CFA LEVEL 1
Study Notes
,PREVIEW: Aggregate Output, Prices, and Growth
GDP, Income and Expenditures
GDP Measurement Approaches
GDP – market value of all final goods and services produced in an
economy/country produced during a period of time. Excludes
intermediate goods, rent value of owner-occupied housing, and
government wealth transfers
2 approaches of estimating – must be equal by definition
Income approach – Gross Domestic Income (GDI) is the sum of
earnings of all households + businesses + government expenditure
NI = Employee wages and benefits, corporate and gov profits,
interest income, business owners income, taxs – subsidies
Capital consumption allowance to replace worn out equipment
Expenditure approach – sum market values of final goods and
services or sum all increase in value at each stage of the production
process
Or alternatively, disaggregating government expenditures per sector
Savings must equal investments by letting income equation =
expenditures equation. G-T is the fiscal balance, X-M is the trade
balance. Savings are either invested, used to finance a government
deficit, or used to fund a trade surplus when both exist.
Income
Personal Income – all pre-tax income received by a household
(includes government transfers)
Household Disposable Income – all post-tax income received by
households. Measures amount available to save or spend.
Real GDP and Nominal GDP
Nominal GDP – sum of all current year goods valued at current year
prices
,Real GDP – sum of all current year goods valued at base year prices.
Removes effects of price levels and inflation.
Fixed Income Risk & Return
Sources of Return & Duration
Annualized HPR – compounded annual return earned over holding
period based on sources of return
Carrying Value (given YTM)
Fixed Income has 3 sources of return:
Coupon + principal payments
Interest earned on coupon payments reinvested over holding period
(reinvestment rate = ytm)
Capital gain/loss from sale prior to maturity
Assuming no credit risk and interest earned on reinvestment is the
same as the YTM.
If YTM changes after purchase but prior to the first coupon date,
coupon reinvestment rate = YTM
Case 1: If held to maturity - Investor will earn a return of YTM of the
bond when purchased. Bonds held to maturity have no capital gain
or loss (as they end up at par).
Only reinvestment income affected (only reinvestment risk)
If YTM↑ Reinvestment Rate↑ Realized Return↑
If YTM↓ Reinvestment Rate↓ Realized Return↓
e.g. 6% annual-pay 3 year bond purchased with a YTM of 7% and
held to maturity
Purchase Price – N=3, I/Y=7, PMT=60, FV=1000, CPT PV =
973.76
Coupon income/reinvestment income – N=3, I/Y=7, PV=0,
PMT=60, CPT FV = 192.89
Rate of return over 3 years
(1000+192.89/973.76)1/3 – 1 = 7%
Case 2: If sold after one period
Only sale price is affected (only price risk)
If YTM↑, Sale Price↓ Realized Return↓
e.g. 3 year 6% annual coupon bond purchased at par (YTM = 6%)
and increases to 7% after purchase but before first coupon date.
Coupon income/reinvestment income – N=3, I/Y=7, PV=0, PMT=60,
, CPT FV=192.89
Annualized HPR = (1192.89/1000)1/3 = 6.06% (>6% at purchase)
If YTM↓, Sale Price↑ Realized Return↑
If YTM is constant,
If sold prior to maturity – Investor will earn a return of YTM of the
bond at purchase if the YTM at sale has not changed
Capital gains – Bonds sold prior to maturity at the same YTM have
no capital gain or loss.
Carrying value – the value of the bond at a specified point in time
using the original YTM at time of purchase
e.g. Investor buys 20 year bond with a 5% semi-annual coupon and
YTM of 6%. 5 years later investor sells the bond for 91.40. determine
capital gain/loss
carrying value at 15 years – N=30, I/Y=3, PMT=2.5, FV=100, CPT
PV = 90.2
capital gain – 91.40 – 90.2 = 1.20 per 100 FV
NOTES:
Main risks are market price risk and reinvestment risk
If holding to maturity, an investor only faces reinvestment risk (bond
value always ends up at par) realized return always linked to rate of
reinvestment
If selling prior to maturity/coupon interest, investor only faces
market price risk
Contents
Quantitative Methods...................................................................................................................................................10
Time Value of Money................................................................................................................................................10
EAY and Compounding Frequency.........................................................................................................................10
PV and FV Calculations..........................................................................................................................................10
Uneven Cash Flows................................................................................................................................................11
Compounding Frequencies....................................................................................................................................11
Organizing, Visualizing and Describing Data..............................................................................................................12
Data Visualization..................................................................................................................................................14
Measures of Central Tendency..............................................................................................................................16
Measures of Location and Dispersion....................................................................................................................17
Downside Deviation...............................................................................................................................................18
Skewness, Kurtosis and Correlation.......................................................................................................................19
Study Notes
,PREVIEW: Aggregate Output, Prices, and Growth
GDP, Income and Expenditures
GDP Measurement Approaches
GDP – market value of all final goods and services produced in an
economy/country produced during a period of time. Excludes
intermediate goods, rent value of owner-occupied housing, and
government wealth transfers
2 approaches of estimating – must be equal by definition
Income approach – Gross Domestic Income (GDI) is the sum of
earnings of all households + businesses + government expenditure
NI = Employee wages and benefits, corporate and gov profits,
interest income, business owners income, taxs – subsidies
Capital consumption allowance to replace worn out equipment
Expenditure approach – sum market values of final goods and
services or sum all increase in value at each stage of the production
process
Or alternatively, disaggregating government expenditures per sector
Savings must equal investments by letting income equation =
expenditures equation. G-T is the fiscal balance, X-M is the trade
balance. Savings are either invested, used to finance a government
deficit, or used to fund a trade surplus when both exist.
