 = 85.97 JPY per CAD. For CAD/EUR no inversion is needed: 1.3020 × 1.1701 = 1.5235. [CFA curriculum, Vol 2 LM8]

Points are scaled to the last decimal of the spot quote: divide by 10,000 (4 decimals), or by 100 for yen. 1.15885 + 0.00809 = 1.16694, a +0.698% premium. Negative points mean the base currency is at a forward discount: GBP/EUR 0.8752 with −1.4 points gives 0.87506. [CFA curriculum, Vol 2 LM8]

The price currency’s rate goes on top: Ff /d = S f /d (1 + r f )/(1 + rd ) = 1.6535(1.05/1.035) = 1.6775. For fractions of a year use actual/360: 30 days, S = 1.6555, r f = 3%, rd = 2% gives 1.6569 (+14 pips); 180 days gives 82 pips, not exactly 6 × 14 = 84. [CFA curriculum, Vol 2 LM8]

The currency with the higher interest rate trades at a forward discount. INR/USD spot 83.00, INR rate 6.5%, USD rate 4.5%: F = 83.00 × 1.065/1.045 = 84.59 (+1.91%), so USD at a premium, INR at a discount. [India context — added, not curriculum] [Illustrative] Forward rates come from arbitrage and are poor predictors of future spot rates. [CFA curriculum, Vol 2 LM8]

The framework has six phases: articulate purpose and context; collect data; process data; analyze/interpret; develop and communicate conclusions; follow-up. Ratios, common-size statements and adjusted statements are an output of the process data phase and an input into the analyze/interpret phase, whose outputs are analytical results, forecasts and valuations. Updated reports and revised forecasts belong to follow-up. [CFA curriculum, Vol 4 LM1]

A qualified opinion reflects some scope limitation or exception to accounting standards, explained in additional paragraphs. An adverse opinion says the statements materially depart from standards and are not fairly presented. A disclaimer means the auditor is unable to issue an opinion. The clean opinion is unqualified (“unmodified”), and it gives reasonable, not absolute, assurance. [CFA curriculum, Vol 4 LM1]

Under the if-converted method, conversion is assumed at the start of the period, so no preferred dividends are deducted. Bright-Warm: net income USD1,750,000; preferred dividends USD200,000; 500,000 shares; 20,000 preferred, each convertible into 5 shares. Basic EPS = 1,550,000/500,000 = USD3.10; diluted EPS = 1,750,000/600,000 = USD2.92. [CFA curriculum, Vol 4 LM2]

Add back the after-tax interest. Oppnox: net income USD750,000; 690,000 shares; USD50,000 of 6% bonds convertible into 10,000 shares; tax rate 30%. Interest USD3,000 × (1 − 0.30) = USD2,100. Diluted EPS = 752,100/700,000 = USD1.07 (basic USD1.09). Adding the pre-tax USD3,000 would give about USD1.08. [CFA curriculum, Vol 4 LM2]

Assume the exercise proceeds repurchase shares at the average market price for the period and add only the net incremental shares; the numerator is unchanged. Hihotech: 30,000 options at USD35; average price USD55; proceeds USD1,050,000 buy back 19,091 shares; incremental shares 10,909. Diluted EPS = 2,300,000/810,909 = USD2.84 (basic USD2.88). IFRS uses the same computation (“inferred shares”) but does not name it the treasury stock method. [CFA curriculum, Vol 4 LM2]

Under IFRS and US GAAP, antidilutive securities are excluded; diluted EPS is always ≤ basic EPS. Dim- Cool: as Bright-Warm, but each preferred converts into only 3 shares. If-converted EPS = 1,750,000/560,000 = USD3.13, above basic USD3.10, so the preferred is antidilutive and reported diluted EPS = USD3.10. [CFA curriculum, Vol 4 LM2]

Under both IFRS and US GAAP, goodwill is capitalized, not amortized, and tested for impairment annually; an impairment loss reduces earnings and total assets and is non-cash. Identifiable intangibles with finite lives are amortized; those with indefinite lives are not (tested annually). A bargain purchase gain is recognized in profit and loss. [CFA curriculum, Vol 4 LM3]

US GAAP: available-for-sale applies only to debt securities; equity investments without significant influence are at fair value through profit or loss. IFRS: equity may be measured at FVOCI only by an irrevocable election at acquisition. EUR100m bond, EUR2.5m coupon, EUR2m unrealized gain: profit impact EUR2.5m at amortized cost or FVOCI/AFS, but EUR4.5m at FVPL/trading. [CFA curriculum, Vol 4 LM3]

US GAAP: interest received, interest paid and dividends received are operating; dividends paid are financing. IFRS: interest and dividends received are operating or investing; interest and dividends paid are operating or financing. Taxes paid: operating (US GAAP); generally operating under IFRS unless specifically identified with investing or financing. Bank overdrafts: part of cash equivalents (IFRS) but financing (US GAAP). [CFA curriculum, Vol 4 LM4]

An increase in a current operating asset is subtracted (a decrease added); an increase in a current operating liability is added. Non-cash charges are added back; gains on sale are subtracted. Net income USD30m; depreciation 7; receivables up 15; inventory down 3; payables up 10. Net adjustment = 7 + 3 + 10 − 15 = +USD5m, so CFO = USD35m. [CFA curriculum, Vol 4 LM4]

Cash proceeds = book value of asset sold + gain (or − loss). Copper Inc.: gain USD12m. Cost of equipment sold = 100 + 15 capex − 109 = 6; accumulated depreciation on it = 30 + 8 − 36 = 2; book value = 4; cash received = 4 + 12 = USD16m, an investing inflow. [CFA curriculum, Vol 4 LM4]

FCFF = CFO + Int(1 − tax rate) − FCInv. Acme (tax rate 34%): 2,606 + 258(0.66) − (1,300 − 762) = 2,606 + 170 − 538 = USD2,238. If an IFRS company put interest paid in financing, CFO needs no interest adjustment; interest and dividends received shown in investing should be added back to CFO. [CFA curriculum, Vol 4 LM5]

FCFE = CFO − FCInv + Net borrowing (or − net debt repayment). Interest is not added back. Acme: 2,606 − 538 − 500 debt repayment = USD1,568, against FCFF of USD2,238. Positive FCFE is available for distribution to owners. [CFA curriculum, Vol 4 LM5]

IFRS: lower of cost and NRV; a later increase in value requires reversal, limited to the original write-down, recognized as a reduction in cost of sales. US GAAP: lower of cost or NRV (other than LIFO and retail), or lower of cost or market for LIFO and retail (market = replacement cost, capped at NRV, floored at NRV less normal profit margin); reversal prohibited. [CFA curriculum, Vol 4 LM6]

