CS Professional SMCF cheat sheet

Equity = residual ownership claim: limited liability, residual dividend rights, voting rights, and lowest priority in liquidation after creditors and preference shareholders.

Preference shares rank ahead of ordinary shares for dividends and liquidation but behind all debt; cumulative, participating, and redeemable variants change the cash-flow profile.

Bonds: price and yield move inversely. Clean price excludes accrued interest; dirty (full) price = clean price + accrued interest from last coupon date.

Accrued interest (straight convention) = coupon rate × days since last coupon ÷ days in coupon period × face value.

Money market instruments (T-bills, commercial paper, CDs, repos) have original maturity ≤ 1 year and are typically quoted on a discount-yield basis.

Discount yield = (face − price)/face × 360/days to maturity; add-on (investment) yield uses price in the denominator and a 365-day year.

Derivatives: futures are exchange-traded, standardised and margined daily; forwards are OTC and carry counterparty credit risk. Options give the buyer a right, not an obligation.

Hybrids: convertible bonds embed an equity call option; warrants are detached equity options issued by the company; depositary receipts represent foreign shares.

Real return ≈ nominal return − inflation; effective annual rate = (1 + periodic rate)^periods per year − 1, which exceeds the nominal rate when compounding is more frequent.

IPO vs. further issue: an IPO admits a company to listing for the first time; a rights issue, placing, or open offer raises additional capital for an already listed issuer.

Offer methods: public offer (full prospectus, retail access), placing (targeted institutional buyers, faster, dilutive to non-participants), rights issue (pre-emptive, pro rata to existing holders).

Pre-emptive rights protect existing shareholders from dilution; a disapplication of pre-emption requires shareholder approval and typically a stated percentage limit.

Underwriting transfers subscription risk to the underwriter for a fee; a firm-commitment arrangement buys the unsold shares, a best-efforts arrangement does not.

Bookbuilding sets price from an order book of indicative bids; a fixed-price offer sets the price in advance. A greenshoe (over-allotment) option lets the stabilising manager buy up to a set percentage above the base deal.

Prospectus liability: the document must be accurate and not misleading; issuers and directors face civil and criminal exposure for material misstatements or omissions.

Due diligence covers financial, legal, tax, and operational review; a working-capital statement and indebtedness statement are standard prospectus contents.

Pricing anchors: comparable company multiples (P/E, EV/EBITDA), discounted cash flow, and the bookbuilding demand curve. A discount to fair value is common to attract demand.

Cost of issuance includes underwriting fees, legal and accounting fees, listing fees, and marketing; net proceeds = gross proceeds − costs.

Order types: market order executes immediately at best available price; limit order executes only at the limit or better; stop order converts to a market order when the trigger is hit.

Order-driven markets match buy and sell orders in a central limit order book by price then time priority; quote-driven markets rely on dealers posting bid and ask prices.

Bid-ask spread is the implicit cost of immediacy; it widens with volatility, thin liquidity, and information asymmetry.

Short selling borrows securities to sell, hoping to buy back lower; risk is theoretically unlimited. Naked short selling is selling without a locate or borrow.

Margin trading: initial margin sets the minimum equity percentage at purchase; maintenance margin triggers a margin call; equity = market value − loan.

Circuit breakers and price limits pause or cap trading after large moves; they are volatility controls, not price guarantees.

Settlement cycle: T+2 is the common standard for equities. Settlement risk is the risk that one leg of a trade delivers and the other does not.

Market impact and slippage are execution costs distinct from commissions; VWAP and implementation shortfall are common execution benchmarks.

Insider dealing and market manipulation (spoofing, layering, wash trades, marking the close) are prohibited in secondary trading regardless of venue.

Brokers act as agent for the client and charge commission; dealers act as principal, buying and selling from their own book and earning the spread.

Market makers quote two-way prices and are often obliged to maintain continuous quotes in assigned securities in exchange for privileges.

Investment banks perform underwriting, advisory (M&A), and sales and trading; conflicts arise when research, advisory, and trading sit in one firm.

Asset managers owe fiduciary-type duties to clients; custody banks safekeep assets separately from the manager's own balance sheet.

Clearing houses novate trades and become central counterparty to both sides, mutualising counterparty risk through margin and a default fund.

Settlement and depository agents hold securities in book-entry form; nominee structures mean the beneficial owner's identity is recorded separately.

Credit rating agencies, proxy advisers, and index providers are information intermediaries whose methodologies can move prices and flows.

Segregation of client money and assets from firm assets is a core investor-protection rule; commingling is a serious breach.

Remuneration and inducement rules require disclosure of commissions or third-party payments that could bias advice.

Objectives of securities regulation: investor protection, fair and efficient markets, and financial stability; disclosure is the primary tool.

Registration/licensing regimes gate market entry; ongoing requirements cover capital adequacy, conduct, record-keeping, and reporting.

Market abuse has three limbs: insider dealing, unlawful disclosure of inside information, and market manipulation.

Inside information = specific, non-public information likely to have a significant effect on price if made public.

Disclosure of interests in shares: crossing a threshold (commonly 3% or 5% depending on regime) triggers a notification obligation.

Takeover rules: mandatory bid triggers, equal treatment of shareholders, and the prohibition on frustrating action without shareholder approval.

