CFA Level I Equity Investments -Complete
Exam Study Guide with Verified Answers |
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3 main functions of financial system ------- ✔ CORRECT ANSWER ✓✓1. Allow entities to save,
borrow, issue equity capital, manage risks, exchange assets, and utilize information
2. Determine the return that equates aggregate savings and borrowing
3. Allocate capital efficiently
Low rates of return increase/decrease ------- ✔ CORRECT ANSWER ✓✓increase borrowing,
reduce saving
equilibrium interest rate ------- ✔ CORRECT ANSWER ✓✓rate at which the amount individuals,
businesses, governments desire to borrow = amount desire to lend
differ due to differences in liquidity and maturity and risk
financial derivative contracts ------- ✔ CORRECT ANSWER ✓✓Based on equities, equity indexes,
debt, debt indexes, or other financial contracts
Physical Derivative Contracts ------- ✔ CORRECT ANSWER ✓✓derive their values from the values
of physical assets such as gold, oil, and wheat.
spot markets ------- ✔ CORRECT ANSWER ✓✓Markets for immediate delivery
money markets ------- ✔ CORRECT ANSWER ✓✓refers to markets for debt securities with
maturities 1 year or less
,capital markets ------- ✔ CORRECT ANSWER ✓✓refer to markets for longer-term debt securities
and equity securities that have no specific maturity date.
traditional investment markets ------- ✔ CORRECT ANSWER ✓✓refer to those for debt and
equity
alternative markets ------- ✔ CORRECT ANSWER ✓✓refer to those for hedge funds,
commodities, real estate, collectibles, gemstones, leases, and equipment. Alternative assets are
often more difficult to value, illiquid, require investor due diligence, and therefore often sell at a
discount.
Fixed income timeline (what is long, short term, etc) ------- ✔ CORRECT ANSWER ✓✓short: >1-
2yrs (commercial paper)
medium: middle (notes)
long: 5-10+ (bonds)
warrants ------- ✔ CORRECT ANSWER ✓✓similar to options in that they give the holder the right
to buy a firm's equity shares (usually common stock) at a fixed exercise price prior to the
warrant's expiration
mutual funds ------- ✔ CORRECT ANSWER ✓✓pooled investment vehicles in which investors can
purchase shres, either form the fund itself (open ended) or secondary (close end)
ETFs and ETNs ------- ✔ CORRECT ANSWER ✓✓depositories/depository receipts (shares)
trade like closed-end funds with special provisions allowing conversion into individual portfolio
securities
, reserve currency ------- ✔ CORRECT ANSWER ✓✓Currency held in large amounts by
governments for the purpose of setting international debts and supporting the value of their
national currency.
Primary: $ and Euro
forward contract ------- ✔ CORRECT ANSWER ✓✓an agreement to buy or sell an asset in the
future at prices agreed upon today
not on exchange or dealer markets
futures contract ------- ✔ CORRECT ANSWER ✓✓similar to forwards but standardized as to an
amount, asset characteristics, delivery time, traded on exchange
liquid investments
interest rate swap ------- ✔ CORRECT ANSWER ✓✓An exchange of one loan for another
(typically one is a floating rate, the other is a fixed rate);
Total loan amount isn't exchanged, just the difference between the liabilities at the end of the
period
currency swap ------- ✔ CORRECT ANSWER ✓✓involves loan in one currency for the loan of
anothe rcurrency for a period of time
equity swap ------- ✔ CORRECT ANSWER ✓✓The exchange of the return on an equity index or
portfolio for the interest payment on a debt instrument
credit default swaps ------- ✔ CORRECT ANSWER ✓✓financial insurance contracts that provide
payments to holders of bonds if they default
brokers ------- ✔ CORRECT ANSWER ✓✓help their clients buy and sell securities by finding
counterparties to trades in a cost efficient manner
, block brokers ------- ✔ CORRECT ANSWER ✓✓help with the placement of large trades. Typically,
large trades are difficult to place without moving the market. For example, a large sell order
might cause a security's price to decrease before the order can be fully executed. Block brokers
help conceal their clients' intentions so that the market does not move against them.
