Ch 1 Financial Services Sector
| SWIFT | Messaging network — NOT a settlement system or currency |
| Insurance core function | RISK MANAGEMENT (not payments, not capital raising) |
| IPO core function | CAPITAL RAISING |
| Custodian role | Safekeeping + settlement + corporate actions. NOT investment decisions, NOT advice |
| Retail client protection | HIGHEST. ECP = LOWEST |
| Disintermediation | Borrowers bypass banks via capital markets |
Ch 2 Regulation & AML
| FATF | AML/CFT global standards |
| IOSCO | Securities regulation |
| BIS / Basel | Bank capital standards |
| FSB | Systemic financial stability |
| ML stages | Placement → Layering → Integration ("in, hide, out clean") |
| "Concealing" | An OFFENCE, NOT a stage |
| EDD trigger | PEPs, high-risk jurisdictions, unusual transactions |
| Tipping off | SEPARATE criminal offence — don't tell anyone about a SAR |
| Principles-based | Outcomes + judgement (TCF, Consumer Duty) |
| Rules-based | Detailed prescriptive — certainty, less flexibility |
Insider dealing: applies to listed securities only — NOT commodities, NOT property, NOT open-ended fund units
Ch 3 Money Market Instruments
| T-bill | Issued by GOVERNMENT. Discount to par, redeem at par. No coupon. |
| Commercial paper | Issued by CORPORATE. The corporate T-bill. |
| Certificate of Deposit | Issued by BANK. Time deposit with fixed maturity. |
| Repo | Short-term loan secured by securities. "Sell + repurchase later" at higher price. |
| Negative rates | Depositor PAYS the bank to hold cash |
Ch 3 FX Quick Reference
| Spot settlement | T+2 for most majors. USD/CAD = T+1. |
| Buying base currency | You pay the OFFER (higher price) |
| Selling base currency | You receive the BID (lower price) |
Forward = Spot × (1 + i_quote) / (1 + i_base)
- Pro-rate annual rates for sub-yearly forwards (÷2 for 6m, ÷4 for 3m)
- Higher home rate → home currency at forward DISCOUNT
- CIP uses NOMINAL RATES ONLY. Ignore inflation if given.
Ch 3 Bonds — Yields & Prices
Flat yield = Annual coupon / Market price
| YTM / GRY | Includes coupon income AND pull-to-par gain/loss |
| Above par | YTM < flat yield (capital loss to redemption) |
| Below par | YTM > flat yield (capital gain to redemption) |
| Rates ↑ | Bond prices ↓ (inverse relationship) |
| Inverted curve | Recession signal — short rates above long |
| Investment grade | BBB− and above. BB+ and below = "junk" |
| Highest duration | Long-dated zero-coupon. Most rate-sensitive. |
| Accrued interest tax | INCOME tax (not CGT) |
Ch 3 Corporate Actions
| Rights issue | MANDATORY WITH OPTIONS. Take up / sell rights / let lapse |
| Bonus (scrip) issue | Mandatory. Free shares, no cash raised |
| Stock split | Mandatory. More shares, lower price. Economic value unchanged |
| Open offer | Like rights issue but NON-RENOUNCEABLE (can't sell) |
| Final redemption | Mandatory, no options. Bond principal repaid at maturity |
| Warrant | Right to BUY new shares from company. Dilutive on exercise |
Ch 3 Markets & Trading
| Quote-driven | Market makers post two-way prices, profit from spread |
| Order-driven | Central order book matches buys/sells automatically |
| Principal | Trades from OWN BOOK. Spread is its profit. |
| Agent | Arranges trades for others. Commission. No inventory. |
| DvP | Securities + cash exchanged SIMULTANEOUSLY. Eliminates principal risk. |
| CCP | Novation. Reduces COUNTERPARTY risk, NOT market risk |
| Bearer security | Owner = whoever holds the certificate. Now rare due to AML. |
| Best execution | Price + speed + settlement + size — NOT adviser bonus |
Ch 3 Derivatives
