Study Plan

WEEK ENDING WK END 1 WK END 2 WK END 3 WK END 4 WK END 5
14-Feb 21-Feb 28-Feb 7-Mar 14-Mar

STUDY
REVIEW
SELF TESTS
MILESTONES
Referene!"
T#$% &rea! Topics
Weightages Ethics/ Professional Standards
How to Quantitatie !ethods
"oru# Econo#ics
$nal%st notes "inancial State#ents $nal%sis
anal%st foru# &orporate "inance
E'uit% $nal%sis
Inestopedia E(a# "i(ed Inco#e
Deriaties
Diff) *++,- *+.+ $lternatie Inest#ents
Portfolio !anage#ent
* !id Ter# Tests
* "ull /ength Tests
Total

http0//www)cfainstitute)org/cfaprog/courseofstud%/topic)ht#l
http0//finguru)in/we1/leel.)php
http0//www)ehow)co#/how234+*45.2pass6cfa6leel6e(a#)ht#l
http0//www)anal%stnotes)co#/
http0//www)anal%stforu#)co#/
http0//www)inestopedia)co#/professionals/cfa/default)asp7iewed8.
http0//www)fin'ui9)co#/tips/leel.
Quantitatie
!ethods
"inancial :eporting ;
$nal%sis
&orporate
"inance
:eiew Q!-
":$- &orp
"in
<
Sa#ple test
on topic
Sa#ple test
on topic
Sa#ple test
on topic
3+= weightage
topics done
WK END ' WK END 7 WK END 8 WK END ( WK END 1) WK END 11
21-Mar 28-Mar 4-&$r 11-&$r 18-&$r 25-&$r

T#$% &rea!
Le*e+ I
&$$r#,- .#/r! D#ne0 OVER&LL ST&TUS E,a1 We%234!
Ethics/ Professional Standards .>= ? P:EP$:$TI@N ST$:T D$A
Quantitatie !ethods .*= *3 .++= T$:GET D$TE T@ "INISH
Econo#ics .+= *3 B+= WEEKS :E!$INING T@ "INISH
"inancial State#ents $nal%sis *+= 3> .++= D$AS :E!$INING T@ "INISH
&orporate "inance ?= .+ .++= D$AS G@NE CA
E'uit% $nal%sis .+= .B = EDPE&TED D@NE
"i(ed Inco#e .*= *. = $&TE$/ D@NE
Deriaties >= .?
$lternatie Inest#ents 5= B
Portfolio !anage#ent >= B .++=
* !id Ter# Tests ?
* "ull /ength Tests .*
Total .,? >.=

>+= Each
.++= Each
.++=
Econo#ics E'uit%
Inest#ents
"i(ed Inco#e
Deriaties
$lternatie
Inest#en
ts
Portofolio
!anage#
ent ;
Wealth
Planning
Ethical ;
Professional
Standards
:eiew EQ
In- "I-
Econo#ics
Sa#ple test
on topic
Sa#ple test
on topic
Sa#ple test
on topic
Sa#ple test
on topic
Sa#ple test
on topic
3+= weightage
topics done
4*=
weightage
topics done
WK END 12 WK END 13 WK END 14 WK END 15 WK END 1' WK END 17
2-Ma5 (-Ma5 1'-Ma5 23-Ma5 3)-Ma5 '-6/n
OVER&LL ST&TUS $!CE:
P:EP$:$TI@N ST$:T D$A ,6"e1
T$:GET D$TE T@ "INISH *6!a%
WEEKS :E!$INING T@ "INISH +
D$AS :E!$INING T@ "INISH +
D$AS G@NE CA .B>>
= EDPE&TED D@NE .++)++=
= $&TE$/ D@NE ??)>.=

Re1a%n%n2 rea7%n2! $er 7a5 8DIV9):

:eiew Q!-
":$- &orp
"in-
:eiew EQ
In- "I- $I-
Deriaties
:eiew
Econo#ics-
Ethics- P!
:eiew hea% weights and
weaF areas
&"$ inst)
Sa#ple test
Sa#ple test
on topic
D D$A &"$ inst)
Sa#ple test
&"$ inst)
Sa#ple test
&"$ inst)
Sa#ple test
.++= topics
done
SUMM&RY *3>
TO;I<S S4/75 Se!!%#n
E43%a+ an7 ;r#fe!!%#na+ S4an7ar7! =15>? 1 3)-)
. &ode of Ethics and Standards of Professional &onduct
Session .
4)>
* GGuidanceH for Standards IIJII 4)>
5 Introduction to the Glo1al Inest#ent Perfor#ance Standards 4)>
3 Glo1al Inest#ent Perfor#ance Standards KGIPSLM 4)>
;#r4f#+%# Mana2e1en4 an7 Wea+43 ;+ann%n2 =5>? 2 12-)
4* asset allocation decision
Session .*
*)+
45 introduction to portfolio #anage#ent *)+
43 asset pricing #odels *)+
E@/%45 In*e!41en4! =1)>? 3 2)-)
3, organisation and functioning of securities #arFets
Session .5
5)+
>+ securit% #arFet inde(es 5)+
>. efficient capital #arFets 5)+
>* #arFet efficienc% and ano#aliesN 5)+
>5 introduction to securit% aluationN
Session .3
5)+
>3 industr% anal%sisN 5)+
>> co#pan% anal%sis and stocF aluationN 5)+
>B introduction to price #ultiplesN 5)+
<#r$#ra4e F%nane =8>? 4 12-)
33 capital 1udgeting
Session ..
*)+
3> cost of capital *)+
3B worFing capital #anage#ent *)+
34 financial state#ent anal%sis *)+
3? corporate goernance of listed co#panies *)+
F%,e7 In#1e =12>? 5 3)-)
>4 features of de1t securities
Session .>
>)+
>? risFs associated with inesting in 1onds >)+
>, oeriew of 1ond sectors and instru#ents >)+
B+ understanding %ield spreads >)+
B. introduction to aluation of de1t securities
Session .B
>)+
B* %ield #easures- spot rates and forward rates >)+
B5 #easure#ent of interest rate risF >)+
&+4erna4%*e In*e!41en4! =5>? ' 1)-)
4+
Session .?
5)+
S/22e!4e7
T#$% 4%1e
.#/r!A
D%!4
T%pes of $lternatie Inest#ents and their &haracteristics
4. &o##odities Session .? 5)+
F%nan%a+ Re$#r4%n2 an7 &na+5!%! =2)>? 7 ')-)
*, financial state#ent anal%sis
Session 4
3)+
5+ financial reporting #echanics 3)+
5. financial reporting standards 3)+
5* understanding inco#e state#ent
Session ?
3)+
55 understanding 1alance sheet 3)+
53 understanding cashflow state#ent 3)+
5> inentories
Session ,
3)+
5B long6lied assets 3)+
54 inco#e ta(es 3)+
5? long6ter# lia1ilities and leases 3)+
5, financial anal%sis techni'ues
Session .+
3)+
3+ financial reporting 'ualit%0 red flags and accounting warning signs 3)+
3. accounting shenanigans on the cashflow state#ent 3)+
3* financial state#ent anal%sis0 applications 3)+
35 international standards conergence 3)+
B/an4%4a4%*e Me43#7! =12>? 8 3)-)
> Ti#e Jalue of !one%
Session *
3)+
B Discounted &ash "low $pplications 3)+
4 Statistical &oncepts and !arFet :eturns 3)+
? Pro1a1ilit% &oncepts 3)+
, Pro1a1ilit% Distri1utions
Session 5
3)+
.+ Sa#pling and Esti#ation 3)+
.. H%pothesis Testing 3)+
.* Technical $nal%sis 3)+
Der%*a4%*e! =5>? ( 18-)
B3
Session .4
5)+
B> "orward !arFets and Instru#ents 5)+
Deriatie #arFets and Instru#ents
BB "utures !arFets and Instru#ents
Session .4
5)+
B4 @ptions !arFets and Instru#ents 5)+
B? Swaps !arFets and Instru#ents 5)+
B, :isF a#ange#ent applications of option strategies 5)+
E#n#1%! =1)>? 1) 5)-)
.5 elasticit%
Session 3
.)>
.3 efficienc% and e'uit% .)>
.> #arFets in action .)>
.B organising production .)>
.4 output and costs .)>
.? Perfect &o#petition
Session >
.)>
., !onopol% .)>
*+ !onopolistic co#petition and oligopol% .)>
*. !arFets for factors of production .)>
** !onitoring Oo1s and price leel .)>
*5 aggregate suppl% and aggregate de#and .)>
*3 #one%- price leel and inflation
Session B
.)>
*> us inflation- une#plo%#ent and 1usiness c%cles .)>
*B fiscal polic% .)>
*4 #onetar% polic% .)>
*? oeriew of central 1anFs .)>
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Ke5 43%n2! 4# re1e1ber
i#pact of :etention on stocF price- EPS and diidend P.
repeat after reiewing "S$ &" ratios
1ooF/#arFet alue ratio7
Wa%s to reduce transaction costs0 trading turnoer-
li'uidit% costs
treasur% 1onds hae se#i6annual coupons
9ero6coupon 1ond is also alued using se#i6annual
discounting
re#e#1er to dou1le the I:: calculated to get AT! Kor
CEAM of a se#i6annual paid 1ond
spg05,
Q5
redo once
interpretation of confidence interal0 spg*?*
6 difference 1etween 'ualified- un'ualified and aderse
opinion
6 diff 1etween footnotes- !D$- pro(% state#ents
dou1le6declining 1alance- EPS calcs0 options- weighted6
shares
SPG.*30Q*5 how is unreali9ed gain included in net
inco#e7
annuit% 1egin/end
ti#elines
6 re#e#1er to do .6p whereer appropriatePoptions will
alwa%s hae a QpQ
6 donQt appl% std) de) $ppro(i#ations- instead use R6ta1le
6 difference 1etween confidence interal for a population
and for a sa#ple
6 shortfall risF
std) deiation /s ariance
6 alpha/* onl% when two6tailed test i)e) e'ual to test
6 usage of sa#ple /s h%pothesi9ed statistic
6 t%pe .- * error- p alue- power of test
6 chi6s'uared- f6test- paired co#parison and diff) of #eans
tests
Re*%!%#n C/%7e
SPG4>0 4- .>- .?- .,- *.- 5*- 3+- 33- 3,) >+
CPG.*>0 *- ?- .+- .5- .3- .B- *.- *4- *,- 5*- 55
spg4>0 5- 4- .+- ..- .?
spg,B05-3->- .5
*>
all 'uestions
all 'uestions
all 'uestions
all 'uestions
all 'uestions
all 'uestions
all 'uestions
all 'uestions
spg.B,0 'uartile calcS spg.?+S spg.??0*-3-
spg*B?0 '*?- '5$S spg *,*0'**S '5
spg55.0'.?S spg5550'.-*-5
spg5340 all
SPG.3*0 ti#e6weighted :o:
SPG.340 CEA &alculation- SPG.>+T *- 5- ,
.*6!a% .56!a% .36!a% .>6!a% .B6!a% .46!a% .?6!a% .,6!a% *+6!a% *.6!a% **6!a%
wed thu fri sat sun #on tue wed thu fri sat
reision . reision *
"S$ Quant) "S$
portfolio #g#t Ethics P!
e'uities
corp fin)
alternatie in)
fi(ed inco#e
econo#ics
TEST .
tue wed thu fri sat
, .* fsa @f
.* 5 cf- p#- e'uities
5 B e43%! fi- der
B .+ e#n 'ue 'ue
.+ * ai U 'ue sch. cfa* sch*
*56!a% *36!a% *>6!a% *B6!a% *46!a% *?6!a% *,6!a% 5+6!a% 5.6!a% .6Vun *6Vun
sun #on tue wed thu fri sat sun #on tue wed
reision * reision 5 reision 3
EQEITIES
&@:P "IN
$lternatie
"i(ed Inc
Econ)
TEST* TEST5
weights test.
ethics .>)++= >>)>B=
'f ..)B4= B3)*,=
econ .+)++= 3.)B4=
fsa *+)++= BB)B4=
cf ?)55= B+)++=
e'uities .+)++= 4>)++=
deri >)++= BB)B4=
fi .+)++= BB)B4=
ai >)++= 55)55=
p# >)++= WWW
WWW +)B*,?3
>>6X4+
56Vun 36Vun >6Vun B6Vun
thu fri sat sun
reision 3
FE&TURES OF DEDT SE<URITIES =1 -
Cond indenture0 contract- rights- o1ligations Eer#-#/$an b#n7!
&oenants0 prohi1itions KnegatieM and pro#ises Kaffir#atieM sold at discount to par alue
restriction on sale of collateral S4e$-/$ n#4e!
sa#e collateral 1acFing #ultiple 1onds coupan rates increase oer ti#e
additional 1orrowings at a specified rate
#aintenance of certain financial ratios Deferre7 #/$an b#n7!
initial coupans are deferred for specified period
$l#ost all treasur% 1onds and ES corporate 1onds &oupans accrue- paid as lu#psu# at period end
pa% two se#iannual coupan install#ents
O$4%#n! 2ran4e7 4# b#n73#+7er =+en7er?
S%nF%n2 f/n7 $r#*%!%#n! faours 1u%er- lower coupan therefore
proide for principal repa%#ent through are alued higher 8X lower %ield as co#pared to
a series of pa%#ents oer issue life other non6option 1onds Kother things sa#eM
e)g) Y.! starting Bth %ear for a Y.>! loan
for *+ %ears fi(ed nu#1er of shares
E(a#ple0 Q.+-.. pg *.
a specified price prior to #aturit%
RISKS &SSO<I&TED WIT. INVESTINC IN DONDS =24 -
induced 1% the fact that #aturit% differences #a% also contri1ute to
Aield differences
of the# 1eing called and hence the risF
Prepa%#ent risF0
re6inested at a lower =) &all/prepa%#ent can also induce re6inest#ent
risF as principal receied will hae to 1e inested at lesser =
Rero6coupan 1ond doestnQ hae re6inest#ent risF
&hanges in interest rates will cause %ield cure to shift parallel%
indicating Interest :ate risF
Eent Knatual disasterM- credit- li'uidit%- e(change rate risFs are other risFs Non6parallel shift happens 1ecause long6ter# inest#ents #a% re'uire
Soerign risF0 a1ilit% and willingness of goern#ents to repa% de1t higher %ield
1ecause of changing policies
Re+a4%#n!3%$ be4Geen $r%e #f a a++ab+e b#n7H price is less sensitie to interest rate changes as
$r%e #f an #$4%#n-free b#n7H $r%e #f an e1be77e7 a++ #$4%#n co#pared to fi(ed6coupan 1ond)
calla1le 1ond alue 8 option6free 1ond alue 66 call option alue Price will 1e 1acF to par at eer% reset)
Ne2a4%*e #*enan4! e(a#ples0
&ff%r1a4%*e <#*enan4! e(a#ples0
Deben4/re! are /n!e/re7 whereas 1onds hae so#e collateral thatQs Fept asside
<#n*er!%#n #$4%#n" right to conert 1onds into
;/4 $r#*%!%#n!" right to sell the 1ond to issuer at
F+##r" #ini#u# coupan rate for a floating6rate 1ond
In4ere!4 r%!F" when interest rates increase- 1ond prices decrease
interest rate risF- sensitiit% and 7/ra4%#n are used interchangea1l%
Y%e+7 /r*e r%!F" pertains to a non6parallel shift of %eild cure
<a++ r%!F" when interest rates are olatile- 1onds hae #ore risF in ter#s
Re%n*e!41en4 r%!F" as #arFet rates fall- coupans will hae to 1e
V#+a4%+%45 r%!F" for 1onds haing options
Inf+a4%#n r%!F" reduction in purchasing power of coupans/principal
$s coupan rate of a f+#a4%n2 ra4e !e/r%45
puta1le 1ond alue 8 option6free 1ond alue U put option alue Howeer- greater the reset period- higher the interest
rate risF)
Presence of a cap increases Interest :ate risF
as price would start fluctuating 1e%ond cap
price6%ield cure is positiel% cone( towards origin 8X Ue %ield change will reduce
price less- than 6e %ield will increase price) This is good for 1ond holders
another interpretation is that as %ield increases- prices decrease at a lesser rate
si#ilarl%- as %ields decrease prices increase at a faster rate
In case of a calla1le 1ond- 1e%ond certain point- as %ield decreases- price increase
at a lesser rate K1ecause of negatie cone(it%MPthis is 1ecause closer it gets
to the call price- higher is the call pro1a1ilit%)
$nother wa% to looF at this is- as price of a calla1le 1ond is er% less- it 1ehaes
#ore liFe a noncalla1le 1ond
@nl% at lower %ields- cure shows 6e cone(it%
OVERVIEW OF DOND SE<TOR &ND INSTRUMENTS =;C 45 -
"our #ethods to issue soereign de1tS
. regular c%cle auction 6 single price .+*6> of face alue 8X K.+*U>/5*M= of "J
highest price at which entire auction can 1e sold
* regular c%cle auction 6 #ult) price Trea!/r5 Inf+a4%#n ;r#4e4e7 Se/r%4%e! =TI;S?
winning 1idders get it at the price the% 1id
5 ad hoc auction s%ste# continous change of par- updated par used to calc) ne(t coupon
auction when conditions are in faour of got) at #aturit% inflation adOusted face alue is gien 1acF
3 tap s%ste#
1ased on preious issuances of 1onds
auctioned treasur% issues
Got) sponsored enterprises are priatel% owned KSallie!ae- "reddie!ac- "annie!aeM and hae so#e credit risF
<#r$#ra4e b#n7 %!!/e!" S4r/4/re7 n#4e!" <D!"
are sold at once 1ond co#1ined with a deriatie
are sold on fir#6co##it#ent 1asis . step6up notes
i)e) underwriter guarantees entire issue sale * inerse floaters
hae a single coupon rate and #aturit% 5 deleeraged floaters Ne2#4%ab+e <D!I
Me7%/1 4er1 N#4e! =MTN? 3 dual6inde(ed floaters
differ fro# corporate 1onds on all three > range notes
can 1e sold oer a period of ti#e with each issue B inde( a#orti9ing notes DanFerA! ae$4ane!"
1eing a #ini#u# a#ount
hae #aturit% ranges- can hae different coupan rates
offering is done on a 1est6effort 1asis unsecured de1t- free fro# SE& registration
issued as a pure discount securit% 1% corp) haing strong credit ratings
no actie secondar% #arFet and are hold till #aturit%
UNDERST&NDINC YIELD S;RE&DS =;C '7 -
T3e#r%e! #f 4er1 !4r/4/re #f %n4ere!4 ra4e!" FED 1ana2e! !3#r4-4er1 ra4e! b5"
. tweaFing discount rates at which 1anFs 1orrow fro# "ED
an aerage of short6ter# rates e(pected in future * 1u%ing/selling Treasur% securities in #arFet
If short6ter# rates are e(pected to rise in future- interest rate 5 tweaFing resere rates at which 1anFs #ust parF their funds with "ED
Trea!/r5 b#n7H n#4e $r%e! are 'uoted as0
T-b%++! are Jer# #/$an b#n7! Kshort6ter#M
<#/$#n K inflation adOusted par alue D coupan rate / *
On-43e-r/n issues0 #ost recentl% auctioned treasur% issues
Off-43e-r/n issues0 that hae 1een replaced with recentl%
&2en5 b#n7!" issued 1% ES Got) agencies) Those owned 1% Got) are free fro# &redit :isF
<#11er%a+ $a$er" short ter# KZ*4+M
;/re E,$e4a4%#n! 43e#r5" %ield of a particular #aturit% is
%ields on longer #aturit% will 1e higher as co#pared to short6ter# 3 persuading 1anFs to alter their lending policies
therefore- the %ield cure will 1e upward sloping
S$#4 ra4e!H YTM"
holding longer ter# 1onds YTM K IRR f#r a b#n7
incase of se#i6annual 1ond- AT! 8 * D I:: as such needs to 1e annuali9ed
spot rate 8 appropriate discount rate to calculate PJ of
and de#and Kwillingness to lendM deter#ines e'uili1riu# indiidual future pa%#ent
%ields for arious long/short ter# #aturities a nu#1er of spot6rates Kone for each coupan and pa%1acFM
are used therefore to co#pute PJ/price of the 1ond
with an addition that inestors can 1e #oed fro# their preferred Fr#1 YTMH 5#/ an a+/+a4e b#n7A! /rren4 $r%e an7 *%e-*er!a
#aturit%/%ield range if %ield is sufficientl% higher Q) ?- pg6 ?+
V&LU&TION OF DEDT SE<URITIES =;C 84 -
Steps to aluation0 if AT! 8 coupon rate- 1ond is selling at par
esti#ate cashflows
deter#ine appropriate spot discount rates 9ero coupon 1onds are alwa%s alued using
calculate PJ of all &"s !e1%-ann/a+ 7%!#/n4 ra4e! an7
!e1%-ann/a+ 7%!#/n4%n2
Pro1le#s in esti#ating cashflows0
unpredicta1le principal repa%#ent strea#s i)e) a B6#onth spot rate of 4= would #ean that
coupon pa%#ents are not certain for ":Ns- default risF a 9ero coupon 1ond after B6#onth will %eild 4/* 8 5)>=
1ond is conerti1le- has an option
5%e+7 #n a r%!F5 b#n7 Conds in general are paid se#i6annuall% so
8 %eild on default6free 1ond U risF pre#iu# se#i6annual rates 8 AT!/* should 1e used
DEYH E&Y De!r%$4%#n
Cond6e'uialent Aield assu#es B6#onthl% coupons) So it can 1e seen as se#i6annual AT!
Howeer- if 1ond is paid annuall%- K.UCEA/*M 8 SQ:TK.U annual AT!M
E$A 6 effectie annual %ield of an annuall% paid 1ond 8 annual AT!
for se#i6annuall% paid 1ond- K.UE$AM 8 SQE$:EK.UCEA/*M
YIELD ME&SURESH S;OT R&TESH &ND FORW&RD R&TES
$// :$TES NEED T@ CE $NNE$/IRED $"TE:
&@!PET$TI@N)
8 [par alueN stated coupon rate \ / current 1ond price SI!I/$:/A- $// :$TES NEED T@ CE :EDE&ED-
since current %ield is 1ased on annual interest inco#e IN &$SE @" SE!I6$NNE$/ P$A!ENTS
current %ield is sa#e for se#i6annual/annual 1ond ED&EPT "@: SE!I6$NNE$/ DIS&@ENT :$TE
AT&- ATP are calculated with call/put price as "J and first
opportunit% to call as #aturit% date
AT& Z AT!- when 1ond is selling at a pre#iu# to call price- hence it is used as true %eild
ATP X AT! when 1ond is selling at a discount to put price- hence used as true %ield
Re%n*e!41en4 %n#1e"
calla1le price range howeer- and refunding isnQt 8 co#pounded return 6 Kcapital gain U couponM
allowed till a future date
AT: uses call price and first calla1le date when refunding D##4!4ra$$%n2 $r#e!!
protection ends
L%1%4a4%#n! #f YTMH YT<H YT;L
assu#es coupon re6inest#ent at AT!
doesnQt account for re6inest#ent risF
L%@/%7%45 $referene 43e#r5" inestors re'uire risF pre#iu# for
#easured with L%@/%7%45 $re1%/1
MarFe4 !e21en4a4%#n 43e#r5" suppl% Kwillingness to 1orrowM
;referre7 3ab%4a4 43e#r5" follows #arFet seg#entation thoer%
!$#4 ra4e! are alwa%s annual
</rren4 5%e+7" looFs onl% at annual interest inco#e
8 ann/a+ coupon pa%#ent / current 1ond price
Y%e+7 4# Ref/n7%n2 is used in situation where 1ond is in
ME&SUREMENT OF INTEREST R&TE RISKS
price sensitiit% of an e#1edded option 1ond Kw)r)t) interest ratesM
is lesser than that of an option6free 1ond
Effectie Duration 8
effectie duration will 1e positie) If %ou want to co#pute change in prices- it would 1e as follows0
change in price 8 66 effectie duration N Kchange in %ieldM
an increase in %ield will cause decrease in price
F+#a4%n2 ra4e !e/r%4%e! F/++ =7%r45? ;r%e
coupan rate aries as reference rate changes includes accrued interest
reference rateK/IC@:M U #argin "ull Price 8 &lean Price U $ccrued interest
In*er!e f+#a4er
coupan rate 8 D 6 :eference rateK/IC@:M &u# coupan 6X with right to ne(t coupan
Inf+a4%#n-%n7e,e7 b#n7! E( coupan 6X without right to ne(t coupan
coupan 8 D U &PI
If issuer is in default- 1ond will trade
initial coupans are deferred for specified period F+#a4%n2 ra4e !e/r%4%e! G%43 without accrued interest
&oupans accrue- paid as lu#psu# at period end cap- floor- collar
O$4%#n! 4# %!!/er =b#rr#Ger? &ap is e'uialent to a series of
faours issuer- higher coupan therefore interest rate call options fro# a 1roFer/1anF with securities as collateral
are alued lower 8X higher %ield as co#pared to Is regulated 1% SE& in ter#s of = of 1ond alues)
other non6option 1onds Kother things sa#eM "loor is e'uialent to a series of
interest rate put options
no fi(ed pa%#ent schedule though arrange#ent when an institution sells a securit% with a co##it#ent to 1u%
it 1acF at a specified KhigherM price
a specified price prior to #aturit% K1u%ing price 6 selling priceM accounts for the interest Krepo rateM charged 1% the lender K1u%erM
&e+era4e7 !%nF%n2 f/n7 $r#*%!%#n! repo rate 8 annuali9ed = difference 1etween 1u%ing and selling price
repo rate Z 1anF rate in case of #argin loan
lesser risF to lender 1ecause he owns securit% as against haing a clai# on collateral
not regulated 1% "ed
&hanges in interest rates will cause %ield cure to shift parallel%
Non6parallel shift happens 1ecause long6ter# inest#ents #a% re'uire
D%!a7*an4a2e! #f a++ab+e #r $re$a5ab+e !e/r%45
price is less sensitie to interest rate changes as . uncertaint% a1out cashflow ti#ings as it could 1e called
co#pared to fi(ed6coupan 1ond) * calling- prepa%#ent is #ore pro1a1le with declining interest rates
Price will 1e 1acF to par at eer% reset) 5 #ore principal is returned when there are lesser e(citing reinest#ent opps)
Mar2%n b/5%n2
;re$a51en4 #$4%#n!" Oust liFe loans Re$/r3a!e a2ree1en4
<a++ #$4%#n0 right to 1u% issue at
<a$!0 #a(i#u# on coupan rate for floating rate 1ond M#!4 #f 43e b#n7 f%nan%n2 %! 7#ne *%a re$/r3a!e a2ree1en4!
