CISA: Domain #2, Part A: IT Governance
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CPA EXAM: BEC
interest rate risk (yield) - ANS-fluctuations in value of the instrument in response to change in
interest rates
interest rate risk - ANS-fixed coupon/(1+r)
market/systematic/nondiversifiable risk - ANS-fluctuation in value as a result of operating within
an economy (market risk)
unsystematic/firm-specific/diversifiable - ANS-portion of a firm's or industry's risk associated
w/random causes & can be eliminated through diversification
credit risk - ANS-company's inability to secure financing or secure favorable credit terms as a
result of poor credit ratings
default risk - ANS-done on not publicly traded (real estate land); exposed when they desire to
sell their security but can't in a timely manner OR when material concessions made to so so
lenders/investors - ANS-who does default risk impact
borrowers - ANS-who does credit risk impact
investors - ANS-who does price risk impact
price risk - ANS-when decline in value of individual security/portfolio; unique to individual
inv/portfolios contribute to price risk = concern w/market volatility
stated annual interest rate - ANS-interest charged before any adj. for compounding or market
factors
effective rate - ANS-actual finance charge associated with borrowing after reducing loan
proceeds for charges & fees related to a loan origination
interest paid/period((principalxSAR)/#periods)
divided by NET proceeds loan - ANS-calc. of effective rate
annual % rate - ANS-noncompounded version of effective annual % rate; required for disclosure
by federal regulations
effective periodic rate x # periods - ANS-annual % rate calc.
, effective annual % - ANS-stated rate adj. for # of compounding periods per year
simple interest - ANS-interest paid only on the original amount of principal without regard to
compounding
orig. principal*(interest rate/period)*# periods - ANS-simple interest calc.
compound interest - ANS-based on original principal + any unpaid interest earnings/expenses
orig. principal*(1+interest)^# periods - ANS-compound interest calc
required ror - ANS-calculated by adding risk premiums to RFR
diversification - ANS-process of building a portfolio of investments of different and offsetting
risks
exchange rate risk - ANS-exists because the relationship between domestic & foreign
currencies may be subject to volatility
trade & financial - ANS-two major influences on exchange rates
relative inflation rates - ANS-when domestic inflation > foreign inflation; inverse relationship
between demand and inflation
relative income levels - ANS-as income increase, exchange rate changes and demand
increases (direct relationship)
government controls - ANS-trade/exchange barriers that artificially suppress natural forces of
supply & demand
relative interest rates & capital flow - ANS-interest rates create demand by motivating
investments; effect of interest rates is directly affected by volume of capital allowed between
countries
transaction exposure - ANS-potential that an organization could suffer economic loss/gain upon
settlement of individual transactions as a result of change in exchange rates
economic exposure - ANS-potential that the PV of an organization's cash flows could increase
or decrease as a result of change in exchange rates
translation exposure - ANS-risk that assets/liab/equity/inc. of a consolidated organization with
foreign subs will change as a result of change in exchange rates
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