With rising unit costs and stable or rising quantities, LIFO (vs FIFO) gives higher cost of sales, lower gross profit and lower inventory: a lower gross margin and current ratio but higher inventory turnover. FIFO inventory is closer to current replacement value; LIFO cost of sales is closer to current replacement value. LIFO is not permitted under IFRS. [CFA curriculum, Vol 4 LM6]

FIFO inventory = LIFO inventory + LIFO reserve; FIFO COGS = LIFO COGS − change in LIFO reserve. Crux (USD millions): LIFO reserve fell from 72 to 55; COGS 3,120 includes 13 of write-downs. Adjusted COGS = 3,120 − 13 − (55 − 72) = 3,124. FIFO inventory = 480 + 55 = 535 and 465 + 72 = 537; turnover = 3,124/536 = 5.83. [CFA curriculum, Vol 4 LM6]

IFRS: research costs are expensed, but development costs (not only software) may be capitalized under certain conditions. US GAAP: generally both research and development costs are expensed, but certain software development costs must be capitalized. [CFA curriculum, Vol 4 LM7]

IFRS: loss = carrying amount − recoverable amount (higher of fair value less costs to sell and value in use). US GAAP: first test recoverability against undiscounted cash flows; if not recoverable, write down to fair value. Sussex: carrying 18,000; undiscounted 19,000; value in use 16,000; fair value 17,000 less costs 2,000. IFRS loss = GBP2,000; US GAAP no loss. Reversals: permitted under IFRS; not under US GAAP for assets held for use. [CFA curriculum, Vol 4 LM7]

The revaluation model is permitted under IFRS but not US GAAP. An increase (with no previous downward revaluation) bypasses the income statement: it is reported in OCI and in equity as revaluation surplus. Equity and assets rise with net income unchanged, so ROE falls, and ROA and debt-to-capital also fall. [CFA curriculum, Vol 4 LM7]

Swap them: average age ≈ accumulated depreciation / depreciation expense; average remaining life ≈ net PPE / depreciation expense. These apply mainly to PPE under the cost model. [CFA curriculum, Vol 4 LM7] Accumulated depreciation 600, net PPE 400, depreciation 100: age 6 years, remaining life 4 years. [Illustrative]

US GAAP operating lease: ROU asset and lease liability are recognized; one straight-line “lease expense”; the entire payment is an operating outflow. IFRS: a single model, with separate interest and amortization; principal repayment is financing. Proton (5 years, 10%, EUR100,000 a year, PV 379,079): Year 1 expense 37,908 + 75,816 = 113,724 vs 100,000. Exemptions: term ≤ 12 months (both); low-value assets (IFRS only). [CFA curriculum, Vol 4 LM8]

IFRS: service cost and net interest go to P&L; remeasurements (actuarial gains and losses; actual return less the return in net interest) go to OCI and are not amortized into profit. US GAAP: service cost, interest cost and expected return go to P&L; past service costs and actuarial gains and losses go to OCI and are amortized into pension expense (immediate P&L recognition of actuarial gains and losses is permitted). [CFA curriculum, Vol 4 LM8]

Under IFRS and US GAAP, share-based compensation is generally measured at fair value at the grant date and expensed over the vesting (service) period. Changes in the stock price after the grant date do not affect the reported expense. Awards that vest immediately are expensed on the grant date. [CFA curriculum, Vol 4 LM8]

Asset: carrying amount > tax base ⇒ DTL; carrying < tax base ⇒ DTA. Liability: carrying amount > tax base ⇒ DTA; carrying < tax base ⇒ DTL. Reston: equipment GBP20,000, 10-year book life, 7-year tax life, 30% rate. End of Year 1: carrying 18,000, tax base 17,143, DTL = 857 × 30% = GBP257. Tax expense = payable 1,153 + change in DTL 257 = GBP1,410. [CFA curriculum, Vol 4 LM9]

Non-deductible items (e.g. penalties and fines) and tax credits are permanent differences: they never reverse and create no deferred tax. They make the effective tax rate (income tax expense / pre-tax income) differ from the statutory rate. The cash tax rate (cash taxes paid / pre-tax income) is a third, different measure, used for forecasting cash flows. [CFA curriculum, Vol 4 LM9]

When statutory rates change, recorded DTAs and DTLs change: a cut (e.g. 35% to 21%) reduces both. If realization is doubtful, US GAAP sets up a valuation allowance to the amount “more likely than not” to be realized; under IFRS the existing DTA is reversed. [CFA curriculum, Vol 4 LM9] A taxable temporary difference of 1,000 gives a DTL of 350 at 35% but 210 at 21%. [Illustrative]

Unbiased reporting is ideal. Conservative choices bias current performance downward and may raise it in later periods; conservatism conflicts with neutrality. Conservative choices can build hidden reserves used for earnings smoothing. “Within GAAP, but biased choices” sits below the top of the quality spectrum, whether the bias is conservative or aggressive. [CFA curriculum, Vol 4 LM10]

Reporting quality concerns the information disclosed (relevant, complete, neutral, free from error). Results (earnings) quality concerns whether earnings are sustainable and give adequate returns. A report can be high quality yet show low earnings quality if it faithfully represents weak performance. High reporting quality enables earnings quality to be assessed. [CFA curriculum, Vol 4 LM10]

ROE = NI/EBT (tax burden) × EBT/EBIT (interest burden) × EBIT/Revenue × Revenue/Average assets × Average assets/Average equity. A higher tax burden = a lower tax rate (30% tax gives 0.70). Anson: 0.70 × 0.90 × 5.29% × 1.11 × 1.60 ≈ 5.92%. [CFA curriculum, Vol 4 LM11]

Cash conversion cycle = DOH + DSO − number of days of payables. A shorter cycle indicates greater liquidity: inventory and receivables must be financed for less time. A longer cycle indicates lower liquidity. [CFA curriculum, Vol 4 LM11] DOH 50, DSO 40, payables 30 days gives 60 days. [Illustrative]

Conservatism bias = maintaining prior views or forecasts by inadequately incorporating new information; also called anchoring and adjustment, since the update is too small. It most commonly means reluctance to incorporate new negative information, but analysts can also under-react to positive information. Mitigate with regular team reviews and flexible models with fewer variables. [CFA curriculum, Vol 4 LM12]

With unit volume maintained, the gross margin percentage is unchanged but absolute gross profit increases. [CFA curriculum, Vol 4 LM12] Sales 100, COGS 60 become 110 and 66: margin 40% both times, gross profit 40 to 44. [Illustrative] In the short term, however, volumes usually decline after a price increase, especially when demand is price elastic.

