fbpixel 101 concepts level II | IFT World - Part 8
Generic selectors
Exact matches only
Search in title
Search in content
Post Type Selectors
Search in posts
Search in pages
Filter by Categories
101 concepts level I
101 concepts level II
2021 Level I Corporate Finance Full Videos
2021 Level I Economics Full Videos
2021 Level I Ethics Full Videos
2021 Level I FRA Full Videos
2021 Level I Portfolio Management Full Videos
2021 Level I Quantitative Methods Full Videos
Advice and How to Study Videos
All-Levels
Alternative Investments
Alternative Investments (AI)
BookLet Top Level
Corporate Issuers
Corporate Issuers (CI)
Demystified Videos
Derivatives
Derivatives (DV)
Economics
Economics (EC)
Equity
Equity Investments (EI)
Ethical and Professional Standards (ES)
Ethics
featured
Financial Reporting and Analysis
Financial Statement Analysis (FSA)
Fixed Income
Fixed Income (FI)
Level I
Level II
Level III
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
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
New Booklet Top level
Portfolio Management
Portfolio Management (PM)
Quantitative Methods
Quantitative Methods (QM)
Uncategorized

Category: Essential Concepts for Level II

Essential Concept 71: Value of a Bond and its Credit Spread, Given Assumptions about the Credit Risk Parameters

For credit analysis of a risky bond in a volatile interest rate environment, we use the arbitrage-free framework. The first step in the arbitrage-free framework is to build the binomial interest rate tree under assumption of no arbitrage. Once the tree is built we need to verify that it is correctly calibrated. Analyzing a fixed-coupon corporate bond: This tree can then be used to analyze a fixed-coupon corporate bond. The steps are: Determine value of bond assuming no default (VND) Calculate credit valuation adjustment (CVA) Fair value of bond = VND – CVA Using fair value determine YTM. Using YTM… Read More

101 concepts level II

Essential Concept 72: Credit Analysis of Securitized Debt

Credit analysis of structured debt requires a different approach compared to credit analysis of other risky bonds. There are three major factors to consider when evaluating asset-backed securities (ABS): Underlying collateral – Granularity and homogeneity describe the underlying collateral. Granularity refers to the number of obligations in the overall structured financial instrument. Homogeneity refers to the degree to which the underlying debt characteristics within a structured financial instrument are similar across individual obligations. Three major credit analysis approaches can be used for ABS: book of loans, portfolio, loan by loan. The appropriate approach depends on the asset type, tenor and… Read More

101 concepts level II

Essential Concept 73: CDS Description; Single Name and Index CDS

A credit default swap is a derivative contract between two parties, a credit protection buyer and credit protection seller, in which the buyer makes a series of cash payments to the seller and receives a promise of compensation for credit losses resulting from the default of a third party. The figure below shows the structure of payment flows.   The ISDA master agreement is a document that lays down the rules that all CDS contracts must conform to and other guidelines for the functioning of the CDS market. Each CDS contract has a notional amount and maturity date. The debt… Read More

101 concepts level II

Essential Concept 74: Credit Events and Settlement Protocols

Credit event is an event that defines default by the reference entity. When a credit event occurs, the protection seller makes a payment to the protection buyer. Three general types of credit events include: Bankruptcy Failure to pay Restructuring If credit event has occurred, two parties to a CDS have the right to settle the CDS. Settlement can happen in two ways: Physical settlement: The debt instrument (reference obligation) is delivered by the protection buyer to the protection seller in exchange for a payment equal to the notional amount of the CDS contract Cash settlement: The credit protection seller pays… Read More

101 concepts level II

Essential Concept 75: Principles and Factors which Influence CDS Pricing

Basic pricing concepts: Probability of default: probability of non-payment of an upcoming interest or principal obligation. Since CDS typically cover a multi-year horizon, we use the hazard rate to calculate the probability of default for each year. Hazard rate: probability that an event will occur given that it has not already occurred. It is a conditional probability. Ex: death. Probability of survival: Given the hazard rate, the probability of survival is calculated as: 1 – hazard rate. Loss given default: amount that will be lost if a default occurs. Expected loss: full amount owed minus the expected recovery. It is… Read More

101 concepts level II

Essential Concept 76: FRA Pricing and Valuation

A forward rate agreement is an over-the-counter forward contract in which the underlying is an interest rate. FRAs are usually expressed in the “X x Y” convention, ‘X’ represents the point where the underlying loan starts. This also the point where the FRA expires. ‘Y’ represents the point where the underlying loan ends. A 3 x 9 FRA is depicted in the figure below. The FRA fixed rate i.e. price of an FRA can be calculated using these steps: Set up the time line. Compute the de-annualized fixed rate: Annualize by multiplying by 360/(n2 – n1) The FRA value for… Read More

101 concepts level II

Essential Concept 77: Fixed-Income Forward and Futures Contracts

Unique issues: Quoted priced, accrued interest and full price: The quoted price is the clean price without the interest accrued since the last coupon date. The full price is the quoted price plus interest accrued since the last coupon date. Conversion factor: Fixed-income futures contracts often have more than one bond that can be delivered by the seller. Because bonds trade at different prices based on their maturity and stated coupon, an adjustment known as the conversion factor is used to make all deliverable bonds roughly equal in price. Cheapest to deliver bonds: However, even after applying the conversion factor… Read More

101 concepts level II

Essential Concept 78: Interest Rate Swaps

A swap is an over-the-counter contract between two parties to exchange a series of cash flows based on some pre-determined formula. In a plain vanilla interest rate swap one party pays fixed rate, whereas the other party pays a floating rate. Swap fixed rate = (1 – final discount factor) / (sum of all discount factors) Value of a fixed rate swap at Time t = Sum of the present value of the difference in fixed swap rates x Stated notional amount   Example: Suppose two years ago we entered a €100,000,000 seven-year receive-fixed Libor-based interest rate swap with annual… Read More

101 concepts level II

Essential Concept 79: Binomial Model: Expectations Approach

The expectations approach is given by the following equations: c = PV[πc+ + (1 – π)c–]  and p = PV[πp+ + (1 – π)p–] π = the risk-neutral probability of an up move = (1 + r – d) / (u – d) The expected terminal option payoffs can be expressed as: E(c1) = πc+ + (1 – π)c– and E(p1) = πp+ + (1 – π)p– The option values can be written as: c = PV[E(c1)] and p = PV[E(p1)] With the expectations approach, The probability, π, is objectively determined and is called the risk-neutral (RN) probability. No assumption… Read More

101 concepts level II

Essential Concept 80: The BSM Model

The inputs to the BSM model are: Price of underlying stock, S Continuously compounded risk-free rate, r Time to maturity in years, T Strike price, X Volatility of the underlying in annual percentage terms, σ The BSM model for non-dividend paying stock is: c = SN(d1) – e–rTXN(d2) p = e–rTXN(–d2) – SN(–d1) where: Using the above inputs, the BSM model can be used to predict: Call option price, c Put option price, p Instructor’s Note: The following tips will help you remember the formulas. c = SN(d1) – e–rTXN(d2) p = e–rTXN(–d2) – SN(–d1) A call option is of… Read More

101 concepts level II
CFA Institute does not endorse, promote, or warrant the accuracy or quality of the products or services offered by IFT. CFA®, Chartered Financial Analyst® are trademarks owned by CFA Institute. McAfee SECURE sites help keep you safe from identity theft, credit card fraud, spyware, spam, viruses and online scams