Series
CFA Level 2 Notes
43 posts
- #1
Level 1 Content Review
We rebuild arithmetic vs geometric mean from scratch — and why using the wrong average on stock returns will quietly wreck your portfolio lol.
· 7 min read - #2
Forward Pricing
A casual walkthrough of forward pricing for zero coupon bonds — showing how today's spot rates imply a locked-in future price, and why realized rates rarely match what we expected.
· 2 min read - #3
Par Rate
Par rate is just the YTM of a bond trading at face value — and once you get that, bootstrapping spot rates from the par curve is honestly just arithmetic.
· 6 min read - #4
Rolling Down the Yield Curve
A casual breakdown of how buying longer-maturity bonds and selling early lets you squeeze out extra return by rolling down an upward-sloping yield curve.
· 4 min read - #5
Swap Rate Curve
Breaking down what swap rates actually are, why the swap curve matters as a benchmark, and how it stacks up against government bond yield curves.
· 5 min read - #6
Spread Measures
A been-here-done-this rundown of swap spread, I-spread (yes, with that annoying linear interpolation), and Z-spread — basically Level 1 déjà vu, but let's power through it.
· 4 min read - #7
Term Structure Theory
A quick rundown of the theories that explain why the yield curve slopes the way it does — and the sneaky exam traps hiding in each one.
· 3 min read - #8
Yield Curve Risks and Economic Factors (Nelson-Siegel Model)
Why effective duration falls flat for non-parallel yield curve shifts — and how key rate duration and the Nelson-Siegel model actually fix that.
· 4 min read - #9
Yield Curve Volatility and Term Premium
Finally wrapping up Chapter 1 — yield curve volatility, term premium, and how the curve twists with expansions, recessions, and flight-to-quality~
· 3 min read - #10
The Arbitrage-Free Valuation Framework
Chapter 2 kicks off with arbitrage-free bond valuation — value additivity, dominance, and the binomial interest rate tree where volatility is the secret sauce!
· 4 min read - #11
Binomial Trees, Part 2
This time we build the interest rate tree from scratch — calibration, e^{2σ} forward-rate spacing, and all — then value it via backward induction or pathwise.
· 2 min read - #11
Valuing Option-Free Bonds with the Binomial Model
A quick walkthrough of valuing option-free bonds using backward induction on a binomial tree, plus why pathwise valuation matters when cash flows are path-dependent.
· 3 min read - #12
Term Structure Models: CIR, Vasicek, Ho-Lee, and KWK
A rundown of CIR, Vasicek, Ho-Lee, and KWK — what makes each term structure model tick and the key characteristics you actually need to nail for the exam.
· 4 min read - #13
Bonds with Embedded Options
A quick rundown of callable vs. putable bonds — who holds the option, why callables are cheaper, and how to back out the embedded option value from the straight bond price.
· 2 min read - #14
Valuing Bonds with Embedded Options, Part 1
We finally put the Binomial Tree Framework to work pricing callable and putable bonds, walking through how cash flows shift at every node as rates move.
· 1 min read - #15
Interest Rate Volatility, Rate Level, and Yield Curve Changes: Impact on Embedded-Option Bond Values
Here's the breakdown on how volatility, rate levels, and yield curve shape each hit the value of embedded options in callable and putable bonds — exam staples, all three.
· 2 min read - #16
Option-Adjusted Spread (OAS)
OAS is the constant spread you add to every node of a risk-free binomial tree until your callable bond price matches the market — and spoiler: it has nothing to do with options.
· 4 min read - #17
Key Rate Duration (Partial Duration)
A casual walkthrough of duration — modified, effective, and key rate — and why assuming a parallel yield curve shift doesn't always cut it.
· 8 min read - #18
Capped and Floored Floaters
Capped floaters put a ceiling on the coupon (great for the issuer), floored floaters set a minimum (great for you), and you value both by tweaking a binomial tree and working backward.
· 2 min read - #19
Convertible Bonds
A casual breakdown of convertible bond terminology — conversion ratio, conversion price, conversion value, straight value, and why CBs trade above their theoretical floor.
· 4 min read - #20
Credit Valuation Adjustment (CVA)
Diving into CVA — that shave-off amount on OTC derivative valuations that accounts for counterparty default risk, because zero-risk counterparties just don't exist.
· 7 min read - #21
Risk-Neutral Probability of Default
Risk-neutral (aka implied) default probability is just the PD that calibrates you to market prices — so you can discount everything at the risk-free rate, no guesswork needed.
