Preparing for Level II - A different perspective

Since I've been preparing for LIII I've realized that there is a reason why Level II is considered to be the most difficult among three. It is because mechanics have been covered in Level II to an extent which can act as bridge to an amazing skill set. A very strong feeling of it developed when I went through Risk Management and Equity of Level III. A paradigm shift is required while studying for LIII. So those who are preparing for LII, I would like to ask them not to study only for passing the exam but to achieve excellence. The technicalities, mechanics, details, practice etc can lead you to something amazing. It all can help you out in making yourself something out of.. something less. Consider it a rare opportunity and do not prepare for the exam just to pass it but to develop yourself up. Go through examples, chapter end questions, exhibits, illustrations to know what's going on. Once you are done with the stuff following this approach, you'll end up passing the exam. The exam is after 6 months. A lot of you would be planning for LII. Start it this way especially the areas which require calculations. It will add greatly to your skill set.

Good Luck.

A must read post before the Level I exam

I was about to create a post comprising of some points to ponder before the level I exam, I came across this post which was received through an email.

here goes the link

http://www.finquiz.com/blog/2012/11/25/exam-day-prep-dos-and-donts-for-the-cfa-exam/

This is a must read post with a lot of things you must be thinking of doing or have been already practising.. Don't forget about your passport, exam ticket, working calculator (with functioning batteries) and of course stationary.

Good Luck and all the best for the exam.

Level I Exam - Some important tips (Part 1)

I heard somewhere that if you rank, the most powerful strength is the strength of faith followed by mental strength and then comes the physical strength. Reminds me of Batman Begins, the first episode of an epic series by Christopher Nolan, a classic example of the power of soul and belief over physical strength. Believing in yourself is very important for passing the exam and the ability to overcome the fear of failing the exam can really make the difference. Referring to an excellent dialogue of the movie that we fall in order to learn how to stand up, if we start thinking about failing the fear ruin the whole situation. The first and foremost thing in this regard is to overcome this fear and remained focused.

I believe a lot of you have appeared in several mocks and you'd have identified your strongest areas. Starting the exam from the strongest area can boost up the confidence and can give you a winning sense.

For me time was never an issue in both level I exam and level II exam. Same is the case for most of  the students but does that mean we should not bother about time management? I certainly doubt that. The exam is balanced in terms of difficulty level so try spending less time on questions which are straight away and try spending more questions which you find tricky.

Starting the exam from the area which you find difficult and think that with fresh mind you may cover that easily could be a winning strategy for a few but it can result drastically as if questions are left undone then while doing the other areas you could have 'evil thoughts' coming about that area.

Stay tuned for other tips they are on their way...

What I was doing in last week before Level I exam?

The perspective is entirely different for those who are appearing first time compared to those who are re taking the exam. Since I appeared only once in the LI exam, the feelings which I had were a mixture of somewhat fear and curiosity. Though I had overcome my fear to a reasonable extent by giving CFAI, Schweser and Finquiz mocks but the curiosity to know the actual exam's difficulty level and the experience of having it was residing. The CFAI text EOC questions were my target in the last week along with going through chapter end summaries from the curriculum. I had already gone through the schweser volumes thrice, once before each mock I gave and the smart summaries provided by finquiz were of great help to me in those 6 days. The confidence which revising gave me was immense and that really made the difference. Candidates should go through end of chapter questions a long with chapter end summaries of the curriculum now and if possible try purchasing the smart summaries of finquiz in order to go through the whole syllabus before the exam. Schweser Secret sauce can also serve the cause and make the difference. If you are planning to go through mocks in these days then try solving them in a 'simulated exam environment' by solving the whole morning section then taking a two hours break and then going through the afternoon session. Level I isn't only about knowing the stuff but also about retaining and recalling it in the exam. Stamina along with accuracy and effectiveness counts and 90 seconds are there for one MCQ.

Good Luck

Getting Enrolled

Let me recall when I had seriously started studying for Level II? This year January I guess... but I was supposed to start in September last year? Of course I did but the element of seriousness was missing! What happened in Jan that made me 'serious'.... well I got enrolled for Level II program in Jan! Does it have any connection? Hell Yeah! For me it is the only connection so far...

Theoretically, according to the schedule which finquiz guys provided me, I should have done by fixed income and equity by now and start with alternative investments but I am way behind the theory. As I have got enrolled in the exam and my books are in the process of being shipped, based upon the analogy I drew, I think I'll start studying now. Particularly it is important in this case as I am not preparing from Schweser, but using the curriculum notes and the CFAI text, for examples and chapter end questions. I would say those who are planning to appear in 2013 and have started their preparations for level III they should get enrolled and not wait for the deadline to come close as CFAI text is necessary for preparations, I think, & biology of belief that since enrolment is done lets start preparing... that inner drive is necessary. It works for me really well.  

How did I use FinQuiz Curriculum Notes?

Particularly I am writing this in response to a recent comment on a post previously published. I used FinQuiz notes as an alternate to the CFAI text. It helped me in multiple ways as the material was much more organized and consisted of highlighted point in the form of bullets. Moreover the structure was more or less of the CFAI text unlike other notes providers as they focus on LOS in spite of covering the whole area. I was able to revise the syllabus multiple times due to the notes due to their comprehensiveness. Another approach in this regard could be to first go through the CFAI text and then utilize the notes. It could be counter productive. Using primarily the curriculum notes and then approaching CFAI text for the areas which Curriculum Notes fail to provide adequate details could be a productive approach.

Doing CFAI text examples along with chapter end questions is a must. Following a schedule while preparing for CFA Exams is inevitable in passing and I can certainly say FinQuiz curriculum notes provide you with an opportunity to follow a schedule, complete studies in time, be organized, consistent and can revise the syllabus multiple times before the exam.

