Risk-Return Characteristics
When the underlying share price is well below the conversion price, the convertible bond exhibits mostly bond risk-return characteristics and is described as a busted convertible. Therefore, the bond will be sensitive to interest rate movements and credit spreads, just…
Time Structure Models
Equilibrium Term Structure Models Equilibrium term structure models are built on theories about the economy. They explain the stochastic process that describes the dynamics of the yield curve (term structure). They are primarily based on macroeconomic variables. That includes inflation,…
Effects of Demographics, Immigration, and Labor Force Participation on the Rate and Sustainability of Economic Growth
Labor Supply The production function shows that economic growth is mainly affected by increased labor and capital. The size of Labor is measured using the total number of hours available for work. The labor force is the proportion of the…
Effect of Natural Resources on Economic Growth
A simple form of the production function, which concentrated on labor and capital inputs, was used in the previous reading. The production function can be extended to include other factors of production, such as: Human capital (H). Raw materials (N)….
Study Notes for CFA® Level II – Economics – offered by AnalystPrep
Reading 8: Currency Exchange Rates: Understanding Equilibrium Value -a. Calculate and interpret the bid-offer spread on a spot or forward currency quotation and describe the factors that affect the bid-offer spread; -b. Identify a triangular arbitrage opportunity and calculate the…
Arbitrage Pricing Theory (APT), Its Assumptions and Relation to Multifactor Models
Arbitrage Pricing Theory (APT) Arbitrage pricing theory (APT) is a theory of asset pricing. It asserts that the expected return of an asset can be expressed as a linear function of multiple systematic risk factors priced by the market. APT…
Study Notes for CFA® Level II – Portfolio Management – offered by AnalystPrep
Reading 39: Exchange-Traded Funds: Mechanics and Applications -a. Explain the creation/redemption process of ETFs and the function of authorized participants; -b. Describe how ETFs are traded in secondary markets; -c. Describe sources of tracking error for ETFs; -d. Describe factors…
Study Notes for CFA® Level II – Derivatives – offered by AnalystPrep
Reading 33: Pricing and Valuation of Forward Commitments -a. Describe the carry arbitrage model without underlying cashflows and with underlying cashflows; -b. Describe how equity forwards and futures are priced, and calculate and interpret their no-arbitrage value; -c. Describe how…
Study Notes for CFA® Level II – Fixed Income – offered by AnalystPrep
Reading 28: The Term Structure and Interest Rate Dynamics -a. Describe relationships among spot rates, forward rates, yield to maturity, expected and realized returns on bonds, and the shape of the yield curve; -b. Describe how zero-coupon rates (spot rates)…
Financial Ratios Used to Analyze Real Estate Investments
Debt financiers often prefer debt service coverage ratio (DSCR) and loan to value (LTV) when arriving at the maximum loan on a definite property. $$ \text{DSCR} = \frac {\text{Year one NOI}}{\text{Debt service}} $$ Where: $$ \text{Debt service} = (\text{Interest}…