$s coupan rate of a f+#a4%n2 ra4e !e/r%45 changes
Howeer- greater the reset period- higher the interest 3 1ecause of lesser sensitiit% to interest rates- prices appreciate less
Presence of a cap increases Interest :ate risF L%@/%7%45 r%!F"
as price would start fluctuating 1e%ond cap . inestor wants higher %ield in case of lesser li'uidit%
*
5 1ecause securities are used as collateral- !T!
price6%ield cure is positiel% cone( towards origin 8X Ue %ield change will reduce 1eco#es a challenge in case of lesser li'uidit%
price less- than 6e %ield will increase price) This is good for 1ond holders 3 lower aluation can lead to higher cost of capital
another interpretation is that as %ield increases- prices decrease at a lesser rate
si#ilarl%- as %ields decrease prices increase at a faster rate Y%e+7 V#+a4%+%45 r%!F"
Higher %ield olatilit%
In case of a calla1le 1ond- 1e%ond certain point- as %ield decreases- price increase . 8X #ore call pro1a1ilit% 8X lesser price lender will 1e willign to pa% for a calla1le 1ond
at a lesser rate K1ecause of negatie cone(it%MPthis is 1ecause closer it gets * 8X #ore put pro1a1ilit% 8Xhigher price lender will 1e willing to pa% for a puta1le 1ond
to the call price- higher is the call pro1a1ilit%) M#re re-%n*e!41en4 r%!F G3en"
$nother wa% to looF at this is- as price of a calla1le 1ond is er% less- it 1ehaes coupon is higher
it has call feature
@nl% at lower %ields- cure shows 6e cone(it% it is an a#orti9ing securit%
contains prepa%#ent option
Since ES Got) doesnQt issue +6coupon notes/1onds
Inest#ent 1anFers create strips deried fro# #ortgage passthru certs)
&oupan Strips0 strips created fro# coupan
Principal Strips0 strips created fro# prinicipal pa%#ents until it is co#pletel% paid off
pa%#ent stripped fro# original securit%
continous change of par- updated par used to calc) ne(t coupon S4r%$! !#+7 a! Jer#-#/$#n b#n7! co#pletel% paid off- 1e%ond that all princ)
at #aturit% inflation adOusted face alue is gien 1acF pa%#ents till it is co#pletel% paid
#ortgage passthrough paid) Ce%ond that all princ)
&!@ $ND stripped !CS pa%#ents till it is co#pletel% paid
M#r42a2e $a!!43r#/23 !e/r%45" Tranche . has lesser e(pected #aturit%
Got) sponsored enterprises are priatel% owned KSallie!ae- "reddie!ac- "annie!aeM and hae so#e credit risF all pa%#ents are passed through to inestors Tranche 5 has lesser prepa%#ent risF
interest- prepa%#ent- closures
<D!" &!!e4 baFe7 !e/r%4%e!
issued in specific deno#)
for a specified period
insured 1% "DI& upto .++-+++ $CS therefore donQt hae CanFruptc% risF
Ne2#4%ab+e <D!I
can 1e sold in secondar% #arFet
E,4erna+ re7%4 en3ane1en4!"
DanFerA! ae$4ane!" &orporate guarantee
guarantee 1% a 1anF that a loan will 1e paid CanF letter
t%picall% used in cross61order trades Cond insurance
issued as a pure discount securit% 1% corp) haing strong credit ratings
no actie secondar% #arFet and are hold till #aturit%
FED 1ana2e! !3#r4-4er1 ra4e! b5" &b!#+/4e 5%e+7 !$rea7 I1$a4 #f e1be77e7 #$4%#n! #n 5%e+7 !$rea7!
tweaFing discount rates at which 1anFs 1orrow fro# "ED 8 %ield on higher %eild 1ond 6 %ield on lower %ield 1ond
1u%ing/selling Treasur% securities in #arFet Re+a4%*e 5%e+7 !$rea7
tweaFing resere rates at which 1anFs #ust parF their funds with "ED 8 a1solute %ield spread / %ield on 1ench#arF 1ond
lesser li'uidit% also increases b%7-a!F !$rea7
<MO K&ollaterali9ed !ortgage @1ligatiosnM
Tran3e I0 receies interest and all principal
inflation adOusted par alue D coupan rate / * Tran3e II" receies interest till TrancheI is
issues0 #ost recentl% auctioned treasur% issues "redie!ac-"anie!ae issue 3 45$e! #f MDS" Tran3e III0 onl% interest till Tranche II is
issues0 that hae 1een replaced with recentl%
S;V - separate legal entit% to which corporate +e2a++5
!e++! financial assets for an $CS issue
!otiation of $CS is to re7/e b#rr#G%n2 #!4!
$ll else sa#e- inestors would re'uire
persuading 1anFs to alter their lending policies
8 su1Oect 1ond %ield / %ield on 1ench#arF 1ond
<re7%4 !$rea7"
is %ield spread 1etween two 1onds that are e'ual in all
incase of se#i6annual 1ond- AT! 8 * D I:: as such needs to 1e annuali9ed respect e(cept credit ratings
spot rate 8 appropriate discount rate to calculate PJ of
a nu#1er of spot6rates Kone for each coupan and pa%1acFM
are used therefore to co#pute PJ/price of the 1ond
Fr#1 YTMH 5#/ an a+/+a4e b#n7A! /rren4 $r%e an7 *%e-*er!a
Va+/a4%#n a$$r#a3e!"
Tra7%4%#na+ a$$r#a3
get AT! of a 1ond si#ilar in ter#s of risFs- #aturit% characteristics
use this AT! as a discount rate to discount coupon- principal &"s
&rb%4ra2e-free *a+/a4%#n a$$r#a3
discount each &" using a Discount :ate specific to #aturit% of that &"
i)e) a B6#onth spot rate of 4= would #ean that these discount rates are called Spot :ates and are actuall% AT! rates of
a 9ero coupon 1ond after B6#onth will %eild 4/* 8 5)>= 9ero6coupon 1onds haing sa#e #aturit% as the &" under aluation
It sa%s all else e'ual- alue of T61ond 1ased on spot rates #ust 1e e'ual to the PJ of
3 !#/re! #f re4/rn! %f b#n7 %! 3e+7 5n4%++ 1a4/r%45"
coupon interest pa%#ents
recoer% of principal- alongwith an% capital gain
re6inest#ent inco#e
:egardless of re'uired %ield- 1ond price will conerge to par alue as !aturit% approaches No#inal spread 8 AT!1ond 6 AT!treasur%1ond
$// :$TES NEED T@ CE $NNE$/IRED $"TE: If its selling at discount- 1ond price will increase as #aturit% approaches to par alue
Jer# *#+a4%+%45 !$rea7" =E-!$rea7?
SI!I/$:/A- $// :$TES NEED T@ CE :EDE&ED- %earl% spot rates on treasur% are not the right rates to #easure alue of a risF% 1ond
1ecause we are not taFing into account the risF pre#iu#) R6spread is that constant
ED&EPT "@: SE!I6$NNE$/ DIS&@ENT :$TE spread on top of local spot rates- for which PJ 8 su# of discounted cashflows
Steeper spot rate cure is- higher the difference 1etween no#inal spread and 96spread
The earlier 1ond principal is paid- higher the spreads)
$ calla1le 1ond has higher %ield as co#pared to an option6free 1ond
and therefore- a higher no#inal or 96spread
8 co#pounded return 6 Kcapital gain U couponM @ption6adOusted Spread K@$SM is spread w)r)t) Treasur% 1ond that the 1ond will hae
if it were option6free
t8+ t8)> t8. t8.)> t8* t8*)> t85 t85)>
"irst &all alue 8 .+* refunding protection ends
Y%e+7 ra4%# $ll else sa#e- 1orrowers would 1e gie
L%@/%7%45 %1$a4"
&f4er Ta, Y%e+7 8 K. 6 ta( rateM N ta(a1le %ield
all parts) If this is not the case- there is an
AT& would use N83 K*N*MS "J 8 .+*) AT& to 1e calculated onl% when 1ond is trading at per#iu#
AT: K%eild to refundingM calculated when 1ond is currentl% calla1le 1ut canQt 1e refunded 1ecause of protection
assu#ing price is 1e%ond .+*- in that case- "J 8 call price- N 8 ti#e left for refunding protection
price sensitiit% of an e#1edded option 1ond Kw)r)t) interest ratesM
is lesser than that of an option6free 1ond
Effectie Duration 8
effectie duration will 1e positie) If %ou want to co#pute change in prices- it would 1e as follows0
change in price 8 66 effectie duration N Kchange in %ieldM
an increase in %ield will cause decrease in price
&all proisions gie issuer a right to call the 1ond
"ull Price 8 &lean Price U $ccrued interest call protection i))e period 1efore which 1ond canQt 1e called
&u# coupan 6X with right to ne(t coupan
E( coupan 6X without right to ne(t coupan
fro# a 1roFer/1anF with securities as collateral
Is regulated 1% SE& in ter#s of = of 1ond alues)
arrange#ent when an institution sells a securit% with a co##it#ent to 1u%
it 1acF at a specified KhigherM price
K1u%ing price 6 selling priceM accounts for the interest Krepo rateM charged 1% the lender K1u%erM
repo rate 8 annuali9ed = difference 1etween 1u%ing and selling price
repo rate Z 1anF rate in case of #argin loan
lesser risF to lender 1ecause he owns securit% as against haing a clai# on collateral
not regulated 1% "ed
In4ere!4 ra4e r%!FH 7/ra4%#nH !en!%4%*%45
$ll rest e'ual- a 1ond haing longer #aturit% will hae
higher = change in alue for a gien change in interest rates
This is 1ecause of the intrinsic alue i)e) ]PJcouponUPJprincipal
at the #arFet rate of interest
Sii#ilarl%- 1ond haing higher coupan will hae lesser = change
in price with a gien change in interest rates
this is 1ecause of the ^si9e of change w)r)t) CondQs interest rate^
calling- prepa%#ent is #ore pro1a1le with declining interest rates @nl% !aturit% increases Duration Kie) Interest rate risFM
#ore principal is returned when there are lesser e(citing reinest#ent opps) alue of option 1onds is less sensitie as the% hae a price li#it
$fter the call period- 1ond is /rren4+5 a++ab+e
Cond with call option hae 3%23er #/$an
N#n ref/n7ab+e b#n7! canQt 1e called
Mar2%n b/5%n2 inoles 1orrowing funds for 1u%ing securities
Re$/r3a!e a2ree1en40
M#!4 #f 43e b#n7 f%nan%n2 %! 7#ne *%a re$/r3a!e a2ree1en4! as0
1ecause of lesser sensitiit% to interest rates- prices appreciate less Duration 8 66 K= change in 1ond priceM
K= change in %ieldM this isnQt = of percent
e'ual to its %ears to #aturit%
the ne(t reset date
indiidual 1ondQs duration
8X #ore call pro1a1ilit% 8X lesser price lender will 1e willign to pa% for a calla1le 1ond
8X #ore put pro1a1ilit% 8Xhigher price lender will 1e willing to pa% for a puta1le 1ond
S4r%$$e7 MDS
either principal6onl% KP@M or interest6onl% strip KI@M
P@ strips gain with prepa%#ent as face alue is receied 1efore #aturit%
I@ strips lose with prepa%#ent as lesser interest is paid 1ecause of lesser principal outstanding
M/n%%$a+ b#n7!"
co#pletel% paid off- 1e%ond that all princ)
and parFed in escrow account) $#ount sufficient to pa% for 1onds &"s
secured de1t- unsecured de1t- senior de1t- su1ordinated de1t
collateral is an underl%ing pool of other de1t instru#ents
Tranches are created 1ased on clai# seniorit% of &"s fro# these instru#ents
I1$a4 #f e1be77e7 #$4%#n! #n 5%e+7 !$rea7!
this is 1ecause of the calling option aaila1le to 1orrower should 1ond price
go a1oe striFe price there1% 1enefitting the 1orrower
D/ra4%#n #f a Jer# #/$an b#n7 is appro(i#atel%
D/ra4%#n #f a f+#a4er is e'ual to fraction of an %ear till
D/ra4%#n of a portfolio is !arFet6Weighted aerage of
CO =2enera+ #b+%2a4%#n? b#n7!" 1acFed 1% ta(ing power of issuer
Re*en/e b#n7!" 1acFed 1% reenue generated 1% proOect
;ref/n7e7 b#n7!" 1onds for which treasur% securities hae 1een 1ought
<DO Kcollaterali9ed de1t o1ligationM0
$ll else sa#e- inestors would re'uire 3%23er 5%e+7 #n a a++ab+e b#n7
this is 1ecause of the put option aaila1le to inestor should 1ond price
go down 1elow striFe price there1% 1enefitting the inestor
Va+/a4%#n a$$r#a3e!"
Tra7%4%#na+ a$$r#a3
get AT! of a 1ond si#ilar in ter#s of risFs- #aturit% characteristics
use this AT! as a discount rate to discount coupon- principal &"s
&rb%4ra2e-free *a+/a4%#n a$$r#a3
discount each &" using a Discount :ate specific to #aturit% of that &"
these discount rates are called Spot :ates and are actuall% AT! rates of
9ero6coupon 1onds haing sa#e #aturit% as the &" under aluation
It sa%s all else e'ual- alue of T61ond 1ased on spot rates #ust 1e e'ual to the PJ of
3 !#/re! #f re4/rn! %f b#n7 %! 3e+7 5n4%++ 1a4/r%45"
coupon interest pa%#ents
recoer% of principal- alongwith an% capital gain
re6inest#ent inco#e
No#inal spread 8 AT!1ond 6 AT!treasur%1ond
Jer# *#+a4%+%45 !$rea7" =E-!$rea7?
%earl% spot rates on treasur% are not the right rates to #easure alue of a risF% 1ond
1ecause we are not taFing into account the risF pre#iu#) R6spread is that constant
spread on top of local spot rates- for which PJ 8 su# of discounted cashflows
Steeper spot rate cure is- higher the difference 1etween no#inal spread and 96spread
The earlier 1ond principal is paid- higher the spreads)
$ calla1le 1ond has higher %ield as co#pared to an option6free 1ond
and therefore- a higher no#inal or 96spread
@ption6adOusted Spread K@$SM is spread w)r)t) Treasur% 1ond that the 1ond will hae
if it were option6free
refunding protection ends
$ll else sa#e- 1orrowers would 1e gie +#Ger 5%e+7 #n a $/4ab+e b#n7
L%@/%7%45 %1$a4" less li'uid the 1ond is- higher the %ield re'uired would 1e
all parts) If this is not the case- there is an arb%4ra2e #$$#r4/n%45
AT& would use N83 K*N*MS "J 8 .+*) AT& to 1e calculated onl% when 1ond is trading at per#iu#
AT: K%eild to refundingM calculated when 1ond is currentl% calla1le 1ut canQt 1e refunded 1ecause of protection
assu#ing price is 1e%ond .+*- in that case- "J 8 call price- N 8 ti#e left for refunding protection
ORC&NISINC &ND FUN<TIONINC OF SE<URITIES M&RKETS =;C 153?
&haracteristics of well functioning securities #arFes0 Pri#ar%/Secondar% #arFets &all and continuous #arFets E(change #e#1ership T%pes of orders
ti#el% and accurate infor#ation IC proide co#petitie 1ids- 1est efforts- negotiations &all #arFets0 stocF traded onl% at specifc ti#es specialist0 controls the li#it order 1ooFs- !arFet orders0 1u%/sell at 1est al) Price i##ediatel%
li'uidit% &ontinuous #arFets0 trades occur an%ti#e #arFet is open posts 1id/asF prices- trades for his own account /i#it orders0 1u% at a price lesser than currentS
internal efficienc% 6 low transaction costs prices are set either 1% auction process or dealer 1id/asF 'uotes co##ission 1roFer0 e(ecutes custo#er trades sell at a price a1oe current
infor#ational efficienc% 6 prices adOust rapidl% to new info) these n/ws #atch large 1u% and sell orders for a 1roFerage fir# ti#efra#e associated with order
floor 1roFer0 act as freelancer 1roFers for other Short sale orders0 sell now and 1u% later
S3#r4-!e++ r/+e!" Initial !argin0 = #one% inestor should initiall% hae in the account co##ission 1roFers Stop loss orders0 order to sell if price hits a lower al)
EpticF rule !aintenance #argin0 = #one% inestor should hae in the account post purchase registered trader0 trade for their own accounts order to 1u% if price hits a higher al)
short seller #ust pa% all diidends due to lender of securit% 4r%22er $r%e K ;# =1 - %n%4%a+ 1ar2%n?9 =1 - 1a%n4enane 1ar2%n? stoploss 1u% in general results fro# short6sell
short seller #ust deposit collateral to guarantee eentual repurchases of securit% CroFer starts with ^.6initial #argin^ contri1ution and doesnQt want to go 1e%ond ^.6#aintenance #argin^
SE<URITY M&RKET INDEMES
;r%e-Ge%234e7 %n7e, MarFe4 Va+/e-Ge%234e7 %n7e, UnGe%234e7 %n7e, #r e@/a+ Ge%234e7 %n7e, S#/re an7 D%re4%#n #f D%a!
$erage of current stocF prices Su# of Ktotal outstanding alue of stocFsM Cased on = returns- worFing on = price changes Price6weighted 1ias0 larger high6growth fir#s hae an adantage oer s#all low growth fir#s
In case of stocF6split- deno#inator is diided 1% a si#ilar su# calculated at 1ase period as the% can split their stocFs) $s a result- low growth fir#s will lose weight
adOusted while Feeping inde( alue sa#e !ultiplied 1% inde(Qs 1ase alue K.++M $rith#etic #ean0 ]Di / n where Di 8 return Jalue6weighted 1ias0 fir#s haing larger #arFet cap hae greater i#pact on the inde(
fir# haing higher price has higher i#pact fir# haing greater #arFet cap has greater i#pact on the #Ft) Geo#etric #ean0 Enweighted/e'ual weighted inde(0 usage of Geo#etric !ean will cause a downward 1ias as co#pared to $rith#etic !ean
$ll inde( returns e(clude diidends K =</rren4 %n7e, *a+/e 9 ba!e *a+/e?N1))
it is not aerage of current inde( alue where Di 8 K. U HP:M 8 PricetU. / Pricet Cond Inde(es0 #ore difficult as .) 1ond unierse is #uch 1roader- changes constantl% due to wide ariet% of new issues
;RI<E-OV&LUE-ORETURN New inde( price 8 @ld inde( price U change in inde( alue 1ond #aturities- calls and sinFing funds- 5)) /acF of continuous data
EFFI<IENT <&;IT&L M&RKETS =;C 178 ?
Efficient #arFet 8X "or#s of Efficient #arFet h%pothesis KE!HM0 WeaF-f#r1 4e!4 #f EM." Se1%-!4r#n2 f#r1 4e!4 #f EM. S4r#n2-f#r1 4e!4 #f EM."
current prices reflect all info) $l) Including risF statistical tests for independence oer ti#e e#phasis on finding if a1nor#al results possi1le No group of inestors hae access to
stocF prices adOust 'uicFl%Uco#pletel% to new info) aaila1le securit% #arFet infor#ation returns are not significantl% correlated oer ti#e . /na7P/!4e7 -O Ra4/a+ - R1F4 priate infor#ation that would allow
Eff%%en4 1arFe4 a!!/1$4%#n! )8X No e(cess returns 1% technical anal%sis stocF price changes are independent oer ti#e * risF adOusted 6X :actual 6 [:": U _K:#Ft 6 :":M\ group to consistentl% earn a1nor#al returns
large no) of people anal%sing- aluing securities independenl% Trading rule tests0 It assu#es that all info is free and is al) To all at the sa#e ti#e
new info) co#es rando#l% and independentl% aalia1le securit% #arFet infor#ation #echanical rules 1ased on price data donQt earn a1nor#al long6ter# returns oer ti#e
inestors adOust prices rapidl% in response to infor#ation )8X No e(cess returns 1% "unda#enta/technical anal%sis a1nor#al results taFing transaction costs into accnt) hae #ade a1nor#al profits
e(pected returns i#plicitl% incldues :isF inoled doesnQt out6perfor# 1u%6and6hold on a risF6adOusted 1asis returns done after announce#ent of signification pu1lic infor#ation
No assu#ption around correctness of adOust#ent aalia1le securit% #arFet infor#ation li#it orders- the% hae #anaged to earn
)8X no group has aaila1ilit% of #onopolistic infor#ation a1nor#al returns 1ased on anal%sing cross6 a1oe6aerage returns
and therefore- no6one can hae a1nor#al e(cess returns sectional data liFe P/E- diidend %ield etc)
asu#e that #arFets are efficient and securit%Qs influence #arFets
MarFe4 ana1#+%e! ref/4%n2 EM. O*era++ <#n+/!%#n #n EM. returns lie around S!/
$fter incorporating transaction costs- #anaged to #atch perfor#ance of si#ple
adOusted stocF prices to reflect earnings surprises larger risF6adOusted returns than larger fir#s si#ple trading rules canQt generate a1nor#al returns <#n+/!%#n!I 1u%6and6hold polic%
as fast as would hae 1een e(pected 1% se#i6strong E!H Perfor#ance should 1e #easured against a 1u%6and6hold strateg% of stocFs within sa#e risFclass
M%,e7 re!/+4! f#r !e1%-!4r#n2 f#r1" $s it #a% 1e possi1le to #aFe a1oe6aerage retuns 1% selecting s#all cap fir#s- high 1ooF/#arFet alue
no) of anal%sts following the# hae a1nor#all% eent studies strongl% support SS E!H so selecting appropriate fund #anager can help
inestor can 1enefit 1% 1u%ing stocFs at %ear6end and selling high returns Inest in Inde( funds
the# in first weeF eidence that #arFets are not alwa%s efficient
WeeFend6effect shows that a) :eturns for weeFda%s is Ue $part for Insiders and Specialists
1ut 6e return is associated with "rida% close to !onda% open of 1ooF/#arFet alue- lower the return re!/+4! !/$$#r4 S4r#n2-f#r1 EM.
to #arFet while higher P/E hae inferior returns
De3a*%#ra+ F%nane O*er#nf%7ene b%a!" <#nf%r1a4%#n b%a!" E!a+a4%#n b%a!
E(pected utilit% theor%0 decisions are #ade onl% on the 1asis of possi1le outco#es and risF inoled anal%sts hae 1een found to 1e oer6confident People seeF out infor#ation after #aFing a decision tendenc% of inestors to co##it #ore funds to a position that
Prospect theor%0 indiiduals ranF risF% outco#es 1ased on where the outco#e lies w)r)t) so#e w)r)t) growth co#paines and aoid/ignore new info) That 'uestions that decision has gone down 6 called ^$eraging^
reference point K)e)g) initial wealthM the% oer6e#phasi9e good news This can e(tend to prior 1eliefs To agree that original anal%sis was flawed is generall% downpla%ed in
!otiation for prospect theor% is a finding that indiiduals are0 downpla% 1ad news faour of #ore6co#pelling 1u%
risF aerse when it co#es to gains $nd this #aFes the# aerage too often- escalating their positions
prefer risF when faced with uncertain losses
M&RKET EFFI<IEN<Y &ND &N&MOLIES =;C 1(3 ?