Current yield = annual coupon / price = 3.2%/1.01 = 3.168%. It is a simple measure. The YTM is the IRR of all cash flows to maturity: 101 = 1.6/(1 + r) + · · · + 101.6/(1 + r)10 gives r = 1.49% per half-year, or 2.98% annualized. The investor earns the YTM only if there is no default, the bond is held to maturity, and coupons are reinvested at the YTM. [CFA curriculum, Vol 6 LM1]

Affirmative covenants say what issuers are required to do. They are mostly administrative: use of proceeds, timely financial reports, a pari passu clause and a cross-default clause. Negative covenants say what issuers are prohibited from doing: limits on liens, sale and leaseback, and additional debt, plus a negative pledge clause. The curriculum’s own answer puts an interest coverage minimum and an additional debt restriction under negative covenants. [CFA curriculum, Vol 6 LM1]

Who holds the option decides the direction. A call benefits the issuer, so investors demand a higher yield for call risk, and the price is effectively capped near the call price once the YTM falls below the coupon. A put benefits the investor, so a putable bond’s price is above, and its yield lower than, an otherwise similar non-putable bond. If the YTM rises above the coupon, the put price acts as a price floor. [CFA curriculum, Vol 6 LM2]

Conversion ratio = par / conversion price = 1,000/42 = 23.81 shares. Conversion value = conversion ratio × current share price. At a share price of EUR35, it is 23.81 × 35 = EUR833.35. With the bond at par (EUR1,000), the holder prefers to keep the bond rather than convert. If the share price is well below the conversion price, the bond trades like a straight bond. If it is far above, the bond tracks its conversion value. [CFA curriculum, Vol 6 LM2]

That describes an interest-indexed bond, which repays a fixed nominal principal and links only the coupon to inflation. A capital-indexed bond (such as TIPS) applies a fixed coupon rate to an inflation-adjusted principal. CPI 265 → 267.25 is +0.849%, so USD115 million of principal becomes about USD115.98 million. The semiannual coupon is 1% × 115.98m/2 ≈ USD579,882. At maturity, investors usually receive the greater of the inflation-adjusted principal or par. [CFA curriculum, Vol 6 LM2]

Issuers rated BBB− (Baa3 on Moody’s) or higher are investment grade. The curriculum treats BBB− as the lowest investment-grade rating. Issuers rated BB+ (Ba1) or lower are high yield, speculative grade or junk. Fallen angels are formerly investment-grade issuers whose credit quality has deteriorated, which means they have crossed below BBB−. [CFA curriculum, Vol 6 LM3]

The curriculum lists three differences. (1) One issuer may have many bonds outstanding, so bond indexes have many more constituents, some over 10,000. (2) Finite maturities and frequent new issuance cause far higher turnover, and indexes are usually rebalanced monthly. (3) Constituents are usually weighted by market value of debt outstanding, not equally. That is why broad indexes carry high government weights. Because of the complexity, index-tracking funds typically hold a representative sample. [CFA curriculum, Vol 6 LM3]

The security seller is the cash borrower. The buyer is the cash lender and earns the repo rate. The seller retains ownership of the security over the repo term, as well as the interest and actual coupon paid. Seen from the buyer’s side, the deal is a reverse repo. Example: USD100 million at a 0.25% repo rate for 30 days (360-day year) gives a repurchase price of 100m × (1 + 0.0025 × 30/360) = USD100,020,833. [CFA curriculum, Vol 6 LM4] When a central bank such as the RBI does a repo with a bank against government securities, the bank is the cash borrower. [India context — added, not curriculum]

Initial margin = security price / purchase price, so the purchase price is 100m/1.02 = USD98,039,216. Haircut = (security price − purchase price) / security price = 1,960,784/100m = 1.96%. The seller finances the remaining USD1,960,784 from other sources. The repurchase price for 30 days at 0.25% is 98,039,216 × (1 + 0.0025 × 30/360) = USD98,059,641. [CFA curriculum, Vol 6 LM4]

For IG issuers, a significant proportion of YTM is the government benchmark yield. These issuers borrow with few or no restrictive covenants and can choose from a wide range of maturities (usually up to 30 years). For HY issuers, a higher proportion of YTM is the issuer-specific spread. Their cash flows are more equity- like, so analysts focus on loss given default, covenants and collateral, and investors generally impose more constraints. [CFA curriculum, Vol 6 LM4]

That describes a multiple-price auction, where different bidders pay different prices. In a single-price auction, all winning bidders pay the same price, set by the stop (cut-off) yield. Competitive bids above the stop yield get nothing. Non-competitive bidders accept the auction price and always receive securities. Single-price auctions may result in a lower cost of funds and a broader distribution. The curriculum notes that the RBI moved many maturities to single-price auctions in July 2021. [CFA curriculum, Vol 6 LM5]

General obligation (GO) bonds fund general public goods and are repaid from the non-sovereign’s tax revenues. Revenue bonds finance specific projects (roads, bridges, tunnels), and repayment is often linked to the project’s revenue stream (tolls, fees). Revenue bonds usually involve longer-dated funding, with maturity often matching the expected life of the project’s cash flows. [CFA curriculum, Vol 6 LM5]

Dealers quote the flat (clean) price. The buyer pays the full (invoice or dirty) price: full = flat + accrued interest. AI = (t/T ) × PMT, which does not depend on the YTM, so only the flat price responds to rate changes. Flat prices are quoted so that investors are not misled by a price that rises daily with accrual and then drops on the coupon date. [CFA curriculum, Vol 6 LM6]

Full price = PV × (1 + r)t/T , where PV is the value as of the last coupon date. For BRWA, 90 of 180 days after a coupon (r = 2% per period, 9 periods left): PV = 96.735, so full = 96.735 × 1.020.5 = 97.698 and AI = 0.5×1.60 = 0.80. The flat price is 96.898. The PV of 96.735 is not the flat price, and 96.735+0.80 = 97.535 is not the full price. [CFA curriculum, Vol 6 LM6]

Under actual/actual (typically used for government bonds), t = 43 and T = 184. AI = (43/184) × 4.375/2 = 0.511209 per 100. Under 30/360 (typically used for corporate bonds), every month counts as 30 days (31 May is not counted) and the half-year is 180 days: t = 42, T = 180, so AI = (42/180) × 4.375/2 = 0.510417. [CFA curriculum, Vol 6 LM6]

Matrix pricing interpolates yields, not prices. The 3-year, 5.50% bond at 107.500 yields 2.856%. The 5- year, 4.50% bond at 104.750 yields 3.449%. The estimated 4-year yield is (2.856% + 3.449%)/2 ≈ 3.153%. Discounting the 4-year, 4.50% annual-coupon bond’s cash flows at that yield gives 104.991. The same approach is used to estimate the required yield spread when a new bond is underwritten. [CFA curriculum, Vol 6 LM6]