| Futures | OBLIGATION (both sides). Standardised, exchange-traded. |
| Call buyer | RIGHT to BUY at strike. Max loss = premium. |
| Put buyer | RIGHT to SELL at strike. Max loss = premium. |
| Option writer | OBLIGATED if exercised. Receives premium. Loss can be huge. |
| Call ITM | Underlying > strike |
| Put ITM | Underlying < strike |
| Short futures position | OBLIGATION to deliver. Close by buying. |
| Swap | Exchange of cash flows. Notional typically NOT exchanged. |
Ch 3 Commodities & Digital
| Hard commodities | Mined/extracted (oil, metals) |
| Soft commodities | Grown/agricultural (wheat, sugar, coffee) |
| Contango | Futures ABOVE spot. Negative roll yield drags ETFs. |
| Backwardation | Futures BELOW spot. Positive roll yield. |
| Gold | Safe haven, no income, storage cost |
| Stablecoin risk | Reserve quality, redemption confidence, ISSUER risk — NOT risk-free |
Ch 4 Collective Investments
| Open-ended | Units created/cancelled with demand. Price = NAV. (Unit trust, OEIC, SICAV, ETF) |
| Closed-ended | Fixed shares on exchange. Can trade at PREMIUM or DISCOUNT to NAV. (Investment trust, REIT) |
| Investment trust | Can use GEARING (borrow). Independent board. Permanent capital. |
| UCITS | EU retail fund passport. 5/10/40 diversification rule. |
| OEIC oversight | Depositary (independent) holds assets. ACD runs the fund. |
| Unit trust legal owner | TRUSTEE holds for unit holders |
Ch 4 ETFs & ETCs
| ETF trading | INTRADAY on exchange at market prices near NAV |
| AP arbitrage | Creation/redemption keeps ETF price near NAV |
| Full replication | Holds every index constituent |
| Sampling | Representative subset |
| Synthetic | Swap-based. Counterparty risk to swap provider. |
| ETC physical | Holds actual commodity (eg, gold) |
| ETC synthetic | Futures-based. Roll yield matters. |
Ch 4 Hedge Funds, PE, Structured
| Hedge fund structure | Unauthorised, sophisticated investors. Lock-ups + notice. |
| 2-and-20 | 2% mgmt + 20% performance fee above high-water mark |
| Long/short equity | Long undervalued, short overvalued. Variable net exposure. |
| Market neutral | Zero net beta. Returns = stock-picking only. |
| Global macro | Big directional bets on macro themes (Soros vs BoE 1992) |
| Private equity | 10-year LP fund life. Exit = trade sale / IPO / secondary |
| Capital-protected | NOT risk-free — issuer credit risk |
| SCARP | Capital at risk. Can lose principal. |
Ch 4 Sukuk & Islamic Finance
| Riba | Interest — PROHIBITED. No conventional bonds. |
| Gharar | Excessive uncertainty/speculation — prohibited |
| Haram industries | Alcohol, gambling, pork, conventional finance |
| Sukuk | OWNERSHIP of underlying asset. Returns from asset performance, NOT interest. |
| Sukuk al-Ijara | Lease structure. SPV buys asset, leases back to originator. |
Ch 5 Macroeconomics
| GDP | Output WITHIN BORDERS (location) |
| GNP | Output by NATIONALS (nationality) |
| Recession | 2 consecutive quarters of negative real GDP |
| Fiscal policy | GOVERNMENT spending & taxes |
| Monetary policy | CENTRAL BANK rates, QE, reserves |
| Budget deficit | Spending > revenue (not the same as trade deficit) |
| Demand-pull inflation | Excess demand vs capacity |
| Cost-push inflation | Costs rising (oil shock, wage shock) |
| QE | Central bank buys bonds with new reserves. Lowers long-term yields. |
| Inverted yield curve | Recession signal |
| Higher reserve requirement | REDUCES money supply |
GDP = C + I + G + (X − M)
Real return ≈ Nominal − Inflation
Ch 5 Statistics
| Mean | Σx / n |
| Median | Middle value (or mean of 2 middles if even) |
| Geometric mean | [(1+r₁)(1+r₂)…]^(1/n) − 1. Always ≤ arithmetic |
