CIFA Advanced Level

Financial Modelling and Data Analytics flashcards

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What are the three layers of every financial model, and what is the most important rule about them?

Inputs: the facts and assumptions (history, growth, rates, loan terms). Calculations: the logic that turns inputs into forecasts and schedules, with no typed numbers. Outputs: what the decision needs (a valuation, a ratio, a chart). Keep the three physically separate, so a change is made in one place and flows everywhere.

What do B7, $B$7, B$7 and $B7 do when a formula is copied, and which key cycles them?

B7: relative, the column and row both move. $B$7: absolute, neither moves; use it for a single input such as the discount rate. B$7: the row is fixed and the column moves; suits a header row of rates. $B7: the column is fixed and the row moves; suits a column of years. F4 cycles a reference through them while you edit it.

Why is a year 0 outlay never placed inside Excel's NPV range, and what is the correct form?

NPV treats its first value as arriving one period from now, so an outlay inside the range is discounted for a year it never waits. Correct: =NPV(rate, flows for years 1 to n) + the year 0 flow (entered as a negative). Prove it with a discount factor row whose present values add to the same figure.

How does Goal Seek differ from Solver?

Goal Seek changes one input cell (a constant) until one formula cell hits a target, such as a break-even price. It accepts no constraints. Solver changes many decision variables to maximise, minimise or hit a value of an objective cell, subject to constraints. Solver methods: Simplex LP for linear problems, GRG Nonlinear for smooth nonlinear ones (portfolio variance, WACC), Evolutionary for non-smooth ones.

What are the six phases of CRISP-DM, in order?

Business understanding, data understanding, data preparation, modelling, evaluation and deployment. The process is iterative: data understanding often refines the question, modelling often needs more preparation, and evaluation can send the project back to business understanding.

How is the weighted average cost of capital calculated?

WACC = (E/V) x ke + (P/V) x kp + (D/V) x kd x (1 - t) E, P and D are the market values of equity, preference shares and debt, and V is their total. Debt is taken after tax because interest is deductible; preference shares are not. kd is today's yield on the debt, never the coupon.

What is a corkscrew in a financial model, and how is it checked?

A four-row roll-forward of any balance (debt, fixed assets, retained earnings, cash): opening balance (the previous closing balance), additions, deductions, closing balance. Check: total additions less total deductions must equal the final closing balance less the first opening balance.

How is parametric value at risk calculated, and which z values does Excel give?

Zero mean: VaR = z x standard deviation over the horizon x value of the position. Mean-adjusted: VaR = (z x standard deviation - expected return) x value. z = NORM.S.INV(0.95) = 1.6449 at 95%, and NORM.S.INV(0.99) = 2.3263 at 99%. Scale the standard deviation by the square root of time and the mean in proportion to time.

How are accuracy, precision and recall read from a confusion matrix, and why can accuracy mislead?

Accuracy = (TP + TN) / all cases. Precision = TP / (TP + FP): the share of flagged cases that are real. Recall = TP / (TP + FN): the share of real cases the model catches. When the event is rare (default, fraud), predicting no event for everyone scores a high accuracy and catches nothing.

How do duration and convexity estimate a bond's price change when yields move?

%change in price = -modified duration x change in yield + 0.5 x convexity x (change in yield)^2. Modified duration = Macaulay duration / (1 + y/f). In Excel, DURATION returns Macaulay duration and MDURATION modified duration.

What do the custom formats #,##0, and #,##0.0,, show for a cell holding 12,345,678?