Enforcement tools include censure, fines, disgorgement, suspension, and referral for criminal prosecution; cooperation credit reduces sanctions.

Cross-border: equivalence and passporting regimes let firms serve clients in other jurisdictions subject to home-state supervision.

Record retention (commonly 5–7 years) and transaction reporting to the regulator are standard operational obligations.

WACC = (E/V) × Ke + (D/V) × Kd × (1 − tax rate), where V = E + D and Ke is the cost of equity.

CAPM: Ke = risk-free rate + beta × equity risk premium. Beta measures systematic risk only; unsystematic risk is diversifiable.

Modigliani-Miller without tax: firm value is independent of leverage. With tax: value rises by the tax shield, approximately debt × tax rate.

Trade-off theory balances the interest tax shield against financial distress and agency costs; pecking order prefers internal funds, then debt, then equity.

Leverage raises return on equity in good years and magnifies losses in bad years; EPS accretion/dilution depends on the earnings yield versus after-tax cost of acquisition financing.

NPV = sum of cash flows discounted at the project's cost of capital; accept if NPV > 0. IRR is the discount rate at which NPV = 0.

Free cash flow to firm = EBIT × (1 − tax) + depreciation − capex − increase in working capital.

Dividend policy: in a perfect market with no taxes or transaction costs, dividend policy does not change firm value; clientele and signalling effects matter in practice.

Working capital cycle = inventory days + receivable days − payable days; a shorter cycle releases cash.

P/E = price ÷ earnings per share; trailing uses last reported EPS, forward uses forecast EPS. Higher P/E implies higher expected growth or lower risk.

EV/EBITDA is capital-structure neutral; EV = market capitalisation + net debt + minority interest + preferred shares.

Dividend discount model: P0 = D1 ÷ (Ke − g); Gordon growth requires g < Ke. Sustainable g = ROE × retention ratio.

DCF value = sum of FCFF discounted at WACC + terminal value; terminal value via Gordon growth = FCFF(n+1) ÷ (WACC − g).

Terminal value often dominates DCF output; sensitivity to WACC and g should always be shown.

Price-to-book = market price ÷ book value per share; useful for financial institutions where book approximates economic value.

Bond valuation: price = present value of coupons plus face value, discounted at yield to maturity; a bond trades at par when coupon = YTM.

Relative valuation requires comparable selection on growth, margin, and risk; unadjusted peer multiples can mislead.

Sensitivity and scenario analysis test how value changes with key assumptions; a valuation range is more defensible than a single point.

Total risk = systematic + unsystematic; only systematic risk is priced because unsystematic risk can be diversified away.

Sharpe ratio = (portfolio return − risk-free rate) ÷ standard deviation of returns; higher is better on a risk-adjusted basis.

Beta = covariance of asset and market returns ÷ variance of market returns; the market portfolio has beta 1.

Duration measures bond price sensitivity to yield: approximate percentage price change ≈ −modified duration × change in yield.

Convexity corrects duration for large yield moves; positive convexity benefits the holder in either direction of rate change.

VaR at 95% one-day means a 5% chance of loss greater than the stated amount over one day; VaR says nothing about the size of losses beyond the threshold.

Correlation drives diversification benefit; portfolio variance = w1²σ1² + w2²σ2² + 2w1w2ρσ1σ2.

Behavioural biases (overconfidence, anchoring, loss aversion, herding) cause systematic deviations from rational pricing.

Performance attribution splits return into allocation, selection, and interaction effects versus a benchmark.

Board structure: unitary board (single board with executives and non-executives) versus two-tier board (supervisory and management boards).

Independence criteria typically exclude former employees, advisers, and family members; independent directors should form a majority of key committees.

Audit committee: independent, oversees external audit, internal controls, and financial reporting; at least one member should have financial expertise.

Remuneration committee sets executive pay and should align pay with long-term performance; say-on-pay votes give shareholders an advisory or binding voice.

Separation of chair and CEO roles reduces concentration of power; a lead independent director serves the same purpose where roles are combined.

Shareholder rights: one share one vote, ability to call meetings, to table resolutions, and to vote on major transactions.

Stakeholder versus shareholder models differ on whose interests the board serves; codes commonly adopt an enlightened shareholder value approach.

Disclosure of governance: board composition, committee membership, related-party transactions, and compliance with the code on a comply-or-explain basis.

Whistleblowing channels and anti-bribery controls are governance mechanisms that reduce agency costs and misconduct risk.

Principles-based disclosure requires material information to be disclosed accurately, completely, and on a timely basis; materiality is the key filter.

Selective disclosure to analysts or favoured investors is prohibited; information must be released to the market as a whole.

Chinese walls and information barriers separate advisory from trading and research functions; wall-crossing must be logged and controlled.

Conflicts of interest must be identified, disclosed, and managed; disclosure does not cure a conflict that should be avoided.

Personal account dealing rules: pre-clearance, no dealing ahead of client or firm orders (front-running), and minimum holding periods.

Insider lists record everyone with access to inside information during a transaction; they support surveillance and enforcement.

Ethical decision framework: identify stakeholders, the duty owed, the applicable rule, and whether the action would survive public scrutiny.

Fair dealing means no client is advantaged by timing, price, or information; allocation of oversubscribed issues must follow a disclosed policy.

Record-keeping and audit trails are ethical obligations as well as legal ones: if it is not documented, it cannot be evidenced.