exchanges ------- ✔ CORRECT ANSWER ✓✓provide a venue where traders can meet, sometimes
act as brokers by providing electronic order matching
regulate members to provide timely disclosures, promote democratization
Alternative trading systems (ATS) ------- ✔ CORRECT ANSWER ✓✓same function as exchange
without regulatory function
aka
Electronic Communication Networks ECNs
Multilateral trading facilities MTF
dark pools ------- ✔ CORRECT ANSWER ✓✓electronic communication networks where
participants can anonymously buy or sell large blocks of securities
dealers ------- ✔ CORRECT ANSWER ✓✓facilitate trading by buying for or selling from their own
inventory
provide liquidity
profit off spread
broker-dealers ------- ✔ CORRECT ANSWER ✓✓Have an inherent conflict of interest because
they should seek the best prices for their clients but their goal is to profit through the
transaction;
Traders typically place limits on how their orders are filled when working through a broker
dealer
Exam Study Guide with Verified Answers |
Guaranteed A+
3 main functions of financial system ------- ✔ CORRECT ANSWER ✓✓1. Allow entities to save,
borrow, issue equity capital, manage risks, exchange assets, and utilize information
2. Determine the return that equates aggregate savings and borrowing
3. Allocate capital efficiently
Low rates of return increase/decrease ------- ✔ CORRECT ANSWER ✓✓increase borrowing,
reduce saving
equilibrium interest rate ------- ✔ CORRECT ANSWER ✓✓rate at which the amount individuals,
businesses, governments desire to borrow = amount desire to lend
differ due to differences in liquidity and maturity and risk
financial derivative contracts ------- ✔ CORRECT ANSWER ✓✓Based on equities, equity indexes,
debt, debt indexes, or other financial contracts
Physical Derivative Contracts ------- ✔ CORRECT ANSWER ✓✓derive their values from the values
of physical assets such as gold, oil, and wheat.
spot markets ------- ✔ CORRECT ANSWER ✓✓Markets for immediate delivery
money markets ------- ✔ CORRECT ANSWER ✓✓refers to markets for debt securities with
maturities 1 year or less
,capital markets ------- ✔ CORRECT ANSWER ✓✓refer to markets for longer-term debt securities
and equity securities that have no specific maturity date.
traditional investment markets ------- ✔ CORRECT ANSWER ✓✓refer to those for debt and
equity
alternative markets ------- ✔ CORRECT ANSWER ✓✓refer to those for hedge funds,
commodities, real estate, collectibles, gemstones, leases, and equipment. Alternative assets are
often more difficult to value, illiquid, require investor due diligence, and therefore often sell at a
discount.
Fixed income timeline (what is long, short term, etc) ------- ✔ CORRECT ANSWER ✓✓short: >1-
2yrs (commercial paper)
medium: middle (notes)
long: 5-10+ (bonds)
warrants ------- ✔ CORRECT ANSWER ✓✓similar to options in that they give the holder the right
to buy a firm's equity shares (usually common stock) at a fixed exercise price prior to the
warrant's expiration
mutual funds ------- ✔ CORRECT ANSWER ✓✓pooled investment vehicles in which investors can
purchase shres, either form the fund itself (open ended) or secondary (close end)
ETFs and ETNs ------- ✔ CORRECT ANSWER ✓✓depositories/depository receipts (shares)
trade like closed-end funds with special provisions allowing conversion into individual portfolio
securities
, reserve currency ------- ✔ CORRECT ANSWER ✓✓Currency held in large amounts by
governments for the purpose of setting international debts and supporting the value of their
national currency.
Primary: $ and Euro
forward contract ------- ✔ CORRECT ANSWER ✓✓an agreement to buy or sell an asset in the
future at prices agreed upon today
not on exchange or dealer markets
futures contract ------- ✔ CORRECT ANSWER ✓✓similar to forwards but standardized as to an
amount, asset characteristics, delivery time, traded on exchange
liquid investments
interest rate swap ------- ✔ CORRECT ANSWER ✓✓An exchange of one loan for another
(typically one is a floating rate, the other is a fixed rate);
Total loan amount isn't exchanged, just the difference between the liabilities at the end of the
period
currency swap ------- ✔ CORRECT ANSWER ✓✓involves loan in one currency for the loan of
anothe rcurrency for a period of time
equity swap ------- ✔ CORRECT ANSWER ✓✓The exchange of the return on an equity index or
portfolio for the interest payment on a debt instrument
credit default swaps ------- ✔ CORRECT ANSWER ✓✓financial insurance contracts that provide
payments to holders of bonds if they default
brokers ------- ✔ CORRECT ANSWER ✓✓help their clients buy and sell securities by finding
counterparties to trades in a cost efficient manner
, block brokers ------- ✔ CORRECT ANSWER ✓✓help with the placement of large trades. Typically,
large trades are difficult to place without moving the market. For example, a large sell order
might cause a security's price to decrease before the order can be fully executed. Block brokers
help conceal their clients' intentions so that the market does not move against them.
exchanges ------- ✔ CORRECT ANSWER ✓✓provide a venue where traders can meet, sometimes
act as brokers by providing electronic order matching
regulate members to provide timely disclosures, promote democratization
Alternative trading systems (ATS) ------- ✔ CORRECT ANSWER ✓✓same function as exchange
without regulatory function
aka
Electronic Communication Networks ECNs
Multilateral trading facilities MTF
dark pools ------- ✔ CORRECT ANSWER ✓✓electronic communication networks where
participants can anonymously buy or sell large blocks of securities
dealers ------- ✔ CORRECT ANSWER ✓✓facilitate trading by buying for or selling from their own
inventory
provide liquidity
profit off spread
broker-dealers ------- ✔ CORRECT ANSWER ✓✓Have an inherent conflict of interest because
they should seek the best prices for their clients but their goal is to profit through the
transaction;
Traders typically place limits on how their orders are filled when working through a broker
dealer
