1. Trang chủ
  2. » Tài Chính - Ngân Hàng

2019 CFA program curriculum level i vol 5

741 5 0

Đang tải... (xem toàn văn)

Tài liệu hạn chế xem trước, để xem đầy đủ mời bạn chọn Tải xuống

THÔNG TIN TÀI LIỆU

Thông tin cơ bản

Tiêu đề Equity Investments
Tác giả CFA Institute
Trường học CFA Institute
Chuyên ngành Finance
Thể loại curriculum
Năm xuất bản 2019
Thành phố Charlottesville
Định dạng
Số trang 741
Dung lượng 9,57 MB

Nội dung

2019 CFA PROGRAM CURRICULUM LEVEL I VOLUMES 1-6 đ â 2018, 2017, 2016, 2015, 2014, 2013, 2012, 2011, 2010, 2009, 2008, 2007, 2006 by CFA Institute All rights reserved This copyright covers material written expressly for this volume by the editor/s as well as the compilation itself It does not cover the individual selections herein that first appeared elsewhere Permission to reprint these has been obtained by CFA Institute for this edition only Further reproductions by any means, electronic or mechanical, including photocopying and recording, or by any information storage or retrieval systems, must be arranged with the individual copyright holders noted CFA®, Chartered Financial Analyst®, AIMR-PPS®, and GIPS® are just a few of the trademarks owned by CFA Institute To view a list of CFA Institute trademarks and the Guide for Use of CFA Institute Marks, please visit our website at www.cfainstitute.org This publication is designed to provide accurate and authoritative information in regard to the subject matter covered It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service If legal advice or other expert assistance is required, the services of a competent professional should be sought All trademarks, service marks, registered trademarks, and registered service marks are the property of their respective owners and are used herein for identification purposes only ISBN 978-1-946442-07-9 (paper) ISBN 978-1-946442-31-4 (ebk) 10 Please visit our website at www.WileyGlobalFinance.com EQUITY AND FIXED INCOME CFA® Program Curriculum 2019 • LEVEL I • VOLUME CONTENTS How to Use the CFA Program Curriculum   Curriculum Development Process   Organization of the Curriculum   Features of the Curriculum   Designing Your Personal Study Program   Feedback   ix ix x x xi xiii Equity Investments Study Session 14 Equity Investments (1)   Reading 44 Market Organization and Structure   Introduction   The Functions of the Financial System   Helping People Achieve Their Purposes in Using the Financial System   Determining Rates of Return   Capital Allocation Efficiency   Assets and Contracts   Classifications of Assets and Markets   Securities   Currencies   Contracts   Commodities   Real Assets   Financial Intermediaries   Brokers, Exchanges, and Alternative Trading Systems   Dealers   Securitizers   Depository Institutions and Other Financial Corporations   Insurance Companies   Arbitrageurs   Settlement and Custodial Services   Summary    Positions   Short Positions   Leveraged Positions   Orders   Execution Instructions   Validity Instructions   Clearing Instructions   Primary Security Markets   Public Offerings   Private Placements and Other Primary Market Transactions   Importance of Secondary Markets to Primary Markets   indicates an optional segment 6 12 13 14 14 16 19 20 25 26 28 28 30 31 32 33 34 36 38 38 40 41 44 44 48 49 50 50 52 53 ii Reading 45 Reading 46 Contents Secondary Security Market and Contract Market Structures   Trading Sessions   Execution Mechanisms   Market Information Systems   Well-­Functioning Financial Systems   Market Regulation   Summary   Practice Problems   Solutions   53 54 54 58 58 60 63 66 73 Security Market Indexes   Introduction   Index Definition and Calculations of Value and Returns   Calculation of Single-­Period Returns   Calculation of Index Values over Multiple Time Periods   Index Construction and Management   Target Market and Security Selection   Index Weighting   Index Management: Rebalancing and Reconstitution   Uses of Market Indexes   Gauges of Market Sentiment   Proxies for Measuring and Modeling Returns, Systematic Risk, and Risk-­ Adjusted Performance   Proxies for Asset Classes in Asset Allocation Models   Benchmarks for Actively Managed Portfolios   Model Portfolios for Investment Products   Equity Indexes   Broad Market Indexes   Multi-­ Market Indexes   Sector Indexes   Style Indexes   Fixed-­ Income Indexes   Construction   Types of Fixed-­Income Indexes   Indexes for Alternative Investments   Commodity Indexes   Real Estate Investment Trust Indexes   Hedge Fund Indexes   Summary   Practice Problems   Solutions   77 77 78 79 81 82 82 83 91 93 93 94 94 94 94 95 95 95 97 97 98 98 98 101 101 101 102 104 106 112 Market Efficiency   Introduction   The Concept of Market Efficiency   The Description of Efficient Markets   Market Value versus Intrinsic Value   Factors Contributing to and Impeding a Market’s Efficiency   Transaction Costs and Information-­Acquisition Costs   115 115 117 117 119 120 123 indicates an optional segment Contents iii Forms of Market Efficiency   Weak Form   Semi-­ Strong Form   Strong Form   Implications of the Efficient Market Hypothesis   Market Pricing Anomalies   Time-­ Series Anomalies   Cross-­ Sectional Anomalies   Other Anomalies   Implications for Investment Strategies   Behavioral Finance   Loss Aversion   Herding   Overconfidence   Information Cascades   Other Behavioral Biases   Behavioral Finance and Investors   Behavioral Finance and Efficient Markets   Summary   Practice Problems   Solutions   124 125 125 128 128 129 130 133 133 136 136 137 137 137 138 138 139 139 139 142 145 Study Session 15 Equity Investments (2)   147 Reading 47 Overview of Equity Securities   Introduction   Equity Securities in Global Financial Markets   Types and Characteristics of Equity Securities   Common Shares   Preference Shares   Private versus Public Equity Securities   Investing in Non-­Domestic Equity Securities   Direct Investing   Depository Receipts   Risk and Return Characteristics of Equity Securities   Return Characteristics of Equity Securities   Risk of Equity Securities   Equity Securities and Company Value   Accounting Return on Equity   The Cost of Equity and Investors’ Required Rates of Return   Summary   Practice Problems   Solutions   149 149 150 155 156 159 162 164 165 166 169 169 170 171 172 177 178 180 184 Reading 48 Introduction to Industry and Company Analysis   Introduction   Uses of Industry Analysis   Approaches to Identifying Similar Companies   Products and/or Services Supplied   187 188 188 189 189 indicates an optional segment iv Contents Business-­ Cycle Sensitivities   Statistical Similarities   Industry Classification Systems   Commercial Industry Classification Systems   Governmental Industry Classification Systems   Strengths and Weaknesses of Current Systems   Constructing a Peer Group   Describing and Analyzing an Industry   Principles of Strategic Analysis   External Influences on Industry Growth, Profitability, and Risk   Company Analysis   Elements That Should be Covered in a Company Analysis   Spreadsheet Modeling   Summary   Practice Problems   Solutions   190 191 192 192 196 197 198 202 204 222 228 229 232 233 237 241 Equity Valuation: Concepts and Basic Tools   Introduction   Estimated Value and Market Price   Major Categories of Equity Valuation Models   Present Value Models: The Dividend Discount Model   Dividends: Background for the Dividend Discount Model   The Dividend Discount Model: Description   Preferred Stock Valuation   The Gordon Growth Model   Multistage Dividend Discount Models   Multiplier Models   Relationships among Price Multiples, Present Value Models, and Fundamentals   The Method of Comparables   Illustration of a Valuation Based on Price Multiples   Enterprise Value   Asset-­ Based Valuation   Summary   Practice Problems   Solutions   243 244 245 246 248 248 251 254 256 261 265 Study Session 16 Fixed Income (1)   295 Reading 50 Fixed-­Income Securities: Defining Elements   Introduction   Overview of a Fixed-­Income Security   Basic Features of a Bond   Yield Measures   Legal, Regulatory, and Tax Considerations   Bond Indenture   297 297 298 299 304 304 305 Reading 49 266 269 272 274 276 280 283 289 Fixed Income indicates an optional segment Contents v Legal and Regulatory Considerations   Tax Considerations   Structure of a Bond’s Cash Flows   Principal Repayment Structures   Coupon Payment Structures   Bonds with Contingency Provisions   Callable Bonds   Putable Bonds   Convertible Bonds   Summary   Practice Problems   Solutions   Reading 51 313 316 318 318 323 329 330 332 332 336 339 343 Fixed-­Income Markets: Issuance, Trading, and Funding   347 Introduction   347 Overview of Global Fixed-­Income Markets   348 Classification of Fixed-­Income Markets   348 Fixed-­ Income Indexes   357 Investors in Fixed-­Income Securities   358 Primary and Secondary Bond Markets   359 Primary Bond Markets   359 Secondary Bond Markets   365 Sovereign Bonds   367 Characteristics of Sovereign Bonds   367 Credit Quality of Sovereign Bonds   368 Types of Sovereign Bonds   369 Non-­Sovereign Government, Quasi-­Government, and Supranational Bonds   371 Non-­ Sovereign Bonds   371 Quasi-­ Government Bonds   372 Supranational Bonds   372 Corporate Debt   373 Bank Loans and Syndicated Loans   373 Commercial Paper   374 Corporate Notes and Bonds   377 Structured Financial Instruments   381 Capital Protected Instruments   382 Yield Enhancement Instruments   382 Participation Instruments   382 Leveraged Instruments   383 Short-­Term Funding Alternatives Available to Banks   384 Retail Deposits   385 Short-­ Term Wholesale Funds   385 Repurchase and Reverse Repurchase Agreements   386 Summary   390 Practice Problems   393 Solutions   397 indicates an optional segment vi Contents Reading 52 Introduction to Fixed-­Income Valuation   Introduction   Bond Prices and the Time Value of Money   Bond Pricing with a Market Discount Rate   Yield-­to-­Maturity   Relationships between the Bond Price and Bond Characteristics   Pricing Bonds with Spot Rates   Prices and Yields: Conventions for Quotes and Calculations   Flat Price, Accrued Interest, and the Full Price   Matrix Pricing   Yield Measures for Fixed-­Rate Bonds   Yield Measures for Floating-­Rate Notes   Yield Measures for Money Market Instruments   The Maturity Structure of Interest Rates   Yield Spreads   Yield Spreads over Benchmark Rates   Yield Spreads over the