2019 CFA Program: Level II Errata

5 April 2019
To be fair to all candidates, CFA Institute does not respond directly to
individual candidate inquiries. If you have a question concerning CFA
Program content, please contact CFA Institute (info@cfainstitute.org)
to have potential errata investigated.

• The eBook for the 2019 curriculum is formatted for continuous flow, so the text will fit all
screen sizes. Therefore, eBook page numbering—which is linked to section heads—does
not match page numbering in the print curriculum.
• Corrections below are in bold, and new corrections will be shown in red; page numbers
shown are for the print volumes.
• The short scale method of numeration is used in the CFA Program curriculum. A billion is
109 and a trillion is 1012. This is in contrast to the long scale method where a billion is 1
million squared and a trillion is 1 million cubed. The short scale method of numeration is the
prevalent method internationally and in the finance industry.

Volume 1
Reading 7
• In the solution to 19 (page 325 of print), the square root sign in the denominator of the
first fraction should not extend over the second square root sign. The calculation should
appear as follows:
−9.2430
49 −0.1886327
= = −0.3054
2.2225 412.2042 0.2130  2.9004
49 49

Volume 2
Reading 15
• Practice problem 8 (page 114 of print) and its solution should be deleted.
• Practice problem 31 (page 121 of print) and its solution should be deleted.

Reading 17
• The solution to practice problem 4 (page 285 of print) should be C. The explanation is
correct.

Volume 3
Reading 22
• In the reading summary, seventh bullet point from the top of page 184 should read as
follows: “According to Lintner (1956), the stable dividend policy can be represented by a
 gradual adjustment process in which the expected dividend is equal to last year’s
dividend per share plus [(Expected earnings x Target payout ratio – Previous
dividend) x Adjustment factor].

Volume 4
Reading 29
• The solution to practice problem 11A (pages 269-270 of print) should read as follows:
“Let r be the required rate of return. Also let t = 0 indicate the middle of 2008. Because
the dividend growth rate becomes constant from the middle of 2011 (t = 3), this can be
solved using the two-stage dividend discount model as follows:
D1 = 0.27(1.10) = 0.2970
D2 = 0.27(1.10)2 = 0.3267
D3 = 0.27(1.10)3 = 0.3594
V3 = 0.27(1.10)3(1.08)/(0.12 – 0.08) = 9.7030
V0 can be expressed as
D1 D2 D3 V3
V0 = + + +
1 + r (1 + r) 2
(1 + r)3
(1 + r)3
0.2970 0.3267 0.3594 9.7030
= + + +
1 + 0.12 (1 + 0.12) 2
(1 + 0.12) 3
(1 + 0.12)3
= 0.2652 + 0.2604 + 0.2558 + 6.9064
= A$7.69

Reading 30
• In practice problem 35 (page 357 of print), choice B should be €105,349.1, and choice C
should be €105,399.1. In the solution to 35 (page 375 of print), the Value of operating
assets should equal 3,226 million(1 + 0.045)/(0.0770 – 0.045) = €105,349.06. The Total
value of the company should equal 104,349.06 million + 50 million = €105,399.06.
• The solution to practice problem 36 (page 376 of print) should have calculations as
follows:
TV3 = 3,398.66/(0.0770 – 0.0075) = €48,901.58 million.
The total value of operating assets = (3,040.37 + 2,865.42 + 2,700.53) + 48,901.58/(1 +
0.0770)3 = 8,606.32 + 39,144.95 = 47,751.27
Value of Bern’s common stock = Value of operating assets + Value of non-operating
assets – Market value of debt – Preferred stock = 47,751.27 + 50.00 – 15,400 – 4,000 =
€28,401.27

Reading 32
• The second sentence of Example 13 (page 523 of print) should read as follows: “The
company’s cost of equity capital is 10 percent.”

Volume 5
Reading 34
• In Example 7 (page 23 of print), the third question should read as follows: “Assume a flat
yield curve of 6%. A three-year L100 bond is issued at par paying an annual coupon of

2
 6%. What is the bond’s portfolio manager’s return if a trader she predicts that the yield
curve one year from today will be a flat 7%?”
• In the fifth paragraph of Section 3.4 (page 30 of print), the third sentence from the end
should read: “By simple interpolation between these two rates, the treasury rate for 2.97
years is …”
• In the second paragraph after Equation 18 (page 43 of print), the following text should be
added: “Below, we create a two-period binomial lattice-based model for the short-term
rate. In the discrete binomial model, the dz term has two possible outcomes: +1 for
periods in which rates move up and –1 for periods in which rates move down.
Note that the monthly volatility is”
• In the solution to practice problem 13 (page 69 of print), there should be a minus one
1 + r (5)
5
after the equation: f (2,3) = 3 −1
1 + r (2)
2

Reading 35
• In the solution to 4 (page 113 of print), the number in the numerator should be 101.5168
(not 101.5816).

