CFA (Chartered Financial Analyst) Equity and Fixed Income Investments Syllabus

Equity and Fixed Income Investments syllabus — full chapter and topic list

Expand any chapter to see its topics and sub-topics. This is the whole examinable outline for Equity and Fixed Income Investments in CFA (Chartered Financial Analyst), not a summary of it.

1. 1

   Equity Markets and Securities

   4 topics

   • Market organization, indexes, and efficiency
   • Equity securities and overview
     • Types of equity securities and ownership
     • Private vs public equity
   • Security market indexes and benchmark construction
   • Industry and company analysis
2. 2

   Equity Valuation

   4 topics

   • Discounted cash flow models
     • Dividend discount models (Gordon growth, multistage)
     • Free cash flow to firm and to equity
     • Residual income valuation
   • Market-based valuation and price multiples
   • Private company valuation
   • Return concepts and equity risk premium
3. 3

   Fixed Income Fundamentals

   4 topics

   • Features and pricing of fixed-income securities
     • Bond cash flows, structures, and covenants
     • Pricing, yield measures, and spot/forward rates
   • Fixed-income markets: issuance, trading, and funding
   • Asset-backed and structured securities
   • The term structure and interest rate dynamics
4. 4

   Fixed Income Risk and Credit Analysis

   3 topics

   • Interest rate risk and return
     • Duration (Macaulay, modified, effective)
     • Convexity and key rate duration
   • Yield curve strategies and portfolio management
   • Credit analysis
     • Credit risk, ratings, and spread analysis
     • Credit default swaps and structured credit

Equity and Fixed Income Investments flashcards for CFA (Chartered Financial Analyst)

22 of 59 cards from the Equity and Fixed Income Investments deck — real questions with worked answers.

1. What are the three main functions of the financial system?

   (1) To allow entities to save, borrow, raise equity, manage risk, exchange assets, and use information; (2) to determine equilibrium returns that equate the aggregate supply of savings with the aggregate demand for borrowing; (3) to allocate capital efficiently to its most productive uses.

2. Distinguish between a primary market and a secondary market.

   A primary market is where issuers sell newly created securities to investors to raise capital (e.g., IPOs, seasoned offerings). A secondary market is where investors trade already-issued securities among themselves; the issuer receives no new funds.

3. What is the difference between a quote-driven (dealer) market and an order-driven market?

   In a quote-driven market, customers trade against dealers who post bid/ask quotes and supply liquidity from inventory. In an order-driven market, customers trade with each other via an order-matching system using priority rules; no dealer is required.

4. In an order-driven market, what are the order-precedence (matching) rules?

   Orders are ranked by price priority first (highest bid, lowest ask wins), then by secondary precedence such as time (earliest first) or display (displayed before hidden) priority.

5. Define the leverage ratio of a margin (leveraged) position and how it relates to the margin requirement.

   The leverage ratio is the ratio of position value to equity. It equals the reciprocal of the initial margin requirement: $$\text{Leverage ratio} = \frac{1}{\text{Initial margin \%}}$$ A 40% initial margin gives a maximum leverage of $\frac{1}{0.40} = 2.5$.

6. Write the formula for the margin call (trigger) price for a long leveraged stock position.

   $$P_{\text{margin call}} = P_{0}\,\frac{1 - \text{initial margin}}{1 - \text{maintenance margin}}$$ where $P_{0}$ is the purchase price.

7. List the three forms of the efficient market hypothesis and the information each reflects.

   Weak form: prices reflect all past market (price and volume) data. Semi-strong form: prices reflect all publicly available information. Strong form: prices reflect all information, public and private.

8. Which market anomalies are commonly cited as challenges to market efficiency?

   Calendar effects (January effect), the value effect (low P/E and P/B outperform), the size effect (small caps outperform), momentum, overreaction/underreaction, and closed-end fund discounts.

9. What is the value-weighting (market-cap weighting) of a security in an index, and a key drawback?

   $$w_{i} = \frac{Q_{i}P_{i}}{\sum_{j=1}^{N} Q_{j}P_{j}}$$ A drawback is that it can produce a momentum bias—overvalued securities get larger weights and undervalued ones smaller weights.

10. Compare price-weighted, equal-weighted, and market-cap-weighted index construction.

    Price-weighted: weight $\propto$ share price (high-priced stocks dominate; affected by splits). Equal-weighted: each constituent gets weight $\frac{1}{N}$ (needs frequent rebalancing). Market-cap-weighted: weight $\propto$ float-adjusted market value (largest firms dominate).

11. What does float-adjusted (free-float) market-cap weighting adjust for?

    It weights each constituent only by the value of shares actually available to public investors, excluding shares held by insiders, governments, or controlling interests that are not freely traded.

12. Distinguish between an index's price return and total return.

    Price return reflects only the change in constituent prices (capital appreciation). Total return reflects price changes plus reinvested income (dividends or interest).

13. What is index rebalancing versus index reconstitution?

    Rebalancing is adjusting constituent weights back to target weights at scheduled dates. Reconstitution is changing the actual membership of the index—adding new securities and deleting those that no longer meet criteria.

14. List the uses of security market indexes.

    They act as market sentiment gauges, performance benchmarks, measures of market return and risk, proxies for asset classes in asset allocation, proxies for systematic risk (beta), and the basis for index funds/ETFs and derivatives.

15. What rights typically distinguish common shares from preferred shares?

    Common shareholders have voting rights and a residual claim on assets/earnings with no fixed dividend. Preferred shareholders generally have no voting rights, a fixed dividend, and priority over common in dividends and liquidation but rank below debt.

16. Differentiate cumulative from non-cumulative preference (preferred) shares.

    For cumulative preferred, any omitted (unpaid) dividends accumulate as arrears and must be paid in full before common dividends. For non-cumulative preferred, missed dividends do not accumulate and are forfeited.

17. What are participating versus non-participating preference shares?

    Participating preferred shares receive the fixed dividend plus an additional share in profits above a threshold (and may get extra in liquidation). Non-participating preferred shares receive only their fixed dividend and stated par value at liquidation.

18. What is the difference between callable and putable common/preferred shares?

    Callable shares give the issuer the right to repurchase the shares at a preset call price (benefits the issuer when its cost of equity falls). Putable shares give the holder the right to sell them back to the issuer at a preset price (benefits the investor).

19. Distinguish depository receipts (DRs) from direct foreign share ownership; what is an ADR?

    A depository receipt is a security trading on a local exchange that represents shares of a foreign company held by a depository bank. An American Depository Receipt (ADR) is a USD-denominated DR trading in the U.S. representing a defined number of foreign shares.

20. What is the accounting return on equity (ROE) and one issue with using book values?

    $$\text{ROE} = \frac{\text{Net income}}{\text{Average book value of equity}}$$ A rising ROE may reflect either improved efficiency or merely a declining book value (e.g., from losses or buybacks), so it must be interpreted carefully.

21. Compare public equity with private equity along liquidity, disclosure, and pricing.

    Public equity is exchange-traded, highly liquid, subject to mandatory disclosure, and continuously priced by the market. Private equity is illiquid, has limited disclosure, is negotiated/infrequently priced, and typically involves a longer investment horizon and active ownership.

22. Name three main forms (strategies) of private equity investment.

    Venture capital (financing early-stage/start-up companies), leveraged buyouts (acquiring mature companies using significant debt), and development/growth capital (financing expansion of established firms).

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