fbpixel 101 concepts level II | IFT World - Part 4
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101 concepts level II
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LM01 Alternative Investment Features, Methods, and Structures.
LM01 Categories, Characteristics, and Compensation Structures of Alternative Investments
LM01 Corporate Structures and Ownership
LM01 Derivative Instrument and Derivative Market Features
LM01 Derivative Instrument and Derivative Market Features.
LM01 Ethics and Trust in the Investment Profession
LM01 Ethics and Trust in the Investment Profession.
LM01 Fixed-Income Instrument Features.
LM01 Fixed-Income Securities: Defining Elements
LM01 Introduction to Financial Statement Analysis
LM01 Introduction to Financial Statement Analysis.
LM01 Market Organization & Structure.
LM01 Market Organization and Structure
LM01 Organizational Forms, Corporate Issuer Features, and Ownership.
LM01 Portfolio Management Overview
LM01 Portfolio Management: An Overview.
LM01 Rates and Returns.
LM01 The Firm & Market Structures.
LM01 Time Value of Money
LM01 Topics in Demand and Supply Analysis
LM02 Alternative Investment Performance and Returns.
LM02 Analyzing Income Statements.
LM02 Code of Ethics and Standards of Professional Conduct Profession
LM02 Code of Ethics and Standards of Professional Conduct.
LM02 Financial Reporting Standards
LM02 Fixed Income Markets - Issuance Trading and Funding
LM02 Fixed-Income Cash Flows and Types.
LM02 Forward Commitment and Contingent Claim Features and Instruments
LM02 Forward Commitment and Contingent Claim Features and Instruments.
LM02 Introduction to Corporate Governance and Other ESG Considerations
LM02 Investors and Other Stakeholders.
LM02 Organizing, Visualizing, and Describing Data
LM02 Performance Calculation and Appraisal of Alternative Investments
LM02 Portfolio Risk & Return: Part I.
LM02 Portfolio Risk and Return Part I
LM02 Security Market Indexes
LM02 Security Market Indexes.
LM02 The Firm and Market Structures
LM02 Time Value of Money in Finance.
LM02 Understanding Business Cycles.
LM03 Aggregate Output, Prices and Economic Growth
LM03 Analyzing Balance Sheets.
LM03 Business Models & Risks
LM03 Corporate Governance: Conflicts, Mechanisms, Risks, and Benefits.
LM03 Derivative Benefits, Risks, and Issuer and Investor Uses
LM03 Derivative Benefits, Risks, and Issuer and Investor Uses.
LM03 Fiscal Policy.
LM03 Fixed-Income Issuance and Trading.
LM03 Guidance for Standards I-VII
LM03 Guidance for Standards I–VII.
LM03 Introduction to Fixed Income Valuation
LM03 Investments in Private Capital: Equity and Debt.
LM03 Market Efficiency
LM03 Market Efficiency.
LM03 Portfolio Risk & Return: Part II.
LM03 Portfolio Risk and Return Part II
LM03 Private Capital, Real Estate, Infrastructure, Natural Resources, and Hedge Funds
LM03 Probability Concepts
LM03 Statistical Measures of Asset Returns.
LM03 Understanding Income Statements
LM04 An Introduction to Asset-Backed Securities
LM04 Analyzing Statements of Cash Flows I.
LM04 Arbitrage, Replication, and the Cost of Carry in Pricing Derivatives
LM04 Arbitrage, Replication, and the Cost of Carry in Pricing Derivatives.
LM04 Basics of Portfolio Planning & Construction
LM04 Basics of Portfolio Planning and Construction.
LM04 Capital Investments
LM04 Common Probability Distributions
LM04 Fixed-Income Markets for Corporate Issuers.
LM04 Introduction to the Global Investment Performance Standards (GIPS)
LM04 Introduction to the Global Investment Performance Standards (GIPS).
LM04 Monetary Policy.
LM04 Overview of Equity Securities
LM04 Overview of Equity Securities.
LM04 Probability Trees and Conditional Expectations.
LM04 Real Estate and Infrastructure.
LM04 Understanding Balance Sheets
LM04 Understanding Business Cycles
LM04 Working Capital and Liquidity.
LM05 Analyzing Statements of Cash Flows II.
LM05 Capital Investments and Capital Allocation.
LM05 Company Analysis: Past and Present.
LM05 Fixed-Income Markets for Government Issuers.
LM05 Introduction to Geopolitics.
LM05 Introduction to Industry and Company Analysis
LM05 Monetary and Fiscal Policy
LM05 Natural Resources.
LM05 Portfolio Mathematics.
LM05 Pricing and Valuation of Forward Contracts and for an Underlying with Varying Maturities
LM05 Pricing and Valuation of Forward Contracts.
LM05 Sampling and Estimation
LM05 The Behavioral Biases of Individuals
LM05 The Behavioral Biases of Individuals.
LM05 Understanding Cash Flow Statements
LM05 Understanding Fixed-Income Risk and Return
LM05 Working Capital & Liquidity
LM06 Analysis of Inventories.
LM06 Capital Structure.
LM06 Cost of Capital-Foundational Topics
LM06 Equity Valuation: Concepts and Basic Tools
LM06 Financial Analysis Techniques
LM06 Fixed-Income Bond Valuation: Prices and Yields.
LM06 Fundamentals of Credit Analysis
LM06 Hedge Funds.
LM06 Hypothesis Testing
LM06 Industry and Competitive Analysis.
LM06 International Trade.
LM06 Introduction to Geopolitics
LM06 Introduction to Risk Management
LM06 Introduction to Risk Management.
LM06 Pricing and Valuation of Futures Contracts
LM06 Pricing and Valuation of Futures Contracts.
LM06 Simulation Methods.
LM07 Analysis of Long-Term Assets.
LM07 Business Models.
LM07 Capital Flows and the FX Market.
LM07 Capital Structure
LM07 Company Analysis: Forecasting.
LM07 Estimation and Inference.
LM07 International Trade and Capital Flows
LM07 Introduction to Digital Assets.
LM07 Introduction to Linear Regression
LM07 Inventories
LM07 Pricing and Valuation of Interest Rate and Other Swaps.
LM07 Pricing and Valuation of Interest Rates and Other Swaps
LM07 Technical Analysis
LM07 Yield and Yield Spread Measures for Fixed-Rate Bonds.
LM08 Currency Exchange Rates
LM08 Equity Valuation: Concepts and Basic Tools.
LM08 Exchange Rate Calculations.
LM08 Fintech in Investment Management
LM08 Hypothesis Testing.
LM08 Long Lived Assets
LM08 Measures of Leverage
LM08 Pricing and Valuation of Options
LM08 Pricing and Valuation of Options.
LM08 Topics in Long-Term Liabilities and Equity.
LM08 Yield and Yield Spread Measures for Floating-Rate Instruments.
LM09 Analysis of Income Taxes.
LM09 Income Taxes
LM09 Option Replication Using Put-Call Parity
LM09 Option Replication Using Put–Call Parity.
LM09 Parametric and Non-Parametric Tests of Independence.
LM09 The Term Structure of Interest Rates: Spot, Par, and Forward Curves.
LM10 Financial Reporting Quality.
LM10 Interest Rate Risk and Return.
LM10 Non-current (Long-Term) Liabilities
LM10 Simple Linear Regression.
LM10 Valuing a Derivative Using a One-Period Binomial Model
LM10 Valuing a Derivative Using a One-Period Binomial Model.
LM11 Financial Analysis Techniques.
LM11 Financial Reporting Quality
LM11 Introduction to Big Data Techniques.
LM11 Yield-Based Bond Duration Measures and Properties.
LM12 Applications of Financial Statement Analysis
LM12 Introduction to Financial Statement Modeling.
LM12 Yield-Based Bond Convexity and Portfolio Properties.
LM13 Curve-Based and Empirical Fixed-Income Risk Measures.
LM14 Credit Risk.
LM15 Credit Analysis for Government Issuers.
LM16 Credit Analysis for Corporate Issuers.
LM17 Fixed-Income Securitization.
LM18 Asset-Backed Security (ABS) Instrument and Market Features.
LM19 Mortgage-Backed Security (MBS) Instrument and Market Features.
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Category: Essential Concepts for Level II