Benchmark Yield Curve   Summary   Practice Problems   Solutions   401 401 402 402 406 407 411 413 413 417 420 425 429 433 441 441 443 446 449 458 Reading 53 Introduction to Asset-­Backed Securities   Introduction   Benefits of Securitization for Economies and Financial Markets   How Securitization Works   An Example of a Securitization   Parties to a Securitization and Their Roles   Structure of a Securitization   Key Role of the Special Purpose Entity   Residential Mortgage Loans   Maturity   Interest Rate Determination   Amortization Schedule   Prepayment Options and Prepayment Penalties   Rights of the Lender in a Foreclosure   Residential Mortgage-­Backed Securities   Mortgage Pass-­Through Securities   Collateralized Mortgage Obligations   Non-­agency Residential Mortgage-­Backed Securities   Commercial Mortgage-­Backed Securities   Credit Risk   CMBS Structure   Non-­Mortgage Asset-­Backed Securities   Auto Loan ABS   Credit Card Receivable ABS   Collateralized Debt Obligations   CDO Structure   An Example of a CDO Transaction   473 473 474 476 476 478 481 482 485 486 486 487 488 488 490 491 497 503 503 504 504 508 508 511 512 513 513 indicates an optional segment Contents vii Summary   Practice Problems   Solutions   516 519 523 Study Session 17 Fixed Income (2)   527 Reading 54 Understanding Fixed‑Income Risk and Return   Introduction   Sources of Return   Interest Rate Risk on Fixed-­Rate Bonds   Macaulay, Modified, and Approximate Duration   Effective Duration   Key Rate Duration   Properties of Bond Duration   Duration of a Bond Portfolio   Money Duration of a Bond and the Price Value of a Basis Point   Bond Convexity   Interest Rate Risk and the Investment Horizon   Yield Volatility   Investment Horizon, Macaulay Duration, and Interest Rate Risk   Credit and Liquidity Risk   Summary   Practice Problems   Solutions   529 530 530 537 538 545 549 549 555 557 559 567 568 569 574 575 579 584 Reading 55 Fundamentals of Credit Analysis   Introduction   Credit Risk   Capital Structure, Seniority Ranking, and Recovery Rates   Capital Structure   Seniority Ranking   Recovery Rates   Ratings Agencies, Credit Ratings, and Their Role in the Debt Markets   Credit Ratings   Issuer vs Issue Ratings   Risks in Relying on Agency Ratings   Traditional Credit Analysis: Corporate Debt Securities   Credit Analysis vs Equity Analysis: Similarities and Differences   The Four Cs of Credit Analysis: A Useful Framework   Credit Risk vs Return: Yields and Spreads   Special Considerations of High-­Yield, Sovereign, and Non-­Sovereign Credit Analysis   High Yield   Sovereign Debt   Non-­Sovereign Government Debt   Summary   Practice Problems   Solutions   591 592 592 595 595 595 597 601 602 603 605 610 610 611 628 indicates an optional segment 638 638 645 650 652 656 666 I-10 Index futures in commodities, 25, 26 in contracts market, 22–23 forwards vs., 23 rollover of, 102 G G-20 see Group of Twenty gains capital, 316, 533, 569 foreign exchange, 169 Galileo space program, 225 GDP see gross domestic product GDRs see global depository receipts GE Capital Bank, 512 GE Capital Corporation, 512 GE Capital Credit Card Master Note Trust Series 2013-1, 512 General Dynamics, 209 General Motors, 189, 209, 269 general obligation (GO) bonds, 650 Genomic Solutions, 158–159 Genzyme, 209 geographic classifications for fixedincome markets, 354–355 geometric average of forward rates, 441 Germany auctions, 362 bonds outstanding, 354, 360 domestic and international debt securities, 315 fixed-income indexes, 357 inflation-linked bonds, 326 investments in BASF, 165 MSCI multi-market index, 96 non-sovereign government bonds, 371 overconfidence and mispricing in markets, 137 residential mortgage loans, 486, 487 returns on bonds, bills, and equities, 153 risk tolerance and equity ownership, 154 sovereign bonds, 367–369 Ghana, 96 GICS see Global Industry Classification Standard Gillette, 176 gilts, 367, 368 Ginnie Mae see Government National Mortgage Association GlaxoSmithKline in pharmaceutical industry, 189 ROE for, 173–175 strategic analysis, 219–221 global bonds, 314 global debt markets, 349–350 global depository receipts (GDRs), 167 global equity markets, 349–350 global finance markets and depository receipts, 166–169 direct investing, 165–166 equity securities in, 150–155 integration and growth in, 164–165 Global Industry Classification Standard (GICS), 189, 190, 192 Global Investment Performance Standards, 61 global registered shares (GRSs), 168 GO bonds see general obligation bonds gold, forward contracts on, 21–22 Goldcorp, 276 Goldman Sachs callable preference shares, 160 as dealers, 30 industry concentration and pricing power, 209 QUIDS at, 300 good-on-close orders, 48 good-on-open orders, 48 good-till-cancelled orders (GTCs), 48 Gootkind, Christopher L., 608n.21 Gordon growth model, 256–261 applying, 258–259 justified value of price multiple from, 266 with no current dividend, 260–261 governmental debt see sovereign debt governmental industry classification systems, 196–197 ANZSIC system, 196 ISIC system, 196 NACE system, 196 NAICS system, 197 governmental influences in industry analysis, 203, 224–226 in strategic analysis, 220 government and government-related sector, 348–349 government equivalent yield, 423 Government National Mortgage Association (Ginnie Mae), 490, 503 government-sponsored enterprises (GSEs), 371, 490 Greece, 96, 487 greenfields, constructing, 211 grey market, 361 gross domestic product (GDP) contributions to global, 150–151 and governmental debt, 648 in sovereign credit analysis, 647 Group of Twenty (G-20), 476 growth, industry, 613 growth cyclical companies, 191n.3 growth industries, 190, 191, 221 growth stage (industry life-cycle), 214–215 growth stocks, 97 GRSs see global registered shares Grupa Zywiec SA, 658, 666 GSEs see government-sponsored enterprises G-spread, 442, 445 GTCs see good-till-cancelled orders guarantee certificates, 382 H haircut, 388 Halliburton, 219–221 Harley-Davidson, Inc., 479–480, 482 Harley-Davidson Credit Corp., 479, 480 Harley-Davidson Motorcycle Trust 2005-2, 479, 480 Harmonized Index of Consumer Prices (HICP), 370 HBOS, 324 Health Care sector, 193 heavy truck industry, similar companies in, 189 hedge fund indexes, 102 hedge funds, 15, 19, 102 hedgers, 9–10, 21, 39 herding behavior, 137 Hershey, 219–221 Hewlett-Packard Company, 200, 209 HFRX Equal Weighted Strategies EUR Index, 104 HFRX Global Hedge Fund Index, 104 hhgregg, 162 Hibor see Hong Kong interbank offered rate HICAP see Harmonized Index of Consumer Prices hidden orders, 47–48 high yield bonds see non-investmentgrade bonds high-yield credit analysis, 638–645 corporate structure in, 642–643 covenant analysis, 643–644 debt structure and leverage in, 640–642 equity-like approach to, 644–645 financial projections for, 639–640 liquidity in, 638–639 and non-investment grade ratings, 638 high-yield indexes, 99 Hillenbrand, Inc., 199 HM Treasury, 306 holder-of-record date, 249 holding companies, 306, 642 holding-period rate of return, 571 holding periods, for private equity investments, 163 holiday effect, 132 Home Depot, 208, 216–217 Honda Motor Company, 189, 270 Hong Kong SAR margin requirements of, 41 in MSCI multi-market index, 96 Hong Kong dollar, 351 Hong Kong interbank offered rate (Hibor), 301, 353 Hong Kong Stock Exchange, 152, 167, 333 horizon yield, 532–536, 571 housing industry, demographic influences in, 224 H&R Block, Inc., 199 human-capital based companies, collateral of, 626 Hungary, 96 Hurricane Katrina, 212 hybrid mortgages, 487 hybrid securities, 596n.4 Hynix, 209 Hyundai, 189 I IASB see International Accounting Standards Board IBM, 443, 444 ICB see Industry Classification Benchmark iceberg orders, 47 Index I-11 ICMA see International Capital Market Association IFRS see International Financial Reporting Standards IG Group plc, 30 IKEA, 164 IMF see International Monetary Fund immediate or cancel orders (IOCs), 48 implied forward rates, 438 “in arrears” payment structure, 426 income interest, 536 net, 172–174 net operating, 504 operating, 276 income per capita measure, 647 income trusts, 224–225 indenture see bond indenture indexed-annuity bonds, 327 indexed-referenced ARM, 487 indexes, 78 see also security market indexes index-linked bonds, 325–328 index weighting of security market indexes, 83–91 equal weighting, 85–86 fundamental weighting, 89, 91 market-capitalization weighting, 85, 87–90 price weighting, 83–85 India coupon payment structures, 323 debt and equity outstanding, 350 domestic and international debt securities, 315 as growth country, 190n.2 MSCI multi-market index, 96 indirect investing, in real assets, 26 individuals borrowing by, financial system functions for, 7–12 information-motivated trading by, 10–12 raising of equity capital by, rationality of markets vs., 137 risk management by, 9–10 savings of, 7–8 spot market trading by, 10 Indonesia, 96, 164, 369 Industrial/Producer Durables sector, 193 industry(-ies) in company analysis, 229–230 defined, 189 describing, 202–203 fundamentals of, 613 ICB definition, 192 peer group vs., 200 performance of, 202–203 recovery rate variation by, 598 statistics on fundamentals for, 613 structure of, 612 industry analysis, 187–242 and company analysis, 228–232 in credit analysis, 614–615 elements of, 229–232 spreadsheet modeling in, 232 defined, 188 describing industries for, 202–203 external influences, 222–228 in airline industry, 227–228 demographic, 223–224 governmental, 224–226 macroeconomic, 222 social, 226–227 technological, 222–223 industry classification systems, 192–202 commercial, 192–196 governmental, 196–197 and peer groups construction, 198–202 strengths and weakness, 197 practice problems, 237–240 with similar companies, 189–191 solutions to problems, 241–242 strategic, 204–222 barriers to entry in, 206–208 capacity in, 211–212 example, 219–222 five forces framework, 205–206 industry concentration in, 208–211 industry life-cycle model in, 213–218 market share stability in, 212–213 price competition in, 218–219 uses, 188–189 industry capacity see capacity Industry Classification Benchmark (ICB), 189–190, 192–193 industry classification systems, 192–202 commercial, 192–196 example, 194–196 GICS standard, 192 ICB system, 192–193 representative sectors in, 193–194 RGS system, 192 governmental, 196–197 ANZSIC system, 196 ISIC system, 196 NACE system, 196 NAICS system, 197 and