Is the CFA Charter Really Worth It?
It’s 7:30 p.m. and I had been in the office since 7:30 a.m. I was staring at a blank PowerPoint slide on one screen and a Bloomberg homepage on the other. For the last several weeks, I had been working tirelessly as our firm prepared to go on the road and raise capital from investors. We had recently hired an outside placement agent to line up investor meetings. We hired a brand consultant to update our firm branding. And I had been tasked with creating the new firm marketing materials. My background had been as a restructuring and bankruptcy advisor. I had no experience as a marketing professional.
I was a CFA® Level II candidate at the time—and it was one month to the test. Studying for the CFA exam is challenging because it requires so much hard work and self-discipline. However, as I progressed, I found the CFA curriculum benefiting me in all sorts of ways I never imagined.
The blank slide on my PowerPoint presentation stared at me. I checked my notes: “prepare chart describing impact of duration.” What did that even mean?
I should know this stuff, I thought to myself. I haphazardly began sketching out a chart. I grabbed my CFA materials, a list of fixed income terminology (so I could keep everything straight), and opened a new Excel spreadsheet.
I used my Bloomberg to pull the CUSIP for the “on the run” 30-year Treasury bond and started entering data into my spreadsheet.
The price of the bond was easy enough to find. Duration was a little tougher. I knew that duration measured the change in bond price for the change in yield, but I wasn’t prepared to discern among the multiple definitions I came across when I looked up the bond’s duration on the Bloomberg:
Effective Duration: the approximate change in price for a 100 basis point (1.00%) change in interest rates
Modified Duration: the approximate change in price for a 100 basis point (1.00%) change in interest rates, assuming a bond’s cash flow does not change when the yield changes
Macaulay Duration: the weighted average maturity of cash flows (in years)
Those definitions seemed almost intentionally complicated. I started checking my CFA study materials. Modified duration, I found, is a static measure, whereas effective duration considers embedded options (callable and puttable bonds). Macaulay duration isn’t meant to measure interest rate sensitivity. Because I was building out a chart with callable bonds, I figured effective duration was the appropriate measure for my presentation.
Next, I would need to determine the convexity. Convexity is a measure of the curvature of how the price of a bond varies with interest rate changes (i.e., how duration changes as the interest rate changes). Convexity allows analysts to account for the fact that duration only measures the approximate change in price for a change in yield.
That is, duration measures assume a parallel shift in the yield curve, but in reality, the yield curve almost never behaves this way. The yield curve typically slopes upward or downward based on market conditions. As you move along the curve, the duration changes, and convexity captures this measure.
I calculated the implied change in price for a 1.00% change in yield:
In order to assess the impact on different types of fixed income, I ran through the same exercise with a fixed rate corporate bond index.
Finally, I analyzed floating rate bonds. Floating rate bonds are a special type of bond in which the coupon is variable. The coupon resets periodically based on a benchmark interest rate such as LIBOR. What makes floating rate bonds particularly unique is that their duration is effectively zero. Because the coupon rate resets to market interest rates, the price is always extremely close to par. When a bond’s coupon rate is the same as its yield to maturity, the bond sells at par. Very little price change means very short effective duration.
I combined all this to create a new chart:
Perfect, I thought to myself, dropping the chart into the PowerPoint. I shut down the computer and left the office. It had been a long day, so I headed to the gym for an hour to blow off some stress. I ended my day back at my apartment, where I re-opened my CFA materials to get an hour of studying in before bed. It was already May, and I only had a month to go before taking my Level II exam.
A Valuable Experience
Today, I truly am grateful for the CFA charter. When I signed up for the program, I wasn’t sure whether it made sense for me; I had been in the industry for several years and was a finance major in college. However, I quickly recognized how valuable the CFA program was. Almost immediately, I began incorporating things I was learning into my day-to-day work. By leveraging the CFA curriculum, I came up with creative solutions to problems and delivered a higher-quality work product.
Make no mistake, the CFA program is an intensive multi-year commitment. If the program was easy, everyone would do it. There are days when you will want to give up, but you’ll also get an incredible feeling of accomplishment when you finally receive your CFA charter.
You will be forced outside of your comfort zone. You will learn a ton. You may even get a raise or a promotion. Regardless of your background, you will gain a new level of respect from your peers, who recognize that you have earned the most challenging credential in finance.
If this is your goal, go for it. It’s worth it.
About the Author
Andrew Bekker, CFA, is a senior investment analyst at Kilimanjaro Advisors, LLC, a private investment firm located in Boca Raton, Florida. He focuses on analyzing performing and distressed corporate credit opportunities across a diverse range of industries. Mr. Bekker is a member of the CFA Society of South Florida. He received his BS in Finance and International Business from the Stern School of Business at New York University.