Convert first: (1 + 0.04548/4)4 = (1 + APR2 /2)2 gives 4.574% on a semiannual basis. The true difference is 4.574% − 2.780% = 179 bps. The rule is that compounding more often corresponds to a lower stated rate. For example, 3.582% (semiannual) = 3.566% (quarterly) = 3.556% (monthly). [CFA curriculum, Vol 6 LM7]

Use the yield-to-worst, the lowest of the yields-to-call and the YTM. For the VIVU 6.5% bond at 106.50, the yield-to-first call is 5.149%, the second call 5.247%, the third 5.313%, the fourth 5.362%, and the YTM is 5.374%. The YTW is therefore the yield-to-first call, 5.149%. A more precise approach uses an option pricing model to derive an option-adjusted price and yield. [CFA curriculum, Vol 6 LM7]

The G-spread is the YTM minus an actual or interpolated government yield. For a 24-year bond, the benchmark is 0.6 × 2.00% + 0.4 × 2.25% = 2.10%, so a YTM of 3.756% gives 166 bps. The I-spread is measured over the swap rate of the same tenor. The Z-spread is a constant spread added to each benchmark spot rate so that PV equals price. OAS = Z-spread − option value (bps per year), so for a callable bond the OAS is below the Z-spread. [CFA curriculum, Vol 6 LM7]

An FRN returns to par on a reset date only if the required (discount) margin equals the quoted margin. The quoted margin is fixed at issuance. The required margin is set by the market and usually changes with the issuer’s credit risk. If QM 140 bps > DM 128 bps, the FRN trades at a premium. If QM 150 bps < DM 165 bps, it trades at a discount, equal to the PV of the deficient interest. [CFA curriculum, Vol 6 LM8]

Discounting at MRR + QM always returns par, so it cannot explain a discount. The cash flows use MRR + QM. The discount rate uses MRR + DM. Example: a 2-year semiannual FRN pays MRR + 0.75%, MRR = 1.10%, and the price is 95.50. Solving gives DM ≈ 312 bps, so the fixed 75 bps is deficient by 237 bps. The DM is an estimate because the simple model assumes the same MRR in every period. [CFA curriculum, Vol 6 LM8]

A money market discount rate divides interest by face value (FV), not by the price paid, so it under- states the return. The curriculum example is an Indian T-bill: PV = 10,000,000 × (1 − 91/360 × 0.0345) = INR9,912,791.67, with interest of INR87,208. [CFA curriculum, Vol 6 LM8] Restated as a bond equivalent yield (365-day add-on rate), the return is 365/91 × 87,208.33/9,912,791.67 ≈ 3.53%. This conversion is our own calculation. [Illustrative]

The first number is when the forward period starts. The second is the tenor. So 2y1y is a one-year rate two years from now, and it uses Z2 and Z3 : (1.015)2 (1 + f ) = 1.023 , so f = 3.01%. The calculation in the wrong statement gives the 1y2y instead. Similarly, with 3-year and 4-year zero yields of 3.65% and 4.18%, the 3y1y is 5.79%. [CFA curriculum, Vol 6 LM9]

Discount each cash flow by the product of all forward rates up to its date. With a 0y1y of 1.88%, 1y1y of 2.77%, 2y1y of 3.54% and 3y1y of 4.12%, a 4-year 3.75% annual-coupon bond is worth 3.75/1.0188 + 3.75/(1.0188 × 1.0277) + · · · + 103.75/(1.0188 × 1.0277 × 1.0354 × 1.0412) = 102.637. That is the same price as discounting at the implied spot rates (2-year spot 2.324%). [CFA curriculum, Vol 6 LM9]

When the spot curve is upward sloping, par rates are below spot and forward rates are above spot. When it is flat, all three are equal. When it is downward sloping, par is above spot and forward is below spot. With spot rates of 5.263%, 5.616%, 6.359% and 7.008%, the par rates are 5.263%, 5.606%, 6.306% and 6.899%. [CFA curriculum, Vol 6 LM9]

Take the BRWA 10-year, 6.2% bond bought at par, with yields rising to 7.2%. VFO (buy-and-hold, 10 years) reinvests coupons at 7.2%. Their FV is 86.475, and there is no price loss, so the horizon yield is 6.43%. Baywhite (sells after 4 years) gets coupons with an FV of 27.609 but sells at 95.263, so its horizon yield is 5.28%. [CFA curriculum, Vol 6 LM10]

Duration gap = Macaulay duration − investment horizon. A positive gap (MacDur > horizon) means price risk dominates, so rising rates hurt. A negative gap means reinvestment risk dominates, so falling rates hurt. A gap of about zero means the two risks offset. For example, 9.85 − 7.0 = 2.85 is positive, so this investor is exposed to rising rates. [CFA curriculum, Vol 6 LM10]

The weights are each cash flow’s share of the full price (PV). At a 6.2% YTM, the final 106.2 payment is 58.19% of the PV, and ∑ t × wt = 7.7429 years, which is less than the 10-year maturity. For a semiannual bond, divide the result in periods by 2 to annualize. MacDur is not static. Fifty-seven days later, it is 7.5845. [CFA curriculum, Vol 6 LM10]

Macaulay duration is a weighted-average time to receipt; the price-sensitivity measure is modified duration = MacDur/(1 + r), where r is the yield per period. For a 4% semiannual bond with annualized MacDur 3.589 and yield 5%: AnnModDur = 3.589/1.025 ≈ 3.502, so %∆PV Full ≈ −3.502 × 0.01 = −3.502%. [CFA curriculum, Vol 6 LM11]

PVBP = (PV− − PV+ )/2 with yields moved ±1 bp — a currency/price change, not a percentage. Money duration = AnnModDur × PVFull and ∆PV Full ≈ −MoneyDur ×∆Yield. With AnnModDur 4 and price 95: MoneyDur = 380; a 50 bp rise gives −380 × 0.005 = −1.90 per 100 par. [CFA curriculum, Vol 6 LM11]

For a floating-rate note, interest rate risk arises only between reset dates, so MacDurFloating = (T − t)/T , the fraction of the period to the next reset. With 57 of 180 days elapsed: (180 − 57)/180 ≈ 0.683 periods. [CFA curriculum, Vol 6 LM11]

All else equal, duration is higher for a longer maturity, lower coupon and lower yield (coupon and yield are inverse relationships). The maturity rule always holds for par and premium bonds, but for long-dated discount bonds Macaulay duration can exceed (1 + r)/r, peak, and then decline, so a longer discount bond may carry less rate risk. [CFA curriculum, Vol 6 LM11]

