CFA: LEVEL 1
nominal risk-free rate equals... - CORRECT ANSWER✅✅✅real risk free rate + expected
inflation
required interest rate on a security - CORRECT ANSWER✅✅✅nominal risk free rate +
default risk premium + liquidity premium + maturity risk premium
EAR or APY - CORRECT ANSWER (1+periodic rate)^m - 1
always higher than annual percentage rates (not compounded)
ordinary annuity - CORRECT ANSWER✅✅✅cash flows that occur at the end of each
compounding period
annuity due - CORRECT ANSWER✅✅✅payments or receipts occur at the beginning of
each period
PV of Perpetuity - CORRECT ANSWER✅✅✅Payment/interest rate
Effect of increase in the frequency of compounding rates - CORRECT
ANSWER✅✅✅increases FV, decreases PV
amortization schedule - CORRECT ANSWER✅✅✅interest component = interest rate *
beginning balance
principal component = payment - interest component
ending balance = period's beginning balance (last period's ending balance) - principal component
holding period return - CORRECT ANSWER✅✅✅(ending value-beginning value) /
beginning value OR
,(Ending value / beginning value) - 1
time-weighted rate of return - CORRECT ANSWER✅✅✅The compound rate of growth of
one unit of currency invested in a portfolio during a stated measurement period; a measure of
investment performance that is not sensitive to the timing and amount of withdrawals or
additions to the portfolio. Also a geometric mean return
money weighted return - CORRECT ANSWER✅✅✅IRR based on cash inflows and
outflows
Bank discount yield - CORRECT ANSWER✅✅✅RBD = D/F * 360/t Where: D = dollar
discount from face value, F = face value, T = days until maturity, 360 = days in a year
US T-Bills are quoted on a bank discount basis
holding period yield - CORRECT ANSWER✅✅✅Holding Period Return = (ending
value/beginning value) - 1
EAY^t/365 - 1
total return an investor earns between the purchase date and the sale or maturity date
effective annual yield - CORRECT ANSWER✅✅✅EAY = (1 + HPY)^365/t - 1 where t is
days to maturity. Remember that EAY > bank discount yield, for three reasons: (a) yield is based
on purchase price, not face value, (b) it is annualized with compound interest (interest on
interest), not simple interest, and (c) it is based on a 365-day year rather than 360 days. Be
prepared to compare these two measures of yield and use these three reasons to explain why
EAY is preferable.
money market yield (Rmm) - CORRECT ANSWER✅✅✅= HPR * (360/days until maturity)
, bond equivalent yield - CORRECT ANSWER✅✅✅= Semiannual Yield * 2
semiannual yield needs to be compounded
Descriptive statistics - CORRECT ANSWER✅✅✅used to summarize the important
characteristics of large data sets
Inferential statistics - CORRECT ANSWER✅✅✅a sample, pertain to the procedures used to
make forecasts, estimates or judgement about a large set of data
nominal scale / categorical - CORRECT ANSWER✅✅✅level of measurement with least
information, observations are classified or counted with no particular order
ordinal scale - CORRECT ANSWER✅✅✅level of measurement, categorized with respect to
specified characteristic
interval scale - CORRECT ANSWER✅✅✅provides relative ranking like ordinal scale plus
assurance that the difference between the scale values are equal e.g. temperature
however measurement of 0 does not necessarily indicate the total absence of what we are
measuring - e.g. 30 c is not three times as hot as 10 c
ratio scale - CORRECT ANSWER✅✅✅ratio scales provide ranking and equal difference
between scale values and a true zero point as the origin e.g. measurement of money
difference between parameter and sample statistic - CORRECT ANSWER✅✅✅parameter is
used for population
sample statistic is used for sample
nominal risk-free rate equals... - CORRECT ANSWER✅✅✅real risk free rate + expected
inflation
required interest rate on a security - CORRECT ANSWER✅✅✅nominal risk free rate +
default risk premium + liquidity premium + maturity risk premium
EAR or APY - CORRECT ANSWER (1+periodic rate)^m - 1
always higher than annual percentage rates (not compounded)
ordinary annuity - CORRECT ANSWER✅✅✅cash flows that occur at the end of each
compounding period
annuity due - CORRECT ANSWER✅✅✅payments or receipts occur at the beginning of
each period
PV of Perpetuity - CORRECT ANSWER✅✅✅Payment/interest rate
Effect of increase in the frequency of compounding rates - CORRECT
ANSWER✅✅✅increases FV, decreases PV
amortization schedule - CORRECT ANSWER✅✅✅interest component = interest rate *
beginning balance
principal component = payment - interest component
ending balance = period's beginning balance (last period's ending balance) - principal component
holding period return - CORRECT ANSWER✅✅✅(ending value-beginning value) /
beginning value OR
,(Ending value / beginning value) - 1
time-weighted rate of return - CORRECT ANSWER✅✅✅The compound rate of growth of
one unit of currency invested in a portfolio during a stated measurement period; a measure of
investment performance that is not sensitive to the timing and amount of withdrawals or
additions to the portfolio. Also a geometric mean return
money weighted return - CORRECT ANSWER✅✅✅IRR based on cash inflows and
outflows
Bank discount yield - CORRECT ANSWER✅✅✅RBD = D/F * 360/t Where: D = dollar
discount from face value, F = face value, T = days until maturity, 360 = days in a year
US T-Bills are quoted on a bank discount basis
holding period yield - CORRECT ANSWER✅✅✅Holding Period Return = (ending
value/beginning value) - 1
EAY^t/365 - 1
total return an investor earns between the purchase date and the sale or maturity date
effective annual yield - CORRECT ANSWER✅✅✅EAY = (1 + HPY)^365/t - 1 where t is
days to maturity. Remember that EAY > bank discount yield, for three reasons: (a) yield is based
on purchase price, not face value, (b) it is annualized with compound interest (interest on
interest), not simple interest, and (c) it is based on a 365-day year rather than 360 days. Be
prepared to compare these two measures of yield and use these three reasons to explain why
EAY is preferable.
money market yield (Rmm) - CORRECT ANSWER✅✅✅= HPR * (360/days until maturity)
, bond equivalent yield - CORRECT ANSWER✅✅✅= Semiannual Yield * 2
semiannual yield needs to be compounded
Descriptive statistics - CORRECT ANSWER✅✅✅used to summarize the important
characteristics of large data sets
Inferential statistics - CORRECT ANSWER✅✅✅a sample, pertain to the procedures used to
make forecasts, estimates or judgement about a large set of data
nominal scale / categorical - CORRECT ANSWER✅✅✅level of measurement with least
information, observations are classified or counted with no particular order
ordinal scale - CORRECT ANSWER✅✅✅level of measurement, categorized with respect to
specified characteristic
interval scale - CORRECT ANSWER✅✅✅provides relative ranking like ordinal scale plus
assurance that the difference between the scale values are equal e.g. temperature
however measurement of 0 does not necessarily indicate the total absence of what we are
measuring - e.g. 30 c is not three times as hot as 10 c
ratio scale - CORRECT ANSWER✅✅✅ratio scales provide ranking and equal difference
between scale values and a true zero point as the origin e.g. measurement of money
difference between parameter and sample statistic - CORRECT ANSWER✅✅✅parameter is
used for population
sample statistic is used for sample