3 +%1%4a4%#n! 4# eff%%en4 1arFe4!" F#/r $r#b+e1! 43a4 $re*en4 arb%4ra2e/r! #rre4 $r%e! Rea!#n! f#r 6/!4%f%e7 ana1#+%e! D%a! %n abn#r1a+ re4/rn! e!4%1a4%#n
processing infor#ation taFes ti#e and cost there isnQt an% guarantee around when Kif at allM #ispricings will a) s#all fir#s are persistentl% under6priced @:
if prices adOust within hours- #arFet is efficient otherwise not 1e corrected f%r1A! Q 1a5 n#4 %n+/7e !#1e r%!F Suriorship 1ias
s#arter- efficient anal%sts are co#pensated as the% No two securities hae e(act sa#e risF associated with fir#Qs si9e Sa#ple selection 1ias
ealuate infor#ation and funda#entals fast enough The% hae li#ited funds) This #eans onl% #ore significant this would lead to &$P! proOecting lesser S#all sa#ple 1ias
inefficient prices #a% persist 1ecause of transaction costs pricing differences are e(ploited while others are risF and return non s%nchronous trading
1ecause of higher short6sell transaction costs- stocFs allowed to persist 1) Strateg% risF0 if strateg% is 1ased on *+ %r returns-
can re#ain #ore oeralued as co#pared to &apital proiders #a% place li#its on ar1itrage trades a1nor#al results #a% 1e possi1le in onl% a few of
underalued stocFs as creation of long position has the#
low transaction costs :easons wh% a price #isfit
ar1itrage #a% not necessaril% 1ring efficient prices
thinF a1out a short6co#pan% who is taFen oer at a higher price
In4r#7/4%#n 4# !e/r%45 *a+/a4%#n an7 %n7/!4r5 ana+5!%! =;C 2)3 ?
aluation techni'ues preferred %ield is lesser than highest grade 1onds %ields
1ased on PJ of future cashflows
1ased on so#e #ultiple of fir#Qs e(pected
perf) e)g) EPS- Sales per share
3r7 1arFe4!" @T& #arFets
443 1arFe4!=E<N!?" sere retail 1roFers and institutional traders
<3an2e %n *a+/e #f %n7e, can 1e calculated as0
T#4a+ re4/rn %n7e, assu#es re6inest#ent of diidend
WeaF-f#r1" prices full% reflect a++ /rren4+5
Se1%-!4r#n2 f#r1" prices full% reflect a++ $/b+%+5 T%1e-!er%e! 4e!4!" is it possi1le to predict
Tests indicate that In!%7er Tra7er!
E*en4 !4/7%e! is it possi1le to derie a1nor#al
S4r#n2-f#r1" prices full% reflect a++ $/b+%9$r%*a4e $s e,3an2e !$e%a+%!4! hae access to
<r#!!-!e4%#na+ 4e!4! is it possi1le to predict
Se/r%45 ana+5!4! hae #anaged to
;r#fe!!%#na+ 1#ne5 1ana2er! ^hae not^
Earn%n2 !/r$r%!e! 4# $re7%4 re4/rn!" #arFets haenQt S1a++-f%r1 effe40 s#all fir#s consistentl% earn
Hence- re!/+4! !/$$#r4 GeaF-f#r1 EM.
Ne2+e4e7 f%r1 effe40 fir#s that hae onl% s#all
<a+en7ar !4/7%e!" Due to ta(6induced trading at %ear6end- an
4%1e-!er%e!H r#!! !e4%#na+ 4e!4! gie
D##F *a+/e9MarFe4 *a+/e ra4%#!0 greater the ratio
;9E ra4%#!" low P/E ratio stocFs e(perience higher returns relatie
7a4a 1%n%n2 b%a!" statistical errors can i#pact return esti#ations
Cenera+ <a+/+a4#r 2/%7e+%ne!
alwa%s read all the options especiall% in su1Oectie 'uestions
use e(clusion in su1Oectie 'uestions
e(clude carefull%P)reisit e(clusion in case of confusion
conert to positie state#entsPleast liFel% 6X #ost liFel%) E)g least liFel% incorrect 8X #ost liFel% correct
gie such 'uestions #ore ti#e to reflect carefull%`
in case of #ost6liFel%- least liFel%P)use categori9ation if not too clear on the right option
B/an4
wheneer #ultiple interest rates- confusing Kend/1eginM ti#elines- draw ti#eline
1e careful a1out the pa%#ent durations 6 in case of #onthl%- 'uarterl%- se#i6annual pa%#ents adOust N and I/A accordingl%) Si#ilarl%- adOust those if co#puted 1ased on the pa%#ents #ade
1e careful around when cashflows happen 6 1egin or end of a ti#e
$nnuit% Due is greater than nor#al annuit%
&alculating co#pounded annual growth rate0 should consider onl% the final and initial reenue
PJ/"J calculations follow additiit% principle i)e) PJ of cashflows 8 su# of PJ of indiidual cashflows
degree of confidence- significance lee- degree of freedo#
h%pothesis testing0 sa#ple statistic- h%pothesi9ed alue
"S$
#oe#ent fro# one asset account to another doesnQt i#pact total asset si9e
diff) 1etween trading and al) "or sale securities is how the% handle unreali9ed gains/loss) $"S6Xother co#prehensie inco#e TS 6X inco#e
SEEK $PP:@DI!$TI@N IN D$T$ INTENSIJE QEESTI@NS especiall% around coariance and all 6 T:A S@/JING W/@ &$/&E/$T@:
CE &$:E"E/ $C@ET ST:$IGHT &H@I&ESP!@ST/A TH@SE WI// CE IN&@::E&T
D@NQT $J@ID &H@I&ES TH$T H$S W@:DS WHI&H A@E D@NQT :E/$TE T@PTH@SE &@E/D CE @THE: W$A @" PETTING IT
"i(ed inco#e
while co#puting I:: of a se#i6annual 1ond0 AT! 8 * ( I::
ETHI&S
Feep underlining controersial state#ents- Fe%words- an%thing that sounds fish% in first reading
Goodness checF0 good for profession- good for #arFets- good for clients- good for e#pno%ers
Hurt checF0 who does it hurt0 profession- #arFets- clients- e#plo%ers- 1eneficiaries
/ooF for outside faours- conflicts- trade of one thing against other
catch words liFe CET- H@WEJE:- !$NIPE/$TED
<a+/+a4#r 2/%7e+%ne!
Eer%ti#e %ou set calc to CEGIN- set it 1acF to END after calc)
:egularl% clear the worFsheets
I/A is period interest in percentage)
redo calculations in case the co#puted alue differs significantl% with an% of the choicesPchances are that the data hasnQt 1een inputted correctl%
a1oe is true for 'uestions that has too #an% data points
entering ?= instead of )+? for cashflow/interests in TJ!
M%!4aFe 45$e!"
. 1#!49+ea!4 +%Fe+5
* concepts/Fnowledge
5 tricF
3 calculation co#pleteness
> carelessness
B fatigue
4 language issue
diff) 1etween trading and al) "or sale securities is how the% handle unreali9ed gains/loss) $"S6Xother co#prehensie inco#e TS 6X inco#e Wherneer there are 5 continuous corrects- reiew it again o1Oectiel%
!arF 'uestions with dou1tful responses in .st go
SEEK $PP:@DI!$TI@N IN D$T$ INTENSIJE QEESTI@NS especiall% around coariance and all 6 T:A S@/JING W/@ &$/&E/$T@:
D@NQT $J@ID &H@I&ES TH$T H$S W@:DS WHI&H A@E D@NQT :E/$TE T@PTH@SE &@E/D CE @THE: W$A @" PETTING IT
Feep underlining controersial state#ents- Fe%words- an%thing that sounds fish% in first reading
redo calculations in case the co#puted alue differs significantl% with an% of the choicesPchances are that the data hasnQt 1een inputted correctl%
*
B
*
.
.
Wherneer there are 5 continuous corrects- reiew it again o1Oectiel%
!arF 'uestions with dou1tful responses in .st go
;ROFESSION&LISM
Kn#G+e72e #f +aG =7%fferen4%a4e +aG G%43 be!4 $ra4%eH $+a5 !afe?
E)G) CPG .? e(.-*
In7e$en7ene an7 #bPe4%*%45
M%!re$re!en4a4%#n" RFn#G%n2+5R 1ean! Fn#G! an7 !3#/+7 3a*e Fn#Gn
M%!#n7/4
CPG *B0 .- *-3-4-
CPG 5B0 E(3
INTECRITY OF <&;IT&L M&RKETS
DUTIES TO T.E <LIENTS
+#5a+45H $r/7eneH an7 are
fa%r 7ea+%n2!
suita1ilit%
perfor#ance presentation0 present infor#ation current- clear- co#plete- accurate- no #isrepresentations- eas% to understand for
preseration of confidentialit%
DUTIES TO T.E EM;LOYER
1a4er%a+ n#n-$/b+% %nf#r1a4%#n"
1arFe4 1an%$/+a4%#n"
+#5a+45"
additional co#pensation arrange#ents
re!$#n!%b%+%4%e! #f !/$er*%!#r!
INVESTMENT &N&LYSISH RE<OMMEND&TIONS &ND &<TIONS
diligence and reasona1le 1asis0 diligence- independence and thoroughness supported with appropriate :;D and inestigation in #aFing inest#ents- reco##endations
co##unication with cleints and prospectie clients
record retention
<ONFLI<T OF INTEREST
disclosure of conflicts
priorit% of transactions
referral fees
RES;ONSIDILITIES OF & <F& INSTITUTE MEMDER OR <F& <&NDID&TE
;ROFESSION&LISM
Kn#G+e72e #f +aG =7%fferen4%a4e +aG G%43 be!4 $ra4%eH $+a5 !afe?
follow #ore stricter law or code/standards if law is weaFer of the two
E)G) CPG .? e(.-*
In7e$en7ene an7 #bPe4%*%45
aoid situations that could cause or 1e perceied as loss of independence and o1Oectiit% in reco##eding/taFing inest#ent actions
D@ N@T ESE su1tle/a#1iguous language in reports to circu#ent pressures fro# superisors
Issuer paid research0 potential for conflict of interests) :eport #ust state these potential conficts- including nature of co#pensation
due diligence #eans gathering infor#ation fro# a wide ariet% of sources
anal%sts #ust also distinguish 1etween fact and opinions
M%!re$re!en4a4%#n" RFn#G%n2+5R 1ean! Fn#G! an7 !3#/+7 3a*e Fn#Gn
!EST N@T #aFe an% #isrepresentations relating to inest#ent anal%sis- reco##endations- actions or other professional actiities
$ctual ^SPE&I"I&^ source of the infor#ation #ust 1e cited een though info- is picFed up fro# an inter#ediate source
M%!#n7/4
DoesnQt coer legal transgressions resulting fro# acts of ciil diso1edience in support of personal 1eliefs e)g) noniolent protest
Fnow law)))not necessaril% 1e an e(pert though #ust co#pl% with laws and regulations that directl% goern their worF
responsi1le for oilation if the% participate and/or assist ^KN@WING/A^ or participate ÊNKN@WING/A^ when the% should hae Fnown
the regulation
If a #e#1er has reasona1le ground to 1eliee illegal actiit%- the% !EST disassociate or separate fro# the actiit% after atte#pt to stop
Kreporting to superisor- confronting the personM doesnQt worF) :eporting to regulator% 1odies ISNQT NE&ESS$:A unless #andated 1%
the law
&"$ institute ÊN&@E:$GES^ D@ESN^T :EQEI:E reporting to &"$ Institute of potential oilations
Encourage e#plo%ers to deelop and/or adpot &ode of Ethics- #aFe aaila1le applica1le laws and regulations- and esta1lish
procedures for oilations reporting
e(ternal sources #a% tr% to influence 1% offfering 1enefits) :eOect an% offer of gifts that could 1e e(pected to threaten
independence/o1Oectiit%) Cenefits could include gifts- initation to laish functions- ticFets- faors- Oo1 referrals etc)
!$A $&&EPT C@NESES/ #odest GI"TS as long as such are appreciations and not perceied detri#ental to other cleints @: as
faours seeFing to influence the #e#1er) !EST CE disclosed to e#plo%ers and #ust not 1e perceia1le as causing loss of
o1Oectiit%/independence) So#e client relationships are #ore precarious that others)))discretion should 1e #aintained on the 1asis of
how gifts can 1e perceied
reco##endations #ust cone% #e#1erQs true opinions- free of 1ias fro# internal/e(ternal pressures and 1e stated in clear and
una#1iguous ter#s
In IC- anal%sts and I1anFers can worF together onl% if conflict of interest is carefull% and E""E&TIJE/A !$N$GED $ND DIS&/@SED-
$ND reporting structure #ust 1e separate) $nd :esearch anal%stQs co#pensation shouldnQt 1e linFed to IC assign#ents
CPG *B0 .- *-3-4- 8
#isrepresentations0 o#ission of an% fact- untrue or #iseading state#ent- guarantee of returns unless it is 1uilt into product structure or
for which institution has agreed to coer an% lossesS false i#pression in oral representations)
No plagiaris#0 cop%ing or using otherQs #aterial without per#ission/acFnowledge#entPgie credit where it is due) This holds een for
plain language description of general concepts liFe price/earning ratio- std de etc)
!ust not engage in an% professional conduct inoling dishonest%- fraud- deceit or an% act that reflects adersel% on professional
reputation- integrit%- or co#petence
a1using &"$ institute professional conduct progra# to settle personal- political or other disputes unrelated to professional ethics
CPG 5B0 E(3
INTECRITY OF <&;IT&L M&RKETS
oilation wonQt occur if conclusion is #ade on the 1asis of non6#aterial pu1lic/non6pu1lic infor#ation)
ensure #aterial infor#ation is disse#inated in an e'uita1le #anner
in an% situation- first deter#ine if the infor#ation is pu1lic
as long as stor%/reco##endation is 1uilt on ^#osaic theor%^- its fine and isnQt in iolation
howeer in case of risF6ar1itrage trading- it is 1est to suspend trading actiit%) This is 1ecause potential for illegal profits is greater
doesnQt prohi1it transactions done for ta( purposes e)g) selling and i##ediate 1u%ing
DUTIES TO T.E <LIENTS
+#5a+45H $r/7eneH an7 are
recogni9e higher trust that client shows
fa%r 7ea+%n2!
ensuring sa#e leel of serice to all clients 1ased on what the% are pa%ing for
inest#ents 6 in line with 1locF6allocation policies) Such policies should 1e disclosed to the cleints too
suita1ilit%
reco##endations in line with o1Oecties- constraints) Vudge suita1ilitit% in conte(t of cleintQs co#plete portfolio
KA& 1efore #aFing inest#ent reco##endations and regular updates)
perfor#ance presentation0 present infor#ation current- clear- co#plete- accurate- no #isrepresentations- eas% to understand for
#aintain reco##endations- perf) &alculation data)
preseration of confidentialit%
info) of current- for#er and prospectie clients confidential unless illegal actiities- disclosure re'uired 1% law- or allowed 1% client
DUTIES TO T.E EM;LOYER
1a4er%a+ n#n-$/b+% %nf#r1a4%#n" no inest#ent actiit% 1% self/other relaties on #aterial non6pu1lic infor#ation) Info) IsnQt #aterial if source of info#ration canQt 1e relia1le) Info) !ore a#1iguous the effect on the price- less #aterial the infor#ation is
its co##on for anal%sts to anal%se insider infor#ation liFe new products- capital proOects- co#petitie en)- #err% that up with the rest of
the infor#ation to #aFe a reco##endation
a well6Fnown anal%stQs research report doesnQt fall under this een if his reco##endation changes can cause price fluctuations) $nal%st
isnQt supposed to #aFe this pu1lic as the research is paid for 1% his clients
not all situations where #aterial non6pu1lic infor#ation is al) would warrant ceasing trading actiit% as that itself could 1e seen as
release of #aterial infor#ation e)g) withdrawal of #arFet6#aFing
1arFe4 1an%$/+a4%#n" not engage in practices that distort prices or artificiall% inflate trading olu#es with an intent to #islead #arFets
cleint 1efore e#plo%er and self- deter#ine and co#pl% with fiduciar% dut% as i#posed 1% law/regulation- e(ercise sa#e leel of
prudence- Oudge#ent and care that would 1e applied for own interests under si#ilar circu#stances
prioriti9ation in ter#s of co##unication of info) &an 1e done 1ased on releance to the custo#er Ke)g) onl% long position holders could
1e interested in downgrade reco##endation
+#5a+45" #ust not deprie e#plo%er of the adantage of sFills/a1ilities - diulge confidential infor#ation or otherwise cause har# to e#plo%er
co#pl% with policies and procedures esta1lished 1% e#plo%ers that goern the relationship as long as these donQt conflict with laws-
code/standards
e#plo%ers #ust also adhere to their duties towards e#plo%ess
leaing e#plo%er0 #ust continue to act in e#plo%erQs 1est interestsPensuring no conflicts of interest/serices
whistle61lowing0 when integrit% of capital #arFets and/or clients is co#pro#ised 1% the fir#
nature of e#plo%#ent0 understand ter#s and a1ide 1% those
additional co#pensation arrange#ents
#ust not accept gifts that #ight reasona1l% 1e e(pected to create a conflict of interest with e#plo%erQs interest
re!$#n!%b%+%4%e! #f !/$er*%!#r!
#ust #aFe reasona1le effort to detect/preent iolations
if procedures arenQt good enough- #e#1er should decline to accept superisor% responsi1ilities untill fir# adopts these
esta1lish procedures for record6Feeping and checFs on personal trades
INVESTMENT &N&LYSISH RE<OMMEND&TIONS &ND &<TIONS
co##unication with cleints and prospectie clients
record retention
<ONFLI<T OF INTEREST
disclosure of conflicts
priorit% of transactions
referral fees
RES;ONSIDILITIES OF & <F& INSTITUTE MEMDER OR <F& <&NDID&TE
donQt need to su1ordinate i#portant personal/fa#il% o1ligations to worF) Should enter into a dialouge a1out WC/ when personal #atters
interfere with worF on a regular/significant 1asis
independent practice0 proide notification- description of serices and co#pensation receied and start actiities onl% after receiing
consent
post6leaing- #e#1ers can use sFills/e(perience gained) &lients can also 1e reached out to using pu1lic infor#ation unless there is a
specific agree#ent with the e#plo%er
#ere reporting up the chain of co##and or warning e#plo%ee isnQt enough) Superisors should taFe steps to ensure the oilations are
not repeated such as placing li#its- or increasing #onitoring of e#plo%eeQs actiities
<#1$+%ane $r#e7/re"
In case #e#1er/candidate notices oilation0 !e#1ers and candidates should encourage e#plo%ers to0
. report to superisor
* confront person
5 report to regulator @N/A if re'uired 1% the law
3 @: disassociate 1% reassign#ent
<#1$+%ane $r#e7/re"
<#1$+%ane $r#e7/re!"
not #eant to coer legal transgressions resulting fro# acts of ciil diso1edience in support of personal 1eliefs as these donQt reflect 1adl% on
professional reputation- integrit% or co#petence
cross6firewall co##unication is fine as long it is er% well guarded and #onitored) E)g) 1etween anal%st and inest#ent 1anFing diisions)
inter6firewall co##) Should 1e #anaged 1% the co#pliance officer #1$+%ane $r#e7/re!"
deter#ine if info) is #aterial/non6pu1lic
deter#ine if info) is worF of a paid anal%st
no trading should happen on #aterial/non6pu1lic infor#ation unless the info) Is prepared in6line with #osaic theor%
<#1$+%ane $r#e7/re!
no inest#ent actiit% 1% self/other relaties on #aterial non6pu1lic infor#ation) Info) IsnQt #aterial if source of info#ration canQt 1e relia1le) Info) !ore a#1iguous the effect on the price- less #aterial the infor#ation is
ethics and co#pliance should 1e segregated to ensure 1etter understanding
<#1$+%ane $r#e7/re"
!e#1ers and candidates should encourage e#plo%ers to0
reiew procedures
#aintain current files
esta1lish protocols to handle reporting of oilations
<#1$+%ane $r#e7/re"
#e#1ers- firs# #ust protect integrit% of opinions
li#it gifts to toFen ite#s)
restrict inest#ents
reiew procedures
<#1$+%ane $r#e7/re!"
not #eant to coer legal transgressions resulting fro# acts of ciil diso1edience in support of personal 1eliefs as these donQt reflect 1adl% on
esta1lish procedures so that e#plo%ees are regularl%
infor#ed
restricted list0 if fir# is unwilling to per#it desse#ination of
aderse opinions a1out a corp) client- #e#1ers shuld
encourage re#oal of the fir# fro# research unierse 1%
putting it in restricted list) This !EST CE done in
$NTI&IP$TI@N N@T :E$&TIJE/A
restric special cost arrange#ents0 issuer should not alwa%s
1e hosting #eetings 1etween
written list of fir#Qs aaila1le serices) &ontains wa%s of
descri1ing fir#Qs serices- 'ualiications- and co#pensation)
cross6firewall co##unication is fine as long it is er% well guarded and #onitored) E)g) 1etween anal%st and inest#ent 1anFing diisions)
#1$+%ane $r#e7/re!"
restricted lists- infor#ation 1arriers
restrictions on personal trading
using a co#1ination of watch list and restricted list
no trading should happen on #aterial/non6pu1lic infor#ation unless the info) Is prepared in6line with #osaic theor%
<#1$+%ane $r#e7/re!
shorten ti#efra#e 1etween dissi#ination and decision
si#ultaneous disse#ination
#aintain list of client and its holdings
written and disclosed trade allocation procedures
disclose leels of serice
no inest#ent actiit% 1% self/other relaties on #aterial non6pu1lic infor#ation) Info) IsnQt #aterial if source of info#ration canQt 1e relia1le) Info) !ore a#1iguous the effect on the price- less #aterial the infor#ation is
li#it nu#1er of people inoled who are pri% to
reco##endation change infor#ation
a1out the law
$nnuit% Due is greater than nor#al annuit%
wheneer it gets co#plicated- draw ti#eline
&alculating co#pounded annual growth rate0 should consider onl% the final and initial reenue
PJ/"J calculations follow additiit% principle i)e) PJ of cashflows 8 su# of PJ of indiidual cashflows
"inancial State#ents and anal%sis
Direct6#ethod 'uestions at ti#es proide infor#ation on depreciating e(penses) Depreciation e(penses 1eing non6cash charges are not considered in direct #ethod
Non6cash transactions e)g) write6off- depreciation- a#orti9ation are not ^classified^ as cashflows as no cash transaction is inoled) Such donQt need to 1e added/su1tracted unless calculation 1ase is Net Inco#e
howeer- non6cash transactions #ust 1e added to Net Inco#e while co#puting &"@ as such get deducted in Inco#e State#ent while arriing at Net Inco#e
PPE transactions are part of Inesting &ashflow howeer in inco#e state#ent an% gain KlossM on sale of PPE is accounted for while co#puting Net Inco#e hence such needs to 1e reduced KaddedM while co#puting &"@ using Indirect #ethod
While calculating &"@ supplier- a#ort/depreciation doesnQt need to 1e added to &@GS
While calculating &""- 1e careful of adOusting diidends
while calculating turnoer ratios- re#e#1er aeraging out the deno#inator
Econo#ics
elasticit% uses aerage alues
"i(ed inco#e
se#i6annual pa%#ents
spot rate- AT!- CEA calcs
Direct6#ethod 'uestions at ti#es proide infor#ation on depreciating e(penses) Depreciation e(penses 1eing non6cash charges are not considered in direct #ethod
howeer- non6cash transactions #ust 1e added to Net Inco#e while co#puting &"@ as such get deducted in Inco#e State#ent while arriing at Net Inco#e
contra account
contra account
contra account
contra account
$SSET 8 /I$CI/ITIES U &@NT:ICETED &$PIT$/ U $DDN/) P$ID IN &$PIT$/
U CEGINNING :TND E$:NINGS U :EJENEE 6 E$:NINGS 6 DIJIDEND
diff in cash 8 total cashflow
calc &"@- &"I- &"" 1oth using direct indirect #ethods
see how depreciation is ignored in direct #ethods
also looF at ite#s considered in &""- &"I
diidends paid are part of &"" all others are &"@
increase in asset 8 use of cash
calc &"@- &"I- &"" 1oth using direct indirect #ethods
see how depreciation is ignored in direct #ethods
diidends paid are part of &"" all others are &"@
GENE:$/ "END$!ENT$/S
a1#/n4 a4 G3%3 %4e1! are re$#r4e7 %n f%nan%a+ !4a4e1en4! Going concern 1asis 6 fir# will continue to e(ist
historical cost 6 at which it was 1ought originall% $ccrual 1asis 6 effect of transactions on financial condition and inco#e are recorded when the% occur- not when the% are settled in cash
current cost 6 at which fir# can 1u% now !atching principle 6 e(pesnes to generate reenue are recogni9ed in the sa#e period as the reenue
reali9a1le alue 6 at which fir# can sell 1% the sa#e principle- long6ter# assets are a#orti9ed- depreciated oer the period asset is supposed to generate econo#ic 1enefits
present alue 6 discounted alue of assetQs future cashflows No netting
fair alue 6 at which two fir#s can e(change
In4r#7/4%#n
"ootnotes KauditedM contain0 !D$0 assess#ent of perf) $nd condition of co#pan% fro# #g#t) perspectie
accounting #ethods- esti#ations used discussion oer financial results- sales/e(penses/cashflow trends
addnl) Info) /iFe ac'uisitions- legal actions general 1usiness perspectie
discussion oer unusual/infre'uent eents
supple#entar% schedules Knot auditedM In addition to !D$- fir#s release 'uarter/se#i6annual reports Knot auditedM
contain additional infor#ation liFe En'ualified opinion0 state#ents are correct
sales 1% CE- region Qualified opinion0 e(ceptions e(ist
hedging actiities $derse opionion0 #aterial non6confor#ance to standards
IN<OME ST&TEMENT =47 - ?