Active vs Passive Management Strategies - Level III

Passive Strategies

• Such strategies assume that market expectations are correct.
• Portfolio is structured in a way to closely track the benchmark index.
• Portfolio manager deploying such strategies accept average risk and return level.

Active Strategies

• Primarily rely on manager's forecasting abilities.
• Returns of the portfolio must increase if manager has superior forecasting skills.

Types of Passive Management Strategies

1. Pure bond indexing/Full replications approach
2. Enhanced indexing by matching primary risk factor
3. Enhanced indexing by small factor mismatches

Types of Active Management Strategies

1. Active management by larger risk factor mismatches
2. Full blown active management

Key Terms - Level III

Usually when the word essay is used, the sketch which strikes the mind is more or less related to something detailed or a kind of a vignette. As per my understanding, so far, the morning section of Level III demands, to a considerable extent, the structured response which may comprise of terminologies which must be remembered. As I am in the initial phases of my preparation and going through fixed income section which has a fancy name in Level III as its associated with portfolio management, I am gradually realizing the importance of remembering they key terms. I mean we could have questions in which our desired response should only be those terms! For majority remembering and cramming the terms in late Feb or in start of March 2013 might be a suitable strategy but considering how I used to prepare in LI and LII - gradually, I think I should try to remember their names and try to connect them with the concepts to get comfortable with them.

Good Luck!

Level II vs Level III - A talk with a Charterholder

As always he was kind, comprehensive and very much calculated in each and every word coming out of him. The basic difference he cited in preparing for level II and level III was the portfolio perspective. Level II was much more of a hardcore stuff dealing with mechanics and tools while Level III was kind of managerial in which the everything is considered in relation to the broader picture - The Portfolio. Apart from the other details like old examination questions are available for LIII, the exam does not only comprise of item sets but essay or rather structured response, according to him, was an addition distinct to Level III another major difference is the historic pass rate for LIII. Probably the 70% distinction does not apply here and there is a good chance for students to pass scoring < 70%. Though MPS is never disclosed but generally its an understanding that scoring above 70% is considered to be Pass for Level I & Level II. I can recall while preparing for Level I & II, I used to put myself into the stuff & mostly tried to think from examiner's perspective so that I could cover all the aspects which I potentially find testable. Focusing on Portfolio Perspective and acting like making judgements from the question according to the scenario painted could better help in passing the exam. And I think I must do it from the beginning. Reading 23 is almost done I hope by next week 2 more readings will be covered. Stay tuned!

Lets See what CFA Institute has to say about Level III Essay Questions

My preparations for Level III have 'officially' started from 25th of this month and waow its hard to believe I am preparing for the final level! Last year when I looked at the item sets... they freaked me out ALOT. I hope Essays which are distinct to Level III do not rip me a** apart. Level III essay exam is tested in the morning. Usually 10 - 15 questions are tested in the exam with multiple parts and each question & part's points are given in the exam accumulating to max 180 points. Each essay question consists of one or more parts. Some parts direct the student to write the answer in a template. Instructions in bold print immediately following the question direct the candidate to the page number of each template. 

Source: http://www.cfainstitute.org/cfaprogram/exams/format/Pages/cfa_exam_question_formats.aspx

The Website further shared interesting information

·         The published guideline answers on past essay exams are more complete and better written than actual exam answers that receive full credit.

·         The published guideline answers may not reflect all alternative approaches to the question that received full or partial credit.

·         Answers are graded only on content. They are not graded for language and style. (pretty important and a point certainly I need to focus well)

·         Use short phrases and bullet points to save time, but be sure your meaning is clear. (tough job to remain comprehensive)

·         Handwriting is rarely so poor that the answer cannot be graded. (Whoops! Let me recall when I had solved the last exam with hand??? Probably 2 years!"

·         Points are awarded for direct answers to a question.

·         No points are awarded for general knowledge that is not responsive to the question. (Another area to focus on)

·         Do not spend too much time writing an answer. This is particularly tempting when you know the topic well. Formulate a direct response to the command words, and use the amount of time allotted. (Another weak point!)

·         You should expect to encounter questions that you will not be able to answer correctly. There is a great deal of material to master and exam questions are challenging. Standard setters and the Board of Governors (at all three levels) take account of exam difficulty in setting Minimum Passing Scores. 

Source: http://www.cfainstitute.org/cfaprogram/exams/format/Pages/cfa_exam_question_formats.aspx

And Some common reasons why candidates get poor grades!

·         Not responsive to command word list (list, define, etc.)

·         Answered a question they wish they had been asked instead of the question that was asked.

·         No work shown on a calculation question and the answer is incorrect.

·         Hedged on questions that asked for a recommendation and justification (e.g., recommended A, but justified B).

·         Neglected to answer part of the question (especially if a several part question). Note that you can still answer part E, even if you do not know the answer to part D.

·         Content area experts spent too much time on their area of expertise, leaving too little time for weak areas.

·         Providing more items or responses than requested. If a question asks for three factors, only the first three that you list will be graded.

Source: http://www.cfainstitute.org/cfaprogram/exams/format/Pages/cfa_exam_question_formats.aspx

For Further details on Level III Essay questions visit:

http://www.cfainstitute.org/cfaprogram/exams/format/Pages/level_iii_essay_question_details.aspx

The Broader Picture vs Details

Throughout my preparation for Level II, I was of the impression that it is totally different than Level I in terms of understanding, depth and testing. After going through the exam I realized LII is different in terms of understanding and depth but in a lot of areas I had found the testing to be more or less on the same path. I don't know how true I am in exclaiming this but this is exactly my impression. Understanding the broader picture is undoubtedly necessary but it is also deceiving in terms of exams point of view. For instance I spent a lot of time in understanding and solving fairly detailed examples forgetting that an MCQ has three options and we have around 3 minutes to solve it. Steps which are involved in broader applications need to be understand fairly and can be tested in the exam. Like in translating the whole Financial Statements in Multi National Operations using Temporal or All current method several steps were involved. Considering the examples provided in the chapter I went through the whole process but lately I realized that the whole situation is less likely to be tested as compared to individual steps like how to translate revenues, COGS etc. or how using one method is different that other in terms of ratio analysis and so on. Trying to grasp the whole topic may lead one, as what happened with me initially, not to remember and recall individual steps which have the potential to be tested. I am not stating to let go off the broader picture and cram the steps but understanding as well as making ourselves comfortable with details is important. Thanks to curriculum notes I used, had separated the details and highlighted them in boxes which could be digested easily. Precisely talking about the exam it is very important to stay focused on details and steps which could be tested along with proper understanding of the topics particularly in all major areas.