Essential Concept 31: Quality of Financial Reports

Financial reporting quality Low High Low quality reports contain information that is pure fabrication. High-quality reports contain information that is relevant, complete, neutral, and free from error. Low financial reporting quality impedes assessment of earnings quality and impedes valuation. High financial reporting quality enables assessment.   Earnings (results) quality Low High Low earnings quality is unsustainable. High earnings quality increases company value. High earnings quality is sustainable.   From an investor’s perspective, the overall quality of financial reports, that is combining reporting quality and earnings quality, can be thought of as a continuous spectrum ranging from highest to lowest as depicted in… Read More

101 concepts level II

Essential Concept 32: Potential Problems that Affect the Quality of Financial Reports

Income statement: Overstatement or non-sustainability of operating income and/or net income. Overstated or accelerated revenue recognition Understated expenses Misclassification of revenue, gains, expenses, or losses Balance sheet: Misstatement of balance sheet items Over- or understatement of assets Over- or understatement of liabilities Misclassification of assets and/or liabilities Cash flow statement: Overstatement of cash flow from operations. Mergers and acquisitions provide opportunities and motivations to manage financial results. For example, companies with declining cash flow from operations (CFO) may acquire companies to increase CFO as the acquisition may appear in CFI if paid with cash or not appear at all if… Read More