· 3 min read - #22
Credit Scores and Credit Ratings
A quick breakdown of how credit scores differ from credit ratings, why subordinated bonds get notched down, and what credit migration does to bond prices.
· 2 min read - #23
Structural and Reduced-Form Credit Models
A casual walkthrough of structural vs. reduced-form credit models — just enough to nail the pros and cons without drowning in the math.
· 5 min read - #24
Credit Spread Analysis and Term Structure of Credit Spreads
VND, CVA, and why credit spreads have their own term structure — plus what credit quality, the economy, liquidity, and equity vol do to the curve shape.
· 5 min read - #25
Credit Default Swaps (CDS) and CDS Premium
CDS isn't your typical derivative — it's basically bond insurance, and this post breaks down the structure, settlement types, and why you don't even need to own the bond.
· 5 min read - #26
Credit Default Swaps (CDS), Part 2
A casual breakdown of single-name vs. index CDS, how credit correlation drives pricing, and why expected loss is the number that really matters.
· 9 min read - #27
FRA Orientation and Overview
A quick orientation on CFA Level 2 FRA — ditching the shallow-but-wide Level 1 style to go deeper on 5 big themes, kicking off with intercorporate investments.
· 5 min read - #28
Investments in Financial Assets
A casual breakdown of the three types of intercorporate investments — financial assets, associates, and subsidiaries — and how to tell them apart on exams and in real life.
· 10 min read - #29
Equity Method Accounting: Fundamentals
A breakdown of why associate stocks skip fair-value measurement and how the equity method pipes B's net income straight into A's books to close the dividend-manipulation loophole.
· 6 min read - #30
Equity Method Accounting: Advanced Topics
Real-life equity-method: BV ≠ FV, a control premium gets stapled on top, and you've gotta reconstruct income from an FV lens — exactly what the CFA exam tests.
· 4 min read - #31
Equity Method Accounting: Intercompany Transactions and Impairment
A casual breakdown of how intercompany transactions mess with your equity-method income — upstream, downstream, unrealized profits, and when impairment comes knocking.
· 6 min read - #32
Proportionate Consolidation
A quick breakdown of proportionate consolidation — folding in assets, liabilities, revenues, and expenses at your exact ownership %, and why accounting standards don't actually use it.
· 5 min read - #33
Full Consolidation: The Acquisition Method
A casual breakdown of why full consolidation wins over proportionate consolidation, how NCI keeps the balance sheet balanced, and what it does to your ROE and ROA.
· 5 min read - #34
Goodwill (Full and Partial) and Bargain Purchases
Breaking down how goodwill pops out of consolidation accounting, how NCI gets booked, and what happens with partial goodwill and bargain purchases — CFA-style.
· 9 min read - #35
Special Purpose Entities (SPE) and Variable Interest Entities (VIE)
VIEs always get consolidated — no exceptions — and here's the wild history of how Korea's IMF crisis, ABS, and IFRS killed off-balance-sheet SPC financing for good.
· 5 min read - #36
Defined Benefit Pension Plans: Accounting Treatment
A breakdown of how severance pay and DB/DC pension plans hit the financial statements — and why stashing money outside the company matters when things go south.
· 13 min read - #37
Defined Benefit Pension Plans: Analytical Perspective
Even though it got yanked from the 2024 CFA L2 curriculum, here's how analysts reclassify pension F/S and compute TPPC — both ways — from an economic lens.
· 6 min read - #38
Share-Based Compensation
Picking up with post-employment benefits and share-based comp — breaking down the actuarial stuff, stock options, SARs, and the vesting quirks you actually need to know.
· 7 min read - #39
Multinational Operations
A quick breakdown of transaction exposure — how FX rate changes hit your AR and what counts as realized vs. unrealized in multinational accounting.
· 4 min read - #40
Foreign Currency Translation: Types of Currency
A quick breakdown of the three currency types you need for translation — local, functional, and presentation — using Samsung as the running example.
· 4 min read - #41
The Current Rate Method
A quick rundown of the Current Rate Method — when to use it, how to translate I/S before B/S, and how to make sense of AOCI without overcomplicating it!!
· 3 min read - #42
The Temporal Method
Breaking down the Temporal Method — when to use it, which assets get translated at what rate, and how to snap to a gain/loss answer fast on the CFA.
· 8 min read