Income
Personal Income – all pre-tax income received by a household
(includes government transfers)
Household Disposable Income – all post-tax income received by
households. Measures amount available to save or spend.
Real GDP and Nominal GDP
Nominal GDP – sum of all current year goods valued at current year
prices
,Real GDP – sum of all current year goods valued at base year prices.
Removes effects of price levels and inflation.
Fixed Income Risk & Return
Sources of Return & Duration
Annualized HPR – compounded annual return earned over holding
period based on sources of return
Carrying Value (given YTM)
Fixed Income has 3 sources of return:
Coupon + principal payments
Interest earned on coupon payments reinvested over holding period
(reinvestment rate = ytm)
Capital gain/loss from sale prior to maturity
Assuming no credit risk and interest earned on reinvestment is the
same as the YTM.
If YTM changes after purchase but prior to the first coupon date,
coupon reinvestment rate = YTM
Case 1: If held to maturity - Investor will earn a return of YTM of the
bond when purchased. Bonds held to maturity have no capital gain
or loss (as they end up at par).
Only reinvestment income affected (only reinvestment risk)
If YTM↑ Reinvestment Rate↑ Realized Return↑
If YTM↓ Reinvestment Rate↓ Realized Return↓
e.g. 6% annual-pay 3 year bond purchased with a YTM of 7% and
held to maturity
Purchase Price – N=3, I/Y=7, PMT=60, FV=1000, CPT PV =
973.76
Coupon income/reinvestment income – N=3, I/Y=7, PV=0,
PMT=60, CPT FV = 192.89
Rate of return over 3 years
(1000+192.89/973.76)1/3 – 1 = 7%
Case 2: If sold after one period
Only sale price is affected (only price risk)
If YTM↑, Sale Price↓ Realized Return↓
e.g. 3 year 6% annual coupon bond purchased at par (YTM = 6%)
and increases to 7% after purchase but before first coupon date.
Coupon income/reinvestment income – N=3, I/Y=7, PV=0, PMT=60,
, CPT FV=192.89
Annualized HPR = (1192.89/1000)1/3 = 6.06% (>6% at purchase)
If YTM↓, Sale Price↑ Realized Return↑
If YTM is constant,
If sold prior to maturity – Investor will earn a return of YTM of the
bond at purchase if the YTM at sale has not changed
Capital gains – Bonds sold prior to maturity at the same YTM have
no capital gain or loss.
Carrying value – the value of the bond at a specified point in time
using the original YTM at time of purchase
e.g. Investor buys 20 year bond with a 5% semi-annual coupon and
YTM of 6%. 5 years later investor sells the bond for 91.40. determine
capital gain/loss
carrying value at 15 years – N=30, I/Y=3, PMT=2.5, FV=100, CPT
PV = 90.2
capital gain – 91.40 – 90.2 = 1.20 per 100 FV
NOTES:
Main risks are market price risk and reinvestment risk
If holding to maturity, an investor only faces reinvestment risk (bond
value always ends up at par) realized return always linked to rate of
reinvestment
If selling prior to maturity/coupon interest, investor only faces
market price risk
Contents
Quantitative Methods...................................................................................................................................................10
Time Value of Money................................................................................................................................................10
EAY and Compounding Frequency.........................................................................................................................10
PV and FV Calculations..........................................................................................................................................10
Uneven Cash Flows................................................................................................................................................11
Compounding Frequencies....................................................................................................................................11
Organizing, Visualizing and Describing Data..............................................................................................................12
Data Visualization..................................................................................................................................................14
Measures of Central Tendency..............................................................................................................................16
Measures of Location and Dispersion....................................................................................................................17
Downside Deviation...............................................................................................................................................18
Skewness, Kurtosis and Correlation.......................................................................................................................19
