FIMS cheat sheet

Money market instruments (T-bills, commercial paper, CDs, repos) mature in one year or less; capital market instruments (bonds, equities) exceed one year.

Primary market issuance raises new capital via IPOs, follow-on offerings, and bond auctions; the secondary market provides liquidity and price discovery without issuing new claims.

Order types: market orders execute immediately at best available price; limit orders execute only at the limit or better; stop orders become market orders once the stop price trades.

Bid-ask spread is the implicit transaction cost; quoted spread = ask − bid, and relative spread = (ask − bid) / midpoint.

Equity instruments: common shares carry residual claim and voting rights; preferred shares rank ahead of common for dividends and liquidation but typically lack voting rights.

Bond structures: fixed-coupon, zero-coupon (issued at discount, pays par at maturity), floating-rate (coupon resets off a reference rate), and callable/putable variants.

Derivative instruments (forwards, futures, options, swaps) derive value from an underlying; exchange-traded contracts are standardized and cleared, OTC contracts are customized and carry counterparty risk.

Pooled vehicles: open-end mutual funds price at end-of-day NAV; ETFs trade intraday and may deviate from NAV; hedge funds may impose lockups and performance fees.

GDP (expenditure approach) = C + I + G + (X − M); real GDP uses base-year prices, nominal GDP uses current prices, and the GDP deflator = nominal / real × 100.

Business cycle phases: expansion, peak, contraction (recession), trough; leading indicators (yield curve, building permits, PMI) turn before the cycle, coincident and lagging indicators turn with or after it.

Inflation measures: CPI is a fixed basket (Laspeyres-type, upward bias), PCE covers broader substitution, and core inflation excludes food and energy.

Phillips curve: short-run inverse trade-off between unemployment and inflation; the long-run curve is vertical at the natural rate of unemployment.

Central bank tools: policy rate, reserve requirements, open market operations, and forward guidance; expansionary policy lowers rates to stimulate, contractionary policy raises them.

Monetary policy transmission affects aggregate demand with lags; fiscal policy multipliers are larger when the output gap is negative and smaller near full employment.

Exchange rates: appreciation raises export prices and reduces import prices; a country with higher relative inflation tends to see its currency depreciate under purchasing power parity.

Interest rate parity: covered parity links forward premium to the interest differential; uncovered parity predicts spot change equals the interest differential.

Elasticity and market structure: price elasticity of demand = %Δquantity / %Δprice; monopoly pricing sets marginal revenue equal to marginal cost.

Balance sheet identity: Assets = Liabilities + Equity; the statement of cash flows reconciles beginning and ending cash across operating, investing, and financing activities.

Accrual accounting recognizes revenue when earned and expenses when incurred; CFO (indirect method) starts with net income and adjusts for non-cash items and working capital changes.

Key ratios: current ratio = current assets / current liabilities; quick ratio excludes inventory; debt-to-equity = total debt / total equity; interest coverage = EBIT / interest expense.

Profitability: gross margin = gross profit / revenue; operating margin = EBIT / revenue; ROE = net income / average equity; DuPont ROE = net margin × asset turnover × equity multiplier.

Free cash flow to firm = EBIT × (1 − tax rate) + depreciation − capex − increase in NWC; FCFF is discounted at WACC.

WACC = (E/V) × Re + (D/V) × Rd × (1 − tax rate); Re from CAPM = Rf + β × (Rm − Rf).

NPV = Σ CFt / (1 + r)^t − initial outlay; accept projects with NPV > 0; IRR is the rate making NPV zero and can mislead with non-conventional cash flows or scale differences.

Modigliani-Miller: without taxes and frictions capital structure is irrelevant; with taxes, debt shields create value up to the offsetting costs of financial distress.

Dividend discount model: P0 = D1 / (r − g); sustainable growth g = ROE × retention ratio b, where b = 1 − payout ratio.

Justified P/E = payout ratio / (r − g); a higher required return lowers the justified multiple, a higher growth rate raises it.

Free cash flow to equity = net income + depreciation − capex − ΔNWC + net borrowing; discount at the cost of equity to obtain equity value directly.

Enterprise value = market value of equity + market value of debt − cash; EV/EBITDA is capital-structure neutral and useful for comparing levered firms.

Bond price = Σ coupon / (1 + y)^t + par / (1 + y)^n; price and yield move inversely, and the relationship is convex.

Duration measures first-order price sensitivity: %Δprice ≈ −modified duration × Δy; modified duration = Macaulay duration / (1 + y/k).

Convexity adjustment: %Δprice ≈ −D_mod × Δy + 0.5 × convexity × (Δy)^2; positive convexity benefits the holder for large rate moves.

Spot, forward, and par rates are linked by no-arbitrage; forward rate f(1,2) ≈ [(1 + s2)^2 / (1 + s1)] − 1 for annual compounding.

