fbpixel 101 concepts level II | IFT World - Part 7
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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
LM02 Code of Ethics and Standards of Professional Conduct Profession
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
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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
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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 61: Valuation Discounts and Premiums for Private Companies

Two factors that affect the valuation of private companies are issues related to control and marketability. When valuing the total equity of a private company, a control premium is added if publicly traded companies are used as the basis for pricing multiple. Discounts for lack of control are used to convert a controlling interest value into a non-controlling equity interest value. The formula for a discount for lack of control is given by:   A discount for lack of marketability (DLOM) is an amount or percentage deducted from the value of an ownership interest to reflect the relative absence of… Read More

101 concepts level II

Essential Concept 62: Forward Pricing and Forward Rate Models

Forward pricing model: It is expressed as:   If T* is 1 and T is 2, the present value of $1 to be received 3 years from today, P(3), is given by P(3) = P(1)F(1, 2). Forward rate model: If we express the forward pricing model in terms of rates, we get the forward rate model.   If T* is 1 and T is 2, then (1 + r(3))3 = (1 + r(1))1(1 + f(1,2))2 Two interpretations of forward rates: Suppose f(1,2), the rate agreed on today for a two-year loan to be made one year from today, is 12%…. Read More

101 concepts level II

Essential Concept 63: Riding the Yield Curve or Rolling Down the Yield Curve

Active bond portfolio managers can outperform the bond market’s return by correctly anticipating changes in interest rates relative to the projected evolution of spot rates. When a yield curve is upward sloping, the forward curve is always above the current spot curve. If a trader does not believe that the yield curve will change its level and shape over an investment horizon, he will buy bonds with a maturity longer than the investment horizon. This strategy is called riding the yield curve or rolling down the yield curve. If the view is correct, the trader’s total return will be greater… Read More

101 concepts level II

Essential Concept 64: Traditional Term Structure Theories

Unbiased expectations (Pure expectations theory): It states that the forward rate is an unbiased predictor of the future spot rate. The implication is that bonds of any maturities are perfect substitutes for each other. For example, buying a bond with a maturity of five years and holding it for three years has the same expected return as buying a three-year bond or buying a series of three one-year bonds. The major limitation of this theory is that it simplistically assumes that investors are risk neutral. Local expectations: This theory is more rigorous than the unbiased expectations theory. Rather than assuming… Read More

101 concepts level II

Essential Concept 65: Pricing a Bond using a Binomial Tree

To find the value of the bond at a particular node, we use the backward induction valuation methodology. Backward Induction: Start at maturity, fill in those values, and work back from right to left to find the bond’s value at the desired node. Refer to the following figure.   The value of the bond is given by the following equation:

101 concepts level II

Essential Concept 66: Confirming the Arbitrage-Free Value of a Bond

To value an option free bond, we can either use the sport rates or a binomial tree. Since both the methods are arbitrage free, the two values should be the same. Consider an option-free bond with four years remaining to maturity, a coupon rate of 2%, and a par value of $100. Assume spot rates are as shown in Exhibit 3. Maturity (Years) One-Year Spot Rate 1 1.000% 2 1.201% 3 1.251% 4 1.404% 5 1.819%   Then the bond value can be calculated as:   Next consider a binomial interest rate tree calibrated to the same spot curve (Exhibit… Read More

101 concepts level II

Essential Concept 67: Relationships between the Values of a Callable or Putable Bond, Straight Bond, and Embedded Option

An embedded option represents a right that can be exercised by the issuer, by the bondholder, or automatically depending on the course of interest rates. Embedded options can be: Simple: call options, put options etc. Complex: estate put, sinking fund bonds etc. A call option decreases the value of a bond to an investor. Therefore, Value of callable bond = Value of straight bond – Value of issuer call option Value of issuer call option = Value of straight bond – Value of callable bond A put option increases the value of a bond to an investor. Therefore, Value of… Read More

101 concepts level II

Essential Concept 68: Duration

Effective duration indicates the sensitivity of a bond’s price to a 100-bps parallel shift of the benchmark yield curve in particular, the government par curve; assuming no change in the bond’s credit spread.   The flowing procedure is used to apply this formula in practice. Given a price (PV0), calculate the implied OAS to the benchmark yield curve at appropriate interest rate volatility. Shift the benchmark yield curve down, generate a new interest rate tree, and then revalue the bond using the OAS calculated in Step 1. This value is PV–. Shift the benchmark yield curve up by the same… Read More

101 concepts level II

Essential Concept 69: Components of a Convertible Bond’s Value

There are a number of investment metrics and ratios that help analyze and value convertible bonds. The conversion value indicates the value of the bond if it is converted at the market price of the shares. The minimum value of a convertible bond is the greater of The conversion value and The value of the underlying option-free bond The market conversion premium represents the price investors effectively pay for the underlying shares if they buy the convertible bond and then convert it into shares. Scaled by the market price of the shares, it represents the premium payable when buying the… Read More

101 concepts level II

Essential Concept 70: Structural Versus Reduced-Form Models

Structural Models Reduced-Form Models What is it? Predict why a default may occur. Based on insights from option pricing theory. The values for debt and equity at time T can be expressed as: D(T) + E(T) = A(T) E(T) = Max[A(T) – K,0] D(T) = A(T) – Max[A(T) – K,0] Probability of default is endogenous to the model. Predict when a default may occur (default time). Statistical methods are used. Default intensity (probability of default over the next period) is estimated using regression analysis on company-specific and macro-economic variables. Default is an exogenous variable that occurs randomly. Assumptions Assets are… Read More

101 concepts level II
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