| SD | Total volatility (√variance) |
| Sample SD | Divide by (n−1), not n (Bessel's correction) |
| Range | Max − min |
| Correlation | −1 to +1. Weakest = closest to 0. |
| Normal dist | 68% / 95% / 99.7% within 1/2/3 SD |
| Diversification | Best when correlations are LOW or NEGATIVE |
Ch 5 Financial Maths
PV = FV / (1+r)ⁿ
FV simple = P × (1 + r×t)
FV compound = P × (1+r)ᵗ
PV perpetuity = C / r
PV growing perpetuity = C₁ / (r−g)
PV annuity = PMT × [1 − (1+r)⁻ⁿ] / r
| Rule of 72 | Years to double ≈ 72 / rate% |
| Inflation-adjusted retirement | Inflate income to future, capitalise as perpetuity |
Ch 5 Ratios & Valuation
ROCE = EBIT / (Equity + LT debt)
Interest cover = EBIT / Interest
Quick ratio = (CA − Inventory) / CL
EVA = NOPAT − (Capital × WACC)
Gordon: P = D₁ / (k − g) [requires g < k]
| Price falls (earnings same) | P/E DOWN, dividend yield UP |
| High P/E | Investors expect growth |
| Negative Z-score | Imminent insolvency risk |
| Negative EVA | Returns < cost of capital. Value destroying. |
| MVA | Present value of all future EVA |
Ch 6 Risk & Portfolio Theory
| Systematic (market) risk | CANNOT diversify away |
| Unsystematic (specific) risk | CAN diversify away |
| Standard deviation | TOTAL volatility (sys + unsys) |
| Beta | SYSTEMATIC risk only. β=1 moves w/ market. |
| Alpha | Actual − CAPM expected. Skill (or luck) |
| Beta 0.5 | Cautious investor. Defensive. |
| Beta 2.5 | Aggressive only. Suitability breach for cautious. |
| Diversification | ~15-20 stocks across sectors = most of benefit |
Ch 6 EMH, CAPM, APT
| EMH weak | Past prices in price → technicals don't work |
| EMH semi-strong | All PUBLIC info in price → fundamental analysis on public info doesn't work |
| EMH strong | ALL info (incl. inside) — empirically rejected |
| CAPM | SINGLE factor: market beta |
| APT | MULTI-factor |
CAPM: E(R) = Rf + β × (Rm − Rf)
Insider dealing laws prove strong-form EMH doesn't hold
Ch 6 Behavioural Biases
| Anchoring | Fixating on entry price ("get back to what I paid") |
| Loss aversion | Losses feel ~2× more than equivalent gains |
| Confirmation bias | Seeking info that confirms existing view |
| Herding | Following the crowd |
| Gambler's fallacy | "After 6 down days, a rise is DUE" |
| Disposition effect | Hold losers, sell winners |
| Overconfidence | Over-trading, concentration |
| Availability bias | Overweighting recent/vivid events |
Ch 6 Strategies & Performance
| Core/satellite | Passive core + active satellites |
| Top-down | Macro → sectors → securities |
| Bottom-up | Company fundamentals first |
| Value | Low multiples (P/E, P/B), out of favour |
| GARP | Growth at reasonable price (PEG ratio) |
| Immunisation | PASSIVE bond strategy. Match duration to liability. |
| Negative screening | Excludes "bad" industries |
| Positive screening | Selects best-in-class ESG |
Sharpe = (Rp − Rf) / σp
Treynor = (Rp − Rf) / β
| TWR | Manager performance. Eliminates cash-flow timing. |
| MWR (IRR) | Investor's actual experience |
| Sortino | Like Sharpe but DOWNSIDE deviation only |
| Max drawdown | Largest peak-to-trough |
Ch 7 Investment Advice — Services
| Discretionary | MANAGER decides within parameters |
| Advisory | Manager RECOMMENDS, client DECIDES |
| Execution-only | NO advice. Firm just executes. |
| Suitability | Applies to ADVISED/DISCRETIONARY. Match recommendation to client. |
| Appropriateness | NON-ADVISED + COMPLEX products. Knowledge/experience check. |
| Categorisation purpose | Set the REGULATORY PROTECTION level (not risk profile) |
Execution-only = no suitability test. Don't confuse.