The Schedule I followed for Level II

For Level II I had followed the schedule provided by FinQuiz. By last year they were offering for free.. I think the offer still resides, one can get it in response to a one liner email at info@finquiz.com

Mergers & Acquisitions - Some definitions

• Acquisitions: purchase of some portion of one company.
• Merger: absorption of one company by other.
• Statuary merger: acquirer acquires all target’s assets.
• Subsidiary merger: target becomes subsidiary after purchase.
• Consolidation: both cease to exist to become a new company.
• Target Company: one being acquired.
• Acquiring company: company acquiring target.
• Hostile transaction: potential business combinations without management & board’s consent.
• Friendly transaction: business combinations approved by management of both companies.
• Horizontal merger: merging companies in same kind of business.
• Vertical merger: companies at different position in same value chain.
• Backward integration: acquirer purchases target ahead of it in value chain.
• Forward integration: acquirer purchases target further down the value chain.
• Conglomerate merger: Acquires purchasing target unrelated to its core business.

Effect of Changing Pension Assumptions on Benefit Obligations

Effects On	↑discount rate	↓rate of compensation growth	↑Expected rate of return
PBO	↓	↓	N/A
ABO	↓	N/A	N/A
VBO	↓	N/A	N/A

Ultimately its passing the exam!

I can recall when I had received the result of Level I last year, I had achieved excellence by scoring above 70 in how many areas? You can understand by the word excellence! I feel no doubt in saying that if I had tried to achieve the same excellence in Level II, I would have definitely failed the exam! Am I joking? Certainly not... Thanks God I realized this thing by scoring below 50 in derivatives in a routine test in early days of my preparation. It literally doesn't matter how you've passed the exam unless you haven't failed! Around three months before the exam I had figured out to score above 70 in Equity, Ethics, FRA, Fixed Income and Corporate Finance and guess what... I did that. These areas comprise a major area of the exam and scoring well in them definitely holds weight. I divided my time, energies, practice and revision to focus more on these areas and focus less on other areas. Quants had three readings I didn't give a shit about them. Yes I had spent time on Economics but glad to learn that CFAI has reduced the readings in 2013. So trying to achieve same result in all areas can prove troublesome for many. I would say its better to organize considering the weights. 

Practising through Application

Someone close to me told me that learning through application of CFA knowledge from the real world can help in better understanding of the topics. Initially I didn't realize its importance but after watching myself during the exam connecting topics with news headlines and other bloomberg articles, I can understand its significance. The first three readings of fixed income require understanding and a bit more practice but the last three readings require in depth understanding of MBS, ABS and their valuation. Retaining tranching, CDOs, CMOs, their structures etc. is a tough job. Reading about these instruments more over the internet especially articles and news related to these helps in connecting the topics with the real world happenings. It improves the ability to retain and recall. It worked for me remarkable trying that can also help you...

PS: I have also mentioned several news items related to Fixed Income and Derivatives over this blog. You can check them through the labels.

Changes in the CFA Level II Curriculum from 2012 to 2013

• Readings have been reduced from 64 to 56
• Employee Compensation, Important FRA reading, has some revisions
• Economics has been revamped to three readings i.e. Currency Exchange Rate Determination & Forecasting, Economic Growth & Investment Decision, & Economic of Regulation
• A Note to Asset Valuation, Industry Analysis, & Valuation in Emerging Markets have been deleted in Equity
• Alternatives first two readings have been replaced with Private Real Estate Investments & Publicly Traded Real Estate Securities
• Fixed Income reading General Principles of Credit Analysis has been replaced with Fundamental of Credit Analysis
• Using Derivatives to Enhance Return & Manage Risk has been replaced with Credit Derivatives: An Overview.
• Two Portfolio Management Readings, A Note on Harry Markowitz’s Market Efficiency and International Asset Pricing, have been deleted.
• Corporate Finance, Quantitative Methods & Ethics are the same

When I started off Preparing for Level II.

Last Year in September 2011 I started off preparing for Level II. The first area to cover was Fixed Income, as it was in Level I in January 2011. Fixed Income was covered in 6 readings i.e. 48,49,50,51,52,53. Initially 48,49, and 50 were covered as they were relatively easy. Reading 48 had some tricky areas which had the potential of being tested. Important for me were the cash flow analysis and the ratios which cleared when I completed with Equity especially readings related to FCFs. Immense information is found in these readings and firm grasp over these areas is a must not only with understanding and commanding perspective but also with respect to exams perspective. Almost two weeks were spent on these three readings. Reading 49 related to term structure and key rate duration was not that much difficult for me. I found reading 48 quite detailed and reading 50 interesting. Developing the binomial tree to value a bond with embedded option was a very learning experience. Although how volatility is implied or put into the tree actually in the real world remained a mystery, which I certainly will look into now, but on the whole it was interesting and required a lot of practice. These three readings were not that much difficult as compared to the other study session covering Fixed Income. A fair overview of how in depth Level II could be was considerably experienced by me during first two weeks. People claiming that CFA actually starts from Level II was something in my mind seemingly coming true! I was initially worried but never gave up. May be that's the reason why I have passed this exam...