Cr#!! re$#r4%n2 G3en Enearned reenue when cash receied and serices not deliered
fir# is pri#ar% o1ligator- 1ears credit and inentor% risF
fir# can choose supplier- can esta1lish price
!ethods 1elow used when contracts e(tend 1e%ond one accounting periodPgenerall% construction proOects
Ender G$$P- reenue- e(penses- profit recogni9ed onl% when proOect is oer
Ender I":S- e(penses- reenue to the e(tent of e(penses recognised as incurred- profits at proOect co#pletion
under an% of the a1oe #ethods- loss #ust 1e recogni9ed i##edaitel%
= co#pletion #ethod is #ore aggressie as reenue recogni9ed earlier
re'uired when risFs/rewards are not trasferred 1ecause seller re#ains in the propert%
profit recogni9ed 8 Kcash collected / total saleM N total e(pected profit
cost is recoered first) Profit is recognised onl% when full cost has 1een recoered
Issuing and reac'uiring stocFs affect StocFholderQs e'uit% not Net Inco#e
Diidends paid reduce stocFholderQs e'uit% not net inco#e
unrealised fore( currenc% translation gains/losses
unrealised gains on deriaties for cashflow hedge
unrealised gains on aaila1le6for6sale securities reported on 1alance sheet at fair alue- reported directl% in share6holderQs e'uit% as other co#prehensie inco#e
adOust#ent for #ini#u# pension lia1ilit%
nor#all% due to change in #anage#entQs Oudge#ent- usuall% due to new infor#ation
777correction of an accounting error is reported as prior6period adOust#ent
Re*en/e re#2n%4%#n - apart fro# accrual principle- when collection is reasona1l% sure and price is deter#ina1le
> #1$+e4%#n 1e43#7" reenue- e(penses- profit recogni9ed as = co#pletion w)r)t) costs) > #1$+e4%#nK
#1$+e4e7 #n4ra4 1e43#7" Esed when outco#e canQt 1e relia1l% #easured
In!4a++1en4 Sa+e! - occurs when fir# finances a sale and pa%#ents are e(pected oer an e(tended period
when collecti1ilit% is certain- re*en/e re#2n%Je7 a4 43e 4%1e #f !a+e
when collecti1ilit% canQt 1e reasona1l% esti#ated- In!4a++1en4 1e43#7"
when collecti1ilit% is highl% uncertain- <#!4 re#*er5 1e43#7"
Transactions n#4 affe4%n2 Ne4 In#1e
Transactions included in O43er <#1$re3en!%*e In#1e affect e'uit% 1ut not net inco#e
3an2e %n a#/n4%n2 $r%n%$+e Ke)g) /I"@ to "I"@M re'uires retrospectie application ie) restate#ents of prior state#ents
3an2e %n a#/n4%n2 e!4%1a4e is applied prospectiel% and doesnQt re'uire restate#ents of prior stat#eentsPe)g) change in esti#ated life of an asset
Da!% E;S D%+/4e7 E;S
8 KNet Inco#e 6 preferred diidendsM 8 [Net Inco#e 6 preferred diidends\ U [con) Prefd) Shares Diidend\ U [con) De1t interest K. 6 ta( rateM \
Weighted $g) co##) shares outstanding
Effect of stocF6split/ stocF diidend Dilutie if0
W of addnl) Shares get accounted fro# the 1eginning itself Pref) shares con) Shares di / con) Prefd) Shares Z Casic EPS
Treasur% stocFs are deducted in deno#inator &on) De1t con) De1t interest K. 6 ta( rateM /shares fro# con) De1t Z 1asic EPS
$ref 7%*%7en7! are bea/!e #f $referre7 !4#F! StocF options/Warrant K.6 striFe price/aerage share priceM N N X + i)e if the option is in6the6#one%
aerage price and not %ear6end price taFen into account while ealuating anti6dilutie nature of options
#onth aeraging is done een with pref) shares- con) Shares- and warrants
D&L&N<E S.EET =83 -
$ssets created 1% operating actiities Ke)g) generating net inco#eM- inesting actiities Kpurchasing #fg) e'uip#entM- financing actiities Kissuing de1t- e'uit%M
/ia1ilities are created 1% operating actiiities and financing actiities
@perating c%cle is the duration to produce- sell and collect cash
not enough W& indicates li'uidit% pro1le#s
too #uch W& indicates inefficient assets usage
Non6current assets indicate infor#ation a1out fir#Qs inesting actiities
Non6current lia1ilities indicate fir#Qs long6ter# financing actiities
inentor% costs e(clude0 wastage- storage- ad#in) oerhead- selling costs
calculated as pro6rata share of assets not owned 1% the fir#
reported on CS as lia1ilities or ownerQs e'uit%
trading secs Held6to6#aturit%
CS Treat#ent "air alue Historical/a#ort cost
reali9ed gains %es diidends
unreali9ed gains %es Kin inco#e st#tM no
!#1e f%nan%a+ a!!e4! are re$#r4e7 a4 fa%r *a+/e G3%+e #43er! a4 $re!en4 *a+/e
fair alue0 tangi1le- intangi1le assets Ka#orti9ed- depreciated- i#paired alueM
present alue0 de1t instru#ents liFe 1onds-
<&S.FLOW ST&TEMENTS" 1))-
reconciles 1eginning- end cash 1alance oer an accounting period
e)g) ac'uiring real estate with financing fro# seller
O$era4%n2 <a!3f+#G
Direct #ethod0 coerts an accrual61asis inco#e st#t) to cash61asis inco#e st#t)
Weighted $g) co##) shares outstanding U [con) Prefd) Shares\ U [shares fro# con) De1t\ U [
</rren4 a!!e4! an7 +%ab%+%4%e!" liFel% to 1e conerted to cash- o1ligations satisfied resp) within one %ear or one reporting c%cle whicheer is greater
&urrent assets 6 &urrent lia1ilities 8 W#rF%n2 <a$%4a+
In*en4#r5 Kincl) raw #aterial- finished goods and WIPM 6 re$#r4e7 a4 +#Ger #f #!4 #r ne4 rea+%Jab+e *a+/e
M%n#r%45 In4ere!4" if fir# has controlling interest in a su1sidiar% not full% owned
C##7G%++" e(cess of purchase price oer fair alue if identifia1le assets and lia1ilities in the eent of 1usiness acuisition
N#n-a!3 %n*e!4%n29f%nan%n2 <F!" donQt reslt in cash in/out
starts with cash receied fro# custo#ers and then
deducts cashflow fro# purchases- operating e(penses- interest and ta(es
Doesnat need adOust#ents for depriciation- write6offs- a#orti9ation etc)
presents fir#Qs operating cash inflow- outflow
proides #ore infor#ation than indirect #ethod
Indirect #ethod0 net inco#e conerted to operating cashflow 1% #aFing adOust#ents for transactions
adding noncash e(penses liFe depriciation- a#orti9ation
deducting non6operating ite#sQ loss/gains Ke)g) sale of landM Ksuch are captured as part of &"IM
adding an% increase in operating lia1s) $nd reducing an% increase in operating assets
focusses on difference 1etween NI and &"@
presents onl% net results of &ash6in and cash6out
<F TI;S
.) #arF actiit% including non6cash actiities
*) striFeout su##ar% ite#s
5) Feep striFing out ite#s alread% considered
In*e!4%n2 <a!3f+#G
inesting actiities include propert%- plant- e'uip#ent- intangi1le assets and inest#ent securities
F%nan%n2 a!3f+#G
#easuring cashflows 1etween fir# and its suppliers of capital
interest pa%#ents to creditors go under operating inco#e
"ree &ashflow to the fir# K"&""M
cash aaila1le to all the inestors 1oth e'uit% owners and creditors
8 &"@ U InterestK.6ta( rateM 6 "& in N&& non cash charges
8 NI U N&& U InterestK.6ta( rateM 6 "&in 6 W&in W& in worFing capital inest#ent
"& in "i(ed &apital inest#ent
"ree cashflow to e'uit% "&"E W& adOust#ents alread% get included in &"@
cash aaila1le for disri1ution to shareholders 1% wa% of change in operating assets e)g inentor%
8 &"@ 6 "& in U net 1orrowings
;erf#r1ane ra4%#!
cashflow to reenue 8 &"@/:eenue
cashflow return6on6assets 8 &"@/total assets
cash return6on6e'uit% 8 &"@/aerage total e'uit%
cashflow6per6share 8 K&"@6DiidendsM/weigted W of co##on shares outstanding
<#*era2e ra4%#!
De1t coerage 8 &"@/total de1t
:einest#ent ratio 8 &"@/Kcash paid for long6ter# assetsM
De1t pa%#ent ratio 8 &"@/Kcash long ter# de1t repa%#entM
Diidend pa%#ent ratio 8 &"@/diidend paid
Inesting and financing ratio 8 &"@/K&ash outflows fro# inesting and financing
&alculated 1% e(a#ining changes to gross a!!e4 a#/n4! that result fro# %n*e!4%n2 a4%*%4%e!
cashflows for a$%4a+%Ja4%#n i)e) creating asset that can proide econo#ic 1enefits later
related accu#ulated 7e$r%%a4%#n #r a1#r4%Ja4%#n accounts are %2n#re7 as the% donQt represent cash e(penses
cash6to6inco#e 8 &"@/RO$era4%n2R inco#e
<#11#n-!%Je a!3f+#G !4a4e1en4"
eer%thing e(pressed as a = of reenue
alternatiel% K&" inM as = of total K&" inMS and K&" outM as a = of total K&" outM
;r#b+e1! 4# re*%!e"
page .*. onwards KallM
FIN&N<I&L &N&LYSIS TE<.NIBUES =13) -
Ver4%a+ #11#n-!%Je !4a4e1en4! :eiew page .5.- .5* 6 good su##ar% of 1alance sheet- inco#e state#ent
Calance sheet e(pressed ad a = of total assets reiew current /s non6currentS lia1ilities /s e'uit%- current/long6ter# lia1ilities
Inco#e state#ent e(pressed as a = of reenue/netsales
.#r%J#n4a+ #11#n !%Je !4a4e1en4!
$ccounts e(pressed as a ratio of first %earQs alues
L%1%4a4%#n! #f f%nan%a+ ra4%#!
not useful when iewed in isolation
different accounting treat#ent
difficult to co#pare results across industries
deter#ining target alue for a ratio is difficult
Va+/a4%#n Ra4%#!
price6to6earnings ratio 8 ShareQs #arFet price / EPS
price6to6cashflow
price6to6sales
price6to61ooF
D/!%ne!! R%!F
coefficient of ariation used for this 6 &J sales- &J operating inco#e- &J net inco#e
8 standard deiation / e(pected alue
interest coerage ratios- return on capital- de1t6to6asset ratios
Se21en4 ana+5!%!
when 1usiness units co#prise of #ore than .+= reenue
when 1usiness units are different in ter#s of geographies- operations etc)
TIP0
ECIT is used onl% for :@T& and cash6to6inco#e ratio
interest coerage also uses ECIT for o1ious reasons
rest all ratios use Net Inco#e
<re7%4 r%!F ana+5!%!" co#pan%Qs a1ilit% to repa% the de1t
INVENTORY &<<OUNTINC =171 -
Un7er IFRS
Inentor% reported lower of cost or Net :eali9a1le Jalue 8 esti#ated sale price 6 selling costs
purchase cost Un7er C&&;
conersion cost Kincludes la1our costsM Inentor% reported lower of cost or !arFet alueP#arFet cost is the replace#ent cost
allocation of fi(ed production oerhead on no#al capacit% leel N:J 6 nor#al profit Z !arFet Jalue Z N:J
other costs necessar% to 1ring to present condition and location
such costs are e(pensed when inentor% is sold inentor% is written down 1% Kcost 6 inentor% alueM
Inentor% can 1e written up to the e(tent of preious write6down
unallocated portion of fi(ed production oerhead reiew e(a#ples on .43
a1nor#al waste Inentor% turnoer 8 &@GS / a) inentor%
storage costs No- of inentor% da%s 8 5B>/inentor% turnoer
ad#in oerhead High turnoer- and lower reenue growth 8X insufficient inentor%
selling oerhead /ow turnoer and lower reenue growth 8X o1solete inentor%
whateer can 1e aoided and/or is indirect is coered under period costs
LONC-LIVED &SSETS =1('-
"ir# can either0
.
Interest that accrues during construction of asset is also capitali9ed as a part of assetQs cost
$fter capitali9ation- if asset is held for use- &ost is then allocated to0
@:
*
Tan2%b+e a!!e4 G%43 f%n%4e +%fe
depreciated oer finite life Sa+e9e,3an2e #f +#n2-+%*e7 a!!e4!
e)g) e'uip#ent gain/loss accounted as &" inesting
In4an2%b+e a!!e4 G%43 f%n%4e +%fe 8 sale price 6 carr%ing alue K8 original price 6 acc) DepreciationM
/acF ph%sical su1stance) Jalue 1ased on rights granted
e)g) patents- cop%rights- 1rand na#es- license etc
are a#orti9ed oer its useful life
In4an2%b+e a!!e4 G%43 %nf%n%4e +%fe
one that canQt 1e purchased separatel% and #a% hae an infinite life
&an 1e created internall%- purchased e(ternall%- or thru 1usiness ac'uisition
e() Goodwill- patent/licences that donQt hae finite life as those could 1e renewed w/o or at low cost
Not a#orti9ed 1ut tested for i#pair#ent annuall%
<OCS 8 1eginning inentor% 6 ending inentor% U purchases
Inentor% cost ^capitali9ed^ 6 a++e7 $r#7/4 #!4!"
@ther costs that are not capitali9ed 6 called ^$er%#7 #!4!R
;r#7/4 #!4! canQt 1e aoided een with .++= efficienc%- and are directl% linFed to ^creating product^
LIFO #nf%r1%45 r/+e" per G$$P- if /I"@ is used for accounting- sa#e should 1e used for ta( purposes
$ssets whose econo#ic 1enefits are e(pected 1e%ond one accounting period) &ost of long6lied assets #ust 1e #atched with the reenues it generates oer a period of ti#e) Such allocation of cost is called
Cenera+ r/+e is to recogni9e e(pense if future econo#ic 1enefit is unliFel%
<a$%4a+%Je 43e #!4 as an asset on 1alance sheet and as <FI #/4 on &ashflow state#ent
interest does get counted as <FI#/4 due to change in asset alue
7e$re%a4%#n for tangi1le assets
a1#r4%Ja4%#n e(pense for intangi1le assets haing finite lies
$fter capitali9ation- if asset is held for sale- cost is allocated to0 <OCS
E,$en!e 43e #!4 in the inco#e state#ent under operating e(penses
With so#e e(ceptions- costs incurred 1% the fir# to create intangi1le assets are e(pensed as incurred
are e(pensed as incurred until tech) feasi1ilit% has 1een esta1lised
after that- su1se'uent costs are capitali9ed
&osts incurred to deelop s/w for internal use
are capitali9ed
Tangi1le/intangi1le asset Intangi1le assets Intangi1le assets
finite life finite life infinite life
Korg decided to hold6for6saleM Kpatents- cop%rightsM goodwill- patents/cop%rights that can 1e renewed at little/no costs
e)g) e'uip#ent
Depreciation AES777 N@ N@
$#orti9ation N@ AES N@
I#pair#ent when carr%ing alue #a% not 1e recoered with future usage
Indication that fir# hasnat recognised enough depr) @r a#ort) e(pense
recoera1ilit% test carr%ing al X fairalue6sell cost carr%ing al X Endisc) "uture &"s current carr%ing alue of reporting unit X current fair alue of reporting unit
/oss #easure#ent carr%ing al 6 Kfair al 6 sell costM carr%ing al 6 "air al or Disc) &"sgoodwill carr%ing alue 6 goodwill i#plied alue
I#pair#ent reduces carr%ing alue- and is recogni9ed as loss in Inco#e state#ent) Re*er!%n2 an %1$a%r1en4 +#!!
I#pair#ent Oust liFe a#orti9ation- depreciation has no i#pact on &") Ender G$$P- recoeries are allowed for assets held for sale 1ut not for assets held for use or goodwill
$dditionall% there are no ta( saings fro# an i#pair#ent until asset is sold
IN<OME T&MES =228-
Ta(a1le inco#e and accounting inco#e are different 1ecause of differences in ta( laws and accounting principles
Ta(es pa%a1le ^deried fro#^ Ta(a1le inco#e
RTa, E,$en!eR re#2n%Je7 %n In#1e S414- U!%n2 Ma43%n2 $r%n%$+e - 43%! %!nA4 a4/a+ 4a, $a%7
Cenera+ r/+e"
Ta(a1le inco#e is directl% linFed to cash6in and cash6out)
$ccounting inco#e depends on êarning of reenue^ and #atching e(penses
Kcarr%ing alue 6 ta( 1aseMNta( rate create DT/
&alculate &arr%ing alue 6 Ka#ount of asset/lia1ilit% that will 1e deducted fro# ta(a1le inco#e in futureM
e)g) ta( 1ase 8 depreciated alue of the asset
Kcarr%ing alue 6 ta( 1aseMNta( rate create DT$
if ta( 1ase X carr%ing alue DT/ is created
e)g) Y.+F adance p#t) &arr%alue of lia1ilit% 8 .+F) Since a#ount collected is ta(ed when receied- a#ount that wonQt 1e ta(ed in future 8 .+F
as- that will 1e ta(ed now) 8X ta( 1ase 8 .+F6.+F 8 +) Therefore DT$ 8 K.+F6+MNt
Deferre7 Ta, &!!e4"
Ta(a1le inco#e X $ccounting inco#e i)e reenue ta(ed 1efore recognition
Ta( pa%a1le X Ta( E(pense
&osts incurred to 7e*e+#$ !#f4Gare for ôthers^
Ta, ba!e #f an a!!e4 K a#ount ta( deducti1le or a#ount that will not 1e ta(ed in future
Ta, ba!e #f a +%ab%+%45 K carr%ing a#ount 6 Ka#ount ta( deducti1le or a#ount that will not 1e ta(ed in futureM
When reenue is ta(a1le 1efore it is recogni9ed in inco#e state#ent
Deferre7 Ta, L%ab%+%45"
Ta(a1le inco#e Z $ccounting inco#e i)e) reenue recogni9ed 1efore 1eing ta(ed
Ta( pa%a1le Z Ta( E(pense
DT/ that are not e(pected to reerse- t%picall% 1ecause of e(pected continued growth in capital e(penditures- should 1e treated as e'uit%
$1oe holds if DT/ and DT$ are e(pected to reerse in future
I1$a4 #f 4a, ra4e 3an2e!"
increase in ta( rate will increase DT$ and DT/ and ice6ersa
8X this will i#pact IT E(pense as per a1oe e'uation assu#ing ta(es pa%a1le re#ain sa#e
Va+/a4%#n a++#Gane" =#n4ra-a#/n4?
DT$ are assessed to deter#ine liFelihood of sufficient future inco#e to recoer ta( assets
DT$ is reduced 1% ^Jaluation allowance^ if it is #ore liFel% that so#e or all of DT$ will not 1e reali9ed
increases ta( e(pense and reduces $sset
Ender ES G$$P- DT$ and DT/ are not netted
I#pact of ta( rate change
DT//DT$ adOusted accordingl% and ta( e(pense calculated accordingl%
LONC-TERM LI&DILITIES &ND LE&SES =253 -
This is the interest that inestor wants 1ased on the credit6worthiness of the issuer and a nu#1er of other para#eters
calculated 1% #ultipl%ing 1ooF alue of the 1ond with the #arFet rate of interest
&4 $ar %!!/ane" &4 7%!#/n4
!arFet rate 8 &oupan rate !arFet rate X &oupan rate
Cond proceeds Klia1ilit%M 8 "ace alue Cond proceeds Klia1ilit%M Z "ace alue
Interest e(pense 8 &oupan rate Interest e(pense X Interest paid
Difference added to lia1ilit%
.an7+%n2 <a!3f+#G! /ia1ilit% increase oer ti#e
Issue proceeds as &"" @n !aturit%- lia1ilit% 8 face alue
Interest paid as &"@ Interest e(pense increase oer ti#e
:epa%#ent as &"" T3%nF 7%!#/n4 a! #!4 #f b#rr#G%n2
DS I1$a4
$t issuance- 1oth $sset and /ia1ilit% increase 1% 1ond proceeds
&4 an5 $#%n4 %n 4%1eH b##F *a+/e #f b#n7 +%ab%+%45 G%++ a+Ga5! e@/a+ $re!en4 *a+/e #f 43e re1a%n%n2 f/4/re a!3f+#G! 7%!#/n4e7 a4 1arFe4 ra4e #f %n4ere!4
"ace0 .+++S .+= coupon- ..= #arFetS > %ears) PJ 8 ,B5 Cond at discount
&!!e4 L%ab%+%45 In#1e S4a4e1en4
. 1ond sold
,B5 ,B5
ref) e() Spg*>,
* a %ear later lia1ilit% up 1% discount a#ort) interest e(pense 8
If not for so#e reason- DTL %! #n*er4e7 4# e@/%45 an7 DT& %! Gr%44en-#ff
Da+anae !3ee4 +%ab%+%45 #f a b#n7 =b##F *a+/e? is the ne4 $re!en4 *a+/e of all the future cashflows Kcoupan p#ts) U face alue at #aturit%M discounted at #arFet rate
&oupan pa%#ent is 1ased on 1ondQs interest rate called #/$an ra4e) &alculated 1% #ultipl%ing face alue with the coupan rate
Interest e(pense is 1ased on 1arFe4 ra4e
>), ,B5N).. 8 interest paid U a#ort 8 .+>),
5 a %ear later lia1ilit% up 1% discount a#ort) interest e(pensed 8
B)>4 ,B?),N).. 8 interest paid U a#ort 8 .+B)>4
Le!!#r *%eG
Sa+e!-45$e +ea!e =a!!e4 <OCS K 8F? SD%re4 f%nan%n2 %f <OCS K 1)F an7 n# 2r#!! $r#f%4T
$sset
.) asset re#oed /ease reciea1le
.+F
*) lease pa%#ent receied
reduce lease receia1le
6.B5?
&"@ 8
O$era4%n2 +ea!e
$sset
. .+6*F
Going concern 1asis 6 fir# will continue to e(ist
$ccrual 1asis 6 effect of transactions on financial condition and inco#e are recorded when the% occur- not when the% are settled in cash
!atching principle 6 e(pesnes to generate reenue are recogni9ed in the sa#e period as the reenue
1% the sa#e principle- long6ter# assets are a#orti9ed- depreciated oer the period asset is supposed to generate econo#ic 1enefits
!D$0 assess#ent of perf) $nd condition of co#pan% fro# #g#t) perspectie Pro(% state#ents0
discussion oer financial results- sales/e(penses/cashflow trends issued to shareholders when ote is re'uired
discussion oer unusual/infre'uent eents "low of accounting entries
In addition to !D$- fir#s release 'uarter/se#i6annual reports Knot auditedM Oournal entires record eer% entr% in order of dates
En'ualified opinion0 state#ents are correct general ledger sorts 1% accounts
Qualified opinion0 e(ceptions e(ist initial trial 1alance is created to show current 1alances which are then adOusted
$derse opionion0 #aterial non6confor#ance to standards
Enearned reenue when cash receied and serices not deliered In*en4#r59<OCS"
/I"@- "I"@- Weighted aerage
Ender I":S- /I"@ not allowed
De$re%a4%#n - f#r +#n2-4er1 a!!e4!