%∆PV Full ≈ (−AnnModDur × ∆Yield) + [ 12 × AnnConvexity × (∆Yield)2 ]. For an option-free bond the ad- justment is always positive, for rises and falls alike. AnnModDur 8.376, AnnConvexity 81.701, yield −100 bp: 0.08376 + 21 (81.701)(0.0001) ≈ +8.78% (not 7.97% by subtracting, nor 9.19% by dropping the 12 ). [CFA curriculum, Vol 6 LM12]

Duration is divided by periods per year, but convexity is divided by periods per year squared. For a 4-year 2.8% semiannual par bond the periodic convexity sum is 65.65133, so AnnConvexity = 65.65133/22 ≈ 16.413 (not 32.83). The approximation is ApproxCon = [PV− + PV+ − 2PV0 ]/[(∆Yield)2 × PV0 ] — a squared change in the denominator. [CFA curriculum, Vol 6 LM12]

Use market-value weights. EUR40m of Bond A (ModDur 2.858, Conv 9.752) and EUR60m of Bond B (8.376, 81.701): duration ≈ 6.169, convexity ≈ 52.921; for +50 bp, −6.169(0.005) + 12 (52.921)(0.005)2 ≈ −3.018%. This weighted-average method is common in practice but implicitly assumes a parallel shift; using the weighted average time to receipt of the aggregate cash flows is theoretically correct but difficult in practice. [CFA curriculum, Vol 6 LM12]

With embedded options cash flows are uncertain, so use effective duration and effective convexity (a bench- mark curve shift, prices from an option model). A callable bond can have negative effective convexity: EffDur 7.601, EffCon −285.168 gives about −9.03% for +100 bp but only +6.17% for −100 bp. Putable bonds always have positive effective convexity. [CFA curriculum, Vol 6 LM13]

Effective duration assumes a parallel shift. Key rate (partial) durations measure sensitivity to one maturity’s benchmark rate, capture shaping risk, and sum to effective duration. Estimate: %∆PV ≈ −KeyRateDurk × ∆rk ; a KRD of 1.483 with the 5-year rate −25 bp gives about +0.371%. [CFA curriculum, Vol 6 LM13]

Analytical duration comes from formulas and implicitly treats benchmark yields and spreads as uncorrelated. Empirical duration uses historical data in statistical models. In stress (flight to quality) benchmark yields fall while credit spreads widen — a negative correlation — so empirical duration is lower than analytical for bonds with credit risk and is the more accurate measure there; for government bonds with little or no credit risk the two are expected to be similar. [CFA curriculum, Vol 6 LM13]

EL = POD × LGD, with LGD = EE × (1 − RR). POD 5%, EE EUR400,000, RR 90%: EL = 0.05 × 400,000 × 0.10 = EUR2,000 (not EUR18,000). As an approximation, credit spread ≈ POD × LGD: a 90 bp spread vs POD 1% × LGD 80% = 0.8% implies fair compensation. [CFA curriculum, Vol 6 LM14]

Use %∆PV Full ≈ −(AnnModDur × ∆Spread) + 21 AnnConvexity × (∆Spread)2 . BRWA 2030s (ModDur 3.82250, Conv 20.2264, +1.0%): about −3.72%. BRWA 2035s (6.57882, 58.43082, +2.2%): about −13.06%. Longer duration means greater spread sensitivity. [CFA curriculum, Vol 6 LM14]

Credit ratings tend to be sticky and lag market pricing of credit risk; spreads change daily. Investors who wait for rating changes may underperform. Ratings seek primarily to assess expected loss, whereas distressed-debt pricing focuses on default timing and expected recovery, so similarly rated speculative bonds can trade at very different spreads. [CFA curriculum, Vol 6 LM14]

Sovereign immunity concerns willingness to pay: investors face limits in forcing a sovereign into bankruptcy or liquidating its assets. Analysts assess both ability and willingness. Also note reserve-currency status greatly expands a government’s ability to borrow in its own currency and lowers default likelihood. [CFA curriculum, Vol 6 LM15]

General obligation bonds are unsecured and backed by the issuer’s general revenues and taxing authority; analysis resembles sovereign analysis. Revenue bonds depend on a single project’s revenue, carry higher risk, and are analysed like corporates, with the debt service coverage ratio as a key measure (higher is stronger). [CFA curriculum, Vol 6 LM15] E.g. a toll-road bond of a state-owned entity repaid only from tolls vs a state government bond backed by its tax revenue. [India context — added, not curriculum]

Check where debt sits. Higher debt/EBITDA = more leverage, higher credit risk. Higher RCF/net debt = lower leverage. Higher EBIT/interest = less credit risk; higher EBIT margin means more profit to service debt. [CFA curriculum, Vol 6 LM16]

Because of cross-default provisions, the POD for an issuer and its issues may be the same; seniority mainly changes LGD. With POD 0.8% and recovery 58% / 46% / 23%: EL ≈ 0.336% (senior secured), 0.432% (senior unsecured), 0.616% (subordinated). [CFA curriculum, Vol 6 LM16]

An issuer rating usually applies to senior unsecured debt; notching moves an issue rating up or down from the issuer rating for LGD differences (seniority, collateral, structural subordination). Generally, the higher the rating, the smaller the notching; lower-rated credits get larger adjustments. Holding-company debt is structurally subordinated to operating-subsidiary debt. [CFA curriculum, Vol 6 LM16]

The SPE is bankruptcy-remote; the originator’s bankruptcy does not affect it. The only credit risk investors face is that the borrowers in the pool default. In many countries a true sale protects creditors, but transfers can be challenged as fraudulent conveyances and legal frameworks vary by jurisdiction. [CFA curriculum, Vol 6 LM17]

Seller/originator: removes assets from its balance sheet. SPE: buys the assets and issues the ABS. Ser- vicer: collects payments from borrowers. The prospectus describes structure, payment priority and credit enhancements; the purchase agreement holds the seller’s representations and warranties. [CFA curriculum, Vol 6 LM17]

For covered bonds the assets remain on the issuer’s balance sheet, ringfenced in a cover pool. Investors have dual recourse: first the cover pool, then the issuer’s unencumbered assets. The pool is dynamic — the issuer must replace prepaid or non-performing assets — and is usually overcollateralized. [CFA curriculum, Vol 6 LM18]

Losses hit the most junior tranche first. CLT: A EUR825m, B 100m, C 50m, D 25m. A EUR70m loss wipes out D (25m), C absorbs 45m and gets back only 5m, and A and B lose nothing; A loses only if losses exceed EUR175m. Credit enhancement also includes overcollateralization and excess spread. [CFA curriculum, Vol 6 LM18]

During the lockout (revolving) period, principal repaid is reinvested in new receivables; only in the amortiza- tion period is principal distributed to ABS holders. Early (rapid) amortization provisions can trigger earlier principal payment to protect credit quality. Auto-loan ABS, by contrast, are amortizing. [CFA curriculum, Vol 6 LM18]