101 concepts level II

Essential Concept 33: Integration of Financial Statement Analysis Techniques

DuPont analysis DuPont analysis decomposes ROE into its components: ROE = Return on assets × Leverage ROE = Net profit margin × Asset turnover × Leverage ROE = EBIT margin × Tax burden × Interest burden × Asset turnover × Leverage Evaluating the different components of ROE allows the analyst to identify a company’s potential strengths and weakness. DuPont analysis should be performed with and without the impact of ‘income from associates’. This is because the operations and resources of associate companies are not in the parent company’s control. Asset base composition Common size balance sheets are used to examine… Read More

101 concepts level II

Essential Concept 34: Capital Budgeting: Determining Cash Flows

The cash flows relevant to an investing decision are the incremental cash flows i.e. the cash flows the company realizes with the investment compared to the cash flows the company would realize without the investment. An expansion project is an independent investment that does not affect the cash flows for the rest of the company. In a replacement project we evaluate if it is profitable to replace existing equipment with new equipment by considering the incremental cash flows. The cash flows can be grouped into 1) the investment outlays, 2) after-tax operating cash flows over the project’s life, and 3)… Read More

101 concepts level II

Essential Concept 35: Economic Profit, Residual Income, and Claims Valuation

Economic profit takes the perspective of all investors (debt and equity) Economic profit: EP = NOPAT – $WACC where NOPAT = Net operating profit after tax = EBIT(1 – Tax rate) and $WACC = Dollar cost of capital = WACC * Capital. When applied to the valuation of an asset or security, the NPV of an investment (and its market value added) is the present value of future EP discounted at the weighted average cost of capital. NPV = MVA = Σ EPt/ (1 + WACC)t The total value of the company (of the asset) is the original investment plus… Read More

101 concepts level II

Essential Concept 36: Modigliani–Miller Propositions

MM Proposition I (without taxes): The market value of the company is not affected by the capital structure of the company. VL = VU MM Proposition II (without taxes): The cost of equity is a linear function of the company’s debt/equity ratio. Where, r0 is the cost of capital for a company financed only by equity and has zero debt. MM Proposition I (with taxes): The value of the company with debt is greater than that of the all equity company by an amount equal to the tax rate multiplied by the value of the debt. Where t is the… Read More

101 concepts level II

Essential Concept 37: Dividend Payout Policies

Stable dividend policy: In this policy, a company tries to align its dividend growth rate to the company’s long-term earnings growth rate. The stable dividend policy can be represented by a gradual adjustment process in which the expected increase in dividends is calculated as: Expected increase in dividends = (Expected earnings × Target payout ratio – Previous dividend) × Adjustment factor Adjustment factor = 1/ number of years over which the adjustment in dividends will take place New dividend = Original dividend + Increase in dividend   Example: Current dividend = 0.4. Expected earnings for the year ahead = 1.50…. Read More

101 concepts level II

Essential Concept 38: Evaluating Corporate Governance Policies and Procedures

Board policies and practices: To evaluate a company’s board policies and practices, we look at the following- Board of directors’ structure: Analysts consider whether the structure is a one-tier or two-tier structure and if this structure provides sufficient oversight, representation, and accountability to shareholders. Board independence: A board with a majority of independent board members is considered positive. Board skills and experience: A board with diverse skills and expertise directly related to the company’s core operations is considered positive. Board composition: A board with more diversity with respect to profession, culture, geographical background, gender, age and tenure is considered positive…. Read More

101 concepts level II

Essential Concept 39: Identifying and Evaluating ESG-Related Risks and Opportunities

Materiality and investment horizon: There are several challenges while evaluating ESG information. Companies usually report information and metrics that are inconsistent, making comparisons across companies difficult. Also, ESG disclosures are voluntary. Therefore, different companies may report different levels of information. This again makes comparisons across companies difficult. While evaluating ESG factors, analysts first need to evaluate if an information is material. Materiality typically refers to ESG related issues that can affect a company’s operation, its financial performance, and the valuation of its securities. Analysts also consider their investment horizon when deciding which ESG factors to consider in their analysis. Some… Read More

101 concepts level II

Essential Concept 40: Mergers and Industry Life Cycles

Industry Life Cycle Stage Industry Description Motives for Merger Types of Mergers Pioneering development Industry exhibits substantial development costs and has low, but slowly increasing, sales growth. Younger, smaller companies may sell themselves to larger companies in mature or declining industries looking for ways to enter into a new growth industry. Young companies may look to merge with companies that allow them to pool management and capital resources. Conglomerate Horizontal Rapid accelerating growth Industry exhibits high profit margins caused by few participants in the market. Explosive growth in sales may require large capital requirements to expand existing capacity. Conglomerate Horizontal… Read More

101 concepts level II
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