Ch 7 Six-Step Planning
- Establish relationship
- Gather data (KYC)
- Analyse financial situation
- Action plan / recommendations
- Implement
- Review
After data gathering = analysis. Before implementation = action plan.
| KYC | For SUITABILITY (objectives, risk, knowledge, time) |
| CDD | For AML (identify, verify, monitor — NOT guarantee returns) |
Ch 7 Risk Profiling & Tax
| Risk tolerance | Psychological willingness (SUBJECTIVE) |
| Risk perception | Subjective view of risk |
| Risk capacity | Financial ABILITY to absorb loss (OBJECTIVE) |
| Time horizon | Time until funds NEEDED — not lifespan |
| WHT | Tax deducted AT SOURCE on cross-border income |
| DTA / DTR | Prevents same income being taxed in 2 jurisdictions |
| Relief at source | Treaty rate applied at payment (with documentation) |
| WHT reclaim location | SOURCE country (where income arose) |
| Accrued interest | INCOME tax (not CGT) |
| Domicile | Drives IHT/estate tax |
| Residence | Drives income tax / CGT |
Ch 8 Pensions
| DB | BENEFIT defined by formula. EMPLOYER bears risk. |
| DC | CONTRIBUTION defined. MEMBER bears risk. |
| Contributory | Both employer + employee pay in |
| Non-contributory | Employer funds entire cost |
| DB factors (member) | Salary, service, age, accrual rate — NOT fund performance |
| State pension | PAYG. Based on contribution record. |
| Annuity rates driver | Long-dated gilt yields |
| Drawdown | Flex income, member bears investment + longevity risk |
| Impaired-life annuity | HIGHER income (shorter life expectancy) |
| Sequencing risk | Bad early returns + withdrawals = early-retirement disaster |
Ch 8 Life & Health Cover
| Term assurance | Pays only if death WITHIN term. No maturity value. |
| Whole-of-life | Pays whenever death occurs. Premium higher. |
| Level term | Fixed sum assured |
| Decreasing term | Matches reducing debt (eg, capital + interest mortgage) |
| Non-profit | Fixed sum assured, NO bonuses |
| With-profits | Sum + annual + terminal bonuses |
| Unit-linked | Depends on unit value. Holder bears investment risk. |
| Critical illness | TAX-FREE LUMP SUM on diagnosis |
| Income protection | Regular income while unable to work |
| Key person | Protects BUSINESS from loss of key employee |
| Shareholder protection | Funds BUYOUT of deceased shareholder's stake |
| Insurable interest | Required at OUTSET. Unlimited in own / spouse's life. |
| Utmost good faith | Disclose all material facts (even unasked) |
Ch 8 Estate Planning & Trusts
| POA | Authorises someone to manage donor's affairs |
| Lasting POA | Continues / activates on loss of capacity |
| Lost capacity (no POA) | Need court-appointed deputy |
| Bare trust | Single beneficiary with absolute entitlement (often parent → child) |
| Discretionary trust | Trustees DECIDE distribution among class of beneficiaries |
| Blind trust | For PUBLIC FIGURES — avoids conflict of interest |
| Trustee | Holds LEGAL TITLE for beneficiaries |
| Foundation | Separate LEGAL ENTITY. Civil-law alternative to trust. |
| Life policy in trust | Pays OUTSIDE estate — useful for IHT funding |
| UK IHT | 40% above nil-rate band. 7-year PET rule for gifts. |
ALL Exam-Day Tactics
- 120 mins / 100 Qs = 72 secs per Q. Easy ones go fast; bank time for the calculations.
- Flag and move on if stuck — come back. Don't burn 3 mins on 1 Q.
- Eliminate clearly-wrong options first. Even one elimination doubles your odds on a guess.
- "Most likely / best / least" — underline the qualifier mentally. Multiple options can be partly right.
- "Never" / "always" / "all" — usually WRONG. Real-world finance rarely admits absolutes.
- Numerical Qs: sanity-check the magnitude. If a 30-year compound is 7%, double-check before answering "£14,000".
- Skip the calculator on simple ratios — flat yield = coupon/price, often a 5% or 6% mental check.
- If you genuinely don't know, GUESS. Blank answers score 0. There's no negative marking.