peer group construction, 198–202 for Brink’s Home Security, 199–200 for semiconductor industry, 200–202 strengths and weakness, 197 industry concentration, 208–211, 219 industry life-cycle model, 213–218 airline industry in, 227 example, 217–218 industry classifications based on, 203 limitations of, 217 stages of industry life cycle, 213–216 in strategic analysis, 220 using, 216–217 inefficient markets, intrinsic value in, 119 inflation duration, 574 inflation-linked bonds (linkers), 325–328, 370 information market anomalies and prior, 135–136 market efficiency and availability of, 122 nonpublic (private), 128 public, 125–128 information-acquisition costs, 123–124 informationally efficient financial systems, 58–59 informationally efficient markets, 58–59, 117 see also efficient markets information cascades, 138 information-motivated trading, 10–12, 26 initial margin requirements, 22, 41 initial PAC collar (initial PAC band), 499 initial period fixed-rate mortgages, 487 initial public offerings (IPOs) defined, 50 in markets, 51–52 and pricing anomalies, 135 and venture capital, 162 insider trading, 61, 122 institutional investors, 358, 362 insurance companies as financial intermediaries, 33–34 monoline, 479 regulation of, 62 insurance contracts, 25 intangible assets, in asset-based valuation, 277–278 Intel Corporation industry concentration and pricing power, 209 share price and FTC investigation, 127, 128n.21 sub-industry classification, 200, 201 technological influences, 223 intellectual-capital based companies, collateral of, 626 interbank funds, 385–386 interbank market, 352, 385–386 interbank money market, 352 Intercontinental Exchange, 209 interest accrued, 413–417 shifting interest mechanism, 503 in USCP vs ECP markets, 376–377 interest expenses, 617, 648 interest income, 536 interest-indexed bonds, 327 interest-only mortgages, 487–488 interest-only tranches, structured, 497n.11 interest rate risk, 537–574 approximate modified duration, 543–545 bond convexity, 559–567 defined, 531 duration of bond portfolio, 555–557 effective duration, 545–548 and floating-rate notes, 323 and investment horizon, 569–574 key rate duration, 549 Macaulay duration, 538–542, 569–574 modified duration, 542–543 money duration, 557–559 price value of a basis point, 558 properties of bond duration, 549–554 yield volatility, 568–569 interest rates capped floating, 511 default, 505 equilibrium, 12–13 maturity structure of, 433–441 and money duration, 572 net interest pass-through rates, 491 and repo rate, 387 of residential mortgage loans, 486–487 and returns on fixed-income securities, 531–536 term structure of, 568 I-12 Index interest rate swaps, 23–24 internal credit enhancements, 308–309, 479 International Accounting Standards Board (IASB), 61 International Bank for Reconstruction and Development (World Bank) bonds issued by, 349 definition of emerging markets, 646n.42 supranational bonds from, 372 use of ISIC system, 196 International Capital Market Association (ICMA), 365 International Financial Reporting Standards (IFRS), 189n.1 disclosure of operating segment, 200 on ROE, 173n.28 International Monetary Fund (IMF), 196, 372, 646 International Standard Industrial Classification of All Economic Activities (ISIC), 196 interpolated spread (I-spread), 443 intrinsic value book vs., 176–177 from dividend discount model, 251 in equity valuation, 244 market vs., 119–120 inverse effect, 407, 408 inverse floating-rate bonds (inverse floaters), 383 inverse floating-rate notes, 324 inverted yield curve, 434 invest (term), investment banks, 29 investment-grade bonds and classification of bond market, 350–351 credit ratings of, 602, 603 credit risk with, 299–300 yield spreads of, 631–632 investment-grade indexes, 99 investment horizon for fixed-income securities, 536–537 and interest rate risk, 569–574 share value for three-year, 252 investment pools, 18–19, 32 investor pay model, 601n.13 investors behavioral biases and decision making by, 139 benefits of securitization for, 474–475 in debt vs equity securities, 155 defined, in fixed-income markets, 357–359 and information-motivated traders, 10–11 institutional, 358, 362 market efficiency and number of, 121 required rates of return for equities, 177–178 retail, 358 IOCs see immediate or cancel orders IPOs see initial public offerings Ireland debt burden, 646 international investments in BASF, 165 MSCI multi-market index, 96 residential mortgage loans, 486, 487 returns on bonds, bills, and equities, 153 sovereign bonds, 368 iShares Morningstar ETFs, 104 ISIC see International Standard Industrial Classification of All Economic Activities I-spread see interpolated spread Israel, 96, 326, 370 issuer pay model, 601n.13 issuers of commercial paper, 374 credit ratings of issues vs., 603–605 of fixed-income securities, 299–300 and classification of market, 348–350 legal identity, 305–306 in securitization process, 478 Italy bonds outstanding, 354, 360 domestic and international debt securities, 315 inflation-linked bonds, 326 MSCI multi-market index, 96 non-sovereign government debt, 650 returns on bonds, bills, and equities, 153 securitization, 475 J Jamaica, 96 January effect, 131 Japan benchmark rate, 442 bonds outstanding, 354, 360 capitalization level and contributions to global GDP, 151 credit rating services, 602 debt and equity outstanding, 350 demographic influences, 224 domestic and international debt securities, 315 foreign bonds, 313, 314 government-sponsored enterprises, 490 inflation-linked bonds, 326 maturity of mortgages, 486 MSCI multi-market index, 96 non-sovereign government debt, 650 overconfidence and mispricing in markets, 137 proxy for market portfolio, 94 residential mortgage loans, 486, 487 returns on bonds, bills, and equities, 153 securities backed by quasi-government entities, 490 sovereign bonds, 367, 369 tax considerations with bonds, 316 Japan Airlines Group, 166–167 Japan Bank for International Cooperation (JBIC), 372 Japanese Financial Services Agency, 29 Japanese government bonds (JGBs), 367, 368, 423 Japanese yen foreign exchange gains, 169 international bonds outstanding in, 351 as reserve currency, 19 Japan Housing Finance Agency (JHF), 490 JBIC see Japan Bank for International Cooperation JGBs see Japanese government bonds JHF see Japan Housing Finance Agency John Deere, 198, 219 Johnson & Johnson credit ratios, 622, 624–625 market share stability, 213 Jones, Edward D., 78 Jordan, 96 J.P Morgan Emerging Market Bond Index (EMBI) Global, 357 JPMorgan, 166 junk bonds see non-investment-grade bonds justified values of price multiples, 266–269 K kangaroo bonds, 313 Kazakhstan, 96 Kenya, 96 key rate duration, 549 kimchi bonds, 313 Knight Securities, 30 Kodak, 223 Komatsu, 209, 219 Koninklijke Philips Electronics, 209 Korea interbank offered rate (Koribor), 353 krona, Swedish, 351 krone, Norwegian, 351 Kuwait, 96, 351 L LabCorp, 209 Lam Research Corporation, 200–202 large-denomination negotiable CDs, 386 Latin America, 350, 357 see also specific countries laundry business, asset-based equity valuation, 277 law of one price, 269 lawyers, in securitization process, 478–479 LBOs see leveraged buyouts lead underwriter, 50 learning, personal, 138 Lebanon, 96 legal considerations, with fixed-income securities, 313–316 legal form of bonds, 305–306 legal identity, bond issuer, 305–306 legal maturity, mortgage-backed security, 495 Lehman Brothers, 386, 639 Lehman Brothers Aggregate Bond Index, 99 Lehman Brothers Global Aggregate Bond Index, 103 lenders’ rights, in foreclosures, 488–489 lending, 8–9, 32–33 Lenovo, 209 letras del Tesoro, 368 letters of credit, 309 Level I ADRs, 168 Level II ADRs, 168 Index I-13 Level III ADRs, 168 leverage and debt structure, 640–642 financial, 41–44 operating, 612 leveraged buyouts (LBOs) covenants for, 626–627 as private equity investments, 162, 163 leveraged instruments, 383 leveraged positions, in markets, 41–44 leverage ratios, 41–42, 616–617 Lexmark, 209 LG Group, 315–316 liabilities, contingent, 648 Libor see London interbank offered rate liens, 596, 644 life-cycle stage of airline industry, 227 industry classifications based on, 203 in strategic analysis, 220 Light Sweet Crude Oil futures contract, 23 limitations on liens covenant, 644 limited partnerships, 18, 26 limit order book, 45–46 limit orders, 44–49 lines of credit, 375, 618, 639 linkers see inflation-linked bonds liquidating dividend, 249n.1 liquidation absolute priority rule in, 483 priority of claims in, 599–600 priority of preference shares in, 159n.14 stockholders’ rights in, 157 liquidity in credit analysis, 618 from dealers, 30 external, 647 and forward contracts, 22 in high-yield credit analysis, 638–639 and operating cash flow, 639 and secondary bond markets, 365 and securitization, 475 in sovereign credit analysis, 647 and yield-to-maturity, 433 liquidity duration, 574 liquidity enhancement, 375 liquidity ratios, 231 liquidity risk with fixed-income securities, 574–575 market, 593–594 liquid markets information-motivated trading in, 12 raising capital in, risk management in, 10 secondary, 53 Liquidnet, 30 Lithuania, 96 litigation risk, 608 loans amortizing, 487, 508 auto loan ABS, 508–511 bank, 349, 350, 373–374 bilateral, 373, 374 bullet, 374 margin, 41 mortgage, 485–490 non-amortizing, 508 non-recourse, 488 prime, 486 recourse, 488 residential mortgage, 485–490 amortization schedule, 487–488 interest rates, 486–487 lender’s rights in foreclosures, 488–489 maturity, 486 prepayment options and penalties, 488 subprime, 486 syndicated, 364, 374 loan-to-value ratio (LTV), 486, 504 lockout period, 508, 511 Lombardy region, Italy, 650 London interbank offered rate (Libor) and coupon rate, 301 interest rate swaps, 23–24 and I-spread, 443 as reference rate, 352–353, 425 setting, 353 London Stock Exchange GDRs on, 167 information availability, 122 total market capitalization in, 151, 152 long positions, 39 long sales, clearing instructions on, 50 loss aversion, 137 losses capital, 316, 533–535, 569 expected, 593 stop-loss orders, 48–49 tax-loss selling hypothesis, 131 loss given default, 592 loss severity, 592, 593 low-cost strategy, for companies, 228 lower Tier securities, 596n.4 Lowe’s, 208 LTV see loan-to-value ratio Lund, Susan, 348n.1 Luxembourg Stock Exchange, 167 M Macaulay, Frederick, 538 Macaulay duration calculating, 538–542 and interest rate risk/investment horizon, 569–574 and