!ethods 1elow used when contracts e(tend 1e%ond one accounting periodPgenerall% construction proOects straight6line 8 Kcost6resid) Jal)/ useful lifeM
declining 1alance 8 Kcost 6 accu#ulated deprM/useful life
dou1le declining 1alance 8 * N Kcost 6 accu#ulated deprM/useful life
decl) 1al) applies constant rate of depr) to assets current 1ooF alue
Ender I":S- e(penses- reenue to the e(tent of e(penses recognised as incurred- profits at proOect co#pletion
straight6line #ethod used #ostl%
Dar4er 4ran!a4%#n!"
can 1e recogni9ed at fair alue onl% if fir# has rcd) pa%#ents historicall% and fir# can esta1lish a fair alue 1ased on that e(perience
In#1e S4a4e1en4
:eenue/Net Sales
&@GS
Cr#!! ;r#f%4
Selling- G;$ costs
:;D &osts
Depriciation- a#orti9ation costs
rental/lease
O$era4%n2 ;r#f%4 K EDIT =earn%n2! bef#re %n4ere!4H 4a,?
reported on 1alance sheet at fair alue- reported directl% in share6holderQs e'uit% as other co#prehensie inco#e Interest e(pense
In#1e bef#re Ta, K EDT
Ta(
In#1e fr#1 #n4%n/%n2 #$era4%#n!
apart fro# accrual principle- when collection is reasona1l% sure and price is deter#ina1le
= co#pletion w)r)t) costs) > #1$+e4%#nK K=cost incurredM / total proOect cost
In4an2%b+e a!!e4!" a#orti9ation is allocation of intangi1le assets liFe patents- trade#arFs- licenses oer useful life
occurs when fir# finances a sale and pa%#ents are e(pected oer an e(tended period 2##7G%++ - tested for i#pair#ent annuall% and the i#pair#ent a#ount is recogni9ed in inco#e state#ent
Inesting 2a%n!
Ke)g) /I"@ to "I"@M re'uires retrospectie application ie) restate#ents of prior state#ents Enusual ite#s K2a%n! on sale of assets or part of 1usinessM
is applied prospectiel% and doesnQt re'uire restate#ents of prior stat#eentsPe)g) change in esti#ated life of an asset Infre'uent Ite#s K%1$a%r1en4H
Earnings/losses fro# discontinued operation Knet of ta(M
8 [Net Inco#e 6 preferred diidends\ U [con) Prefd) Shares Diidend\ U [con) De1t interest K. 6 ta( rateM \ E(traordinar% ite#s 6 #aterial transaction that is 1oth unusual and infre'uent Knet of ta(M e)g) uninsured lossed- earl% long6ter# de1t retire#ent
Ne4 In#1e
6 Diidends
con) Shares di / con) Prefd) Shares Z Casic EPS U other co#prehensie inco#e
con) De1t interest K. 6 ta( rateM /shares fro# con) De1t Z 1asic EPS
K.6 striFe price/aerage share priceM N N X + i)e if the option is in6the6#one%
aerage price and not %ear6end price taFen into account while ealuating anti6dilutie nature of options
#onth aeraging is done een with pref) shares- con) Shares- and warrants
$ssets created 1% operating actiities Ke)g) generating net inco#eM- inesting actiities Kpurchasing #fg) e'uip#entM- financing actiities Kissuing de1t- e'uit%M
authori9ed shares0 no) of shares that #a% 1e sold under fir#Qs article of incorporation K)e)g) CSN/ decided to gie awa% .+= e'uit%M
issued shares0 shares actuall% issued to shareholders
outstanding shares0 issued shares 6 shares ac'uired Ktreasur% stocFM
$&&@ENT "@:!$T Kin report for#at- asset- lia1ilities- ownersQ e'uit% are all presented in one colu#nM
&SSET LI&DILITIES
&E::ENT $SSET &E::ENT /I$CI/ITIES
cash a/c pa%a1les
inentor% operating lia1s) Kta(es- wagesM
a/c receia1les unearned reenue
prepaid e(penses accrued e(penses
trading securities notes- 1onds pa%a1les
current inest#ents Ktrading securitiesM current portion of long ter# de1t
accrued reenue $:@ lia1ilit%
N@N &E::ENT $SSET N@N &E::ENT /I$CI/ITIES
PPE long ter# de1ts
Intangi1le assets pension lia1ilities
$aila1le for sale
"air alue
%es KdiidendsM #inorit% interest
%es Kother co#p) inco#eM
O$era4%n2 f" %nf+#G!9#/4f+#G! #f a!3 re!/+4%n2 fr#1 4ran!a4%#n! affe%n2 ne4 %n#1e =C&&;?
Inf+#G O/4f+#G
cash collection fro# custo#ers cash paid to e#plo%ees and suppliers
interest and diidends earned cash paid for other operating e(penses KSG;$- selling etc)M
sale proceeds fro# trading securities ac'uisition of trading securities
Weighted $g) co##) shares outstanding U [con) Prefd) Shares\ U [shares fro# con) De1t\ U [NET &DDNL- stocF options/warrant shares\
liFel% to 1e conerted to cash- o1ligations satisfied resp) within one %ear or one reporting c%cle whicheer is greater
re$#r4e7 a4 +#Ger #f #!4 #r ne4 rea+%Jab+e *a+/e
e(cess of purchase price oer fair alue if identifia1le assets and lia1ilities in the eent of 1usiness acuisition
Sale of inentor% Interest- ta( paid
%n*e!4%n2 a!3f+#G" %nf+#G!9#/4f+#G! #f a!3 re!/+4%n2 fr#1 a@/%!%4%#n #r 7%!$#!a+ #f +#n2-4er1 a!!e4! an7 er4a%n %n*e!41en4!
ac'uisition of fi(ed assets e)g) PPE- intangi1le assets
ac'uisition of de1t and e'uit% inest#ents
principal receied on loans #ade to others /oans #ade to others
Indirect #ethod0 net inco#e conerted to operating cashflow 1% #aFing adOust#ents for transactions
f%nan%n2 a!3f+#G" %nf+#G!9#/4f+#G! #f a!3 re!/+4%n2 fr#1 4ran!a4%#n! affe4%n2 a f%r1A! a$%4a+ !4r/4/re
principal a#ount of de1t issued principal paid on de1t
proceeds fro# issuing stocF pa%#ents to reac'uire stocF
diidends paid to shareholders
T#4a+ a!3f+#G K <FO U <FI U <FF K <3an2e %n a!3 $#!%4%#n be4Geen 4G# ba+ane !3ee4!
While calculating &"s- Feep a tracF of ite#s taFen care of in Calance sheet and inco#e state#ents) Cest is to segregate operating- financing- inesting actiities first
Un7er %n7%re4 1e43#7"
fro# Inco#e state#ent start with Net Inco#e UNI U N&& Knon6cash chargesM 6 Kgains fro# InestingM 6 increase in assets U increase in lia1ilities
fro# Inco#e state#ent reduce gains resulting fro# inesting- financing cashflows e)g) gains on land sale
fro# Inco#e state#ent
fro# Calance sheet adOust changes to operating accounts e)g)
fro# Calance sheet add increase in operating lia1ilities
fro# Calance sheet add increase in accounts pa%a1les
fro# Calance sheet si#ilarl% looF for differences in others operating accounts)
operating accounts include- receia1les- inentor% and pa%a1les
In7%re4 4# 7%re4 <FO #n*er!%#n
re'uires inco#e state#ents and state#ents of cashflows under indirect #ethod
<a!3 #++e4%#n fr#1 /!4#1er!"
fro# Inco#e state#ent U net sales Ese U for net sales
fro# 1alance sheet/indirect #ethod U increase in unearned reenue
fro# 1alance sheet/indirect #ethod 6 increase in accounts receia1les
1% wa% of change in operating assets e)g inentor% <a!3 $a51en4 4# !/$$+%er!"
fro# inco#e state#ent 6 &@GS Kwithout depreciation- write6offsM Ese 6 for &@GS
fro# 1alance sheet/indirect #ethod 6 increase in inentor%
fro# 1alance sheet/indirect #ethod U increase in accounts pa%a1les for the rest- follow si#ple rule0
increase of assets 8X use of cash
increase in lia1ilit% 8X source of cash
<a!3 O$era4%n2 E,$en!e!
fro# inco#e state#ent 6 SG;$
fro# 1alance sheet/indirect #ethod U increase in accrued e(penses
fro# 1alance sheet/indirect #ethod 6 increase in prepaid e(penses
<a!3 Wa2e!
fro# inco#e state#ent 6 Wages
fro# 1alance sheet/indirect #ethod U increase in wages pa%a1le
<a!3 %n4ere!4
fro# inco#e state#ent 6 Interest
sale proceeds fro# fi(ed assets e)g) PPE K%n+/7%n2 2a%n!M
sale proceeds fro# de1t and e'uit% inest#ents =%n+/7%n2 2a%n!?
a!3f+#G! f#r a$%4a+%Ja4%#n i)e) creating asset that can proide econo#ic 1enefits later
N#n-a!3 inesting- financing- operating transactions Ki)e) Gr%4e#ffH a1#r4H 7e$r%%a4%#nM are not reported in cashflow state#ent since the% donQt inole in/outflow of cash e)g) e(change of de1t with e'uit%
a77 a#orti9ation- depriciation as such are non6cash ite#s
fro# 1alance sheet/indirect #ethod U increase in interest pa%a1le
<a!3 Ta,
fro# inco#e state#ent 6 Ta(
fro# 1alance sheet/indirect #ethod U increase in Ta( pa%a1le
fro# 1alance sheet/indirect #ethod U increase in deferred ta( lia1iliti%
fro# 1alance sheet/indirect #ethod 6 increase in deferred ta( asset
:eiew page .5.- .5* 6 good su##ar% of 1alance sheet- inco#e state#ent If a ratio has 1alancesheet ite# and inco#e st#t) Ite#- 1alance sheet ite# will 1e in deno#inator
reiew current /s non6currentS lia1ilities /s e'uit%- current/long6ter# lia1ilities coerage- ratio- turnoer ite# would alwa%s 1e in deno#inator e)g) interest coerage ratio 8 ECIT/interest paid
In #ost of the ratios- wheneer a 1alancesheet ite# is co#pared against inco#e state#ent ite#
/ooF at perfor#ance ratios- coerage ratios as well it is aeraged instead of si#pl% %ear6end 1alance
L%@/%7%45 ra4%#! =a!!e4 *9! +%ab%+%4%e!? - +%ab%+%4%e! %n 7en#1%na4#r &4%*%45 ra4%#! =G-r-4- re!$e4%*e a#/n4! re*en/e?
#easures of li'uidit%- a1ilit% to satisf% short6ter# o1ligations asset utili9ation or turnoer ratios
& Q & Kcurrent 'uicF cashM
S#+*en5 Ra4%#! =G-r-4- 4#4a+ e@/%45? =7eb4 %n n#1%na4#r? Ce aware that aerages need to 1e used
#easures financial risF and leerage
;r#f%4ab%+%45 ra4%#! =G-r-4- re*en/e!?
how well #g#t) is conerting effort into profits
D/$#n4 !5!4e1 #f ana+5!%!
8 Knet profit #arginMNKasset turnoerMN/eerage ratio
8 Kreturn on assetsMN/eerage ratio
reiew .34pg e(a#ple
8 Knet Inco#e/ECTMNKECT/ECITMN KECIT/reenueMNKreenue/assetMNK$ssets/Total E'uit%M
8 Kta( 1urdenMNKinterest 1urdenMNKECIT #arginMNKasset turnoerMN/eerage ratio
net ino#e/ECT 8 . 6 ta( rate :: 8 retention rate
If :@E is low 8X either poor profit #argin- poor asset turnoer- or too little leerage 8 Knet Inco#e al) To co##on 6 diidend declaredM / net Inco#e al) To co##on
</rren4 ra4%# 8 current assets/current lia1ilities ree%*ab+e! 4/rn#*er
B/%F ra4%# 8 KcashU#arFeta1le securities U receia1lesM/current lia1ilities %n*en4#r5 4/rn#*er 8 &@GS / aerage inentor%
<a!3 ra4%# 8 KcashU#arFeta1le securitiesM/current lia1ilities ;a5ab+e 4/rn#*er 8 purchases / aerage pa%a1le
a!!e4 4/rn#*er 8 reenue/total asset
L#n2 4er1 7eb4-4#-e@/%45 8 long6ter# de1t/total e'uit%
Deb4-4#-a$%4a+ 8 total de1t / total de1t U ownerQs e'uit%
7eb4 ra4%# 8 total de1t / total asset
2r#!! $r#f%4 1ar2%n 8 Gross profit/reenue
Deb4 4# e@/%45 8 total de1t/total e'uit%
#$era4%n2 $r#f%4 1ar2%n
F%nan%a+ +e*era2e ra4%# 8 total asset/total e'uit%
ne4 $r#f%4 1ar2%n 8 net inco#e/reenue
In4ere!4 #*era2e 8 earnings 1efore interest and ta(esKECITM / interest pa%#ents
re4/rn #n a!!e4 =RO&?
re4/rn #n 4#4a+ a$%4a+ =ROT<?
re4/rn #n e@/%45 =ROE?
Re4/rn #n E@/%45 8 Net Inco#e/ E'uit% 8 KNet Inco#e/:eenueMNK:eenue/$ssetMNK$ssets/Total E'uit%M
re4/rn #n #11#n e@/%45 =RO<E?
2r#G43 ra4e 2 8 :: N :@E
re#e#1er as e'uit% 6X asset 6X turnoer 6X net inco#e 8 . 6 diidend pa%out ratio
for > point- NI/:eenue is 1roFen down further Feeping NI Z ECT Z ECIT Z :eenue in #ind 8 . 6 Diidend/Earning
re1e1ber" LIFO <OCSH FIFO %n*en4#r5 %-e- LIFO <OCS are 3%23er G3en $r%e! are #n 43e /$
FIFO low &@GS- high inentor% Kthan replace#ent costM- high inco#e- low cashflow
Inentor% reported lower of cost or Net :eali9a1le Jalue 8 esti#ated sale price 6 selling costs proides 1etter Calance Sheet as inentor% is 1ased on recent costs
Inentor% reported lower of cost or !arFet alueP#arFet cost is the replace#ent cost LIFO high &@GS- low inentor% Kthan replace#ent costM- low inco#e- high cashflows
N:J 6 nor#al profit Z !arFet Jalue Z N:J proides 1etter inco#e state#ent as &@GS are 1ased on recent costs
as /I"@ inentor% is liFel% to 1e lesser than #arFet alue- inentor% write6downs are less liFel% in /I"@
inentor% is written down 1% Kcost 6 inentor% alueM
Inentor% can 1e written up to the e(tent of preious write6down &onerting /I"@ to "I"@
reiew e(a#ples on .43 "I"@ Inentor% 8 /I"@ Inentor% U /I"@ :esere
Inentor% turnoer 8 &@GS / a) inentor% $dOust :HS 1% increase ta( lia1ilit% 8 /I"@ :esereNta( rate
No- of inentor% da%s 8 5B>/inentor% turnoer Increase @wnerQs e'uit% 1% /I"@ :esereK.6ta( rateM
High turnoer- and lower reenue growth 8X insufficient inentor% "I"@ &@GS 8 /I"@ &@GS 6 increase in /I"@ :esere
/ow turnoer and lower reenue growth 8X o1solete inentor%
this i#plies higher profit #argins and higher inco#e ta(es
@1iousl%- fir#s can increase earnings- profits 1% li'uidating older inentor%
howeer- this canQt continue foreer
Ne4 In#1e <a!3f+#G!
Higher during capitali9ation period During capitali9ation period
/ower after capitali9ation period as cost is reported as &"I out- Inesting cashflow is lower
S3are3#+7erA! e@/%45 at the sa#e ti#e- since e(penses are not repoted- &"@ is higher
Higher during capitali9ation period $fter capitali9ation period
/ower after capitali9ation period &"I and &"@ re#ain sa#e
as depreciation or a#orti9ation are non6cashflow ite#s
reiew e(a#ple on *++
as interest is e(pensed-
there wonQt 1e Y> depreciation
Sa+e9e,3an2e #f +#n2-+%*e7 a!!e4!
gain/loss accounted as &" inesting
8 sale price 6 carr%ing alue K8 original price 6 acc) DepreciationM
e() Goodwill- patent/licences that donQt hae finite life as those could 1e renewed w/o or at low cost
canQt 1e aoided een with .++= efficienc%- and are directl% linFed to ^creating product^ LIFO L%@/%7a4%#n occurs when /I"@ fir#Qs inentor% 'uantities decline) In this situation- older inentor% i)e) lower costs for# part of &@GS
per G$$P- if /I"@ is used for accounting- sa#e should 1e used for ta( purposes
$ssets whose econo#ic 1enefits are e(pected 1e%ond one accounting period) &ost of long6lied assets #ust 1e #atched with the reenues it generates oer a period of ti#e) Such allocation of cost is called
<a$%4a+%Ja4%#n 7e+a5! e,$en!%n2- Its effect on0
With so#e e(ceptions- costs incurred 1% the fir# to create intangi1le assets are e(pensed as incurred
&!!e4 Re4%re1en4 Ob+%2a4%#n!
Intangi1le assets $ssets that cause eniron#ental da#age e)g) nuclear power plants- plants generating to(ic waste etc)
Trea41en4 a!!e4
goodwill- patents/cop%rights that can 1e renewed at little/no costs ST$:T WITH Disc) PJ
$DVEST EJE:A A: 6 depr)
"or anal%tical purposes- treat $:@ sa#e as de1t
this will increase solenc% ratios liFe de1t ratio- de1t6to6e'uit% ratio etc)
current carr%ing alue of reporting unit X current fair alue of reporting unit
goodwill carr%ing alue 6 goodwill i#plied alue
Re*er!%n2 an %1$a%r1en4 +#!!
Ender G$$P- recoeries are allowed for assets held for sale 1ut not for assets held for use or goodwill
Ta(a1le inco#e and accounting inco#e are different 1ecause of differences in ta( laws and accounting principles D%fferene %n Ta,ab+e an7 &#/n4e7 In#1e %! a/!e7 b5"
ti#ing differences of reenue and e(pense recognition in inco#e state#ent and ta( return
RTa, E,$en!eR re#2n%Je7 %n In#1e S414- U!%n2 Ma43%n2 $r%n%$+e - 43%! %!nA4 a4/a+ 4a, $a%7 certain reenue and e(penses are recogni9ed in inco#es st#t) Cut neer on ta( or ice6ersa
different carr%ing alues and ta( 1ases of assets/lia1ilities) Generall% 1ecause of difference in depreciation #ethods
gain/loss recognition differences
ta( losses fro# preious periods #a% offset future ta(a1le inco#e
financial state#ent adOust#ents
i#pair#ent is recogni9ed as an e(pense howeer ta( isnQt deducti1le till asset is sold
&alculate &arr%ing alue 6 Ka#ount of asset/lia1ilit% that will 1e deducted fro# ta(a1le inco#e in futureM these donQt create DT$ or DT/
caused 1% reenue/e(penses that arenQt ta(a1le/deducti1le
effe4%*e 4a, ra4e K 4a, e,$en!e9EDT
statutor% ta( rate 6 ta( rate of Ourisdiction
a1oe two could 1e different when fir# operates in #ore than one geographies
e)g) Y.+F adance p#t) &arr%alue of lia1ilit% 8 .+F) Since a#ount collected is ta(ed when receied- a#ount that wonQt 1e ta(ed in future 8 .+F
in general caused 1ecause different depreciation #ethods are used for ta( return and inco#e state#ent
either results in future ta(a1le inco#e or e(pected future ta( deductions
In addition- accretion e(penses are treated as interest
;er1ane4 7%fferene - difference 1etween ta(a1le inco#e and inco#e state#ent that will not reerese in future
carr%ing a#ount 6 Ka#ount ta( deducti1le or a#ount that will not 1e ta(ed in futureM
Te1$#rar5 7%fferene - diff) 1etween ta( 1ase and carr%ing alue leading to either ta(a1le or deducti1le a#ounts in future
DT/ that are not e(pected to reerse- t%picall% 1ecause of e(pected continued growth in capital e(penditures- should 1e treated as e'uit%
DT$ is reduced 1% ^Jaluation allowance^ if it is #ore liFel% that so#e or all of DT$ will not 1e reali9ed
This is the interest that inestor wants 1ased on the credit6worthiness of the issuer and a nu#1er of other para#eters
&4 an5 $#%n4 %n 4%1eH b##F *a+/e #f b#n7 +%ab%+%45 G%++ a+Ga5! e@/a+ $re!en4 *a+/e #f 43e re1a%n%n2 f/4/re a!3f+#G! 7%!#/n4e7 a4 1arFe4 ra4e #f %n4ere!4
In#1e S4a4e1en4
ref) e() Spg*>, Handling 9ero coupon 1onds
interest e(pense 8 +
of all the future cashflows Kcoupan p#ts) U face alue at #aturit%M discounted at #arFet rate
) &alculated 1% #ultipl%ing face alue with the coupan rate
,B5N).. 8 interest paid U a#ort 8 .+>), .+>),
no interest e(pense onl% a#ort) E(pense
hence &"@ is higher
interest e(pensed 8 +
,B?),N).. 8 interest paid U a#ort 8 .+B)>4 .+B)>4
Le!!ee *%eG
Sa+e!-45$e +ea!e =a!!e4 <OCS K 8F? SD%re4 f%nan%n2 %f <OCS K 1)F an7 n# 2r#!! $r#f%4T
/ia1ilit% E(pense/:eenue :ecognition
reenue recogni9ed 8 .+F . asset and lia1ilit% increased 1% .+F
&@GS 6X 6?F
* b. %r end asset depreciated 1% .+/> 8 *F- lia1ilit% reduced 1% principal a#ount
reduce lease receia1le
interest rcd) 8 .F
8X &"@ 8 6.+++ on account of interest
&"" 8 6.B5? on account of reduction in lia1ilit%
ECIT 8 6*FS Net Inco#e 8 65F
O$era4%n2 +ea!e a+/+a4%#n!
E(pense/:eenue recognition
Depr 8 6*F 8X &"@ 8 6*B5?S ECIT 8 6*B5?S Net Inco#e 8 6*B5?
rental inco#e 8 *B5?
$t the end of the da%- total interest paid U total principal paid will 1e e'ual to rental paid
F%na%n2 +ea!e K.+F worth of e'uip#ent for > %ears b .+= interest 8X *B5? E!IM
1% the sa#e principle- long6ter# assets are a#orti9ed- depreciated oer the period asset is supposed to generate econo#ic 1enefits
issued to shareholders when ote is re'uired
Oournal entires record eer% entr% in order of dates
initial trial 1alance is created to show current 1alances which are then adOusted
De$re%a4%#n - f#r +#n2-4er1 a!!e4!
straight6line 8 Kcost6resid) Jal)/ useful lifeM
declining 1alance 8 Kcost 6 accu#ulated deprM/useful life
dou1le declining 1alance 8 * N Kcost 6 accu#ulated deprM/useful life
decl) 1al) applies constant rate of depr) to assets current 1ooF alue
straight6line #ethod used #ostl%
can 1e recogni9ed at fair alue onl% if fir# has rcd) pa%#ents historicall% and fir# can esta1lish a fair alue 1ased on that e(perience
Cr#!! ;r#f%4
period costs liFe G;$ costs are accounted for in the period incurred
and are not tied to reenue recognition e)g) rentals
Depriciation- a#orti9ation costs
O$era4%n2 ;r#f%4 K EDIT =earn%n2! bef#re %n4ere!4H 4a,?