Credit spreads compensate for default and liquidity risk; expected loss = probability of default × loss given default, and spread ≈ expected loss under risk neutrality.

Forward price for a non-dividend asset: F = S0 × (1 + r)^T; with income or carry costs, F = (S0 − PV(income)) × (1 + r)^T.

Put-call parity (European, non-dividend): C + PV(X) = P + S0; violations imply arbitrage via synthetic positions.

Black-Scholes inputs: call value rises with S0, volatility, time, and risk-free rate; falls with strike price. Delta = ∂C/∂S, between 0 and 1 for calls.

Option Greeks: delta (price sensitivity), gamma (delta change), vega (volatility sensitivity), theta (time decay), rho (rate sensitivity).

Interest rate swap: fixed-rate payer benefits when rates rise; swap value = PV of floating leg − PV of fixed leg; swap duration approximates the difference in leg durations.

VaR at confidence c over horizon h: the loss not exceeded with probability c; parametric VaR = z × σ × portfolio value for a normal return assumption.

Expected shortfall (CVaR) = average loss beyond the VaR threshold; it is sub-additive and captures tail risk that VaR ignores.

Hedging with futures: minimum-variance hedge ratio = β × (σ_portfolio / σ_futures) or the regression coefficient of spot returns on futures returns.

Counterparty and basis risk remain after hedging; exchange clearing reduces counterparty risk but introduces margin and liquidity demands.

Portfolio expected return = Σ wi × E(Ri); two-asset variance = w1²σ1² + w2²σ2² + 2w1w2σ1σ2ρ12.

Diversification benefit grows as correlation falls; with ρ = +1 no risk reduction is possible, with ρ = −1 a risk-free combination may exist.

CAPM: E(Ri) = Rf + βi × (E(Rm) − Rf); beta = Cov(Ri, Rm) / Var(Rm).

Sharpe ratio = (Rp − Rf) / σp; Treynor ratio = (Rp − Rf) / βp; Jensen's alpha = Rp − [Rf + βp(Rm − Rf)].

Efficient frontier: set of portfolios with maximum expected return for each risk level; the tangency portfolio on the capital allocation line maximizes the Sharpe ratio.

Strategic asset allocation sets long-term policy weights from objectives and constraints; tactical allocation makes short-term deviations from policy weights.

Rebalancing rules: calendar (time-based) versus threshold (band-based); threshold rebalancing controls drift but incurs more trading costs.

Performance attribution decomposes return into allocation effect (sector weights) and selection effect (security picking within sectors).

Behavioral biases affecting portfolios include loss aversion, overconfidence, anchoring, and recency bias; awareness supports disciplined rebalancing.

Fiduciary duty comprises duties of loyalty (put client interest first) and care (act with competence and prudence); suitability standards are weaker than fiduciary standards.

Standard of conduct hierarchy: knowledge of the law, independence and objectivity, misrepresentation, misconduct, integrity of capital markets, duties to clients, duties to employers, analysis and recommendations.

Conflicts of interest must be disclosed and managed; disclosure alone does not cure a conflict that impairs objectivity.

Material nonpublic information (MNPI) must not be traded on or used to benefit others; the mosaic theory permits acting on nonmaterial pieces assembled from public and nonpublic sources.

Market manipulation includes creating false prices or volumes, spoofing, and front-running client orders; both are prohibited regardless of intent to profit.

Know-your-client (KYC) and anti-money-laundering (AML) obligations require customer identification, beneficial ownership checks, and suspicious activity reporting.

Recordkeeping and communication rules require retention of client communications and prohibition of misleading marketing or performance presentation.

Gifts and entertainment: accepting or offering benefits that could compromise independence requires disclosure and often pre-clearance under firm policy.

Investment policy statement (IPS) components: objectives (return and risk), constraints (liquidity, time horizon, tax, legal, unique), and review/rebalancing guidelines.

Risk tolerance has willingness (psychological) and ability (financial capacity) components; when they conflict, the lower governs the recommended allocation.

Time horizon: short horizons favor liquidity and capital preservation; long horizons permit higher equity weight and tolerate interim volatility.

Human capital is the present value of future earnings; younger clients typically hold more human capital and can bear more financial risk.

Tax-aware strategies: asset location (tax-deferred vs taxable accounts), tax-loss harvesting, and holding-period management to favor long-term treatment.

Estate planning tools: wills, trusts (revocable and irrevocable), powers of attorney, and beneficiary designations; trusts can control distribution and reduce probate exposure.

Insurance needs analysis: life insurance need ≈ income replacement + debt + education costs − existing assets; term insurance is pure protection, whole life bundles savings.

Retirement funding: required savings rate rises with the gap between desired retirement income and expected pension/social security; Monte Carlo simulation estimates probability of success.

Client communication: document goals, risk tolerance, and constraints in writing; review the IPS when circumstances, markets, or tax law change materially.