modified duration, 549–551 of portfolio, 555–557 McDonalds, 216–217 macroeconomic influences, on industry analysis, 203, 222 Maersk Line, 210 maintenance covenants, 644 maintenance margin requirement, 22, 43–44 make-whole calls, 330 make-whole charge, 505 making a market, 45, 46, 631 Malaysia, 96 management, book value and, 172 management buyouts (MBOs), 162 management strategy, as company fundamental, 613–614 maple bonds, 313 Marathon Oil, 209 margin discount, 426–429 initial margin requirements, 22, 41 maintenance margin requirements, 22, 43–44 quoted, 426 repo, 388 required, 426 variation margin payments, 22 margin calls, 43 margin loans, 41 marketable limit orders, 45 Market Abuse Regulation, 122n.11 market anomalies, 129–136 and closed-end investment fund discounts, 133–134 cross-sectional, 133 and earnings surprises, 134–135 for initial public offerings, 135 investment strategies using, 136 and predictability of returns, 135–136 time-series, 130–132 market bid–ask spread, 44 market capitalization of equity markets, 150–152 style indexes based on, 97 total, 87 market-capitalization weighting, of indexes, 85, 87–90 market discount rate bond price and, 407–411 calculating, 402–406 market efficiency, 115–146 and active manager selection, 116 anomalies, 129–136 and closed-end investment fund discounts, 133–134 cross-sectional, 133 and earnings surprises, 134–135 for initial public offerings, 135 investment strategies using, 136 and predictability of returns, 135–136 time-series, 130–132 in behavioral finance, 136–139 contributing factors, 120–123 description of efficient market, 117–119 forms of, 124–129 and market vs intrinsic value, 119–120 and portfolio management, 129 practice problems, 142–144 semi-strong-form efficient markets, 125–128 solutions to problems, 145–146 strong-form efficient markets, 128 and transaction/informationacquisition costs, 123–124 weak-form efficient markets, 125 market float, securities’, 87 market information systems, 58 market liquidity risk, 593–594 market multiple models, 247 see also multiplier models for equity valuation market-on-close orders, 48 market orders, 44, 45, 47–48 market participants fair treatment of, 122 and market efficiency, 120–122 I-14 Index market price, estimated value and, 245–246 markets, 5–76 see also fixed-income market assets in, 14–20 and classification of markets, 14–16 currencies, 19–20 real assets, 26–28 securities, 16–19 benefits of securitization for, 474–476 call, 54 capital, 13–15 central bank funds, 385 commodities in, 25–26 complete, 58 continuous trading, 54, 56–57 contract, 20–25, 27–28, 54–58 contracts for difference, 20–21 execution mechanisms, 54–57 forwards, 21–22 futures, 22–23 insurance contracts, 25 market information systems, 58 options, 24–25 swaps, 23–24 trading sessions on, 54 debt, 592 efficient description of, 117–119 intrinsic value in, 119–120 semi-strong-form, 125–128 strong-form, 128 weak-form, 125 emerging bonds in, 355 capitalization level and contributions to global GDP, 151 securitization in, 475 sovereign debt of, 646 technical analysis for, 125 World Bank definition of, 646n.42 Eurocommercial paper, 376–377 and financial analyst decisions, financial intermediaries, 28–38 arbitrageurs, 34–36 brokers, exchanges, and alternative trading systems, 28–30 dealers, 30–31, 34–36 depository institutions and financial corporations, 32–33 insurance companies, 33–34 securitizers, 31–32 for settlement and custodial services, 36–37 transactions facilitated by, 38 forward, 437 and functions of financial system, 6–14 capital allocation efficiency, 13–14 determining rates of return, 12–13 for individuals, 7–12 global debt, 349–350 global equity, 349–350 global finance and depository receipts, 166–169 direct investing, 165–166 equity securities in, 150–155 integration and growth in, 164–165 inefficient, 119 interbank, 352, 385–386 liquid exchanging assets for immediate delivery in, 10 information-motivated trading in, 12 raising capital in, risk management in, 10 secondary, 53 making, 45, 46, 631 orders in, 44–50 over-the-counter, 55, 168, 358, 365 positions in, 38–44 practice problems, 66–72 primary security, 50–53 rationality of individuals vs., 137 regulation of, 60–63 secondary security, 53–58 solutions to problems, 73–76 sustainable securitization, 476 taking, 46 target, for security indexes, 82 US commercial paper, 376–377 in well-functioning financial systems, 58–60 yield spread and performance of, 631 market sentiment, 93 market share and industry concentration, 208–209 stability of, 212–213, 220 market-to-book ratio, 175 market value and asset-based valuation, 276, 277 and book value, 172 of debt, 274–275 intrinsic vs., 119–120 total, 175 Market Vectors Vietnam ETF, 95 Markit iBoxx, 98 Markit iBoxx Euro High-Yield Bond Indexes, 103 Mars/Wrigley, 209, 219–221 MasterCard, 206, 209 master limited partnerships (MLPs), 26 matador bonds, 313 material adverse change provisions, 375 Mathews International Corporation, 199 matrioshka bonds, 313 matrix pricing, 417–420 mature stage (industry life-cycle), 215 maturity balloon maturity provisions, 505 classifying fixed-income markets by, 351 of corporate notes/bonds, 377–378 of fixed-income securities, 300 legal, 495 of residential mortgage loans, 486 weighted average, 491–494 maturity effect, 408, 409 maturity structure of interest rates, 433–441 maturity value see par value Mauritius, 96 MBOs see management buyouts MBS see mortgage-backed securities MDURATION financial function, 542n.4 Medical Equipment Trust (MET), 477–478, 481–483 medical industry, governmental influences on, 225 Mediquip, 476–478, 482–483 medium-term notes (MTNs), 378 Medtronic, 213 mental accounting, 138 Mercedes, 218 Merck & Co industry concentration and pricing power of, 209 in strategic analysis, 219–221 MET see Medical Equipment Trust method of comparables and multiplier models for equity valuation, 269–272 price multiples in, 266 Mexican Comisión Nacional Bancaria y de Valores, 29 Mexican peso, 10 Mexico, 96, 197, 326, 369 mezzanine bond classes, 513 Mibor see Mumbai interbank offered rate Michelin Group, 68, 74 Middle East, 350, 617 see also specific countries mid-swaps (term), 442 migration, credit ratings, 606–607 Mikuni & Co., 602 minimum required rate of return, 177 MLPs see master limited partnerships model portfolios, security market indexes in, 94–95 modified duration annual, 542–544 approximate, 543–545 calculating, 542–543 and credit risk/return, 633–635 and effective duration, 547–548 and Macaulay duration, 549–551 of portfolio, 555–557 momentum anomalies, 132 momentum effect, of marketcapitalization-weighted indexes, 91 Monetary Authority of Singapore, 161 monetary flexibility, in sovereign credit analysis, 648 monetary policy, 648 money, time value of see time value of money money convexity, 564–565 money duration, 557–559, 572 money market instruments, yield of, 429–433 money markets, 15, 17 money market securities, 300 Monitronics International, Inc., 199 monoline insurance companies, 479 Moody, John, 601 Moody’s Investors Service commercial paper ratings, 375 in credit markets, 601, 602 investment-grade ratings, 299n.2, 350 long-term ratings matrix, 602–603 municipal debt ratings, 650, 651 ratings for Ford Motor Company, 607 sovereign ratings, 368 Moore’s law, 222 Index I-15 moral hazard, insurance and, 34 Morgan Stanley, 300 Morningstar, 98, 104 Morningstar US Market Index, 104 Morocco, 96 mortgage-backed securities (MBS), 308 commercial, 503–508 balloon maturity provisions, 505 call protection, 504–505 credit risk, 504 structure, 504–508 coupon frequency, 300–301 defined, 474 effective duration of, 546 overcollateralization with, 309 repayment structure for, 320 residential, 490–503 collateralized mortgage obligations, 497–503 mortgage pass-through securities, 31, 491–496 non-agency residential mortgagebacked securities, 503 and securitizers, 31 mortgage debt, 596 mortgage design, 486, 489–490 mortgage loans defined, 485 residential, 485–490 amortization schedule, 487–488 interest rates, 486–487 lender’s rights in foreclosures, 488–489 maturity, 486 prepayment options and penalties, 488 mortgage pass-through securities, 31, 491–496 cash flow construction, 493–494 characteristics, 491–492 collateralized mortgage obligations vs., 497 defined, 491 prepayment rate measures, 492–493 prepayment risk, 492 weighted average life, 495–496 mortgage pools, 31 mortgage rates, 486–487 mortgages see residential mortgage loans mortgage sector, 491n.9 MSCI All Country World Index, 103 MSCI Argentina Index, 96n.1 MSCI Barra company classifications, 192 multi-market indexes of, 95–96 MSCI Developed Markets Index, 96 MSCI EAFE Index, 96 MSCI Emerging Markets Index, 96 MSCI Frontier Markets Index, 96 MSCI GCC Countries Index, 96n.4 MSCI Jamaica Index, 96n.3 MSCI Pakistan Index, 96n.2 MSCI Trinidad & Tobago Index, 96n.3 MSCI World Index, 94 MTNs see medium-term notes multilateral trading facilities (MTFs), 29–30 multi-market equity indexes, 95–96 multiple-price auctions, 362 multiple put bonds, 332 multiplier models for equity valuation, 265–276 defined, 247 enterprise values in, 274–276 example, 272–273 fundamentals in, 266–267 method of comparables, 269–272 other models vs., 246–248, 279–280 price multiples in, 266–269 multistage dividend discount models, 261–264 Mumbai interbank offered rate (Mibor), 353 municipal bonds (munis), 355 mutual funds barriers to entry for, 207 performance of, 129 as pooled investments, 18–19 N NACE see Statistical Classification of Economic Activities in the European Community NAICS see North American Industry Classification System NAREIT see National Association of Real Estate Investment Trusts narrow framing, 138 NASDAQ see National Association of Securities Dealers Automated Quotations NASDAQ OMX, 151, 152 National Association of Real Estate Investment Trusts (NAREIT), 101, 102 National Association of Securities Dealers Automated Quotations (NASDAQ), 93, 151n.3, 168 National Highways Authority of India (NHAI), 355 NAV see net asset value Navistar, 189 negative covenants, 310–311, 626 negative pledges, 310 negotiable CDs, 386 Nestlé justified forward P/E of, 267–269 strategic analysis, 219–221 subsidiary of, 159 net asset value (NAV), 134 net coupon pass-through rate, 491 net debt, 616 Netherlands bonds outstanding, 354, 360 domestic and international debt securities, 315 in MSCI multi-market index, 