Reading 36
• In Example 5, solution to 1, the binomial tree (page 144 of print) should have 7.4832%
(not 7.8432%) in the first box under Year 2.
• In the paragraph after Equation 5 (page 161 of print), the third sentence should read as
follows: “The term ‘set in arrears’ means that the coupon rate is set at the end of
the coupon period—the payment date and the setting date are one and the same.”
• In the diagram for the solution to practice problem 26 (page 198 of print), the bottom box
under Year 2 should have 100.5642 as the crossed out number. The rest of the solution
is correct.
• In the last line of the solution to practice problem 34 (page 200 of print), there is a
decimal missing in the first number: =€11.23 – €9.10 = €2.13

Reading 37
• In Example 2 (page 209 of print), the last full paragraph of the solution, second sentence
should read “If this 3-year, 5% bond were default-free, its price would be 107.1401.”

Reading 38
• In Example 10 (page 292 of print), the last sentence of the first paragraph should read
as follows: “The investor can borrow at Libor, which is currently 2.5%.”

Reading 39
• In the fourth paragraph of Section 3.4 (page 325 of print), the second-to-last sentence
should read as follows: “Going short (long) a 3 x 9 FRA effectively replicates going short
(long) a nine-month Libor deposit and going long (short) a three-month Libor deposit.”
• The second question in Example 4 (pages 322-323 of print) should be deleted.
• In the paragraph before Example 8 (page 332 of print), the final three sentences before
the equation should read as follows: “Let us assume a 150-day rate of 3% on day g.

3
 Thus, Lg(h + m – g) = L30(150) = 3%. Then the value of the FRA would be Vg(0,h,m) =
V30(0,90,90) = 0.00025/[1 + 0.03(150/360)] = 0.000247.”
• The fourth sentence of Example 15 (page 352 of print) should read as follows: “At the
swap’s initiation, the US company receives the notional amount in Australian dollars and
pays to the counterparty, a swap dealer, the notional amount in US dollars.”
• The following text should be inserted before Example 16:
“As mentioned, the terms in equation 16 represent the difference of two
fixed-rate bonds. The first term in braces is the value of a long position in a bond
with face value of 1 unit Currency a, which is then multiplied by the notional
amount of the swap, in Currency a (i.e., represented by NA a,0). This product
represents the value of the cash inflows to the counterparty receiving interest
payments in Currency a in the swap. The second term (after the minus sign) is
outflows, and represents the value of a short bond position with face value of 1
unit of Currency b, which is multiplied by the product of the swap notional amount
in Currency b (NAb) and the currency exchange rate, St (stated in units of
Currency a per unit of Currency b). That gives the value of the payments, in
Currency a terms, made by the party receiving interest in currency a and paying
interest in Currency b in the swap. Va is then the value of the swap to the party
receiving Currency a while the value of the swap to the party receiving Currency
b in the swap is –Va.
Example 16 examines the case of a company using a currency swap to
effectively convert a bond issued in US dollars to a bond issued in Australian
dollars. In solving the problem, take care to identify Currency a (implied by how
the exchange rate, St, is given) and the party receiving interest payments in
Currency a in the swap.”
• Example 16 has been rewritten; the new example can be found in the Candidate
Resources area.

Volume 6
Reading 43
• The second paragraph of the Solution to 2 in Example 7 (page 108 of print) should read
as follows: “A is incorrect because it adds depreciation to AFFO (3,320,000 + 611,900 =
£3,931,900. 3,931,9900/1,000,000 = £3.93 per share.) Like FFO, AFFO is a measure
of earnings before the deduction of depreciation. In addition to correctly adding
Non-cash (straight-line) rent + Recurring maintenance-type capital expenditures
and leasing commissions, it also incorrectly adds depreciation to AFFO. Because
real estate is believed to maintain its value to a greater extent than other business
assets, depreciation is not deducted from earning when calculating FFO and
AFFO.”
• In practice problem 12 (page 131 of print), answer choice C should be $28.76.
• The solution to practice problem 12 (pages 133 to 134 of print) should read “C is correct.
The estimated value per share for the Baldwin REIT using a two-step dividend discount
model is $28.76, calculated as:” In the table, the numbers in the second column should
be $1.06, $31.71, and $32.77. The first table note should read “Calculated as

4
 $1.11/(0.085 – 0.05) = $31.71.” The second table note should read “Calculated as
$1.00/(1.085) + $32.77/(1.085)2 = $28.76.”

Reading 44
• In section 3 (page 171 of print), first paragraph, second sentence should read as
indicated: “Because there is considerable risk involved in a typical venture capital deal,
venture capitalists usually apply a very high discount rate “to compensate for the risk.””

Reading 45
• In the second-to-last paragraph before Example 13 (page 217 of print), the fourth
sentence should read as follows: “At the same time, the convenience yield increased in
the futures contracts closer to expiration because there was a scramble to tap into
alternative crude oil supplies for European refiners.”

Reading 47
• In the information for practice problems 8 through 14 (page 307 of print), the first
sentence below Exhibit 1 should be deleted: “The manager of Fund C makes some
modifications to his portfolio and eliminates the arbitrage opportunity. Using a two-factor
model …” Practice problem 11 (page 308 of print) and its solution (page 314 of print)
should be deleted.

Reading 48
• In the practice problem information for questions 1–5, under the heading “Trust
Department’s Equity Fund”, item b, the first sentence should read as indicated: “The
Index Plus Fund has a value at risk (VaR) of $6.5 million at 5% for one day.”