Rates fall ⇒ refinancing, prepayments rise ⇒ contraction risk (reinvest at lower rates; limited price apprecia- tion). Rates rise ⇒ prepayments slow ⇒ extension risk (cash flows stretched out and discounted at higher rates). [CFA curriculum, Vol 6 LM19]

Sequential pay: Tranche A is protected against extension risk by B and C; B and C are protected against contraction risk by A. A PAC tranche makes scheduled principal payments only if prepayments stay within a specified range; within that range the support tranche absorbs all prepayment risk. [CFA curriculum, Vol 6 LM19]

CMBS offer call protection (structural sequential pay; loan-level prepayment lockout, prepayment penalty points, defeasance), so they trade more like corporate bonds. Commercial loans are often balloon loans; failure to make the balloon payment is balloon risk, a type of extension risk. Key credit ratios: LTV and DSC = NOI/debt service, e.g. GBP7,590,000/GBP4,717,169 ≈ 1.61×. [CFA curriculum, Vol 6 LM19]

Private equity funds typically levy the management fee on committed capital, not invested capital; hedge funds and REITs typically charge on assets under management. With USD100 million committed, USD30 million drawn and a 1.5% fee: fee = 1.5% × 100 = USD1.5 million, not 1.5% × 30 = USD0.45 million. [CFA curriculum, Vol 8 LM1] Numbers [Illustrative]

Hard hurdle: rGP = max[0, p(r − rh )]. Catch-up (soft hurdle): rGP = max[0, rcu + p(r − rh − rcu )]. With r = 18%, rh = 8%, p = 20%: hard hurdle gives 0.2(10%) = 2.0%; with a 2% catch-up, 2% + 0.2(18% − 8% − 2%) = 3.6% = 20% × 18% of the entire return. LP gets 14.4% instead of 16%. [CFA curriculum, Vol 8 LM1]

A deal-by-deal (American) waterfall is more advantageous to the GP: carry is paid per deal before LPs get back capital plus the hurdle on the whole fund. In a whole-of-fund (European) waterfall the GP gets nothing until LPs recover capital and the hurdle, so it favours the LPs. In the curriculum case the GP takes USD2m, 3m and 8m on early exits, but the fund only breaks even overall, so a clawback forces all USD13m back; under the European waterfall the GP never receives any carry. [CFA curriculum, Vol 8 LM1]

MOIC = (realized + unrealized value) / invested capital, where invested capital = paid-in capital less management fees and fund expenses. Paid-in EUR750m, fees 750 × 2% × 5 = 75, so invested capital = 675; with EUR1,000m distributed and EUR500m remaining, MOIC = 1,500/675 ≈ 2.2× (not 1,500/750 = 2.0×). [CFA curriculum, Vol 8 LM2]

Fund grows USD100m to 130m, 1% management fee on year-end AUM, 20% incentive fee. Independent: 1.3 + 0.2(30) = USD7.3m, investor return 22.7%. Net of management fee: 1.3 + 0.2(130 × 0.99 − 100) = USD7.04m, investor return 22.96%. [CFA curriculum, Vol 8 LM2]

When the hurdle is tested net of the management fee, deduct that fee first: management fee = 108 × 2% = 2.16; incentive fee = [(108 − 2.16) − 100 × 1.05] × 20% = USD0.168m. Ending NAV = 105.672, so investor net return ≈ 5.67% (the gross-basis shortcut gives about 5.24%). [CFA curriculum, Vol 8 LM2]

With a high-water mark, incentive fees apply only to value above the previous peak (net of fees). HWM USD121.4m, start-of-year 107.8m, year-end 128m, 2% and 20% calculated independently: incentive fee = 20% × (128 − 121.4) = USD1.32m, not 20% × (128 − 107.8) = 4.04. Total fees 2.56 + 1.32 = 3.88, return ≈ 15.14%. A new investor entering at 107.8 gets no HWM relief and earns less. [CFA curriculum, Vol 8 LM2]

A clawback lets LPs reclaim carry when later losses cut aggregate profit. Arguston gains USD12m (carry accrued 20% × 12 = 2.4m); Heartfield then loses USD10m, so aggregate profit = 2m and carry = 0.4m. The GP must return USD2m of the accrued fees. [CFA curriculum, Vol 8 LM2]

Mezzanine-stage financing is venture capital defined by its timing: bridge financing just before an IPO or sale. Mezzanine financing is defined by its method: equity–debt hybrids such as convertible debt or convertible preferred, ranking below senior secured debt and above equity. Mezzanine-stage deals can use mezzanine financing, but typically at this stage the main financing is either equity-like or short-term debt. [CFA curriculum, Vol 8 LM3]

PE indexes rely on self-reporting and are subject to survivorship and backfill biases, which typically overstate returns. Failure to mark to market and the lag in marking illiquid holdings understate volatility and correlations. Data adjustments are needed to measure the benefits reliably. [CFA curriculum, Vol 8 LM3]

Unitranche debt combines secured and unsecured tranches into a single loan with one blended rate. Its rate generally falls between secured and unsecured rates, and it usually ranks between senior and subordinated debt. [CFA curriculum, Vol 8 LM3]

Lowest to highest risk: secondary-stage (fully operational, steady bond-like cash flows) < brownfield (expanding or redeveloping existing facilities) < greenfield (building new assets, the riskiest with the highest expected return). [CFA curriculum, Vol 8 LM4]

Listed REITs are priced continuously, whereas private real estate is appraised perhaps once a year; this mismatch leads to correlation numbers that are artificially low. REITs do have higher correlation with public equity than private real estate, but part of the gap in reported numbers is a measurement effect. [CFA curriculum, Vol 8 LM4]

Low to high risk: senior debt (first mortgages, investment-grade CMBS) < core (stable income-producing properties, diversified public REITs) < core-plus < value-add (leasing vacant space, redevelopment) < opportunistic (development, mezzanine debt, unrated CMBS, distressed). [CFA curriculum, Vol 8 LM4]

Backwardation: spot above forward prices (downward-sloping curve), occurring when the convenience yield outweighs the cost of carry. Contango: spot below forward prices, when the cost of carry exceeds the convenience yield. Rule of thumb: contango generally lowers a long-only investor’s return; backwardation enhances it. With F0 (T ) = S0 e(r+c−i)T , a higher convenience yield i lowers the forward price. [CFA curriculum, Vol 8 LM5]

Over Q3 1992–Q2 2022, correlation with inflation was about 0.54 for commodities, versus −0.17 for farmland and 0.02 for timberland. Commodities did well in rising inflation but had negative returns as inflation declined; farmland and timberland are less effective inflation hedges but did not suffer in low-inflation periods. [CFA curriculum, Vol 8 LM5]