96 residential mortgage loans, 486–488 returns on bonds, bills, and equities, 153 sovereign bonds, 368 net income, in ROE, 172–174 net interest pass-through rate, 491 net operating income (NOI), 504 net working capital, in credit analysis, 618 new entrants, in strategic analysis, 205–208 Newmont Mining, 276 New York Mercantile Exchange (NYMEX), 23 New York Stock Exchange (NYSE) ADRs on, 168 delisting of Allianz SE on, 165 industry concentration and pricing power of, 209 information availability of, 122 New Zealand coupon payment structures, 323 inflation-linked bonds, 327 in MSCI multi-market index, 96 returns on bills and bonds, 152–153 on equities, 152–153 risk tolerance and equity ownership, 155 NHAI see National Highways Authority of India Nigeria, 96 Nikkei Stock Average, 103 Nikon Corporation, 223 Nissan Motor Company, 189, 270 no-arbitrage value, 411 NOI see net operating income Nokia, 217 nominal rate see coupon rate Nomura, 30 non-agency residential mortgage-backed securities, 490, 491, 503 non-amortizing loans, 508 non-callable, non-convertible perpetual preferred shares, 254–255 non-conforming mortgages, 490 non-cumulative preference shares, 160 non-cyclical companies, 190–191, 613 non-domestic equity securities, 164–169 depositary receipts, 166–169 direct investing in, 165–166 non-investment-grade bonds (high-yield bonds), 603 and classification of bond market, 350–351 credit analysis of, 638, 643–645 credit risk with, 299–300 non-investment grade credit ratings, 638 non-mortgage asset-backed securities, 508–512 auto loan ABSs, 508–511 credit card receivable ABSs, 511–512 non-participating preference shares, 160 nonpublic information, 128 non-recourse loans, 488 non-sovereign bonds, 307, 371–373 non-sovereign government debt, 650–651 non-sovereign governments, 299 North American Industry Classification System (NAICS), 197 Northern Trust, 210 Norway, 96, 153 Norwegian krone, 351 notching, 604 note rates, 486–487 I-16 Index notes bonds vs., 17 corporate, 377–380 credit-linked, 382 exchange-traded, 19 floating-rate cash flows from, 323–324 as corporate debt, 378 coupon rate for, 301 inverse, 324 yield measures for, 425–429 medium-term, 378 privately placed, 510 publicly offered, 509 US Treasury, 368, 547–548 variable-rate, 323 Novartis AG industry concentration and pricing power, 209 in pharmaceutical industry, 189 ROE for, 173–175 strategic analysis, 219–221 NYMEX see New York Mercantile Exchange NYSE see New York Stock Exchange NYSE-Euronext as exchange, 29 total market capitalization in, 151, 152 O OAS see option-adjusted spread OAS duration, 548 obligaciones del Estado, 368 obligations assimilables du Trésor (OATs), 367, 368 offering day, 362 offerings best efforts, 51 initial public defined, 50 in markets, 51–52 and pricing anomalies, 135 and venture capital, 162 public, 50–53, 360–364 rights, 52 seasoned, 50 syndicated, 361 underwritten, 50, 51, 360–362 offer prices, 44, 574 off-the-run securities, 442 oil services industry, strategic analysis of, 219–221 Oman, 96 Ontario Securities Commission, 29 on-the-run securities, 368, 442 open-ended funds, 18 open market operations, 358 operating cash flow, 252, 618, 639 operating history, as company fundamental, 613 operating income, enterprise value and, 276 operating leverage, capacity and, 612 Operating Segments (IFRS 8), 189n.1 operationally efficient financial systems, 58–59 option-adjusted price, 425 option-adjusted spread (OAS), 445, 631 option-adjusted yield, 425 option premiums, 24 options, 329 see also embedded options call, 24 in contract markets, 24–25 dealers of, 35 forwards vs., 25 long and short sides of, 39 put, 24, 643 underlying risk exposures of, 39 option writers, 24 order-driven markets, 54–57 Order Machine, 30 order matching rules, 55 order precedence hierarchy, 55 orders, 44–50 clearing instructions for, 44, 49–50 execution instructions for, 44–48 validity instructions for, 44, 48–49 organized exchanges, 365 original issue discount tax provision, 317 orthopedic device industry, market share stability in, 212–213 OTC markets see over-the-counter markets overcapacity, 208 overcollateralization, 309 overconfidence, 137 overnight repo, 387 overreaction anomalies, 132 over-the-counter (OTC) markets, 55, 168, 358, 365 see also quotedriven markets overvalued (term), 245 P Paccar, 189 PAC tranches see planned amortization class tranches Pakistan, 96 panda bonds, 313 Pan-European Aggregate Bond Index, 357 parallel shift, 556 par curve, 436–437 pari passu ranking, 597, 644 parity value, 333 Parmalat, 608 partial duration, 549 partially amortized bonds, 318–320 partially amortizing loans, 487 participating preference shares, 160 participation instruments, 382–383 partnerships, limited, 18, 26 par value of fixed-income securities, 300 and market discount rate, 403–406 passive investment strategies, 117 passive portfolio management, 129 pass-through rate, 491 passthrough securities, on investment pools, 32 path dependence, 218n.14 payable date (payment date), 249 payment-in-kind (PIK) coupon bonds, 325, 378 payments-in-lieu of dividends, 40 payout ratio, 266–269 P/B see price-to-book ratio P/CF see price-to-cash-flow ratio P/E see price-to-earnings ratio peer groups, 197–202 constructing, 198–202 defined, 197 penal sum, 309 penalties, prepayment, 488 pension funds, regulation of, 62 Pentax Imaging Company, 223 People’s Bank of China, 475 PepsiCo, Inc., 209, 211 performance of hedge funds, 102 risk-adjusted, 94 standards for, 61 performance attribution, industry analysis in, 189 periodicity, 420–421, 433 periodicity conversions, 421–422 PerkinElmer, 158–159 Pernod Ricard, 209 perpetual bonds, 300 perpetuities, 550 personal learning, 138 Peru, 96 peso, Mexican, 10 Petroleo Brasileiro SA (Petrobras), 266–267 Peugeot, 269, 270 Pfizer Inc in pharmaceutical industry, 189 ROE for, 173–175 strategic analysis, 219–221 pharmaceutical industry similar companies in, 189 strategic analysis for, 219–221 Philip Morris, 209 Philippines, 96 photographic film industry, 223 physical assets, 14 physical settlement, of contracts, 20 PIK coupon bonds see payment-in-kind coupon bonds Piotowski, John, 348n.1 PIPEs see private investments in public equity plain vanilla (conventional) bonds, 301 cash flows for, 302, 318 outstanding, 334 planned amortization class (PAC) tranches, 499–501 Playtech, 51–52 pledges, negative, 310 Poland, 96, 326, 369 political risk, 647 pooled investments, 15, 18–19, 32 Porter, Michael, 205, 228, 612 portfolio management active information-motivated trading in, 10 manager performance, 129 manager selection, 116 security market indexes in, 94 with fixed-income securities, 298 passive, 129 portfolios defined, 38 duration of, 555–557 model, 94–95 Portugal, 96, 487, 649–650 Index I-17 POSIT, 30, 57 positions, 38–44 leveraged, 41–44 long, 39 short, 39–41 post-trade transparent markets, 58 pound, British, 19, 351 PRA see Prudential Regulation Authority Praxair, 209 predictability, of returns, 135–136 preemptive rights, stockholders’, 157 prefabricated housing industry, 215–216 preference shares (preferred shares), 159–161, 171 callable, 160, 171, 254 common vs., 17–18 convertible, 161 cumulative, 160, 171 non-callable, non-convertible perpetual, 254–255 non-cumulative, 160 non-participating, 160 participating, 160 retractable term, 255–256 risk of, 171 preferred stock, valuation of, 254–256 premium bonds returns on, 531 tax provisions for, 317 premiums, 403–406 call, 330 conversion, 333 option, 24 Pre-Paid Legal Services Inc., 199 prepayment lockouts, 505 prepayment option, residential mortgage loan, 488 prepayment penalties, 488 prepayment penalty mortgages, 488 prepayment penalty points, 505 prepayment rate, 492–493 prepayment risk and contraction/expansion risk, 492 in securitization transactions, 481–482 pre-refunded bonds, 505n.12 present value models for equity valuation, 248–264 defined, 246–247 examples, 253 Gordon growth model, 256–261 multistage, 261–264 other models vs., 246–248, 279–280 preferred stock valuation with, 254–256 share value for three-year investment horizon, 252 present value of growth opportunities, 257n.3 pre-trade transparent markets, 58 price ask, 44 bid, 44, 574 call, 330 clean, 413 conversion, 333 exercise, 18 flat, 413–417 full, 413–417 law of one price, 269 and limit vs market orders, 45–46 market, 245–246 offer, 44, 574 option-adjusted, 425 quoted, 413 repurchase, 387 price competition, in strategic analysis, 218–220 price-driven markets see quote-driven markets PRICE financial function, 415n.1 price index see price return index price multiples see also specific price multiples defined, 265 example valuation based on, 272–273 and method of comparables, 269–272 in multiplier models for equity valuation, 266–269 price priority, in order-driven markets, 55 price return, 78–81 price return index (price index), 78–81 price-to-book ratio (P/B), 175–176, 265 price-to-cash-flow ratio (P/CF), 265 price-to-earnings ratio (P/E) for Canon Inc., 271–272 comparing equity valuation models with, 279–280 defined, 265 justified value of, 266–269 in method of comparables, 269–272 price-to-sales ratio (P/S), 265, 269–270 price value of a basis point (PVBP), 558 price weighting, 83–85, 91 pricing, 230 pricing day, 362 pricing power, 207–210 primary dealers, 30, 364 primary markets bond, 359–365 private placements on, 360, 364–365 public offerings on, 360–364 capital, 13–14 securities, 14–15, 50–53 defined, 14 private placements on, 52–53 public offerings on, 50–53 and secondary markets, 53 Prime Bank, 307 prime brokers, 33, 49 prime lending rate, 374 prime loans, 486 prime paper, 375 principal (principal amount; principal value), 300 principal business activity, industry classification based on, 189 principal repayment structures, 318–323 for bullet bonds, 318–320 for corporate notes/bonds, 378–379 for fully amortized bonds, 318–320 for sinking fund arrangements, 321–323 principal value see par value prior information, 135–136 priority of claims, 595, 599–600 private equity securities, 15, 162–164 private information, 128 private investments in public equity (PIPEs), 162–163 privately placed notes, 510 private placements on bond market, 360, 364–365 on securities market, 52–53 private sector, size of, 647 Procter & Gamble, 210 products, of similar companies, 189–190 profit, economic, 204 profitability, in credit analysis, 615–616 profitability