In#1e bef#re Ta, K EDT
In#1e fr#1 #n4%n/%n2 #$era4%#n!
a#orti9ation is allocation of intangi1le assets liFe patents- trade#arFs- licenses oer useful life
tested for i#pair#ent annuall% and the i#pair#ent a#ount is recogni9ed in inco#e state#ent
Enusual ite#s K2a%n! on sale of assets or part of 1usinessM
Infre'uent Ite#s K%1$a%r1en4H write6offs- restructuring costsM
Earnings/losses fro# discontinued operation Knet of ta(M
E(traordinar% ite#s 6 #aterial transaction that is 1oth unusual and infre'uent Knet of ta(M e)g) uninsured lossed- earl% long6ter# de1t retire#ent
Ne4 In#1e indicator of organisationsQ future earnings
6 Diidends
U other co#prehensie inco#e
unrealised gains/losses
unreali9ed hedging- fore( gains
pension lia1ilit gains
authori9ed shares0 no) of shares that #a% 1e sold under fir#Qs article of incorporation K)e)g) CSN/ decided to gie awa% .+= e'uit%M
issued shares0 shares actuall% issued to shareholders
outstanding shares0 issued shares 6 shares ac'uired Ktreasur% stocFM
$&&@ENT "@:!$T Kin report for#at- asset- lia1ilities- ownersQ e'uit% are all presented in one colu#nM
OWNERAS EBUITY
&@NT:ICETED &$PIT$/ @: &$PIT$/ ST@&K
UUUU $DDITI@N$/ P$ID6IN &$PIT$/ Kin e(cess of parM
UUUU :ET$INED E$:NINGS
88888 CEGINNNING :ET$INED E$:NINGS U :EJENEE 6 EDPENSES 6 DIJIDENDS
current portion of long ter# de1t
UUUU @THE: &@!P:EHENSIJE IN&@!E
88888 unrealised gains
666666 T:E$SE:A ST@&K
no oting rights- no diidends
#inorit% interest captured either as lia1ilit% or #e99annine section
S4a4e1en4 #f 3an2e %n #GnerA! e@/%45
Endign 1alance
8 1eginning 1alance
U retained earnings KNet Inco#e 6 diidendsM
U other co#prehensie ino#e
6 issuance/repurchage of co##on stocFs
cash paid to e#plo%ees and suppliers
cash paid for other operating e(penses KSG;$- selling etc)M
%n*e!4%n2 a!3f+#G" %nf+#G!9#/4f+#G! #f a!3 re!/+4%n2 fr#1 a@/%!%4%#n #r 7%!$#!a+ #f +#n2-4er1 a!!e4! an7 er4a%n %n*e!41en4!
ac'uisition of fi(ed assets e)g) PPE- intangi1le assets
ac'uisition of de1t and e'uit% inest#ents
f%nan%n2 a!3f+#G" %nf+#G!9#/4f+#G! #f a!3 re!/+4%n2 fr#1 4ran!a4%#n! affe4%n2 a f%r1A! a$%4a+ !4r/4/re
While calculating &"s- Feep a tracF of ite#s taFen care of in Calance sheet and inco#e state#ents) Cest is to segregate operating- financing- inesting actiities first
UNI U N&& Knon6cash chargesM 6 Kgains fro# InestingM 6 increase in assets U increase in lia1ilities
reduce gains resulting fro# inesting- financing cashflows e)g) gains on land sale
as non cash ite#s donQt lead to cash outflow and it does get su1tracted while co#puting NI- this needs to 1e added 1acF to get &"@
$sset increase 8X use of cash
/ia1ilit% increase 8X source of cash
re'uires inco#e state#ents and state#ents of cashflows under indirect #ethod
for the rest- follow si#ple rule0
increase of assets 8X use of cash
increase in lia1ilit% 8X source of cash
a!3f+#G! f#r a$%4a+%Ja4%#n i)e) creating asset that can proide econo#ic 1enefits later
M are not reported in cashflow state#ent since the% donQt inole in/outflow of cash e)g) e(change of de1t with e'uit%
&1#r4%Ja4%#n" for intangi1le assets liFe licenses- patents- trade#arFs etc)
If a ratio has 1alancesheet ite# and inco#e st#t) Ite#- 1alance sheet ite# will 1e in deno#inator
coerage- ratio- turnoer ite# would alwa%s 1e in deno#inator e)g) interest coerage ratio 8 ECIT/interest paid
In #ost of the ratios- wheneer a 1alancesheet ite# is co#pared against inco#e state#ent ite#
it is aeraged instead of si#pl% %ear6end 1alance
&4%*%45 ra4%#! =G-r-4- re!$e4%*e a#/n4! re*en/e? If turnoer ratios are for a 'uarter- instead of 5B> use ,.)*>
asset utili9ation or turnoer ratios
no) of da%s pa%a1le 8 5B> / pa%a1le turnoer
a!3 #n*er!%#n 5+e K
Ce aware that aerages need to 1e used DS@ U Da%s of inentor% on hold 6 No) of da%s of pa%a1les
;r#f%4ab%+%45 ra4%#! =G-r-4- re*en/e!? #argins relatie to reenue
how well #g#t) is conerting effort into profits
reiew .34pg e(a#ple
:: 8 retention rate
8 Knet Inco#e al) To co##on 6 diidend declaredM / net Inco#e al) To co##on
ree%*ab+e! 4/rn#*er 8 annual sales / aerage receia1les 7a5! !a+e! #/4!4an7%n2 8 5B> / receia1les turnoer
%n*en4#r5 4/rn#*er 8 &@GS / aerage inentor% 7a5! #f %n*en4#r5 #n 3an7 8 5B> / inentor% turnoer
;a5ab+e 4/rn#*er 8 purchases / aerage pa%a1le
a!!e4 4/rn#*er 8 reenue/total asset
2r#!! $r#f%4 1ar2%n 8 Gross profit/reenue
#$era4%n2 $r#f%4 1ar2%n 8 operating profitKECITM / reenue K1efore ta( and interestM
ne4 $r#f%4 1ar2%n 8 net inco#e/reenue
re4/rn #n a!!e4 =RO&? 8 net inco#e / aerage total assets
re4/rn #n 4#4a+ a$%4a+ =ROT<? 8 ECIT / total aerage capital
re4/rn #n e@/%45 =ROE? 8 net inco#e / total aerage e'uit%
re4/rn #n #11#n e@/%45 =RO<E? 8 net inco#e 6diidend / total aerage ^co##on^ e'uit%
2r#G43 ra4e 2 8 :: N :@E
8 . 6 diidend pa%out ratio
8 . 6 Diidend/Earning
re1e1ber" LIFO <OCSH FIFO %n*en4#r5 %-e- LIFO <OCS are 3%23er G3en $r%e! are #n 43e /$
low &@GS- high inentor% Kthan replace#ent costM- high inco#e- low cashflow
proides 1etter Calance Sheet as inentor% is 1ased on recent costs
high &@GS- low inentor% Kthan replace#ent costM- low inco#e- high cashflows
proides 1etter inco#e state#ent as &@GS are 1ased on recent costs
as /I"@ inentor% is liFel% to 1e lesser than #arFet alue- inentor% write6downs are less liFel% in /I"@
LIFO re!/+4! %n 3%23er <FO bea/!e #f +e!!er 4a,e!-
Higher &@GS get 1alanced out 1% lower inentor%) lesser ta(es therefore increase &"@
since inentor% and &@GS 1oth are part of &"@- net gains would 1e 1ecause
of ta( saings
this i#plies higher profit #argins and higher inco#e ta(es
@1iousl%- fir#s can increase earnings- profits 1% li'uidating older inentor%
howeer- this canQt continue foreer
De$re%a4%#n
carr%ing K1ooFM alue 8 historical cost 6 accu#ulated depr)
historical cost 8 purchase price U installation U transportation costs
!4ra%234 +%ne 1e43#7
Depr e(pense 8 Koriginal cost 6 salage alueM / useful life
&e+era4e7 7e$re%a4%#n 1e43#7
higher depreciation initiall%- lesser later on 8X lower net inco#e in earl% %ears
Dou1le6declining 1alance #ethod
8 * N carr%ing K1ooFM alue/ useful life
salage alue isnQt taFen into account
Un%4! #f $r#7/4%#n 1e43#7" ba!e7 #n /!a2e
8 Kcost 6 salage alueM / units produced
straight6life for financial reporting- accelerated depr) for ta( reporting
in later %ears- when depr) Is less- e(cess ta( paid is reduced fro# deferred ta( lia1ilit%
F%,e7 &!!e4 a2e
helps anal%st identif% older- less efficient assets
helps anal%st forecast significant financing re'uire#ents
occurs when /I"@ fir#Qs inentor% 'uantities decline) In this situation- older inentor% i)e) lower costs for# part of &@GS
$ssets whose econo#ic 1enefits are e(pected 1e%ond one accounting period) &ost of long6lied assets #ust 1e #atched with the reenues it generates oer a period of ti#e) Such allocation of cost is called a1#r4%Ja4%#nH 7e$re%a4%#n
C&&; allows usage of different #ethods for financial reporting and ta( reporting
Difference in ta(es captured as 7effere7 4a, +%ab%+%45
aerage age 8 accu#ulated depriciation / annual depr) E(pense
a) Depricia1le life 8 original cost / annual depr) E(penses
re#aining useful life 8 ending net inest#ent / annual depr) E(penses
ending net inest#ent 8 original cost 6 accu#ulated depreciation
reiew e(a#ple on *..- *.*
$ssets that cause eniron#ental da#age e)g) nuclear power plants- plants generating to(ic waste etc)
+%ab%+%45 e,$en!e!
Disc) PJ
U accretion interest 6 depr 6 accretion interest
"or anal%tical purposes- treat $:@ sa#e as de1t
this will increase solenc% ratios liFe de1t ratio- de1t6to6e'uit% ratio etc)
ti#ing differences of reenue and e(pense recognition in inco#e state#ent and ta( return
certain reenue and e(penses are recogni9ed in inco#es st#t) Cut neer on ta( or ice6ersa
different carr%ing alues and ta( 1ases of assets/lia1ilities) Generall% 1ecause of difference in depreciation #ethods
ta( losses fro# preious periods #a% offset future ta(a1le inco#e
i#pair#ent is recogni9ed as an e(pense howeer ta( isnQt deducti1le till asset is sold
a1oe two could 1e different when fir# operates in #ore than one geographies
in general caused 1ecause different depreciation #ethods are used for ta( return and inco#e state#ent
either results in future ta(a1le inco#e or e(pected future ta( deductions
In addition- accretion e(penses are treated as interest G3%+e a+/+a4%n2 %n4ere!4 #*era4e ra4%#
difference 1etween ta(a1le inco#e and inco#e state#ent that will not reerese in future
diff) 1etween ta( 1ase and carr%ing alue leading to either ta(a1le or deducti1le a#ounts in future
$ssets /ia1ilit% E(pense :ecognition
asset and lia1ilit% increased 1% .+F
.+F .+F
asset depreciated 1% .+/> 8 *F- lia1ilit% reduced 1% principal a#ount
.+6* 8 ?F .+F6.B5? 8 ?5B*
depreciation 8 *F
interest part of E!I 8 .+++
&"@ 8 6.+++ on account of interest
&"" 8 6.B5? on account of reduction in lia1ilit%
ECIT 8 6*FS Net Inco#e 8 65F
O$era4%n2 +ea!e a+/+a4%#n!
rental 8 *B5? KP!T oer > %rs corresponding to PJ 8 .+F- .+= I:M
&"@ 8 6*B5?S ECIT 8 6*B5?S Net Inco#e 8 6*B5?
$t the end of the da%- total interest paid U total principal paid will 1e e'ual to rental paid
F%na%n2 +ea!e K.+F worth of e'uip#ent for > %ears b .+= interest 8X *B5? E!IM
E(traordinar% ite#s 6 #aterial transaction that is 1oth unusual and infre'uent Knet of ta(M e)g) uninsured lossed- earl% long6ter# de1t retire#ent
as non cash ite#s donQt lead to cash outflow and it does get su1tracted while co#puting NI- this needs to 1e added 1acF to get &"@
DS@ U Da%s of inentor% on hold 6 No) of da%s of pa%a1les
C&&; b5 F&SD =r/+e! ba!e7?
:egulator% 1od% is SE&
Qualities0 releance and relia1ilit%
Different o1Oecties for 1usiness and non61usiness st#ts)
Eses reenue- e(penses- loss- gain and co#prehensie inco#e as perfor#ance ele#ents
rule61ased
In#1e !4a4e1en4 re+a4e7 7%fferene!"
In co#pleted contract #ethod- costs- reenue- profit not recogni9ed till co#pletion
Da+ane !3ee4 re+a4e7 7%fferene!"
all allowed) /I"@ preferred 1% #ost ES co#panies
Inentor% reported lower of cost or #arFet alue)
!inorit% Interest can 1e reported under lia1ilities- e'uit% or #e9annine section
<a!3f+#G re+a4e7 7%fferene!"
Interest earned/paid reported as operating actiit%
Diidend earned reported as operating actiit%
Diidend paid reported as financing actiit%
Ta( paid for all operating- inesting- financing actiities reported as operating actiit%
If fir# uses direct #ethod- adOust#ents necessar% to reconcile net inco#e to cash flow #ust 1e disclosed
O43er 7%fferene!"
:;D costs are generall% e(pensed as incurred
G$$P allows different depriciation #ethods for ta( and financial reporting
.+6K0 annual financial state#ents filing- .+6Q0 'uarterl% filing
DE" .36$0 pro(% state#ents to shareholders prior to $G!
.330 fir# issues certain securities to 'ualified 1u%ers w/o registering securities with SE&
"$SC defines asset as a future econo#ic 1enefit)
DoesnQt allow upward adOust#ent of assets
reenue recogni9ed when KaM reali9ed or reali9a1le and K1M earned
$s per G$$P Kin additionM0
reenue recogni9ed when0 KaM eidence of sale 1etween 1u%er and seller
K1M product deliered- serices rendered
KcM price deter#ined/deter#ina1le
KdM seller reasona1l% sure of collecting #one%
E(traordinar% ite#s reported separatel% Knet of ta(M after net inco#e fro# continuing operations
No write6up allowed) @nl% when asset is held6for6sale- write6up is allowed Ke)g) if inentor% is
held for use- write6up isnQt allowedM
dealing with a certain situation- political pressures that regulator% 1odies face fro# 1usiness groups
co#pan% canQt 1e appropriatel% 'uantified
IFRS b5 I&SD =$r%n%$+e! ba!e7?
:egulator% 1od%0 "S$ for EK- #an% national regulator% auths) Celong to I@S&@
Qualities0 understanda1ilit%- releance- relia1ilit%- co#para1ilit%
sa#e o1Oecties for 1usiness/non61i9) Entities
Places #ore e#phasis on going6concern assu#ption
inco#e and e(penses as ele#ents of perfor#ance
principles61ased
uses accrual 1asis
reenue recogni9ed upfront upto costs- profit recogni9ed onl% at co#pletion
/I"@ not allowed
Inentor% reported lower of cost or Net :eali9a1le Jalue 8 esti#ated sales price 6 selling costs
write6up allowed onl% to the e(tent of write6downs
!inorit% interest reported under E'uit% section
interest or diidend earned can 1e reported as operating or inesting actiit%
interest or diidend paid can 1e reported as operating or financing actiit%
Ta( paid reported separatel% for operating- inesting- financing actiities
If fir# uses direct #ethod- adOust#ents necessar% to reconcile net inco#e to cash flow #ust 1e disclosed
:esearch costs are e(pensed as incurred) Deelop#ent costs are capitali9ed during deelop#ent phase
@1Oecties0 .) protect inestors *) ensure fairness- efficienc% and transparenc% of #arFets 5)
reduce s%ste#ic risF
;r%n%$+e!" fair presentation- going concern 1asis- accrual 1asis- consistenc% 1etween periods-
#aterialit%- aggregation and no offsetting
$sset as a resource fro# which a future econo#ic 1enefit is e(pected)
Epward adOust#et allowed to the e(tent of depreciation accounted for preiousl%
DoesnQt allow reporting e(traordinar% ite#s separatel% fro# inco#e state#ent net of ta(- after
inco#e fro# continued operations
I":S re'uires current/non6current for#at unless li'uidit% 61ased presentation is #ore releant
Ke)g) 1anFing industr%M
dealing with a certain situation- political pressures that regulator% 1odies face fro# 1usiness groups
De1an7 E+a!4%%459</r*e !ust read0 pg *.
Feeping other things in the s%ste# constant- what additional price reduction will push custo#erKsM to consu#e one #ore ite#
also called #arginal 1enefit cure therefore) $ctuall%- it is ^worth^ or âlue^ cure
de#and cure indicates decreasing âlue^ to consu#ers of additional goods or serices
consu#er surplus 8 su# of alue consu#er got with eer% ite# consu#ed Ki)e) su# of #arginal 1enefit he deriedM !INES price he paid for it
Perfectl% Elastic De#and0 two identical products aaila1le in #arFet) $n% change in oneQs price will lead to infinite de#and increase of the other and infinite decrease in de#and of one
Perfectl% Inelastic De#and0 insulin- a necessit%-
De1an7 E+a!4%%45 7e$en7! /$#n"
closeness of su1stitute0 #ore su1stitutes 8X high elasticit%- less su1stitutes 8X low elasticit%)
proportion of inco#e spent 6 lesser inco#e spent 8X inelastic de#and as consu#ed 'uantit% wouldnQt change #uch
ti#e elapsed since last price hiFe0 #ore ti#e 8X #ore ti#e for people to decide upon changingPhence #ore elasticit% as ti#e progresses
&ross Elasticit%0 change in price of one leading to change in consu#ption of the other
In#1e E+a!4%%45"
less = of inco#e going into product 8X product de#and is inelastic as one wouldnQt #ind pa%ing that little e(tra e)g) change in chewing gu# price
high = of inco#e going into product 8X product de#and is elastic as people would liFe to switch to so#ething cheaperPe)g) lu(ur% products
Necessities are inco#e inelastic
$n inferior good shows negatie elasticit%
S/$$+5 E+a!4%%459</r*e
price at which supplier is willing to suppl% Nth ite#
suppl% cure illustrates opportunit% cost of additional units of goods or serices that #ust 1e foregone
opportunit% cost of producing additional units of goods increase as #ore and #ore resources are 1id awa% fro# alternatie productie uses
!/$$+5 e+a!4%%45 7e$en7! /$#n
aaila1le resource su1stitutes0 #ore su1stitutes #ean higher elasticit% as input ite#s are not constrained to produce #ore or with higher efficiencies
suppl% decision ti#e fra#e
E@/%++%br%/1 $#%n4
till price 1id 1% custo#er `8 price offered 1% supplier- #arginal alue is #ore than the #arginal cost K1efore e'uill pt)M and #arginal alue less than the #arginal cost Kafter e'uill) Pt)M
1e%ond e'uill) Pt)- the alue that consu#er places on the ôther^ good Kgood corresponding to the opportunit% costM is #ore than the alue the% place on the good)
1efore e'uill) Pt- alue that consu#er places on the good is #ore than the alue it places on other serices/goods forgone to produce those goods)
de#and cure shows #arginal 1enefit to the societ% and suppl% cure shows #arginal cost to societ%
at e'uill) Pt)- #arginal 1enefit for societ% Ki)e) 1enefit to 1oth consu#ers as well as suppliersM is #a(i#ised
to understand suppl% and de#and cures fro# societ%Qs #arginal 1enefit and #arginal costPassu#e two parties a consu#er haing infinite power to consu#e arious goods- and a supplier haing infinite capa1ilit% to produce an% good) If %ou hae an o1Oectie to #a(i#i9e 1enefits to 1oth))))it will lead to e'uili1riu# position across all
Ender prerfect6#arFet conditions- industr% suppl% cure is also #arginal societal Kopportunit%M cost cure
Ob!4a+e! 4# eff%%en4 a++#a4%#n 4# $r#7/4%*e re!#/re!" re!/+4! %n G3ene*er !/$$+597e1an7 /r*e! 7#nA4 4aFe %n4# a#/n4 4#4a+ benef%4 #r 4#4a+ #!4! 4# !#%e45
;r%e #n4r#+! !/3 a! ;r%e f+##r #r e%+%n2 Ta,e! an7 4ra7e re!4r%4%#n! =e@/%++- 7#e! rea3?
#a(i#u# rental or #ini#u# wages are the e(a#ples
When #arFets are functioning well- co#petition and allocation of price lead to an efficient allocation of resources- where
In capitalist econo#%- each consu#er tries to consu#e the co#1ination of goods that he alues #ost and each producer tries to #a(i#i9e profits fro# production) :esulting in
&++#a4%*e eff%%en5 is attaned when allocation of econo#%Qs productie resources leads to production of 'uantities of arious goods that hae total #a(i#u# 1enefit to custo#ers
Dea7Ge%234 +#!! - loss to societ% 1ecause of difference in #arginal 1enefit and cost
S4a4/4#r5 4a, #n !/$$+%er =#!4 %nrea!e!?
+ab#/r 1arFe4" 1%n%1/1 Ga2e!
;G! K 1a,- b+aF 1arFe4 ren4 Qs 8 aaila1le la1our
Pws6Pc 8 creates loss 1ecause of house search Qd 8producerQs de#and of la1our at that wage
Qd6Qs 8 housing suppl% shortfall Qs6Qd 8 e(cess la1ourers :elatie elasticities of de#and/suppl% cures deter#ine actual incidence of ta( 1etween 1u%er/seller
Price ceiling leads to suppl% shorffall and results in0 Deadweight loss resulting in0 whoeer is less elastic will 1ear #ore
1lacF #arFet or first6co#e first sere producers looFing for efficient alternaties /ess elastic suppl%/de#and will also #ean lesser deadweight loss
discri#ination fro# supplier resulting in une#plo%#ent
reduction in 'ualit% of goods reduction in pleasant/safe worFing conditions
and other inefficiencies 1ecause of suppl% shortfall reduction of non6#onetar% 1enefits to la1ourers
E,4erna+ #!4!
costs i#posed on others that are not taFen into account in production decision
e)g) costs i#posed on fisher#en 1% a fir# that pollutes the ocean as part of production process
suppl% cure doesnQt reflect âll the costs^ incurred 1% the ^societ%^
this results in oerallocation of resources 1% the suppliers
;/b+% 2##7! an7 #11#n re!#/re! M#n#$#+5
co##on resources get inefficientl% used KoerusedM single seller) &hooses profit6#a(i#i9ing 'uantit%
as there isnQt cost inoled) less than efficient
results in oerproduction
E,4erna+ benef%4!
when de#and cure doesnQt reflect ^total 1enefit^ to societ%
consu#ption 1enefits enOo%ed 1% other people in addition to 1u%ers
results in e'uilli1riu# 'uantit% 1eing lesser than efficient 'uantit%
e)g) deelop#ent of a tropical garden in an industrial co#ple(
ETI/IT$:I$N $ND SA!!ET:A P:IN&/E "@&ES @N0 U4%+%4ar%an%!1" =re!/+4-ba!e7?
Fa%rne!! $r%n%$+e *a+/e 1a,%1%!e7 G3en ea3 $er!#n #Gn! e@/a+ a1#/n4 #f re!#/re!
whether rules of allocation of resources are fair wealth should 1e transferred fro# rich to poor Kresult 1asedM
whether results of allocation of resources are fair . eer%oneQs wants and needs are sa#e
S3#r4-r/n * #arginal 1enefit of a dollar is greater for a poor than the rich
capacit% canQt 1e adOusted 1enefit to poor 1eing #ore than loss to rich 8X #ore is gained than lost
production olu#e can 1e controlled 1% la1our adOust#ent this i#plies that the total #arginal 1enefit is greater
$r#b+e1!" +e!!er +ab#/r an7 a$%4a+
L#n2-r/n trade6off 1etween fairness and efficienc% resulting fro# cost of e(ecuting wealth transfer
all can 1e #odified/leeraged to increase 'uantit% . transfer 1% wa% of higher ta(es will cause the# to worF less- resulting in less than efficient 'uantit% of la1our
* higher ta(es will reduce saings)
5 there is ad#in cost inoled in ensuring the transfer
ORC&NIEINC ;RODU<TION =;C-5)?
&4/a+ In%7ene #f 4a,
;r#f%4 1a,%1%!a4%#n <#n!4ra%ne7 b5
E(plicit &osts . technolog% constraints
production cost technolog% defined as #eans of production
interest cost additional technolog% resources #eans additional costs
I#plicit &osts * infor#ation constraints
i#plicit rental Kopportunit% costs to a fir# for using its own capitalM lacF of infor#ation on which to 1ase decisions
econo#ic depreciation0 decrease in a fir#Qs asset co9 of TJ! infor#ation has cost associated with it
foregone interest0 interest that fir# could hae earned 5 #arFet constraints
nor#al profit Kopportunit% costs of ownerQs entrepreneurship e(pertiseM how #uch custo#ers are willing to pa%
price and #arFeting actiities of co#petitors
$ccounting profit X Econo#ic profit as it accounts onl% for e(plicit costs
MarFe4 #nen4ra4%#n 1ea!/re1en4!
.erf%n7a3+- .%r!31an %n7e, . 1arFe4 #-#r7%na4%#n =D#-%4-5#/r!e+f a$$r#a3?
sig#a K= #arFet shareM s'uare each ingredient picFed fro# indiidual #arFets
Z.+++ 8X co#petitie * f%r1 #-#r7%na4%#n
.+++6.?++ 8X #oderatel% co#petitie lower transaction costs 6 negotiations costs
X.?++ 8X not co#petitie econo#ies of scale 6 a) Enit cost decreases as olu#e increases
F#/r-f%r1 #nen4ra4%#n ra4%#" econo#ies of scope 6 when sa#e resources could 1e used to produce a range of serices/goods
= reenue of top 3 fir#s w)r)t) industr% econo#ies of tea# production 6 as resources 1eco#e speciali9ed leading to efficiencies
Z3+= 8X co#petitie #arFets $ll a1oe lead to fir# co6ordination 1eing #ore efficient than #arFet6coord
XB+= 8X oligopol%
. pro1le#s defining geographical scope of #arFets
* 1arriers to entr% and fir# turnoer in #arFets Kno 1arrier #eans higher co#petitienessM
5 weaF relationship 1etween #arFet and industr%
OUT;UT &ND <OSTS =;C-'3?
O$$#r4/n%45 <#!4!" return that could hae 1een earned elsewhere
E#n#1% ren4 8 reenue 6 [total opportunit% costs 8 area 1elow Suppl% cure\
E#n#1% a4%*%45 can 1e produced 1%0
U!ef/+ne!! of these #easures is li#ited 1ecause0
E#n#1% $r#f%4 %! 1a,%1%!e7 G3en MR K M<
;ERFE<T <OM;ETITION =;C 75?