Level II Story - 1st Episode

The purpose of writing this series of posts is to provide a narrative of last 8 to 9 months. How I started off with the preparations of Level II. What I had in mind before initiating my preparations. The routine I followed. The material I used. The tests I appeared in. The way I perceived things and what aided to the success. The value of success can not be imagined by me as I've passed in the first attempt. The vigour can be asked by those who unfortunately have failed after putting in all the efforts throughout the year. This is the first post of the series. I'll be sharing the whole stuff in a series.

Stay Tuned.

Apple Inc. Revenues & Profit for Q3 2012

CFA Level II result

I have passed Level II. Will post the details later. Thanks to all the people who supported during this journey... Passing in first attempt while living in this part of the globe and also securing above 70 in 8 areas our of 10 is certainly encouraging. Must appreciate my decision of trying FinQuiz Curriculum Notes, it turned out amazing.. Last but not the least thanks to the visitors of this blog...

Bilal

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Shit happens but Life moves on...

The greatest all-rounder in 150 years cricket history, Imran Khan, was dropped from the team after he played the first match. He is the only fast bowler in the cricket history to have changed his bowling action and have succeeded. With his career's last match he, as the caption of the team, won the world cup in 1992. So much from the Cricketing Legend. I once heard him saying that you do not deserve to win unless you have the potential to face failure. These words have changed my life. Confidence does shatter after getting failed but only those succeed who manage to build themselves up for another try. It took us all 7 to 8 long months to prepare for the CFA Level II exams, we all put in our best to prepare ourselves for nailing it but what if we fail??? Less than 24 hours left for the result to be announced. Recalling the exam reminds me of the uncertainty I was having while rolling the circles specially in Ethics, & Economics. FRA & Ethics grant me a bit of confidence but one never knows what will happen. Lets hope for the best and be ready for the worst. Like its said... Shit happens but life moves on...

Financial Modelling

In these days last year I had taken 3 days workshop on financial modelling. Together with our instructor and according to his instructions we made model and valued Colgate. Although the assumptions used in the model were of consensus analysts but building the model itself was an interesting and learning experience. Preliminary knowledge of using Microsoft Excel was a pre-requisite but the most important task was to collect the information from Financial Statements and to deal with non-recurring items in projecting. The workshop was based on making pro forma financial statements, doing DCF and scenario analysis. By plugging in the values we concluded the valued Colgate and guess what it was more or less similar to the actual market value of the data provided. A lot of terms were new to me when I had taken the workshop but after when I have appeared in Level II exam, I feel allegiance to the terminologies and towards my treatment of the financial statements. Those who can have access to such workshops must go for one and try to build a model themselves. It is very important in making the skill set capable to compete in this age.

Expansion through Mergers & Acquisition - Microsoft agree to buy Yammer

Mergers & Acquisitions is an interesting reading under Corporate Finance in CFA Level II Curriculum. Stock based offer, cash based offer, stock purchase, asset purchase, defensive measures, transaction analysis, etc. have been discussed in detail in this reading. Expansion through M&A is considered to be a risky strategy and it can trigger regulatory authorities responsible to maintain competition in the market. The following article of Bloomberg discusses one such story in which Microsoft has agreed to buy Yammer which is a social networking website founded by the former chief operating officer of Paypal, David Sacks.

Read the article: http://www.bloomberg.com/news/2012-06-15/microsoft-said-to-agree-to-acquire-yammer-for-1-2-billion.html

Where will the CFA Program take you? New York edition

Facebook debuts 600 Applications at Mobile Bazaar

Climbed 3 percent to $27.10 today, Facebook offers a service called App Center with 600 applications début. The services is surely to attract users and encourage them to stay longer on the website and marketers can target them with more ease through advertisement. The share dropped 29 percent since it started trading at $38, the major reason cited for this decrease is the uncertainty about earnings of Facebook which are largely composed of advertisements and the company's inadequacy to generate advertisements through mobile interfaces which are increasing day by day. Facebook is also striving to attract software developers so that it could figure out new ways to engage users and provide them with the 'same experience' increasing engage time and no. of users. 

Apple seeks US ban on Samsung Galaxy S3 - Telegraph

Apple trying to ban Samsung Galaxy SIII sales in US? According to Telegraph they are doing so. Why they would be doing so? Because Samsung did copied their patents or its because Samsung became the world's largest Smartphone manufacturer last quarter? The lawsuits and counter lawsuits have been filled in the past and they still are contingent. Samsung has changed its 10.1 tablet design because of Apple claims but the battle is still going on and according to Apple, Samsung has copied its two patents and that is why they are trying legally to ban Samsung Galaxy SIII sales in US.

Read the news: http://www.telegraph.co.uk/technology/apple/9317118/Apple-seeks-US-ban-on-Samsung-Galaxy-S3.html

Integrating Financial Statement Analysis

If I compare the exam with the chapter end questions and also with the detailed examples, I think the exam was much more balanced. The technicalities in the examples and chapter end questions are way deeper. Perhaps the purpose is to equip candidates with the desired level of knowledge and skills. Reading curriculum was a tedious job especially for the purpose of passing the exam but going through it like something vital and valuable in terms of knowledge and skills development certainly changes the perspective and makes it a very helpful guide equipped with latest happenings in the financial world and methods of dealing with them. Reading 27 is one such example which has some amazing application of integrating financial statement analysis. Going through this reading after the exam solely for the purpose of learning helps in several ways. 1) There is no time restriction to complete it and 2) The mind is having a converged focus but a broad spectrum to view it. The adjustments, treatments related to several financial issues, altering numbers to reflect true economic position etc. have been explained in that reading. For me it is a must which I should be doing in 2,3 days by going through that reading from a broader spectrum and apply that knowledge on several financial statements to learn & develop myself up. There are other readings as well which serve this purpose but particularly Study Session 7 is remarkable in this regard.