ratios, 231 prospectus, 478n.3, 479, 626 Protection One, Inc., 199, 200 Prudential Regulation Authority (PRA), 353n.3 P/S see price-to-sales ratio PSA Peugeot Citroën, 189 PSA prepayment benchmark see Public Securities Association prepayment benchmark public auctions, 362–364 public equity securities, 15, 162–164 public information, 125–128 publicly offered notes, 509 public offerings on bond market, 360–364 initial defined, 50 in markets, 51–52 and pricing anomalies, 135 and venture capital, 162 on securities market, 50–53 public sector, size of, 647 Public Securities Association (PSA) prepayment benchmark, 493 pull to par effect, 410–411 purchase agreements, 478–479 pure discount bonds, 301 PureTrading, 30 putable bonds, 332, 379 effective convexity of, 567 interest rate risk with, 554 putable common shares, 159, 171 putable preference shares, 171 put options (puts) American, 332n.6 Bermuda-style, 332 change of control, 643 defined, 24 embedded (see putable bonds) European, 332 PVBP see price value of a basis point Q Qatar, 96, 351 qualified institutional investors, 362 quarterly interest bonds (QUIBS), 300 quarterly interest debt securities (QUIDS), 300 quasi-government bonds, 372–373 quasi-government entities, 299 Quest Diagnostics, 209 QUIBS see quarterly interest bonds QUIDS see quarterly interest debt securities quoted margin, 426 quoted price, 413 I-18 Index quote-driven markets (dealer markets) defined, 54, 55 execution mechanisms for, 55 and fixed-income indexes, 98 order-driven and brokered markets vs., 57 R random walk hypothesis, 125n.15 rapid amortization provisions, 512 rate of return and functions of financial system, 12–13 holding-period, 571 required, 177–178, 254, 402 rating agencies see credit ratings agencies ratio analysis, 615–617 rationality, of markets vs individuals, 137 RBC Bank, 209 RBC Capital Markets, 30 real assets, 14, 26–28 real estate investment trust (REIT) indexes, 101–102 real estate investment trusts (REITs), 26 real rate duration, 574 real returns, on equity securities, 152–154 reasonableness testing, for company analysis, 232 rebalancing, of indexes, 86, 91 reconstitution, 92–93 recourse loans, 488 recovery rates, 503, 597–600 redemption yield, 304 see also yield-to-maturity reference rates, 352–353, 425–426 Regis Corporation, 199 registered bonds, 314 Regulation FD (SEC), 122 regulations on financial reporting, 61 for markets, 60–63 for pension funds, 62 Regulation S ADRs, 168 Regulation T (Federal Reserve), 41 regulatory influences and fixed-income securities, 313–316 of government, 224–226 and industry life-cycle, 217 in strategic analysis, 220 reinvested dividends, 169–170 reinvestment risk, 322 REIT indexes see real estate investment trust indexes REITs see real estate investment trusts renminbi, yuan, 351 reorganization, 600 repayment proceeds, bond, 306–307 replication, by arbitrageurs, 35 repo margin, 388 repo rate, 387 “Report on Securitization Incentives” (Bank for International Settlements), 476 repos see repurchase agreements repo to maturity, 387 representativeness bias, 138 representative sectors, for commercial industry classifications, 193–194 representative security market indexes, 103–104 repurchase agreements (repos), 17, 386–389 repurchase date, 387 repurchase price, 387 required margin, 426 required rate of return, 177–178, 254, 402 required yield, 402 required yield spread, 418 reserve accounts, 309 reserve funds, 309, 385–386 residential mortgage-backed securities (RMBS), 490–503 collateralized mortgage obligations, 497–503 floating-rate tranches, 501 planned amortization class tranches, 499–501 sequential-pay structures, 497–499 support tranches, 499–501 mortgage pass-through securities, 491–496 cash flow construction, 493–494 characteristics, 491–492 collateralized mortgage obligations vs., 497 defined, 491 prepayment rate measures, 492–493 prepayment risk, 492 weighted average life, 495 non-agency residential mortgagebacked securities, 503 residential mortgage loans, 485–490 amortization schedule, 487–488 interest rates, 486–487 lender’s rights in foreclosures, 488–489 maturity, 486 prepayment options and penalties, 488 residual tranche, 504 restaurants asset-based equity valuation for, 278 barriers to entry for, 206 restricted payments covenant, 644 restricted subsidiaries, 644 restrictions on asset disposals, 310 on debt, 310 on distributions to shareholders, 310 on international investment, 164 on investments, 310 on mergers and acquisitions, 310 on prior claims, 310 retail currency transactions, 20 retail deposits, 385 retail investors, 358 Retail Price Index (RPI), 325, 326, 370 retractable term preferred shares, 255–256 retraction, 256n.2 return(s) abnormal, 124 accounting return on equity, 172–177 active, 116 for commodities vs commodity indexes, 101 credit risk vs., 628–637 on equity securities, 169–170 Fama and French three-factor model, 133 on fixed-income securities, 530–537 industry classifications based on correlations in, 191 predictability of, 135–136 price, 78–81 real, 152–154 security market indexes as proxies for, 94 single-period, 79–81 total for equity securities, 169–170 for leveraged stock purchase, 42–43 for multiple periods, 81–82 price vs., 78–79 for single period, 80–81 return on equity (ROE), 172–177 and accounting method, 173 and book vs intrinsic value, 176–177 in company analysis, 232 formulas, 172–173 and justified forward P/E, 268–269 for Pfizer, Novartis AG, and GlaxoSmithKline, 173–175 return on invested capital (ROIC), 204 Reuters, 386 revenue, interest expense and, 648 revenue bonds, 651–652 reverse floating-rate notes, 324 reverse repurchase agreements (reverse repos), 388 reverse stock split, 249 reviewable ARM, 487 revolving period, 508 RGS classification see Russell Global Sectors classification rights offerings, 52 Rio Tinto, 209, 276 risk balloon, 505 Bloomberg’s statistic for, 558 contraction, 492 counterparty, 22, 36 credit, 592–594 with commercial mortgage-backed securities, 504 with corporate notes/bonds, 379 with fixed-income securities, 299–300, 574–575 with floating-rate bonds, 426 and floating-rate notes, 323 with repurchase agreements, 388 return vs., 628–637 and yield-to-maturity, 433 credit migration, 593 default, 592, 593 downgrade, 593 of equity securities, 170–171 event, 608 expansion, 492 interest rate, 537–574 approximate modified duration, 543–545 bond convexity, 559–567 defined, 531 duration of bond portfolio, 555–557 effective duration, 545–548 and floating-rate notes, 323 and investment horizon, 569–574 key rate duration, 549 Index I-19 Macaulay duration, 538–542, 569–574 modified duration, 542–543 money duration, 557–559 price value of a basis point, 558 properties of bond duration, 549–554 yield volatility, 568–569 liquidity, 574–575, 593–594 litigation, 608 political, 647 prepayment, 481–482, 492 reinvestment, 322 of relying on credit ratings, 605–608 and repo rate, 387 rollover, 375 shaping, 549 spread, 593 substitution, 612 systematic, 94 systemic, 333 risk-adjusted performance, 94 risk aversion, 137 risk exposures, underlying, 39 risk-free rate, 419, 645–646 risk management, 9–10 risk managers, risk tolerance, 154–155 rivalries, 205, 612 RMBS see residential mortgage-backed securities Roche Holding AG, 189 ROE see return on equity ROIC see return on invested capital rollover, of futures, 101 rollover risk, 375 Romania, 96 Roxburgh, Charles, 348n.1 Royal Bank of Scotland PLC, 307, 383 RPI see Retail Price Index Rule 10b5-1 (SEC), 122n.10 Rule 10b5-2 (SEC), 122n.10 Rule 144A ADRs, 168 running yield, 304 Russell 2000 Index, 92 Russell 3000 Index as broad market index, 95 reconstitution of, 92 Russell Global Sectors (RGS) classification, 189, 190, 192 Russell Investments, 192 Russia, 96, 313 S sales of assets, 639 long and short, 50, 123 price-to-sales ratio, 265, 269–270 Samsung Electronics Co Ltd., 209, 306 Samurai bonds, 313 Sandoz, 209 Sanofi-aventis S.A., 189 Santander UK plc, 306 Saudi Arabia, 96 saving, 7–8, 12 Schlumberger, 219–221 seasoned offering, 50 seasoned securities, 50 SEC see US Securities and Exchange Commission secondary markets bond, 359, 365–367 security, 53–58 defined, 15 execution mechanisms, 54–57 market information systems, 58 and primary markets, 50, 53 trading sessions on, 54 secondary precedence rules, 55 second lien debt, 596 sector indexes, 97 sectors defined, 189 economic sensitivity of, 190–191 ICB definition, 192 representative, 193–194 secured bonds, 307, 483 secured debt, 595, 596 securities see also specific types of securities asset-backed, 473–525 about, 473–474 collateralized debt obligations, 512–515 commercial mortgage-backed securities, 503–508 creation of, 31–32 economic benefits of securitization, 474–476 non-mortgage asset-backed securities, 508–512 as pooled investments, 19 practice problems, 519–522 residential mortgage-backed securities, 490–503 residential mortgage loans, 485–490 securitization process, 474–485 solutions to problems, 523–525 defined, 16–17 in markets, 16–19 for security market indexes, 82 short positions in, 39–41 Securities and Futures Commission, 41 Securities Industry and Financial Markets Association (SIFMA), 493 securitization, 474–485 for asset-backed securities, 299 defined, 473 economic benefits of, 474–476 and financial markets, 474–476 parties’ roles in, 478–480 special purpose entities, 482–485 of structured financial instruments, 349 structure of, 481–482 transaction example, 476–478 securitization markets, sustainable, 476 securitized assets, 474 securitizers, 31–32 security lending agreements, 40 security market indexes, 77–114 for alternative investments, 101–104 construction of, 82–91 defined, 78 equity indexes, 95–97 fixed-income indexes, 98–100, 357 index values over multiple time periods, 81–82 management, 91–93 origins of, 78 practice problems, 106–111 representative, 103–104 single-period returns for, 79–81 solutions to problems, 112–114 uses of, 93–95 self-regulating organizations (SROs), 62 sellers, in securitization process, 478 semiannual bond basis yield, 421 semiconductor industry, 200–202 semi-strong-form efficient markets, 125–128 seniority ranking, 307, 595–597 Sensex Index, 82 sensitivity analysis, for justified forward P/E, 268–269 sequential-pay tranches, 497–499 Serbia, 96 serial correlation, 125n.16 serial maturity structures, 378 Service Corporation International, 199 servicers, in securitization process, 