KASNEB CIFA Intermediate cheat sheet

Money market instruments mature within one year: Treasury bills, commercial paper, certificates of deposit, banker's acceptances and repurchase agreements.

Capital market instruments are long-term: ordinary shares, preference shares, corporate bonds and long-dated government bonds.

Primary market issues new securities (IPO, rights issue, bond issue); the secondary market trades securities already issued, with no new cash to the issuer.

Kenyan Treasury bill price = Face value ÷ [1 + (discount rate × days to maturity ÷ 364)]; the Central Bank of Kenya prices bills on a 364-day year.

Bond price = Σ C/(1+r)^t + F/(1+r)^n; the price falls when the required yield rises and rises when it falls.

Current yield = annual coupon ÷ market price; it ignores the capital gain or loss realised if the bond is held to maturity.

A rights issue offers existing shareholders new shares pro rata, usually below market price; a bonus issue is free and raises no cash.

Forwards and futures create an obligation; options confer a right without obligation; swaps exchange streams of cash flows between parties.

Bid-ask spread is the market maker's compensation for dealing and inventory risk; a narrow spread signals high liquidity and low transaction cost.

Current ratio = current assets ÷ current liabilities; quick ratio = (current assets − inventory) ÷ current liabilities.

DuPont: ROE = net profit margin × total asset turnover × equity multiplier, separating profitability, efficiency and leverage effects.

EPS = (net income − preference dividends) ÷ weighted average number of ordinary shares outstanding.

P/E = market price ÷ EPS; the earnings yield is its reciprocal; a high P/E implies expected growth or higher perceived risk.

Dividend cover = EPS ÷ DPS and dividend payout = DPS ÷ EPS; the two add to 1.0 when expressed as ratios.

Gordon growth model: P0 = D1 ÷ (r − g); valid only when g < r and growth is expected to remain constant.

Working capital cycle = inventory days + receivable days − payable days; shortening the cycle releases cash for other uses.

Free cash flow = operating cash flow − capital expenditure; it funds debt service, dividends and discretionary reinvestment.

Interest cover = EBIT ÷ interest expense; a ratio close to 1.0 indicates high financial risk and limited headroom.

Expected return = Σ (probability × return); portfolio expected return is the weighted average of constituent asset returns.

Portfolio variance depends on weights, individual variances and covariances; lower correlation between assets reduces total portfolio risk.

Beta = Cov(security, market) ÷ Var(market); the beta of the market portfolio equals 1.0 and the risk-free asset has beta 0.

CAPM: E(R) = Rf + β(Rm − Rf); the term β(Rm − Rf) is the risk premium for bearing systematic risk.

Sharpe ratio = (Rp − Rf) ÷ σp uses total risk; Treynor ratio = (Rp − Rf) ÷ β uses systematic risk only.

Jensen's alpha = Rp − [Rf + β(Rm − Rf)]; a positive alpha means outperformance after adjusting for systematic risk.

Diversification removes unsystematic (company-specific) risk; systematic (market) risk remains and is the risk that is priced.

The efficient frontier plots portfolios giving the highest expected return for each level of risk; rational risk-averse investors hold a portfolio on it.

The security market line plots required return against beta; a security plotting above the line offers an excess return and is undervalued.

Modified duration = Macaulay duration ÷ (1 + yield); percentage price change ≈ −modified duration × change in yield.

Interest rate parity: F = S × (1 + i_quote) ÷ (1 + i_base); the currency with the higher interest rate trades at a forward discount.

Purchasing power parity: the expected change in spot rate reflects the inflation differential between the two countries.

Value at Risk estimates the maximum loss over a stated horizon at a given confidence level, e.g. 95% one-day VaR.

Five Cs of credit: character, capacity, capital, collateral and conditions.

An interest rate swap exchanges fixed for floating payments; a cap sets a maximum rate and a floor sets a minimum rate.

Liquidity risk has two forms: funding risk (cannot raise cash when due) and market risk (cannot sell without moving the price).

Risk management cycle: identify, measure, monitor, control and report exposures within an approved risk appetite.

Gap analysis compares rate-sensitive assets and liabilities repricing in each time bucket; a positive gap benefits from rising rates.

Fundamental principles: integrity, objectivity, professional competence and due care, confidentiality, and professional behaviour.

Five ethical threats: self-interest, self-review, advocacy, familiarity and intimidation; safeguards must be applied or the engagement declined.

A self-interest threat arises where a financial interest, fee dependence or personal benefit could bias professional judgement.

Independence requires both independence of mind (state of mind) and independence in appearance (perception of a reasonable third party).

Audit committees should be composed of independent non-executive directors and include at least one member with financial expertise.

Governance codes require separation of the chair and chief executive roles, board balance and disclosure of related-party transactions.

Insider trading uses unpublished price-sensitive information; it is prohibited under securities law and professional codes of conduct.

Segregation of duties prevents one person controlling authorisation, custody and recording of the same transaction.

Confidentiality survives the end of the professional relationship; disclosure is permitted only where required by law or authorised by the client.