Samsung Income Statement 1Q 2012 - Comparison

Trillion Won	1Q 2012	1Q 2011	4Q 2011	Change 1Q'11 to 1Q'12	Change 4Q'11 to 1Q'12
Sales	45.27	36.99	47.30	22%	-4%
COS	30.14	26.05	31.51	16%	-4%
GP	15.13	10.93	15.79	38%	-4%
R&D Exp	2.73	2.34	2.74	17%	0%
SG&A	6.77	5.79	8.46	17%	-20%
Other Operating P/L	0.21	0.15	0.70	40%	-70%
Operating Profit	5.84	2.95	5.30	98%	10%
Equity Method G/L	0.37	0.38	0.32	-3%	16%
Finance I/E	0.13	0.06	-0.14	117%	-193%
EBT	6.34	3.39	5.47	87%	16%
Tax	1.30	0.60	1.47	117%	-12%
NP	5.04	2.78	4.00	81%	26%

Level II Exam, 3rd June 2012

Finally after several months of 'focused' preparation, the exam went well... As you know under Standard 7A & the Candidate Pledge we aren't allowed to discuss the exam specifically but an opinion regarding general difficulty level can be given. For me the morning session was tough as compared to the evening one. Time wasn't an issue especially in the afternoon part. Ideally 18 minutes per item set are advised but a few took 20 to 25 and a few, I was able to complete in 8 to 10 minutes. As compared to Level I the experience was different in terms of burnout. It was because of the no. of questions as they were 50% less. The areas I was comfortable with enjoyed like nothing else and the areas which I found tricky, I really cursed my self while sitting there.... On the whole it was a good experience in terms of gaining immense knowledge and its application. Over next few days I will be posting about different companies specially applying Reading 27, Integrating Financial Statement Analysis on several companies to keep myself into the stuff.

Am I really scared of failing the exam?
Well Yes! It's a part of life.

Does that mean my all efforts will go in vain?
Certainly Not because of the knowledge & skills I've developed in this one year have paid off!

Will I appear again if I fail?
Obviously!

What are the chances of passing the exam?
Morning Session... 50/50, Evening Session 70/30

Am I excited about the result?
Hell Yea!

Good Luck to all the candidates (including myself) and best wishes for the result..

Keep Visiting.

Exam Day ID Requirements

Perhaps this is the time to check the exam day ID requirements...

http://www.cfainstitute.org/cfaprogram/exams/Pages/exam_day_id_requirements.aspx?intCamp=hompage_banner_ID_policy

Just 2 MCQs...

The value of a single run can be asked from a player who looses his wicket after scoring 99 runs. Same is the case here! I have been practising several mocks and have been able to get score 4/6 in several item sets which end up 66%. In the last mock, which was from CFA Institute, I ended up scoring 70% in the morning and 77% in the evening part. The good thing was I was above 70% but the sad part was not scoring above 70% marks in Equity and FRA. These two are major areas and I was on avg scoring 4/6 marks in them. In 1 item set I did secure 5/6 but the rest were below the mark. Thanks to Economics and Quants where I was able to get 6/6.. Else I would have scored 66% marks. As of now only 5 days have left for the exam my full concentration is on Equity and FRA as it constitutes major weight-age of the exam and I am reviewing the mistakes I have made and  focusing on to correct the 2 MCQs which I am lacking. You see if in morning session 2 item sets are framed from Equity and we end up scoring 7/12 then its 58% while we get 9/12 it constitutes 75% and the tables turn around! Luck is also very important as the syllabus is so vast that grasping it all seems impossible, at least to me. I don't know whether I will be able to pass the exam or not but considering the value addition which I have experienced is immense. Lets hope for the best.

Good Luck!

1st Mock - 4th June 2012

The purpose of appearing in a mock today, month before the exam, was to better gauge myself for the areas which I require more attention and converged focus. Initially I was scared because I wasn't prepared up to the mark but considering the objective of the test I decided to take it as a challenge and put in my best. During those hours I was in a state of dilemma. Compared to Level I certain areas were lightly touched which was pretty helping but that affected adversely in a way that the likelihood of performing well reduced 50%. As in Level I there were 240 questions and in Level II they are 120. Only 1 item set of Ethics in the morning section was indeed encouraging but scoring 5 out of 6 would yield above 70% marks. This was particularly which I lacked in. I mean I did score 62% marks overall which are really encouraging for someone who has 1 month to go and could revise the syllabus multiple times especially when 'equipped' with Curriculum Notes (FinQuiz), as 370 pages and the whole curriculum revised... The thing which I realized heavily today was not getting confident by correcting 3 questions in a row out of 6 in an item set. The rest 3 hold immense importance and being able to correct 5 will certainly yield favourable results. In Equity, FRA, Corporate Finance there is a chance and relatively in these areas the likelihood of correcting most questions is high. A part from that Fixed Income & Ethics also have 2,2 item sets each in both sessions we can score well in them. The rest can be of 1,1 item set. Scoring 4 out of 6 can work well. Any how, to sum up, the experience went well. Precision and Accuracy is required a long with the ability to recall the formulas, concepts timely in the exam. Time wasn't the issue today but doing the question correctly was certainly an issue. The next mock in which I am appearing is 2 weeks ahead. Today's experience has given me a roadmap and have highlighted the areas in which I lack. I hope I'll be able to cope them and perform well in the next mock.

Good Luck!

Got the ticket today...