478 services, of similar companies, 189–190 servicing fee, mortgage pass-through security, 491 settlement clearing instructions for, 49–50 of contracts, 20 of corporate notes and bonds, 380 by financial intermediaries, 36–37 in secondary bond markets, 366 settlement date, 413 shakeout stage (industry life-cycle), 215 Shanghai Stock Exchange, 151, 152 Shanghai Stock Exchange Composite Index (SSE), 95 shaping risk, 549 shareholders bondholders vs., 610–611 voting rights of, 156, 157 shareholders’ equity, ROE and, 174 share repurchase (buyback), 249 shares common, 156–159 callable, 158–159, 171 defined, 156 and fixed-income securities, 298 at Ford Motor Company, 157–158 and preference shares, 159–160 preferred vs., 17–18 putable, 159, 171 at Viacom Corporation, 156–157 defined, 18 dual listing of, 164–165 global registered, 168 preference (preferred), 159–161 callable, 160, 171, 254 common vs., 17–18 convertible, 161 cumulative, 160, 171 non-callable, non-convertible perpetual, 254–255 non-cumulative, 160 non-participating, 160 participating, 160 retractable term, 255–256 risk of, 171 small-cap, 121, 133 value of, for three-year investment horizon, 252 I-20 Index shelf registration, 52, 362 shifting interest mechanism, 503 short positions, 39–41 short rebate rates, 40 short sales, 50, 123 short-term funding for banks, 384–390 repurchase and reverse repurchase agreements, 386–389 retail deposits, 385 wholesale funds, 385–386 Sibor see Singapore interbank offered rate SIC system see Standard Industrial Classification system Siemens AG, 258–259 SIFMA see Securities Industry and Financial Markets Association similar companies, 189–191 simple yield, 423 Singapore, 96, 368 Singapore interbank offered rate (Sibor), 301, 353 Singapore Stock Exchange, 29, 167 single monthly mortality (SMM) rate, 492–494 single-period returns, for security market indexes, 79–81 single price auctions, 54 sinking fund arrangements, 321–323, 378–379 size effect, 133 Slovenia, 96 small-cap shares, 121, 133 small-denomination negotiable CDs, 386 Smith, Donald J., 541n.3, 560n.6 Smith & Nephew, 209, 213 SMM rate see single monthly mortality rate social influences in industry analysis, 203, 226–227 and industry life-cycle, 217 in strategic analysis, 220 solvency ratios, in company analysis, 231 Sony Electronics, 209, 315, 316 Sotheby’s, 199 South Africa inflation-linked bonds, 326 in MSCI multi-market index, 96 returns on bonds and bills, 152–153 on equities, 152–153 sovereign bonds, 370 South America, 475 see also specific countries and regions South Korea domestic and international debt securities, 315 foreign bonds, 313 inflation-linked bonds, 326 international investment, 164 MSCI multi-market index, 96 residential mortgage loans, 486, 487 risk tolerance and equity ownership, 154–155 securities backed by quasi-government entities, 490 sovereign bonds, 367–371 credit quality, 368–369 legal issuers, 305–306 names of, 367–368 sources of repayment, 306 types, 369–370 sovereign debt, 645–650 flexibility and performance profile, 647–648 political and economic profile, 647 in Portugal, 649–650 sovereign debt defaults, 645–646 sovereign governments, 299, 475 sovereign wealth funds, 358 S&P see Standard & Poor’s S&P 500 Index number of securities in, 82 as proxy for market portfolio, 94 securities selection for, 82 Spain bonds outstanding, 354, 360 domestic and international debt securities, 315 foreign bonds, 313 MSCI multi-market index, 96 residential mortgage loans, 486, 487 returns on bonds, bills, and equities, 153 sovereign bonds, 368, 369 SPCs see special purpose companies S&P Developed Ex-US BMI Energy Sector Index, 103 SPDRs see Standard & Poor’s Depositary Receipts SPDR© S&P Energy Sector ExchangeTraded Fund, 103 special dividend (extra dividend), 248–249 Specialized Consumer Services subindustry, 199 special purpose companies (SPCs), 306, 477 special purpose entities (SPEs) and bankruptcy, 483–485 defined, 31, 306, 477 obligations of, 306 as party to securitization, 478 role of, 482–485 as securitizers, 31–32 special purpose vehicles (SPVs) as financial intermediaries, 31–32 legal obligation of, 306 in securitization transaction, 477 SPEs see special purpose entities S&P GSCI Index, 101 split coupon bonds, 325 sponsored depository receipts, 166 spot commodities markets, 25, 26 spot contracts, 20 spot currency transactions, 20 spot curve, 434–435 spot exchange rate, 20 spot markets, 10, 15 spot rates, 411–413 spread(s) benchmark, 442 and benchmark yield, 574–575 bid–ask, 44, 365–366 bid–offer, 365–366 credit, 419, 482–483, 607 excess, 309, 509 G-, 442, 445 interpolated, 443 option-adjusted, 445, 631 yield, 441–445 and benchmark rates, 441–443 and benchmark yield curve, 443–445 and credit risk/return, 630–637 required, 418 zero-volatility, 443, 445 spread over the benchmark, 418 spread risk, 593 spreadsheet modeling, 232 Sprint, 217 S&P/TSX Capped Income Trust Index, 225 SPVs see special purpose vehicles Sri Lanka, 96 SROs see self-regulating organizations SSE see Shanghai Stock Exchange Composite Index stable industries, 190, 191 standard deviation, of expected total return, 170 Standard Industrial Classification (SIC) system, 197 standardized yield measures, 420 Standard & Poor’s (S&P) commercial paper ratings, 375 company classifications, 192, 201–202 credit ratings, 99 investment-grade, 299n.2, 350 transition rates of, 606–607 for United Rentals, Inc., 604–605 default rates by credit category, 605–606, 635–636 funds from operations, 615 industrial comparative ratio analysis, 617 long-term ratings matrix, 602–603 municipal debt ratings, 651 notching guidelines, 604–605 role in credit markets, 601, 602 sovereign credit analysis, 646–648 sovereign ratings, 368 Standard & Poor’s Depositary Receipts (SPDRs), 68, 74 Standards of Professional Conduct (CFA Institute), 49, 51 standing limit orders, 45–46 Stanley Security Solutions, 199, 200 The Stanley Works, 199, 200 State Street, 209 Statistical Classification of Economic Activities in the European Community (NACE), 196 statistical similarities, of similar companies, 191 Statistics New Zealand, 196 statutory voting, 156 step-up coupon bonds, 324 STMicroelectronics, 210 stock see also shares convertible common, 157 growth, 97 preferred, 254–256 subdivisions and combinations of, 157 value, 97, 133 stock analysts, stock dividend (bonus issue of shares), 249 Index I-21 stock splits, 83, 85, 157, 249 stop-buy orders, 48, 49 stop-loss orders, 48–49 stop orders, 48–49 strategic default, 488 strategic groups, analysis of, 202–203 strategic industry analysis, 204–222 barriers to entry in, 206–208 example, 219–222 five forces framework, 205–206 industry capacity in, 211–212 industry concentration in, 208–211 industry life-cycle model in, 213–218 example, 217–218 limitations of, 217 stages of industry life cycle, 213–216 using, 216–217 market share stability in, 212–213 price competition in, 218–219 street conversion, 422 strip curve, 434 strong-form efficient markets, 128 structural subordination, 604 structured finance CDOs, 513 structured finance sector, 349 structured financial instruments, 381–384 capital protected instruments, 382 leveraged instruments, 383 participation instruments, 382–383 yield enhancement instruments, 382 structured interest-only tranches, 497n.11 structured products, 381–382 structuring process, 497 Stryker, 213 style indexes, 97 subdivisions, of stock, 157 subordinated debt, 596–597 subordination, 308–309, 481, 503 subprime loans, 486 subsidiaries high-yield credit analysis for, 642–643 of Nestlé, 159 restricted vs unrestricted, 644 substitute products, 205, 612 substitution risk, 612 superannuation funds, 546 supplementary prospectus, 478n.3 suppliers, power of, 205, 612 supply, 230, 352, 631 support tranches, 499–501 supranational bonds, 372–373 supranational organizations, 299 supranationals, 601n.10 surety bond, 309 survivorship bias, 102 sustainable securitization markets, 476 swaps asset, 443 in contract markets, 23–24 credit default, 25, 34 interest rate, 23–24 long and short side of, 39 Sweden inflation-linked bonds, 326, 327 MSCI multi-market index, 96 returns on bonds and bills, 152–153 on equities, 152–153 risk tolerance and equity ownership, 154–155 sovereign bonds, 369, 370 Swedish krona, 351 Swiss franc, 19, 351 Switzerland foreign bonds, 314 MSCI multi-market index, 96 residential mortgage loans, 487 returns on bonds, bills, and equities, 153 risk tolerance and equity ownership, 155 sovereign bonds, 368, 369 Synchrony Bank, 512 syndicated loans, 364, 374 syndicated offerings, 361 synthetic CDOs, 513 systematic risk, 94 systemic risk, 334 T T + settlement, 366 Tai, Jackson, 161 Taiwan, 96 Taiwan Semiconductor Manufacturing Company Ltd., 200, 201 taking a market, 46 target market, for security market indexes, 82 Tata Motors, 270 taxes and fixed-income securities, 316–318 and income trusts in Canada, 225 and yield-to-maturity, 433 tax-exempt bonds, 355 tax-loss selling hypothesis, 131 T-bills see US Treasury bills T-bonds see US Treasury bonds TD Bank, 209 technical analysis, 125, 129 technological influences in industry analysis, 203, 222–223 on industry life-cycle, 217 in strategic analysis, 221 technology, substitution risk and, 612 Technology sector, 193 telecommunications industry, structure of, 217 Telecommunications sector, 193 Telefónica S.A., 192, 272–273 tenor, 300, 438 TEPCO see Tokyo Electric Power Company terminal stock value (terminal value), 251, 261 term maturity structures, 378 term of repurchase agreement, 387 term repo, 387 term structure of credit spreads, 419 of interest rates, 433–441, 568 of risk free rates, 419 of yield volatility, 568–569 Tesco, 362 Tesoro Público, 368 Teva Pharmaceutical Industries, 209 Texas, 651 Texas Instruments, 210 Thailand, 96, 164 Thaler, Richard, 132 threat of entry, 205, 612 three-stage dividend discount model, 262 Tibor see Tokyo interbank offered rate TIIS see Treasury inflation-indexed securities Timber Hill, 30 time frame, for market efficiency, 117 time periods, security index values over multiple, 81–82 time-series pricing anomalies, 130–132 time-to-maturity, 551 time tranching, 482 time value of money, 402–413 market discount rate, 402–406, 407–411 spot rates, 411–413 yield to maturity, 406–407 TIPS see Treasury inflation-protected securities T-notes see US Treasury notes tobacco industry, 225, 226 Tokyo, Japan, 650 Tokyo