; O &T<
producer fir#s in such #arFets donQt hae an% influence on #arFet prices Short6run profit #a(i#i9ation for a fir# canQt continue for long
N !arFet de#and cure #a% not 1e a straight line though
;erfe4 #1$e4%4%#n /ong6run e'uili1riu# output leel for perfectl% co#petitie fir# is0
when entr% 1arrier doesnQt e(ist when !: 8 !& 8 $T&
econo#ic profit 8 + which is where $T& is #ini#u#
;r%e-4aFer! are fir#s that canQt decide price on their own
therefore- FIRMA! 7e1an7 /r*eN is perfectl% elastic
price6taFer #arFet is an e(a#ple of $erfe4 #1$e4%4%#n
E#n#1% $r#f%4 =;-&T<? %! 1a,%1%!e7
In !3#r4-r/nH 4# 1ee4 %nrea!e97erea!e %n 7e1an7
fir#s adOust 'uantities 1% increasing/decreasing la1our
"or a price taFer- !arginal :eenue 8 Price Kas de#and cure is flatM
fir#s earn econo#ic profit if de#and increases "or producers facing downward6facing de#and cures- !: Z P since price #ust 1e reduced in order to sell additional units
Nor#al profit reduces if de#and decreases
MONO;OLY =$2 88?
!onopol% when 1arriers to entr% are high
/egal 1arrier
patents- licenses- got) approed franchisees etc)
Natural 1arrier Knatural #onopol%M
when large econo#ies of scale
when econo#ies of scope e(ist
&! #1$are7 4# $erfe4 #1$e4%4%#nH M#n#$#+5
produces Q#on Z Qpc to clai# consu#er surplus
Q#on #a(i#ises profit as !: 8 !& bprice P#on
creates deadweight loss w)r)t) perfect co#p) K!& 8 !CM
further loss of efficienc% seeFing/esta1lishing P#on
Na4/ra+ 1#n#$#+5 G3en"
econo#ies of scale are so pronounced that $T& is #ini#i9ed when there is . fir#
fi(ed costs are high and #arginal costs are low
without regulation- #onopolist will #a(i#i9e profits 1% producing where !: 8 !&
Econo#ies of scope can also lead to a #onopol%
MONO;OLISTI< <OM;ETITION &ND OLICO;OLY =$2 ((?
M#n#$#+%!4% #1$e4%4%#n" F%r1! %n 1#n#$#+%!4% #1$e4%4%#n
. large nu#1er of independent sellers face downward6sloping de#and cure
each fir# haing s#all #arFet share so none can drie price de#and cures are highl% elastic
fir#s need to pa% attention onl% to aerage price not to indiidual co#petitors
too #an% fir#s in industr% for collusion Kprice fi(ingM to 1e possi1le
* differentiated products
each product slightl% different
&!!/1%n2 M< K &T< in the 1eginning
close su1stitute to others
5 fir#s co#pete on price- 'ualit% and #arFeting
'ualit% is a significant product6differentiating characteristic
strong correlation 1etween 'ualit% and price that fir# can charge
#arFeting is a #ust to infor# custo#ers a1out productQs KdifferentiatingM attri1s)
3 low 1arriers to entr%
fir#s can enter and e(it
O+%2#$#+5 %! a f#r1 #f 1#n#$#+%!4% #1$e4%4%#n
s#all W of sellers
interedependence Kdecision #ade 1% . fir# affects de#and- price and profit of others "ir# produces Q such that !: 8 !& and charges PN
significant 1arrier to entr% co9 of large econo#ies of scale Cecause of econo#ic profit 8 PN6 $T&N- #ore fir#s enter
products #a% 1e si#ilar or differentiated this leads to downward shift of de#and cure till
e)g) $uto industr% or $irplane #fg) industr%
Tra7%4%#na+ 1#7e+ #f #+%2#$#+5
#ore elastic de#and cure 1e%ond certain price point
PF 6 price a1oe which co#petitors will re#ain at PF
this leads to consu#ers switching to alternaties the% can earn great profits if the% agree to share a restricted output 'uantit%
causing relatiel% #ore elastic de#and 1ut onl% if neither of the# do not cheat
Celow PF- co#petitors will #atch price6cut @ligopolists #a(i#ise their total profits 1% Ooining together KcolludingM and operating as single seller K#onopolistM
QF is therefore Profit !a(i#ising output leel
D#1%nan4 f%r1 #+%2#$#+5 M#7e+
one fir# has significant cost adantage
this fir# has large #arFet share
it produces 'uantit% such that !: 8 !&
this #a(i#ises its econo#ic profits
rest of the fir#s are price6taFers
the% produce 'uantit% where !& 8 P
<#n!%7er 43%!"
S. reduces price in order to increase ^his reenue^
he can do that as this price isnQt related to !&8!: e'n) and is drien 1%
an agree#ent with other co#pan% such that at industr% leel !& 8 !:
other fir# will also reduce price i#pacting 1oth
M&RKETS FOR F&<TORS OF ;RODU<TION =$2 111?
#arginal reenue product
additional re) gained 1% e#plo%ing one #ore unit of a productie resource
holding other inputs constant
Downward sloping si#ilar to !: cure for a downward sloping de#and
!:P cure is fir#Qs short6run de#and cure for that productie resource
e)g) la1our- E+a!4%%45 #f 7e1an7 #f +ab#/r
So long as !:P X Price there is opp) to gain- hence for #a(i#u# profits- !:Pla1our 8 P:I&Ela1our
!:P defined Wage :ate 6 highest a fir# will pa% for an additional la1our .
PN 8 $T&N such that EP 8 +
@ligopol% fir#s are in
"actors influencing fir#Qs
*
Effe4 #f +ab#/r /n%#n! #n Ga2e! 5
!onospon%
when 1u%ers decide the price e)g) single e#plo%er in the region
Si#pl% restrict suppl% KstriFesM untill e#plo%er agrees for higher wage
Wage increase reduces de#anded 'uantit% fro# Qc 6X Qu
Enions #anage this decline in oerall de#and 1%0
a de#anding for #ore ûnioni9ed^ worFers "or the e#plo%er- #a(i#u# profit will 1e when !&/8!:P
1 increase de#and for products in outside world 1% adertising i)e) addnl) reenue 1% e#plo%ing addnl) la1our 8 #arginal cost of la1our
e)g) products #arFeted as 1eing #ade 1% ûnionised la1our^ !onosponic e#plo%er will e#plo% lesser la1our KQ#M at W#
c increasing price of su1stitutes Kie) unsFilled la1ourM this leads to deadweight loss of undere#plo%#ent
e)g) unions forcing politicians to increase #ini#u# wages as !:Padditional worFer X Wage
d increasing #arginal product 1% unionised worFers 1% trainings If worFers are unionised and e#plo%er is #onopsonist
actual wage is decided 1% 1argaining
ReneGab+e an7 n#n-reneGab+e re!#/re! !/$$+5
water is renewa1le- hence its suppl% is fi(ed
hence it is perfectl% inelastic and
price is deter#ined 1% the de#and cure alone
oil is non6renewa1le
and though Fnown stocF at an% gien point is fi(ed
it tends to increase oer ti#e with tech) adance#ents
:ate at which oil is supplied Kflow suppl%M
is perfectl% elastic
at a price that e'uals e(pected ne(t6period alue
If oil price is e(pected to increase at a rate higher than :f interest rate
suppliers will curtail production and wait for oil price to increase
si#ilarl%- if ate of :f interest rate increase is lower than oil price increase
suppliers will suppl% #ore and inest earned reenue
to earn #ore interest
/a1our unions do R<#++e4%*e bar2a%n%n2R
This is called ^.#4e++%n2 $r%n%$+eR
Feeping other things in the s%ste# constant- what additional price reduction will push custo#erKsM to consu#e one #ore ite# F%ner $#%n4!
E(cept for price- if an%thing else changes de#and/suppl%) It would shift de#and- suppl% cures as appropriate
price will function to e'ualise 'uantit% de#anded 1% consu#ers and produced 1% producers
consu#er surplus 8 su# of alue consu#er got with eer% ite# consu#ed Ki)e) su# of #arginal 1enefit he deriedM !INES price he paid for it Deter#inants of suppl% and de#and other than the price of the good in 'uestion- such as consu#ersQ inco#e- input prices and so on- are not e(plicitl% represented in the suppl%6de#and diagra#) &hanges in the alues of these aria1les are represented 1% shifts in the suppl% and de#and cures) C% contrast- responses to changes in the price of the good are represented as #oe#ents along unchanged suppl% and de#and cures)
Perfectl% Elastic De#and0 two identical products aaila1le in #arFet) $n% change in oneQs price will lead to infinite de#and increase of the other and infinite decrease in de#and of one#arginal cost 8 dKT:M/dQ
an% cost changes will shift suppl% cure- an% 1enefit changes will shift de#and cure
when consu#ers increase the 'uantit% de#anded ^$T $ GIJEN P:I&E^- it would lead to de#and cure shift
proportion of inco#e spent 6 lesser inco#e spent 8X inelastic de#and as consu#ed 'uantit% wouldnQt change #uch si#ilarl% when supplier price changes 1ecause of input costs or otherwise- that would shift supplier cure
ti#e elapsed since last price hiFe0 #ore ti#e 8X #ore ti#e for people to decide upon changingPhence #ore elasticit% as ti#e progresses suppl% or de#and increase will lead to outwards #oe#ent of respectie cure) Decrease will lead to inwards #oe#ent of respectie cure
less = of inco#e going into product 8X product de#and is inelastic as one wouldnQt #ind pa%ing that little e(tra e)g) change in chewing gu# price
high = of inco#e going into product 8X product de#and is elastic as people would liFe to switch to so#ething cheaperPe)g) lu(ur% products
opportunit% cost of producing additional units of goods increase as #ore and #ore resources are 1id awa% fro# alternatie productie uses
aaila1le resource su1stitutes0 #ore su1stitutes #ean higher elasticit% as input ite#s are not constrained to produce #ore or with higher efficiencies
till price 1id 1% custo#er `8 price offered 1% supplier- #arginal alue is #ore than the #arginal cost K1efore e'uill pt)M and #arginal alue less than the #arginal cost Kafter e'uill) Pt)M
1e%ond e'uill) Pt)- the alue that consu#er places on the ôther^ good Kgood corresponding to the opportunit% costM is #ore than the alue the% place on the good)
1efore e'uill) Pt- alue that consu#er places on the good is #ore than the alue it places on other serices/goods forgone to produce those goods)
Ob!4a+e! 4# eff%%en4 a++#a4%#n 4# $r#7/4%*e re!#/re!" re!/+4! %n G3ene*er !/$$+597e1an7 /r*e! 7#nA4 4aFe %n4# a#/n4 4#4a+ benef%4 #r 4#4a+ #!4! 4# !#%e45
Ta,e! an7 4ra7e re!4r%4%#n! =e@/%++- 7#e! rea3? S/b!%7%e!9@/#4a!
Ender the assu#ption of perfect co#petition- suppl% is deter#ined 1% #arginal cost) "ir#s will produce additional output as long as the cost of producing an e(tra unit of output is less than the price the% will receie)
When #arFets are functioning well- co#petition and allocation of price lead to an efficient allocation of resources- where 1ar2%na+ benef%4 to societ% Oust e'uals 1ar2%na+ #!4 for the last unit of each good and serice produced
In capitalist econo#%- each consu#er tries to consu#e the co#1ination of goods that he alues #ost and each producer tries to #a(i#i9e profits fro# production) :esulting in &++#a4%*e Eff%%en5
is attaned when allocation of econo#%Qs productie resources leads to production of 'uantities of arious goods that hae total #a(i#u# 1enefit to custo#ers
S4a4/4#r5 4a, #n !/$$+%er =#!4 %nrea!e!? !4a4/4#r5 4a, #n b/5er =benef%4 7erea!e!?
deadweight loss fro# oerproduction 6 !C Z !& to societ%
Pta(6Pe 8 1urden shared 1% 1u%er
Pe6Ps 8 actual ta( felt 1% the seller
KPta(6PsMN Qta( 8 ta( reenue
:elatie elasticities of de#and/suppl% cures deter#ine actual incidence of ta( 1etween 1u%er/seller
whoeer is less elastic will 1ear #ore
/ess elastic suppl%/de#and will also #ean lesser deadweight loss
%++e2a+ 2##7!"
penalties inoled increase cost and has sa#e effect as ta(
Si#ilarl% production 'uota li#its lead to underproduction loss
Quotas lead to higher #arFet price and increase profits for suppliers
single seller) &hooses profit6#a(i#i9ing 'uantit%
If EPKsM 8 EPKdM- e'uill) price would re#ain sa#e
S511e4r5 $r%n%$+e =r/+e-ba!e7?
*a+/e 1a,%1%!e7 G3en ea3 $er!#n #Gn! e@/a+ a1#/n4 #f re!#/re! $e#$+e %n !%1%+ar !%4/a4%#n !3#/+7 be 4rea4e7 !%1%+ar+5 =r/+e-ba!e7?
wealth should 1e transferred fro# rich to poor Kresult 1asedM treat others in the sa#e wa% as %ou liFe the# to treat %ou
eer%oneQs wants and needs are sa#e e'ualit% of opportunities
#arginal 1enefit of a dollar is greater for a poor than the rich fairness #ust 1e on the 1asis of fairness of rules)
1enefit to poor 1eing #ore than loss to rich 8X #ore is gained than lost If rules are fair- results will auto#aticall% 1e fair
this i#plies that the total #arginal 1enefit is greater * rules0
$r#b+e1!" +e!!er +ab#/r an7 a$%4a+ . got) #ust recogni9e and protect priate propert%
trade6off 1etween fairness and efficienc% resulting fro# cost of e(ecuting wealth transfer i)e) eer%thing alua1le #ust 1e held 1% people
transfer 1% wa% of higher ta(es will cause the# to worF less- resulting in less than efficient 'uantit% of la1our * priate propert% #ust 1e transferred when it is oluntaril% done
higher ta(es will reduce saings) propert% ac'uisition through an e(change of so#ething else he owns
there is ad#in cost inoled in ensuring the transfer
&4/a+ In%7ene #f 4a, 8 ta( allocation 1etween 1u%er and seller
;r#f%4 1a,%1%!a4%#n <#n!4ra%ne7 b5 ;r#7/4%#n #r2an%!a4%#n
Te3n#+#25 eff%%en5 &o##and s%ste#s0
technolog% defined as #eans of production output with least a#ount of specific inputs
additional technolog% resources #eans additional costs E#n#1% eff%%en5
output at lowest cost Incentie s%ste#s0
lacF of infor#ation on which to 1ase decisions So#ething which is technicall% inefficient canQt 1e econo#icall% efficient
infor#ation has cost associated with it ;r%n%$a+-a2en4 $r#b+e1
T5$e! #f b%J- #r2!"
how #uch custo#ers are willing to pa% Proprietership Soled 1%0
price and #arFeting actiities of co#petitors single owner- decision not 1% group- unli#ited lia1ilit% .
Partnership *
#ultiple owners- unli#ited lia1ilit%- 5
&orporation
1arFe4 #-#r7%na4%#n =D#-%4-5#/r!e+f a$$r#a3? li#ited lia1ilit%- large capital aaila1ilit%
each ingredient picFed fro# indiidual #arFets
lower transaction costs 6 negotiations costs
econo#ies of scale 6 a) Enit cost decreases as olu#e increases
econo#ies of scope 6 when sa#e resources could 1e used to produce a range of serices/goods
econo#ies of tea# production 6 as resources 1eco#e speciali9ed leading to efficiencies
$ll a1oe lead to fir# co6ordination 1eing #ore efficient than #arFet6coord
Eff%%en5 is ealuated 1ased on la1our and capital i#plo%ed
E#n#1% a4%*%45 can 1e produced 1%0
E#n#1% $r#f%4 %! 1a,%1%!e7 G3en MR K M<
E@/%++%br%/1 %n a $erfe4 #1$e4%4%#n 1arFe4
; K &T<
when $J& Z P Z $T&
Short6run profit #a(i#i9ation for a fir# canQt continue for long #ore fir#s will enter to earn profit fir# continues operations and tries to #ini#i9e losses
this will increase suppl% and reduce price till P 8 $T&
/ong6run e'uili1riu# output leel for perfectl% co#petitie fir# is0 no fir#s will earn econo#ic profit KEPM as
T&8T:S When P Z $J&- fir# doesnQt recoer een :unning &ost- and it considers SHETD@WN
which is where $T& is #ini#u# !& 8 $T& 8 !: 8 P
"ir#s will onl% earn Nor#al Profit i)e opportunit% cost of ownerQs entrepreneurial e(pertise
In +#n2-r/nH %nrea!e %n 7e1an7"
leads to higher e'uill) price and suppl%
$ssu#ing !& 8 $T& in the 1eginning
fir#s start earning EP
this will #aFe other fir#s enter #arFet
@r e(isting fir#s increase long6ter# capacit%- leading to rightward shift of Suppl% cure
this will reduce e'uill) price and increase e'uil) 'uantit% till !& 8 $T&
i)e) EP co#es 1acF to 9ero
S%1%+ar+5H re7/4%#n %n 7e1an7 %n +#n2-4er1
#aFes fir#s to either downsi9e or leae industr% shifting suppl% cure
such that EP is again 9ero
"ir# e(periences econo#ic losses when
$s shown a1oe- %n $erfe4 #1$e4%4%#n"
E#n#1% $r#f%4 =;-&T<? %! 1a,%1%!e7 when !: 8 !& as long as fir# recoers $J&- its
When ; K &V<H
L#n2-r/n e@/%++%br%/1 $r%e
could 1e higher/lower depending upon econo#ies/disecono#ies of scale
this depends upon fir#Qs /:$T& cure Krefer /@NG :EN $J) T@T$/ &@ST &ureM
Technolog% adance#ents generall% reduce input costs
"or a price taFer- !arginal :eenue 8 Price Kas de#and cure is flatM helps fir#s earn Econo#ic Profit till others adopt the change too
"or producers facing downward6facing de#and cures- !: Z P since price #ust 1e reduced in order to sell additional units reduces #arFet price in long ter#
e(isting fir#s using older techs) Will e(perience econo#ic losses and will 1e forced out
M#n#$#+5 $r%e-!e44%n2 !4ra4e2%e! F#r $r%e 7%!r1%na4%#n 4# G#rFH !e++er 1/!4"
Single6price face a downward sloping de#and cure
To #a(i#ise profits- #onopolists will e(pand Quantit% till !: 8 !& hae at least two identifia1le groups of custo#ers haing different de#and elasticities
To ensure profit- De#and cure #ust lie a1oe $T& for QN so that PN X $T& 1e a1le to preent custo#ers fro# reselling
Price discri#ination
different consu#ers different price
atte#pt to clai# consu#er surplus
when different consu#ers classes canQt sell
!onopolists are price searchers
the% e(peri#ent with different prices to find out one that #a(i#ises profit
Na4/ra+ 1#n#$#+5" a*era2e #!4 an7 1ar2%na+ #!4 $r%%n2 Re2/+a4%#n! 4# %1$r#*e re!#/re a++#a4%#n
&*era2e #!4 $r%%n2"
&! #1$are7 4# $erfe4 #1$e4%4%#nH M#n#$#+5 forces #onopolist to price corresponding to $T& 8 De#and
produces Q#on Z Qpc to clai# consu#er surplus
Q#on #a(i#ises profit as !: 8 !& bprice P#on Increased output- and social welfare Kallocatie efficienc%M
creates deadweight loss w)r)t) perfect co#p) K!& 8 !CM
further loss of efficienc% seeFing/esta1lishing P#on Mar2%na+ #!4 $r%%n2"
forces #onopolist to reduce price such that De#and 8 !&
econo#ies of scale are so pronounced that $T& is #ini#i9ed when there is . fir# this results in a loss to the fir# therefore su1sid% 8 $T& 6 !& is re'uired
fi(ed costs are high and #arginal costs are low
without regulation- #onopolist will #a(i#i9e profits 1% producing where !: 8 !& D%ff%/+4%e! 4# re2/+a4#r! %n #n4r#++%n2 $r%e! %n a!e #f 3%23 barr%er!"
Econo#ies of scope can also lead to a #onopol% /acF of infor#ation on fir#Qs $T&- !& or de#and schedule
&ost shifting0 fir# has no incentie to reduce costs as that will cause regulators to reduce prices
Qualit% regulations0 difficult to #easure) "ir# can reduce 'ualit% to #aintain profits
Special interest effect0 fir# #a% influence regulations 1% political connections
M< a!!/1e7 #n!4an4 f#r !%1$+%%45
F%r1! %n 1#n#$#+%!4% #1$e4%4%#n
face downward6sloping de#and cure 7e1an7 /r*e! 2a%n e+a!4%%45 fr#1
de#and cures are highl% elastic #onopol% 6X oligopol% 6X #onopolistic co#p) 6X perfect co#petition
this ensures #onopolist end up getting onl%
referred to
Though !onopolistic co#petition leads to inefficient production/higher price
Perfect co#petition is characterised 1% no product differentiation
I1$#r4ane #f %nn#*a4%#nH $r#7/4 7e*e+#$1en4H a7*er4%!%n2 an7 bran7%n2
Innoation
"ir# produces Q such that !: 8 !& and charges PN In L#n2-r/n %n 1#n#$#+%!4% #1$e4%4%#n fir#s that 1ring new and innoatie products face less elastic cures
Cecause of econo#ic profit 8 PN6 $T&N- #ore fir#s enter P X !& 8X inefficient allocation of resources ena1ling the# to increase price and earn EP
this leads to downward shift of de#and cure till $T& isnQt #ini#u# 8X inefficient production 1ut 1ecause of low 1arrier to entr%- the% need to continuall% innoate
Price slightl% higher than perfect co#petition $dertising
infor# custo#er of differentiators
create perception of differences 1etween products that are actuall% si#ilar
It can actuall% 1ring down aerage costs Kif adertising results in larger salesM
Crand na#e
the% can earn great profits if the% agree to share a restricted output 'uantit%
1ut onl% if neither of the# do not cheat
@ligopolists #a(i#ise their total profits 1% Ooining together KcolludingM and operating as single seller K#onopolistM
Successful collution happens when0
cheating is eas% to detect
threat of new entrants in #arFet is less
enforce#ent of anti6collusion laws- and penalties of collusion are weaF
Fa4#r! %nf+/en%n2 !/$$+5 #f +ab#/r
Increase KdecreaseM in price of fir#Qs output increases KdecreasesM de#and for la1our people prefer leisure- wage rates #ust 1e high enough for the# to gie up leisure
Effect of factors other than price depends upon co#ple#ent Ksu1stituteM nature wages- are opportunit% cost of leisure
e)g) decrease in co#puter price decreased de#and for &usto#er Serices professional as wages increase- alue of leisure for ind) increase- and so does #arginal wages
de#and for IT professionals increased howeer as the% are co#ple#entar% si9e of adult population also affect suppl% of la1our
E+a!4%%45 #f 7e1an7 #f +ab#/r capital accu#ulation of ite#s that increase efficienc% at ho#e also increases suppl%
#ore elastic in long run as in long run #ore things can 1e changed e)g) auto#ated #achiner%
#ore for la1our6intensie production processes ;35!%a+ an7 F%nan%a+ <a$%4a+
PN 8 $T&N such that EP 8 + %n L#n2 r/n
@ligopol% fir#s are in a ;r%!#nerA! D%+e11a t%pe of situation
"actors influencing fir#Qs 7e1an7 f#r +ab#/r
#ore where la1our represents significant portion of costs two pri#ar% factors of production 6 la1our KpeopleM- ph%sical capital K#achinesM
degree to which la1our and capital K#achinesM could 1e su1stituted ph%sical assets of fir# Kplant- propert%- e'uip#ent 6 PPEM
e)g) warehouse operations for filling/shipping orders has #ore elastic de#and of la1our greater the de#and of ph%sical capital- greater the de#and for financial capital
airlinesQ de#and for pilots is less elastic howeer "or profit #a(i#isation0
when 1u%ers decide the price e)g) single e#plo%er in the region a !:Pla1our 8 Wage :ate
$ fir# will e#plo% additional ph%sical capital untill its !:P 8 &ost of &apital i)e) interest rate
Difference 1etween !:Pla1our and !:Pcapital is that
returns on la1our happen i##ediatel% while returns on
ph%sical capital happens oer a period of ti#e
De#and for financial capital is deried fro#
present alue of !:P of ph%sical capital
downward sloping cure
Suppl% of financial capital is drien 1%0
influenced 1% consu#ption now or later
a interest rates
1 current inco#es
c e(pected future inco#es
"or the e#plo%er- #a(i#u# profit will 1e when !&/8!:P
addnl) reenue 1% e#plo%ing addnl) la1our 8 #arginal cost of la1our
!onosponic e#plo%er will e#plo% lesser la1our KQ#M at W#
this leads to deadweight loss of undere#plo%#ent
as !:Padditional worFer X Wage
If worFers are unionised and e#plo%er is #onopsonist
actual wage is decided 1% 1argaining
E#n#1% Ren4 an7 #$$#r4/n%45 #!4!