The examination ticket is available on the CIE website. I got it downloaded today and matched the details with my passport. The ticket is different than it was in the previous year. It reminds me of the days last year when I was preparing for Level I. As compared to that I can certainly experience great deal of addition to my knowledge and so does the exam pressure. This is the moment for me not to bother about result as luck does matter in Level II. Can I fight with that? Well certainly no but will it give me a fair play? I believe yes and I need to give tough time to it. Almost done with first reading except 3,4 LOS. Aiming to revise the whole syllabus at least once. FinQuiz curriculum notes are quite helpful in that regard... 370 pages summing up the whole curriculum and missing nothing. Will be appearing in the mocks after 20th May and share the results. Fingers crossed for Level II exam but the fear is failure is no more. Those who cannot face failure have no right to win! I need to put in my best efforts because they are in my control. What if I fail? Will appear in the Level II exam again and will keep on appearing every year unless I pass. Will failure be another opportunity to learn? Certainly that would be. Am I thinking about the exam result? Nah... will start thinking over it after 3rd June.. At present the full focus is on revising the stuff and making myself better in it.

Good Luck for the Exam.

Converting from LIFO to FIFO

I saw this question posted by someone on a forum.

Due to declining prices, Steffen Inc. has a LIFO reserve of –$20. Its income tax rate is 35%. If an analyst is converting Steffen’s financial statements to a FIFO basis, which of the following adjustments is most likely required?

A)

Increase assets by $20.

B)

Increase shareholders’ equity by $13.

C)

Decrease liabilities by $7.

The interesting thing to note in this question was the negative LIFO Reserve. So far I have been dealing with questions which have positive LIFO Reserves through the ending was less in many instances but the Net value to be negative... I hadn't seen it before. 

When Financial Statements are converted from LIFO basis to FIFO basis there is an imbalance which occurs in the Balance Sheet Equation. As FIFO Inventory = LIFO Inventory + LIFO Reserves, changing the cost flow basis increases the inventory but in this case the LIFO Reserve is negative, the inventory would decrease so A is incorrect.

Since FIFO COGS are less (Under inflationary environment) Reducing them results in higher net profit margins after tax adjustments and so does Retained Earnings. Therefore they increase by the amount = LIFO Reserves x (1-tax rate). In this it is clearly written that the environment is deflationary so converting to FIFO basis the Retained Earnings will increase by -20 x (1-35%) = -13$, effectively decreasing, so B is Incorrect.

Apparently the answer should be C as both A & B have been concluded as wrong. To balance the accounting equation, Liabilities must decrease by amount 20 x tax rate = 7$ as Assets are decreasing by $20, Equity is decreasing by $13 therefore Liabilities must decrease by $7 so C is Correct.

Okay but which liability is gonna decrease? Now this is interesting. I think that deferred tax liabilities accounts for the differences between tax payable and the tax actually paid. If tax payable is higher under some transaction taking place today but not paid then a liability is recorded which will be settled in the future. We know that under LIFO companies report less taxes as LIFO COGS are higher. Changing the cost flow basis to FIFO results in higher tax payable amount and if it is not paid in cash then a liability, deferred tax, is created. However in this case as the LIFO Reserves have become negative, the Deferred tax liability will decrease. The option that any other asset will increase is not provided and apparently the liability which should reduce seems to be Deferred Tax. 

Revision Plan

Initially I had thought of not making a detailed coordinated plan and just start of with areas and decide about the next one after completing the previous one. Intention behind choosing this path was not to put in a lot of energy in planning rather focusing more on actually revising the course. And it went disastrous! Anyhow I have now divided the subjects into two categories. 1. Those which require hard work i.e. immense effort and 2. Those which have either already been practised by my several times like Equity, Fixed Income and Derivatives, or are not more in weight-age like Quantitative Methods. I am simultaneously taking both these categories so that I may not sound less productive by going through two areas simultaneously which are easy or do not freak out by taking two areas which are hard for me. For light areas I am giving 5 days per area and for hard ones I am covering them in 8 days each. Effectively I will be able to go through all the areas by 20th May once and after that in 10 days I will try my best to practice by giving 3 mocks and chapter end questions and revising my weak points. A similar kind of strategy worked for me in Level I and my fingers are crossed this time. Do share if you are working with any strategy of revising and covering the whole stuff.

Good Luck for your exam!

Poll Result - No. of Mocks for Level II

Hi. Below is the graphical representation of the poll result which I posted over my bog. 34 candidates have taken part in this poll. Although most of the participants have said that at least 3 mocks are necessary. Based on these results I have decided to appear in 3 mocks.

Investment Classification - USGAAP vs IFRS

Knowledge Application - SPE

I just completed reading 22 (Revision) SPE are discussed in last section of this topic. I found this related news item to it.

Read the news item: http://www.independent.ie/business/irish/government-fights-to-keep-nama-debt-off-its-books-3078860.html

Reading 20,21 FRA Impact on several Ratios

Impacts on profitability, liquidity, activity and solvency ratios of finance lease, operating lease, inventory write downs, choice of inventory valuation etc. can be tested highly. While doing the chapter end questions of Reading 20 and 21 (Study Session 5) I encountered several questions framed on ratios. I was having a trouble in solving them but when I sketched in my mind the impact of any accounting choice to the numerator and denominator of the ratios and then tried to figure out the effects, my answers started getting correct. Another important aspect in that regard was the effect of adding the same amount to the numerator and to the denominator. Suppose a company has off balance sheet lease arrangements (operating lease) if it had classified it as finance lease the liabilities to total assets ratio would be higher or lower? This was interesting as the same amount will be added to the asset base and a liability equal to the PV of lease obligation would be created. The numerator and the denominator of the liabilities to total assets ratio will increase with the same amount. This will result in decreasing the ratio not increasing it. The answer therefore is lower. Such concepts, which are present in the chapter end questions, can be tested in the exam. I have made myself comfortable with them today and I hope when I'll be encountered with any question like this, I would be able to connect it with what I experienced today.