Timberland is both a factory and a warehouse: trees keep growing and can be stored by not harvesting, so the owner can choose harvest timing (harvest when prices are up, delay when down). Farm products must be harvested when ripe. Raw land’s returns come strictly from price changes, while farmland and timberland also earn an income stream. [CFA curriculum, Vol 8 LM5]

That is backfill bias (which the curriculum calls a variation of survivorship bias): an index retroactively includes a fund’s earlier (typically stellar) performance. Survivorship bias: funds that stop reporting or fail are removed, so the index shows better performance. Selection bias: inclusion covers only funds with good performance that choose to report. All three push reported hedge fund returns upward. [CFA curriculum, Vol 8 LM6]

A redemption fee is typically payable to the fund itself (not the manager) to protect remaining investors, particularly when redemption happens during the lockup. This is a soft lockup: an expensive but available path to redeem early. A gate instead limits redemptions for a period. [CFA curriculum, Vol 8 LM6]

Fees are layered. Direct in a “2 and 20” fund earning 20% gross (fees calculated independently, management fee on beginning AUM): (20 − 2 − 4)/100 = 14%. Through a “1 and 10” FoF earning that 14%: (14 − 1 − 1.4)/100 = 11.6%. [CFA curriculum, Vol 8 LM2] Investors may still choose FoFs for due diligence, diversification, lower minimums and access to closed funds. [CFA curriculum, Vol 8 LM6]

Cryptocurrencies have their own blockchains (e.g., BTC, ETH as native assets); crypto-tokens are built on an existing blockchain. Token types include NFTs (unique, non-fungible), security tokens (digitized ownership rights, may pay dividends), utility tokens (only compensate for network activities) and governance tokens (votes on how networks are run). [CFA curriculum, Vol 8 LM7]

Proof of work: miners use computing power and energy to solve cryptographic puzzles; manipulation needs most of the network’s computational power (the 51% attack threshold). Proof of stake: validators pledge capital (a stake) to vouch for a block, and a majority of other validators must attest to it. Cryptocurrencies can be generated under either protocol. [CFA curriculum, Vol 8 LM7]

Crypto ETFs typically do not invest directly in cryptocurrencies; they gain exposure using cash and cryptocur- rency derivatives. Coin trusts behave like closed-end funds: they trade OTC, charge substantial fees (in some cases over 2%) and may trade at a premium or discount to NAV. Crypto futures are typically cash settled and inherently leveraged. [CFA curriculum, Vol 8 LM7]

Laws often codify ethical actions, but legal and ethical conduct are not always the same. Some legal conduct is considered unethical (e.g., trading on material nonpublic information in a country with no law against it — CFA Institute considers it unethical). Some ethical conduct may be illegal (civil disobedience; some whistleblowing). “Legal standards are often rule based. Ethical conduct goes beyond legal standards, balancing self-interest with the direct and indirect consequences of behavior on others.” [CFA curriculum, Vol 10 LM1]

This is the overconfidence bias: it puts too much weight on internal traits (“I’m honest and would not lie”), although internal traits are generally not the main determinant of whether someone behaves ethically in a given situation. People also underestimate situational influences — external factors such as money, prestige and loyalty to employer or colleagues. Taken to the extreme, a strong compliance culture can itself become a situational influence (“check the box”). [CFA curriculum, Vol 10 LM1]

This is the wrong way round. A code of ethics communicates the organisation’s values and serves as a general guide for how members should act. Standards of conduct identify specific required behaviours and serve as benchmarks for the minimally acceptable behavior. Members may choose to act to even higher standards. Some organisations adopt only a code of ethics. [CFA curriculum, Vol 10 LM1]

Inquiries can arise from self-disclosure on the annual Professional Conduct Statement, written complaints, media or regulatory sources, exam-day proctor reports, and post-exam analysis. Staff may close the inquiry with no sanction, issue a cautionary letter, or propose charges and a sanction. The member or candidate may accept or reject them. If they are rejected, a panel of Disciplinary Review Committee (DRC) members decides whether a violation occurred and what sanction to impose. [CFA curriculum, Vol 10 LM2]

The Code and Standards apply to individual members of CFA Institute and candidates in the CFA Program. Firms are encouraged to adopt them. A party claiming compliance should state: “[name] claims compliance with the CFA Institute Code of Ethics and Standards of Professional Conduct. This claim has not been verified by CFA Institute.” The Asset Manager Code is the version that applies to firms. [CFA curriculum, Vol 10 LM2]

The 2023 revisions added Standard I(E) Competence: Members and Candidates “must act with and maintain the competence necessary to fulfill their professional responsibilities.” Standard I now runs from (A) to (E). There are still six components of the Code of Ethics and seven Standards. Two other Standards were also revised in 2023: V(B) now requires disclosure of the nature of services and their costs, and VI(A) became “Avoid or Disclose Conflicts”. [CFA curriculum, Vol 10 LM2]

“In the event of conflict, Members and Candidates must comply with the more strict law, rule, or regulation.” If the applicable law is stricter than the Code, follow the law. If it is less strict or there is no law, follow the Code and Standards. Example: the law may not require disclosure of referral fees, but the Code does, so disclose them. [CFA curriculum, Vol 10 LM3] If an Indian (SEBI) insider-trading rule adds a restriction that the Code does not, an India-based member follows the SEBI rule. Where the rule is silent or less strict, the Code governs. [India context — added, not curriculum]

Members “must not knowingly participate or assist in and must dissociate from” violations. First, try to stop the activity through a supervisor or the compliance department. If that fails, step away: remove your name from reports, ask for a different assignment, or, in extreme cases, leave the job. The Code and Standards do not compel reporting to regulators unless applicable law makes it mandatory. Such disclosure may be prudent in certain circumstances, and CFA Institute strongly encourages reporting violations by fellow members and candidates. [CFA curriculum, Vol 10 LM3]

“Modest gifts and entertainment are acceptable.” A gift from a client can be treated as supplementary com- pensation. Disclose it to your employer before accepting; if that is not possible, disclose it after accepting. Gifts from outside parties seeking influence (issuers, brokers, underwriters) carry more risk: best practice is to reject any gift that could be expected to threaten independence and objectivity. [CFA curriculum, Vol 10 LM3]

I(C) plagiarism includes citing quotations as attributable to “leading analysts” and “investment experts” without naming the specific references, and using charts without stating their sources. Research produced while employed is the property of the firm. The firm may issue future reports without crediting the analyst who left, but a member cannot reissue a previously released report solely under his or her name. [CFA curriculum, Vol 10 LM3]

Under the mosaic theory, an analyst may act on significant conclusions drawn from public and nonmaterial nonpublic information, even if those conclusions would have been material inside information had the company communicated them directly. Analysts should save and document all their research (see V(C)) as evidence of how they reached the conclusion. [CFA curriculum, Vol 10 LM3]