@pportunit% cost of an e#plo%ee is what he could earn in ne(t highest6pa%ing Oo1
"or low sFill Oo1s- as there are #an% opps - opp) &ost is er% close to wage rate
e)g) wage rate at a car wash
"or high6sFills Oo1s- @pp) &ost and Wage :ate hae significant difference
e)g) a highl% successful actor
Econo#ic rent 8 Earnings 6 @pportunit% &osts
Si#ilar to producerQs surplus
this i#plies that a highl% sFilled professional
will #aFe high econo#ic rent
at it is difficult to replace hi#
E(cept for price- if an%thing else changes de#and/suppl%) It would shift de#and- suppl% cures as appropriate
price will function to e'ualise 'uantit% de#anded 1% consu#ers and produced 1% producers
Deter#inants of suppl% and de#and other than the price of the good in 'uestion- such as consu#ersQ inco#e- input prices and so on- are not e(plicitl% represented in the suppl%6de#and diagra#) &hanges in the alues of these aria1les are represented 1% shifts in the suppl% and de#and cures) C% contrast- responses to changes in the price of the good are represented as #oe#ents along unchanged suppl% and de#and cures)
an% cost changes will shift suppl% cure- an% 1enefit changes will shift de#and cure
when consu#ers increase the 'uantit% de#anded ^$T $ GIJEN P:I&E^- it would lead to de#and cure shift
si#ilarl% when supplier price changes 1ecause of input costs or otherwise- that would shift supplier cure
suppl% or de#and increase will lead to outwards #oe#ent of respectie cure) Decrease will lead to inwards #oe#ent of respectie cure
S/b!%7%e!9@/#4a!
for the last unit of each good and serice produced
deadweight loss fro# oerproduction 6 !C Z !& to societ%
Si#ilarl% production 'uota li#its lead to underproduction loss
Quotas lead to higher #arFet price and increase profits for suppliers
$e#$+e %n !%1%+ar !%4/a4%#n !3#/+7 be 4rea4e7 !%1%+ar+5 =r/+e-ba!e7?
treat others in the sa#e wa% as %ou liFe the# to treat %ou
got) #ust recogni9e and protect priate propert%
i)e) eer%thing alua1le #ust 1e held 1% people
priate propert% #ust 1e transferred when it is oluntaril% done
propert% ac'uisition through an e(change of so#ething else he owns
;r#7/4%#n #r2an%!a4%#n
&o##and s%ste#s0
chain of co##and followed e)g) ar#%
where its eas% to #onitor/#easure perfor#ance
Incentie s%ste#s0
incentie 1ased to #otiate worFers for perfor#ance
;r%n%$a+-a2en4 $r#b+e1
incentie/#otiations of #anagersKagentM different fro# principal K ownersM
Soled 1%0
ownership in fir#
incentie pa%
long6ter# contract0 to encourage &E@s deelop strategies for long6ter# profit
LaG #f 7%1%n%!3%n2 re4/rn!" as #ore and #ore of one resource is added- output Feeps increasing 1ut at decreased rate
Econo#ies of scale 1ecause0
. saings due to #ass production
* speciali9ation of la1our and #achiner%
5 e(perience
Disecono#ies of scale 1ecause of0
. increasing 1ureaucrac%
* #otiating large worFforce
5 great 1arrier to innoation and entrepreneurial actiit%
3 increased principal6agent pro1le#
when $J& Z P Z $T&
fir# continues operations and tries to #ini#i9e losses
When P Z $J&- fir# doesnQt recoer een :unning &ost- and it considers SHETD@WN
"ir#s will onl% earn Nor#al Profit i)e opportunit% cost of ownerQs entrepreneurial e(pertise
In +#n2-r/nH %nrea!e %n 7e1an7"
leads to higher e'uill) price and suppl%
$ssu#ing !& 8 $T& in the 1eginning
fir#s start earning EP
this will #aFe other fir#s enter #arFet
@r e(isting fir#s increase long6ter# capacit%- leading to rightward shift of Suppl% cure
this will reduce e'uill) price and increase e'uil) 'uantit% till !& 8 $T&
i)e) EP co#es 1acF to 9ero
S%1%+ar+5H re7/4%#n %n 7e1an7 %n +#n2-4er1
#aFes fir#s to either downsi9e or leae industr% shifting suppl% cure
such that EP is again 9ero
In !3#r4-r/n- onl% la1our and raw6#aterial costs can 1e altered
In +#n2-r/n- all including plant si9e- e'uip#ent- technolog% can 1e altered
/ong6run cost cures are called $+ann%n2 /r*e!-
"ir# e(periences econo#ic losses when ; V &T<
as long as fir# recoers $J&- its +#!! G%++ be +e!! 43an F%,e7 <#!4!
When ; K &V<H fir# is at S3/47#Gn $#%n4
L#n2-r/n e@/%++%br%/1 $r%e
could 1e higher/lower depending upon econo#ies/disecono#ies of scale
this depends upon fir#Qs /:$T& cure Krefer /@NG :EN $J) T@T$/ &@ST &ureM
Technolog% adance#ents generall% reduce input costs
helps fir#s earn Econo#ic Profit till others adopt the change too
reduces #arFet price in long ter#
e(isting fir#s using older techs) Will e(perience econo#ic losses and will 1e forced out
F#r $r%e 7%!r1%na4%#n 4# G#rFH !e++er 1/!4"
face a downward sloping de#and cure
hae at least two identifia1le groups of custo#ers haing different de#and elasticities
1e a1le to preent custo#ers fro# reselling
Re2/+a4%#n! 4# %1$r#*e re!#/re a++#a4%#n
&*era2e #!4 $r%%n2"
forces #onopolist to price corresponding to $T& 8 De#and
Increased output- and social welfare Kallocatie efficienc%M
Mar2%na+ #!4 $r%%n2"
forces #onopolist to reduce price such that De#and 8 !&
this results in a loss to the fir# therefore su1sid% 8 $T& 6 !& is re'uired
D%ff%/+4%e! 4# re2/+a4#r! %n #n4r#++%n2 $r%e! %n a!e #f 3%23 barr%er!"
/acF of infor#ation on fir#Qs $T&- !& or de#and schedule
&ost shifting0 fir# has no incentie to reduce costs as that will cause regulators to reduce prices
Qualit% regulations0 difficult to #easure) "ir# can reduce 'ualit% to #aintain profits
Special interest effect0 fir# #a% influence regulations 1% political connections
this ensures #onopolist end up getting onl% N#r1a+ ;r#f%4
referred to eff%%en4 re2/+a4%#n
Though !onopolistic co#petition leads to inefficient production/higher price
Perfect co#petition is characterised 1% no product differentiation
I1$#r4ane #f %nn#*a4%#nH $r#7/4 7e*e+#$1en4H a7*er4%!%n2 an7 bran7%n2
fir#s that 1ring new and innoatie products face less elastic cures
ena1ling the# to increase price and earn EP
1ut 1ecause of low 1arrier to entr%- the% need to continuall% innoate
infor# custo#er of differentiators
create perception of differences 1etween products that are actuall% si#ilar
It can actuall% 1ring down aerage costs Kif adertising results in larger salesM
Successful collution happens when0
threat of new entrants in #arFet is less
enforce#ent of anti6collusion laws- and penalties of collusion are weaF
Fa4#r! %nf+/en%n2 !/$$+5 #f +ab#/r
people prefer leisure- wage rates #ust 1e high enough for the# to gie up leisure
wages- are opportunit% cost of leisure
as wages increase- alue of leisure for ind) increase- and so does #arginal wages
si9e of adult population also affect suppl% of la1our
capital accu#ulation of ite#s that increase efficienc% at ho#e also increases suppl%
;35!%a+ an7 F%nan%a+ <a$%4a+
two pri#ar% factors of production 6 la1our KpeopleM- ph%sical capital K#achinesM
ph%sical assets of fir# Kplant- propert%- e'uip#ent 6 PPEM
greater the de#and of ph%sical capital- greater the de#and for financial capital
"or profit #a(i#isation0
!:Pla1our 8 Wage :ate 1 !:Pcapital 8 &ost of &apital
!:Pcapital present alue of future returns
$ fir# will e#plo% additional ph%sical capital untill its !:P 8 &ost of &apital i)e) interest rate
@pportunit% cost of an e#plo%ee is what he could earn in ne(t highest6pa%ing Oo1
"or low sFill Oo1s- as there are #an% opps - opp) &ost is er% close to wage rate
"or high6sFills Oo1s- @pp) &ost and Wage :ate hae significant difference
Econo#ic rent 8 Earnings 6 @pportunit% &osts
this i#plies that a highl% sFilled professional
as #ore and #ore of one resource is added- output Feeps increasing 1ut at decreased rate
MONITORINC 6ODS &ND ;RI<E LEVEL =;C 12'?
P@PE/$TI@N Sources of Ene#plo%#ent
W@:KING $GE P@PE/$TI@N %oung and institutionali9ed
/$C@: "@:&E not in la1our force or ongoing creation/destruction of Oo1s
E!P/@AED une#plo%ed
Ene#plo%#ent rate 8 Ke#plo%ed / la1our force M N.++
/a1our force participation 8 Kla1our force / worFing age popluationM N .++
e#plo%#ent to population 8 Ke#plo%ed / worFing age populationM N .++
8 une#plo%#ent rate N la1our force participation
;RODU<TION &ND ;RI<ES =;C 137?
fr%4%#na+" nor#al la1or turnoer- people entering/leaing la1or force
S4r/4/ra+" co9 of change in technolog%- sFills
<5+%a+" co9 of econo#ic recession/e(pansion
F/++ E1$+#51en4" when no c%clical une#plo%#ent
Na4/ra+ /ne1$+#51en4 ra4e 8 une#pl%#ent rate at full e#plo%#ent
&22re2a4e 3#/r!
total la1or used to produce real GDP cost of &PI 1asFet at 1ase period prices
or ongoing creation/destruction of Oo1s
Rea+ Ga2e ra4e!
'uantit% of good/serices an hourQs worF can 1u%
co#1ines wages with price6leels
new goods
Potential GDP0 when full e#plo%#ent 'ualit% changes
real GDP fluctuates around potential GDP Cias is as #uch as .= hiher
<;I 8 cost of &PI 1asFet at current prices
nor#al la1or turnoer- people entering/leaing la1or force
co9 of change in technolog%- sFills Inf+a4%#n ra4e
co9 of econo#ic recession/e(pansion <;I %! ba%!e7
when no c%clical une#plo%#ent
Na4/ra+ /ne1$+#51en4 ra4e 8 une#pl%#ent rate at full e#plo%#ent
D .++ &PI X .++ #ostl%
cost of &PI 1asFet at 1ase period prices
new goods su1stitution
'ualit% changes outlet su1stitution
Cias is as #uch as .= hiher
<;I 8 cost of &PI 1asFet at current prices
Inf+a4%#n ra4e 8 K&PIcurent %ear 6 &PI last %earM N .++/ &PIlast %ear
<;I %! ba%!e7 1ecause it doesnQt taFe into account0
$sset allocation decision Kpg) .+3M
F#/r !4e$! %n $#r4f#+%# 1214- $r#e!!" Re4/rn #bPe4%*e!"
write a polic% state#ent <a$%4a+ $re!er*a4%#n
deelop an inest#ent strateg% o1Oectie of earning at least the inflation rate
i#ple#ent the plan with less or no chance of loss
#onitor and update inestorQs needs and appropriate when ti#e hori9on is less and fund needed in near future
<a$%4a+ a$$re%a4%#n =1#!4 r%!F5?
Inest#ent o1Oecties #ust 1e descri1ed in ter#s of 1oth risF and return o1Oectie of earning at least the inflation rate e(ceeding inflation
. return oer so#e period of ti#e
* risF appropriate when funds needed in the future e)g) retire#ent
Specif%ing inest#ent goals in ter#s of Oust returns e(poses inestor to0 </rren4 In#1e =%n#1e #bPe4%*e?
in6appropriate- risF% inest#ent strategies when pri#ar% purpose is to produce inco#e instead of appreciation
4#4a+ re4/rn =+#n2 4er1H r%!F a*er!e?
,+= of the portfolio return differences can 1e e(plained 1% o1Oectie of haing portfolio grow in alue to #eet future needs
difference in portfolio allocations through capital gains as well as re6inest#ent of inco#e
;#r4f#+%# Mana2e1en4 =$2- 111?
MarF#G%4J 1#7e+ - a!!/1$4%#n! #n %n*e!4#rA! be3a*%#r
inest#ent opp) is looFed at as pro1a1ilit% dist) of EK:M oer inest#ent hori9on
risF is #easured as ariance of EKr M
all decisions are #ade considering onl% :isF and EK:M
inestors prefer lesser risF for sa#e EK:M
inestors #a(i#ise their e(pected utilit% oer inest#ent hori9on
<#-*ar%ane
@n an indifference cures- all inest#ents are e'uall% preferred
$ cure towards NW is #ore preferred
R%!F Or S47- 7e*%a4%#n #f a $#r4f#+%# 3a*%n2 3 a!!e4!
The risF of a portfolio depends on0 asset weights- std) de) of assets- and correlation of asset returns
&!!e4 ;r%%n2 M#7e+ =$2- 13)?
<a$%4a+ 1arFe4 43e#r5 In4r#7/4%#n #f a r%!F-free a!!e4
E(tension of Portfolio theor% 1% addition of a risF6free asset conerts efficient frontier into &!/ Kcapital #arFet lineM
&!!/1$4%#n!"
#arFowit9 inestors0 portfolio selection along efficient frontier
unli#ited risF free lending and 1orrowing
In ter#s of risF0 a$%4a+ a$$re%a4%#n O 4#4a+ re4/rn O %n#1e #bPe4%*e
;#r4f#+%# 43e#r5" onl% for risF% assets
all inestors see sa#e EKr M /s risF this holds co9 correlation coeff) 8 +
all inestors hae sa#e period hori9on
all inest#ents are infinitel% diisi1le
frictionless #arFets0 no ta(es or transaction costs
no inflation or interest rate changes
#arFets in e'uili1riu#
D- A risF% portfolios on Efficient "rontier
a portfolio along :":6A is preferred to :":6D co9 of #ore
will actuall% hae lesser e'uili1riu# returns as co#pared to returns for a gien risF
a stocF haing #ore s%ste#atic risF Kie) #ore sensitiit% to This can go on till we reach !) $t ! .++= is inested in portfolio !
#arFet risF factorsM
<&;MH SMLH De4a
Gien that onl% releant risF for an indiidual asset i
is the coariance with #arFet returns- relationship is straight line
S!/ uses 1eta on (6a(is- hence all stocFs- portfolio of stocFs
Ceta as risF contri1ution of a securit% to a well6diersified portfolio
&!/ plots against total risF Ksig#a PM- hence onl% efficient
portfolios plot on &!/
I7en4%f5%n2 /n7er9#*er*a+/e7 $ssu#ption0 Differential 1orrowing and lending rates
$s all portfolios under e'uili1riu# are on S!/- a portfolio is0 as 1orrowing and lending rates are different in real6world
underalued if its esti#ated returns are a1oe S!/ &!/ has so#e curature on Efficient frontier which i#plies
i)e esti#ated returns X e(pected Kor re'uiredM returns that 1e%ond !- returns would 1e lesser 1ecause of higher rates
oeralued if esti#ated returns are 1elow S!/
i)e esti#ated returns Z e(pected Kor re'uiredM returns $ssu#ption0 transaction costs
Eer#-be4a 1#7e+ No transaction costs assu#tion guarantees that all stocFs #oe to
Instead of :":- a 9ero 1eta portfolio can 1e used S!/ at e'uili1riu#) In case there are transaction costs inoled-
as a risF6free asset slightl%6#ispriced stocFs wonQt 1e 1rought 1acF to S!/)
This will allow a 1and of EKr M around S!/ whose width will depend upon
transaction costs
S!/ &!/ differences

&! $er 43e 43e#r5H stocF haing #ore uns%ste#atic risF
%n e@/%+%br%/1 wil plot on S!/
In*e!41en4 #n!4ra%n4!" #n!4ra%n4! 43a4 %1$a4 $#r4f#+%# #n!4r/4%#n
o1Oectie of earning at least the inflation rate
with less or no chance of loss
appropriate when ti#e hori9on is less and fund needed in near future
<a$%4a+ a$$re%a4%#n =1#!4 r%!F5?
o1Oectie of earning at least the inflation rate e(ceeding inflation
oer so#e period of ti#e Le2a+ an7 re2/+a4#r5 fa4#r!"
appropriate when funds needed in the future e)g) retire#ent constraints that i#pact inest#ent decision of indiiduals as well as "II
</rren4 In#1e =%n#1e #bPe4%*e? e)g) penalt% for earl% withdrawals
when pri#ar% purpose is to produce inco#e instead of appreciation Un%@/e nee7! an7 $referene!
4#4a+ re4/rn =+#n2 4er1H r%!F a*er!e?
o1Oectie of haing portfolio grow in alue to #eet future needs
through capital gains as well as re6inest#ent of inco#e
MarF#G%4J 1#7e+ - a!!/1$4%#n! #n %n*e!4#rA! be3a*%#r
inest#ent opp) is looFed at as pro1a1ilit% dist) of EK:M oer inest#ent hori9on
all decisions are #ade considering onl% :isF and EK:M
inestors #a(i#ise their e(pected utilit% oer inest#ent hori9on
<#rre+a4%#n
8X higher negatie correlation leads to0
1etween 6. and U. lesser portfolio risF
higher diersification gains
R%!F Or S47- 7e*%a4%#n #f a $#r4f#+%# 3a*%n2 3 a!!e4! can gie 1etter EKr M for a gien risF
can 1e less risF% for a gien EKr M
represents a set of portfolios that will gie highest returns at each risF leel
The risF of a portfolio depends on0 asset weights- std) de) of assets- and correlation of asset returns
Un!5!4e1a4% r%!F
conerts efficient frontier into &!/ Kcapital #arFet lineM that disappears during portfolio construction
uni'ue- fir# specific
!arFet portfolio ! 1est that can 1e achieed
L%@/%7%45" potential need of read% cash
T%1e 3#r%J#nI refers to ti#e 1etween #aFing an inest#ent and needing the funds
Ta, #nern0 after ta( returns are what inestors are concerned with
In ter#s of risF0 a$%4a+ a$$re%a4%#n O 4#4a+ re4/rn O %n#1e #bPe4%*e
O$4%1a+ $#r4f#+%#
Eff%%en4 fr#n4%er" a portfolio is efficient when no other portfolio0
this holds co9 correlation coeff) 8 + on risF diersification
S5!4e1a4% r%!F anA4 be 7%*er!%f%e7
:isF that re#ains in portfolio Q!Q 1e%ond
diersification is called S%ste#atic risF
!e/r%4%e! !en!%4%*e 4# 1arFe4
a portfolio along :":6A is preferred to :":6D co9 of #ore 1#*e1en4! 3a*e 3%23 S5!4e1a4% R%!F
Total risF 8 s%ste#atic U uns%ste#atic risF
This can go on till we reach !) $t ! .++= is inested in portfolio !
all inestors hae to do to get the risF/return co#1ination that
suits the# the #ost is to si#pl% ar% proportion 1etween ! and :": Since one shouldnQt 1e co#pensated for 1earing risF that could hae 1een diersified-
at e'uili1riu# securit% returns depend onl% upon S%ste#ic :isF
43%! a+!# %1$+%e! 43a4 43e r%!F%e!4 !4#F 1a5 n#4 $r#*%7e 2rea4e!4 re4/rn!
<#1$ar%!#n be4Geen <ML an7 SML $dding #ore assets to portfolio will 1ring down ENSASTE!$TI& risF with decreasing rate- howeer S%ste#atic risF can increase or decrease depending upon additional assets 1eta
$ssu#ption0 Differential 1orrowing and lending rates
as 1orrowing and lending rates are different in real6world
&!/ has so#e curature on Efficient frontier which i#plies &!/ plots returns /s total risF S!/ plots all portfolios against Ceta) Hence- whether efficient or not- the% will 1e on S!/ on e'uili1riu#
that 1e%ond !- returns would 1e lesser 1ecause of higher rates Portfolios that are not efficient plot under Efficient "rontier $s per &$P!- in e'uili1riu#- prices are direct function of s%ste#ic risF
&o#pare & and D 1etween two graphs $ low61eta stocF/portfolio liFe & #a% not necessaril% 1e less risF% when considering
Een though D has higher s%ste#ic risF- &Qs total risF is higher total risF
No transaction costs assu#tion guarantees that all stocFs #oe to $ssu#ption0 heterogenous e(pectations and planning periods $ssu#ption0 no ta(es- &!/- S!/ is arried at on an assu#ption of no ta(es)
S!/ at e'uili1riu#) In case there are transaction costs inoled- ho#ogenous e(pectations and single holding period is indiidual inestors pa% different #arginal ta(es depending upon their sla1s
slightl%6#ispriced stocFs wonQt 1e 1rought 1acF to S!/) necessar% to 1ring #ultitude of &!/- S!/ into one) so their &!/- S!/ 1ased on post6ta( inco#e will 1e different
This will allow a 1and of EKr M around S!/ whose width will depend upon If these assu#ptions are not alid- there will 1e #ultiple Inestors pa% capital gain ta( on securities and ordinar% inco#e ta( on diidend
&!/ and S!/ leading to a 1and of lines with width dependent EKr after ta(M 8 [KPe6P1MK. 6 TcapitalgainM U Di N K. 6 Tordinar%M\ / P1
on diergence on EK:# M and holding periods
M re$re!en4! #arFet portfolio
In*e!41en4 #n!4ra%n4!" #n!4ra%n4! 43a4 %1$a4 $#r4f#+%# #n!4r/4%#n
constraints that i#pact inest#ent decision of indiiduals as well as "II
e)g) penalt% for earl% withdrawals
where inestoQs highest indifference cure is tangent to efficient frontier
that disappears during portfolio construction
!arFet portfolio ! 1est that can 1e achieed
potential need of read% cash
refers to ti#e 1etween #aFing an inest#ent and needing the funds
0 after ta( returns are what inestors are concerned with
O$4%1a+ $#r4f#+%# for each inestor is one
S5!4e1a4% r%!F anA4 be 7%*er!%f%e7
:isF that re#ains in portfolio Q!Q 1e%ond
diersification is called S%ste#atic risF
!e/r%4%e! !en!%4%*e 4# 1arFe4
1#*e1en4! 3a*e 3%23 S5!4e1a4% R%!F
Total risF 8 s%ste#atic U uns%ste#atic risF
Since one shouldnQt 1e co#pensated for 1earing risF that could hae 1een diersified-
at e'uili1riu# securit% returns depend onl% upon S%ste#ic :isF
43%! a+!# %1$+%e! 43a4 43e r%!F%e!4 !4#F 1a5 n#4 $r#*%7e 2rea4e!4 re4/rn!
$dding #ore assets to portfolio will 1ring down ENSASTE!$TI& risF with decreasing rate- howeer S%ste#atic risF can increase or decrease depending upon additional assets 1eta
S!/ plots all portfolios against Ceta) Hence- whether efficient or not- the% will 1e on S!/ on e'uili1riu#
$s per &$P!- in e'uili1riu#- prices are direct function of s%ste#ic risF
$ low61eta stocF/portfolio liFe & #a% not necessaril% 1e less risF% when considering
$ssu#ption0 no ta(es- &!/- S!/ is arried at on an assu#ption of no ta(es)
indiidual inestors pa% different #arginal ta(es depending upon their sla1s
so their &!/- S!/ 1ased on post6ta( inco#e will 1e different
Inestors pa% capital gain ta( on securities and ordinar% inco#e ta( on diidend
EKr after ta(M 8 [KPe6P1MK. 6 TcapitalgainM U Di N K. 6 Tordinar%M\ / P1
$dding #ore assets to portfolio will 1ring down ENSASTE!$TI& risF with decreasing rate- howeer S%ste#atic risF can increase or decrease depending upon additional assets 1eta
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'uestion
differentiation 1etween gains/losses under reenue /s other co#prehensie inco#e espwciall% w)r)t) inest#ents and assets
#ini#u# pension lia1ilit%
how is ^co#pleted contract^ handled under I":S
discontinued operations handling) Post #easure#ent date and during phaseout period
how is prior6period adOus#ent reported7
&"I calculation- pro1le# D)
inentor% write up e(a#ple
ta( calculation in dou1le6depr and per6unit #ethods
i#pact of accretion e(pense on interest coerage ratio 6 wh% is accretion e(pense added to ECIT7
relationship 1etween netinco#e and &"operations
how does /I"@ &@GS i#pact &"@7
/ong6lied asset 6 Q No) *
differentiation 1etween gains/losses under reenue /s other co#prehensie inco#e espwciall% w)r)t) inest#ents and assets

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