Revision - FRA

FRA is a major area in Level II. I have started to review it from yesterday and I have planned to cover 2 readings a day. This is the time for me to go through the chapter end questions. I am not reading from the CFAI text rather using my Curriculum Notes (FinQuiz) to go through the stuff. Revision has become pretty easy as only a few pages to read with all important points written in bullets and chapter end questions to test myself up. I will be giving the whole week to FRA and will create a test on Sunday and solve it to check my standings. Study Session 6 is tough and I am going to start it from tomorrow. Planning to give 1 day to each reading and complete it in 3 days. A lot of stuff to retain in this study session but this is the time to do it. In May I would be revising it for the mock but will be extensively practising it now to make myself comfortable with it. After this study area I would be comfortable with Equity and FRA. Three more study areas to go namely Ethics, Economics and Corporate Finance. I believe scoring above 70 in these will have significant impact on the final result. Fixed Income and Derivatives can also aid in passing the exam after these. I will be revising both of them in first week of May. Do share your plans for these months.

Good Luck

Real Options in Projects (Corporate Finance)

My family is in the business of production. They have installed computerized embroidery machines. The business model is such that buyers, who are whole sellers of female embroidery suits, contact the factory and place order. They purchase the dyed base cloth from the market and along with the design send those to the factory. My family charge them according to no. of stitches and once the embroidery is done the lot is returned back and the buyer is charged off with the amount of work (embroidery) done on the cloth sent.

My Uncle also deals in selling the machines. One typical machine costs around 2.5 million PKR. The origin is China and he has developed significant credentials in this field. I was observing him while dealing with a potential customer. He was informing him that a 42 head stitch sequin machine is worth 2.9 million because it gives the option of being operated only on thread (without sequin - a start like element placed on clothes) through sequin and also act as a 21 head machine. Since the market trends keep on changing, the sequin is not in fashion through out the year but in some months, installing this machine provides the option of managing both the seasons and with high volumes of production and less. While listening to what he was saying, my mind immediately went to the topic of Real Options in Corporate Finance. I was wondering about the flexibility option of the machine which apparently worth 4 hundred thousand. While calculating the NPV of the project incorporating the effect and value of this real option will generate a more realistic result and can aid in analysis. The beauty is the connection which developed immediately in my mind regarding the topic and I was able to recall and connect what I had learnt with something happening in front of my eyes. Believe me my uncle and the buyer would have no idea of the analytical aspects connected with this option. For them it would have been something which must happen like this but at that time, my mind had started processing about calculating the NPV of that project and incorporating the value and cost of this option. I was wondering that is how this course develops skills and knowledge. Its not necessary that we need to be at the right place to apply this knowledge but in business transactions happening in front of use, this knowledge is pretty helpful!

Direct Quote & Indirect Quote - Economics

An easy way to remember direct quote and indirect quote is remembering this notation

FC:DC = xxDC

This one is a direct quote for a domestic investor in foreign currency

For example
DC = AUD
FC = USD
USD:AUD = 1.003 AUD

This is a direct quote for an AUD investor in USD

DC:FC = xxFC

This one is an indirect quote for a domestic investor in foreign currency.

DC = AUD
FC = USD
AUD:USD = 0.997 USD

This one is an indirect quote for an Australian Investor in USD

Note: Direct & Indirect quotes are reciprocal of each other.
Direct = 1.003
Indirect = 1/1.003 = 0.997

Cross Over Rates - Using Algebraic Expressions to make the calculation easier.

I figured out that using algebraic expression to calculate cross over rate makes it easier.

For instance you want to calculate AUD:PKR and you have US:AUD and US:PKR the expression would be

AUD:PKR = AUD:US x US:PK

It can also be written as

AUD/PKR = AUD/US x US/PKR

We have been given with US:AUD and we require AUD:US so inverse that and then multiply it with US:PKR to get AUD:PKR

It becomes quite simple and easy to remember using the algebraic expressions. Easy to remember and easy to apply!

Bloomberg News Item - Top Junk Pummels Treasuries for Safest Profits: Riskless Return

A lot of key terms related to Fixed Income of Level II, credit ratings, junk bonds, option adjusted spread etc. are required to be understood before reading this news pick. The curriculum has enabled me to read and understand these news items just because of the relevance and matching of the concepts with what that has been written there in the text with what that is happening 24/7 in the amazing world of finance.

Read the news: http://www.bloomberg.com/news/2012-03-21/top-junk-pummels-treasuries-for-safest-profits-riskless-return.html

Credit Enhancement - A distinctive feature of Asset Backed Securities (External Enhancements)

Credit enhancement occurs when a security’s credit quality is raised above that of the sponsor’s unsecured debt or that of the underlying asset pool. Credit enhancement levels are determined relative to a specific rating desired by the issuer for a security by each rating agency. There are two general types of credit enhancement
structures:

1. External Credit Enhancements:

a) Third-Party or Parental Guarantees (Bond issuance): A third party e.g. an insurer, or the parent company
of the seller/servicer promises to cover losses that may arise on non-performance of the collateral up to a stated maximum dollar amount. Unlike municipal bond insurance which guarantees the entire principal amount, the guarantee in a securitization is only for a percentage of the par value at origination. For example, a $100 million securitization may have only $5 million guaranteed by the monoline insurer.

b) Letter of Credit (LOC): In this case a financial institution, typically a bank, is paid a fee to reimburse the trust for any losses actually incurred, up to the required credit-enhancement amount.

c) Corporate guarantees: Usually provided by the issuer of the ABS or its parent company.

Letter of credit from a bank and a guarantee by the seller of the assets are two less common forms of credit
enhancement because of the “weak link approach” employed by rating agencies. According to this approach, if an issuer seeks a triple A rating for one of the bond classes in the structure, it would be unlikely to be awarded such a rating if the external credit enhancer has a rating that is less than triple A. External credit enhancement exposes the investor to “third-party risk,” where the ABS rating will be dependent on the creditworthiness of the institution.