Electric Power Company (TEPCO), 608 Tokyo Electron, 209 Tokyo interbank offered rate (Tibor), 353 Tokyo Stock Exchange as exchange, 29 information availability, 122 and TOPIX, 103 Tokyo Stock Exchange Group, 151, 152 Tokyo Stock Price Index (TOPIX) features of, 103 number of securities in, 82 as proxy for market portfolio, 94 top-down approach to equity valuation, 244 top heavy capital structure, 642 TOPIX see Tokyo Stock Price Index total market capitalization, 87 total market value, ROE and, 175 total return for equity securities, 169–170 for leveraged stock purchase, 42–43 for multiple periods, 81–82 price vs., 78–79 for single period, 80–81 total return index, 78–82 for multiple periods, 81–82 for single period, 80–81 value of, 79–81 Total S A., 250 “toxic waste,” 32 Toyota Motor Company, 189, 209, 270 track record, as company fundamental, 613 trade pricing rules, 56 trading alternative systems, 29–30 continuous trading markets, 54 on contract/secondary security markets, 54 information-motivated, 10–12, 26 insider, 61, 122 multilateral facilities, 29–30 spot market, 10 I-22 Index trading limits, 123 traditional bonds, ABSs vs., 299 traditional investment markets, 15 tranches for collateralized debt obligations, 513 for collateralized mortgage obligations, 497–501 defined, 32 equity, 504 floating-rate, 501 loss severity and credit risk for, 593n.1 planned amortization class, 499–501 residual, 504 sequential-pay, 497–499 structured interest-only, 497n.11 support (companion), 499–501 tranching, 308–309, 481–482 transaction costs, 9, 123 transparency, of markets, 58 Treasury inflation-indexed securities (TIIS), 326 Treasury inflation-protected securities (TIPS), 326, 328, 329 Trinidad & Tobago, 96 true yield, 422 true yield-to-maturity, 422–423 trust deeds, 305, 626 trustee agents, 479 trustees bond indenture, 305 in securitization process, 479 trust law, 484 trust preferred securities, 596n.4 trusts, in securitization process, 478 TSX Group, 152 Tunisia, 96 Turkey, 96, 326, 369 turn-of-the-month effect, 132 turn-of-the-year effect, 131 Turquoise, 30 two-stage dividend discount model, 261–264 Tyco International, Ltd., 199, 200 U UBS, 209 Ukraine, 96 underlying asset, value of contract and, 20 underlying risk exposures, of options, 39 undervalued (term), 245 underwater mortgages, 488 underwriters, 360, 479 underwritten offerings, 50, 51, 360–362 uniform pricing rule, 56 Unilever, 210 Union Electric Company, 255–256 United Arab Emirates, 96 United Kingdom bankruptcy, 600 benchmark rate, 442 bonds outstanding, 354, 360 capitalization level and contributions to global GDP, 151 commercial paper, 374 coupon payment structures, 323 covenant-strengthening investor groups, 627 domestic and international debt securities, 315 foreign bonds, 313, 314 inflation-linked bonds, 326, 327, 370 international investments in BASF, 165 MSCI multi-market index, 96 non-sovereign government bonds, 371 overconfidence and mispricing in markets, 137 perpetual bonds in, 300 residential mortgage loans, 486–488 returns on bonds, bills, and equities, 153 risk tolerance and equity ownership, 155 sinking fund arrangements, 322 social influences on tobacco industry, 226 sovereign bonds, 305–306, 367–370 UK Debt Management Office, 306 bonds issued by, 315 United Nations, 196 United Rentals, Inc., 604–605, 642–643 United States ADRs, 167–168 auctions, 362–364 bankruptcy, 600 benchmark rate, 442 bonds outstanding, 354, 360 bond yields and credit risk/return, 629–630 capitalization level and contributions to global GDP, 150–151 commercial mortgage-backed securities, 504 commercial paper in, 374 company activities of government industries, 197 corporate notes and bonds, 377 coupon payment structures, 323 covenant-strengthening investor groups, 627 debt and equity outstanding, 350 development of NAICS system, 197 domestic and international debt securities, 315 floating-rate notes, 323 foreign bonds, 313, 314 government-sponsored enterprises, 490 industrial comparative ratio analysis, 617 inflation-linked bonds, 326, 327, 370 international investments, 165 MSCI multi-market index, 96 municipal bonds in, 355 non-sovereign government bonds, 371 non-sovereign government debt, 650 overconfidence and mispricing in markets, 137 proxy for market portfolio, 94 PSA prepayment benchmark, 493 residential mortgage loans, 486–489 returns by asset class, 644–645 on bonds and bills, 152–153 on equities, 152–153 on reinvested dividends, 170 risk tolerance and equity ownership, 154–155 securities backed by quasi-government entities, 490 securities ranked lower than subordinated debt, 596 securitization market, 474 sinking fund arrangements, 322 sovereign bonds, 367–370 tax considerations with bonds, 316 transition rates of credit ratings, 606 trust law in, 484 US Aggregate Bond Index, 357 US Air Force, 226 US Census Bureau, 197 US commercial paper (USCP) market, 376–377 US Consumer Price Index (CPI), 325, 326, 328, 329 US Department of Housing and Urban Development, 490 US dollar foreign exchange gains, 169 international bonds outstanding in, 351 as reserve currency, 19 spot market trading of, 10 US Federal Trade Commission (FTC), 127 US GAAP on disclosure of operating segment, 200 on ROE, 173n.28 US Securities and Exchange Commission (SEC), 29 disclosure regulations, 122 prospectuses filed with, 478n.3 registration with, 168 Regulation FD, 122 requirements for sponsored DRs, 166 Rule 10b5-1 and 10b5-2, 122n.10 Rule 144A, 168 US Treasury, public auctions by, 362–364 US Treasury bills (T-bills) characteristics of, 368 discount rate, 429 maturity of, 351 returns on equities and bonds vs., 152–153 transaction costs with, 123 US Treasury bonds (T-bonds), 368, 560–561 US Treasury notes (T-notes), 368, 547–548 units (term), 18 unrealized capital gains and losses, 569 unrestricted subsidiaries, 644 unsecured debt, 595, 596 unsponsored depository receipts, 166 upper Tier securities, 596n.4 UPS, 209 Uranium Energy Corporation, 92–93 USCP market see US commercial paper market Utilities sector, 193 V Vale, 209 Valero, 209 validity instructions, 44, 48–49 valuation of equities (see equity valuation) of fixed-income securities (see fixedincome valuation) Index I-23 value see also present value models for equity valuation book, 172–173, 176–177, 247 carrying, 247, 533 enterprise, 247, 274–276, 645 estimated, 245–246 fairly valued, 245 fundamental value, 119, 244 of growth opportunities, 257n.3 intrinsic book vs., 176–177 from dividend discount model, 251 in equity valuation, 244 market vs., 119–120 justified values of price multiples, 266–269 market and asset-based valuation, 276, 277 and book value, 172 of debt, 274–275 intrinsic vs., 119–120 net asset value, 134 terminal, 251, 261 total market, 175 value effect, 133 Value Line, 262–264 value stocks, 97, 133 value tilt, of indexes, 91 value weighting see marketcapitalization weighting variable-rate mortgages, 487 variable-rate notes, 323 variation margin payments, for futures contracts, 22 venture capital, 15, 162 Viacom Corporation, 156–157 Vietnam, 96 Visa, 206, 209 volatility in equity markets, 153–154 yield, 568–569 Volkswagen AG, 10, 189, 306 Volvo, 189 vote by proxy, 156 voting rights, shareholders’, 156, 157 W WAC see weighted average coupon rate WACC see weighted average cost of capital Waha Capital, 27 Wall Street Journal, 103 Wal-Mart Stores Inc as bond issuer, 306 bonds issued by, 315, 316 industry life cycle of, 216–217 two-factor analysis of, 210 Walt Disney Company, 377 WAM see weighted average maturity warrants, 18, 333, 334 waterfall structures, 308, 481 Watson Pharmaceuticals Inc case study, 618–625 weak-form efficient markets, 125, 128, 129 weekend effect, 132 weighted average cost of capital (WACC), 178, 204 weighted average coupon rate (WAC), 491–494 weighted average life, 495 weighted average maturity (WAM), 491–494 Western Europe, 350 see also specific countries wholesale funds, 385–386 Wilshire 5000 Total Market Index, 95 window dressing, 131 women, in workforce, 226–227 working capital, 618, 639 workout period, 505 World Bank see International Bank for Reconstruction and Development WorldCom, 608 W.W Grainger, 210 Y Yahoo!, 40 Yankee bonds, 313 yen, Japanese foreign exchange gains, 169 international bonds outstanding in, 351 as reserve currency, 19 yield, 420–433 benchmark, 574 bond equivalent, 431–433 cash flow, 555 and credit risk/return, 629–630 current, 423 of fixed-income securities, 304 of fixed-rate bonds, 420–433 of floating-rate notes, 425–429 forward, 438 government equivalent, 423 horizon, 532–536, 571 for money market instruments, 429–433 option-adjusted, 425 redemption, 304 (see also yield-to-maturity) required, 402 running, 304 semiannual bond basis yield, 421 simple, 423 true, 422 yield curves benchmark, 443–445 inverted, 434 yield duration, 538, 545, 548, 562 yield enhancement instruments, 382 yield maintenance charges, 505 yield spreads, 441–445 and credit risk/return, 630–637 over benchmark rates, 441–443 over benchmark yield curve, 443–445 required, 418 yield-to-maturity based on spot rates, 412–413 for bond vs money market, 429 building blocks of, 441–442 calculation of, 406–407 defined, 304, 407 differences in, 433–435 and Macaulay duration, 551 and rate of return, 531–532 true, 422–423 yield to redemption, 304 yield-to-worst, 425 yield volatility, 568–569 YPG Holdings, 256 yuan renminbi, 351 Z zero-coupon bonds, 301, 378 with call options, 382 convexity adjustment for, 560–563 as deferred coupon bonds, 325 sovereign, 369 spot curve for, 434 zero-coupon indexed bonds, 327 zero curve, 434 zero rates, 411 zero-volatility spread (Z-spread), 443, 445 Zimmer, 209, 213 WILEY END USER LICENSE AGREEMENT Go to www.wiley.com/go/eula to access Wiley’s ebook EULA ... Yield Volatility   Investment Horizon, Macaulay Duration, and Interest Rate Risk   Credit and Liquidity Risk   Summary   Practice Problems   Solutions   52 9 53 0 53 0 53 7 53 8 54 5 54 9 54 9 55 5 55 7... 59 1 59 2 59 2 59 5 59 5 59 5 59 7 601 602 603 6 05 610 610 611 628 indicates an optional segment 638 638 6 45 650 652 656 666 viii Contents Glossary G-1 Index I- 1 indicates an optional segment Equity Investments... 497 50 3 50 3 50 4 50 4 50 8 50 8 51 1 51 2 51 3 51 3 indicates an optional segment Contents vii Summary   Practice Problems   Solutions   51 6 51 9 52 3 Study Session 17 Fixed Income (2)   52 7 Reading 54

Ngày đăng: 18/10/2021, 19:40