Information is nonpublic until it has been disseminated to the marketplace in general. “Information that is made available to analysts remains nonpublic until it is made available to investors in general.” A disclosure to a room full of analysts does not necessarily make it public. Once information has been disseminated, members need not wait for the slowest delivery method. [CFA curriculum, Vol 10 LM3]

Soft dollars: the manager uses client brokerage to buy research. Paying a higher commission without corresponding benefit to the client violates the duty of loyalty. Directed brokerage: the client directs the manager to use the client’s brokerage to buy goods or services for the client. This does not violate loyalty, but the manager must still seek best price and best execution. The manager should also disclose that the client may not be getting best execution. [CFA curriculum, Vol 10 LM3]

The Standard says “fairly”, not “equally”. Members may offer different levels of service, including premium service for higher fees, but different levels must not disadvantage or negatively affect other clients. They should be disclosed and available to everyone, not offered selectively. Recommendations must be disseminated so that all clients have a fair opportunity to act. [CFA curriculum, Vol 10 LM3]

The member should refrain from making the trade until he or she discusses the concerns with the client. If the impact on the portfolio is minimal, educate the client and follow firm policy on approval. At a minimum, the client should acknowledge the discussion and accept the conditions that make the trade unsuitable. If the impact is material, update the IPS. If the client refuses to update it, consider a separate unmanaged account or whether to continue the advisory relationship. [CFA curriculum, Vol 10 LM3]

Members must keep confidential information about current, former, and prospective clients unless (1) it concerns illegal activities by the client, (2) disclosure is required by law, or (3) the client permits disclosure. If the law requires confidentiality even about illegal activity, do not disclose. Forwarding confidential information to the PCP during an investigation is not a violation. [CFA curriculum, Vol 10 LM3]

Until the resignation is effective, act in the employer’s best interest. A member must not contact existing or potential clients before leaving to solicit their business for the new employer. After giving notice, follow the employer’s policies on notifying clients, and do not take records or files without the written permission of the previous employer. After leaving, the member may contact former clients using public information, unless a noncompete agreement prohibits it. [CFA curriculum, Vol 10 LM3]

Anyone with employees under their control or influence, “whether or not the employees are CFA Institute members, CFA charterholders, or candidates”, has supervisory responsibility. At a minimum, supervisors must make reasonable efforts to prevent and detect violations by ensuring effective compliance systems. An effective system goes beyond enacting a code of ethics. Supervisory duties may be delegated, but the delegates must be instructed on how to promote compliance. [CFA curriculum, Vol 10 LM3]

A group report represents the consensus of the group. If the member believes the consensus opinion has a reasonable and adequate basis and is independent and objective, the member need not decline to be identified with the report, even if it does not reflect his or her own opinion. When relying on secondary or third-party research, the member must make reasonable and diligent efforts to determine that it is sound. [CFA curriculum, Vol 10 LM3]

Records are the property of the firm and cannot be taken without the previous employer’s express consent. The member cannot use historical recommendations from the old firm, because the supporting documentation is not available. The records must be re-created from public sources or directly from the covered company, not from memory or sources from the previous employer. For retention periods, follow the regulator’s or firm’s rules; if there are none, CFA Institute recommends at least seven years. [CFA curriculum, Vol 10 LM3]

Members must “avoid or make full and fair disclosure” of conflicts, and disclosures must be prominent, in plain language, and communicate effectively. Conflicts must also be reported to employers: “Ownership of stocks analyzed or recommended, participation on outside boards” and financial pressures are to be promptly reported. Avoiding conflicts is preferred where reasonably possible. [CFA curriculum, Vol 10 LM3]

Personal transactions, including family accounts and accounts in which the member has a pecuniary interest, may be made only after clients and employers have had an adequate opportunity to act. However, family accounts that are client accounts should be treated like any other firm account: they get neither special treatment nor disadvantage. If the member has beneficial ownership, preclearance or reporting rules may apply. [CFA curriculum, Vol 10 LM3]

VII(A) does not cover expressing opinions about CFA Institute or the CFA Program; members and candidates are free to disagree. But when giving an opinion, a candidate must not disclose content-specific information, including any actual exam question or the subject matter covered or not covered in the exam. [CFA curriculum, Vol 10 LM3]

Candidates must never state or imply a partial designation or cite an expected completion date. Proper: “I passed Level I of the CFA Program”; “I am a 2010 Level III candidate in the CFA Program.” Improper: “CFA, Level II”; “CFA, Expected 2011”; “Charter Pending”. Passing all three levels in consecutive years may be stated as a fact, but it must not be linked to superior ability or performance. [CFA curriculum, Vol 10 LM3]

Only a firm that manages actual assets can claim compliance. Consultants cannot, unless they actually manage the assets; they may endorse GIPS or require their managers to comply. Software cannot be compliant, although it can help a firm comply. Asset owners may also comply. Compliance is voluntary and is not typically required by legal or regulatory authorities. [CFA curriculum, Vol 10 LM4]

Compliance is firm-wide and “cannot be achieved on a single product or composite.” A firm has two options: comply fully and claim compliance, or not claim compliance at all. The firm should adopt the broadest, most meaningful definition of the firm. Verification is voluntary, is performed by an independent third party on the whole firm, and does not ensure the accuracy of any specific performance report. [CFA curriculum, Vol 10 LM4]

A composite must include all actual, fee-paying, discretionary portfolios managed to the same mandate, objective, or strategy. Membership is set by pre-established (ex ante) criteria, not after the fact. Non- discretionary portfolios must not be included. Every fee-paying discretionary segregated account must be in at least one composite. [CFA curriculum, Vol 10 LM4]

In the Mwangi case, the law required the clients’ genuine signatures. Signing for them was forgery and violates I(A). “General approval, written or verbal, of the transaction by the clients is insufficient.” Even explicit permission to sign does not allow the member to get around the legal requirement. A good motive (avoiding an overdraft for the clients) does not change this. [CFA curriculum, Vol 10 LM5]

In the Pellie case, a stated income objective combined with hundreds of transfers involving at-risk countries required further inquiry under anti-money-laundering law. Approving the reports without that inquiry violates I(A). The member cannot rely on the clearing firm, because the review is his responsibility. Loyalty and confidentiality cannot be used to justify letting a client break the law. [CFA curriculum, Vol 10 LM5]

Both parts are wrong. In the Mahajan case, I(E) requires competence for all the responsibilities of the new role. His sector study was good, but he took no steps to build supervisory skills for the team he now leads, so he falls short. I(E) does not require formal continuing education; that is just one way to build and maintain competence. [CFA curriculum, Vol 10 LM5]