News Pick - Low listings prompt property market stall warning

There are several LOS in CFA Level II Curriculum which relate to the content of this news pick. Primarily the news item is related to home loans which have been discussed in level II fixed income. Going through these news picks and articles enable me to interlink the theoretical concepts with real life examples thus enabling me retain the topics through these news items. It is not only about the understanding of the topics but also the 'finance vocabulary' which builds through the CFAI Text books, helps a lot in reading these articles. It is encouraging when things start to make sense!

Read the news: http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10796416

(News Pick) The Economic Times - Financial reporting system undergoing a change in US

Financial Reporting & Analysis is one of the major section of Level II. I was looking over this news item of Economic Times.

Read the news: http://economictimes.indiatimes.com/features/investors-guide/financial-reporting-system-undergoing-a-change-in-us/articleshow/12492739.cms

At least how many mocks one should give while preparing for the Level II Exam?

As you all know the time is approaching! I guess I don't need to explain what 'time' specifically refers to... Last year I had appeared in 3 mocks but I am a bit confused this year. Level II is way more difficult as compared to Level I which implies that mocks should be at least three of more. Another aspect is that based upon the length of the material, I was able to repeat the material in one week before appearing into the level I exam effectively revising it 3 times in a row. This is literally impossible for me right now! So appearing in mocks without going through the whole readings would seem meaningless to me. Considering this aspect, appearing in 2 mocks seems a wise step as in 15 days I think I can go through the whole syllabus once. In a nutshell I am confused! Try helping me out and answer the poll by choosing an appropriate choice based upon your understanding!

Your support in this regard would be highly appreciated and can help a lot of candidates.

Are you able to recall these topics of Level II? (Bloomberg News Pick)

Candidates of Level II done with Derivatives let's see how you are able to connect this Bloomberg News Pick with what you've studied in Derivatives of Level II.

Read here: http://www.businessweek.com/news/2012-03-08/corporate-bond-risk-falls-in-europe-credit-default-swaps-show

Parties to Securitization - Level II Fixed Income

1) Originator: The initial owner of the asset (also known as sponsor or seller) who has a loan agreement with the borrowers;

2) SPV: The issuer/trust also known as the SPV is the entity, which would typically buy the assets (to be securitized) from the Originator. The structure keeps the SPV away from bankruptcy of the originator, technically called ‘bankruptcy remote’;

3) Servicer: The servicer is usually the originator, who collects payments due on the underlying assets and, after retaining a servicing fee, pays them over to the security holders;

4) The Investors: The investors may be in the form of individuals or institutional investors like mutual funds, pension funds, insurance companies, etc. They buy a participating interest in the total pool of
receivables and receive their payment in the form of interest and principal as per agreed pattern.

5) The investment bankers: Who assist in structuring the transaction and who underwrite or place the
securities for a fee;

6) The rating agencies: The rating agencies assess credit quality of certain types of instruments and
assign a credit rating;

7) Agent and Trustee: It accepts the responsibility for overseeing that all the parties to the securitization deal perform in accordance with the securitization trust agreement. Basically, it is appointed to look after the interest of the investors.

WSJ Blog - UPDATE: SLM To Sell $668M Student Loan Asset-Backed Securities

If you have studied Fixed Income of Level II specifically Reading 51 & 52, try connecting what you've learned with this Wall Street Journal Blog post & share your experience.

Read the post: http://online.wsj.com/article/BT-CO-20120328-717279.html

News Pick - (Reuters) - U.S. bond funds designed to fight inflation have relaxed their guard against rising interest rates, leaving investors vulnerable to heavy losses

Interest rate risk (duration) has been discussed extensively in Level I and Level II curriculum under Fixed Income. In level a basic understanding is developed and it is considered to be a highly testable area while in Level II a more in depth approach is introduced. Key rate duration is discussed, measuring the duration of portfolio with non-parallel shift in interest rates Candidates who are done with Fixed Income will find this news pick relevant to what they have been studying in the curriculum.

Read the news: http://www.reuters.com/article/2012/03/15/funds-inflation-idUSL2E8EDJ1B20120315

LOS Command Words

Exam is approaching and only 65 days are left. We must be completed with the first reading within next few weeks so that we are left with ample time to revise the syllabus at least once before appearing into mocks. It will enable us to highlight our strengths and weaknesses and plan accordingly. This is the time to read the material with exams perspective. Since exam is designed in a way that the LOS are tested, we must have an overview of the command words so that we could figure out what the CFA Institute is demanding from us regarding a particular topic. As mentioned earlier this is the time to focus more on the material with exams perspective as compared to complete and in depth understanding considering every dimension... Below is the link to LOS Command words I think you all should go through those to better gauge what exactly the CFA Insitute wants us to be equipped for on the exam day.

http://www.cfainstitute.org/Documents/cfa_and_cipm_los_command_words.pdf

Good Luck.

Joint Ventures - Level II FRA

Joint ventures can be organized in the following forms:
· Partnerships
· Corporations
· Other Legal forms i.e. Unincorporated associations

Under IFRS Both Proportionate consolidation method and Equity method can be used. However, Proportionate consolidation method is preferred. In Proportionate Consolidation Method Venturer’s share of the assets, liabilities, income and expenses of the Joint venture is combined on a line-by-line basis with similar items on the venturer’s financial statements & No Minority interest is necessary to be reported.

Under U.S. GAAP · Only Equity method is allowed to use. Proportionate consolidation method can be used
only for unincorporated entities operating in certain industries.


Relative to Proportionate consolidation method, Equity Method results in:
· Net Profit Margin being high
· ROA being high
· D/E Ratio being low
· Total income and total net assets of the investor are identical under both Equity and Proportionate consolidation method.