CFA Level 1 Volume 4

✍ Scribed by CFA Institute

• Publisher: CFA Institute
• Year: 2023
• Tongue: English
• Leaves: 684
• Category: Library

✦ Table of Contents

How to Use the CFA Program Curriculum
Errata
Designing Your Personal Study Program
CFA Institute Learning Ecosystem (LES)
Feedback
Corporate Issuers
Learning Module 1 Cost of Capital-Foundational Topics
Introduction
Cost of Capital
Taxes and the Cost of Capital
Costs of the Various Sources of Capital
Cost of Debt
Cost of Preferred Stock
Cost of Common Equity
Estimating Beta
Estimating Beta for Public Companies
Estimating Beta for Thinly Traded and Nonpublic Companies
Flotation Costs
Methods in Use
Summary
References
Practice Problems
Solutions
Learning Module 2 Capital Structure
Introduction
Factors Affecting Capital Structure
Internal Factors Affecting Capital Structure
Existing leverage
External Factors Affecting Capital Structure
Capital Structure and Company Life Cycle
Background
Start-Ups
Growth Businesses
Mature Businesses
Unique Situations
Modigliani–Miller Propositions
MM Proposition I without Taxes: Capital Structure Irrelevance
MM Proposition II without Taxes: Higher Financial Leverage Raises the Cost of Equity
MM Propositions with Taxes: Firm Value
MM Propositions with Taxes: Cost of Capital
Costs of Financial Distress
Optimal and Target Capital Structures
Market Value vs. Book Value
Target Weights and WACC
Pecking Order Theory and Agency Costs
Stakeholder Interests
Debt vs. Equity Conflict
Preferred Shareholders
Management and Directors
Summary
References
Practice Problems
Solutions
Learning Module 3 Measures of Leverage
Introduction
Leverage
Business and Sales Risks
Business Risk and Its Components
Sales Risk
Operating Risk and the Degree of Operating Leverage
Financial Risk, the Degree of Financial Leverage and the Leveraging Role of Debt
Total Leverage and the Degree of Total Leverage
Breakeven Points and Operating Breakeven Points
The Risks of Creditors and Owners
Summary
Practice Problems
Solutions
Equity Investments
Learning Module 1 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
Fixed Income
Equities
Pooled Investments
Currencies, Commodities, and Real Assets
Commodities
Real Assets
Contracts
Forward Contracts
Futures Contracts
Swap Contracts
Option Contracts
Other Contracts
Financial Intermediaries
Brokers, Exchanges, and Alternative Trading Systems
Dealers
Arbitrageurs
Securitizers, Depository Institutions and Insurance Companies
Depository Institutions and Other Financial Corporations
Insurance Companies
Settlement and Custodial Services and Summary
Summary 
Positions and Short Positions
Short Positions
Leveraged Positions
Orders and Execution Instructions
Execution Instructions
Validity Instructions and Clearing Instructions
Stop Orders
Clearing Instructions
Primary Security Markets
Public Offerings
Private Placements and Other Primary Market Transactions
Importance of Secondary Markets to Primary Markets
Secondary Security Market and Contract Market Structures
Trading Sessions
Execution Mechanisms
Market Information Systems
Well-functioning Financial Systems
Market Regulation
Summary
Practice Problems
Solutions
Learning Module 2 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
Target Market and Security Selection
Index Weighting
Index Management: Rebalancing and Reconstitution
Rebalancing
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
Learning Module 3 Market Efficiency
Introduction
The Concept of Market Efficiency
The Description of Efficient Markets
Market Value versus Intrinsic Value
Factors Affecting Market Efficiency Including Trading Costs
Market Participants
Information Availability and Financial Disclosure
Limits to Trading
Transaction Costs and Information-Acquisition Costs
Forms of Market Efficiency
Weak Form
Semi-Strong Form
Strong Form
Implications of the Efficient Market Hypothesis
Fundamental Analysis
Technical Analysis
Portfolio Management
Market Pricing Anomalies - Time Series and Cross-Sectional
Time-Series Anomalies
Cross-Sectional Anomalies
Other Anomalies, Implications of Market Pricing Anomalies
Closed-End Investment Fund Discounts
Earnings Surprise
Initial Public Offerings (IPOs)
Predictability of Returns Based on Prior Information
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
References
Practice Problems
Solutions
Learning Module 4 Overview of Equity Securities
Importance of Equity Securities
Equity Securities in Global Financial Markets
Characteristics of Equity Securities
Common Shares
Preference Shares
Private Versus Public Equity Securities
Non-Domestic Equity Securities
Direct Investing
Depository Receipts
Risk and Return Characteristics
Return Characteristics of Equity Securities
Risk of Equity Securities
Equity and Company Value
Accounting Return on Equity
The Cost of Equity and Investors’ Required Rates of Return
Summary
References
Practice Problems
Solutions
Learning Module 5 Introduction to Industry and Company Analysis
Introduction
Uses of Industry Analysis
Approaches to Identifying Similar Companies
Products and/or Services Supplied
Business-Cycle Sensitivities
Statistical Similarities
Industry Classification Systems
Commercial Industry Classification Systems
Constructing a Peer Group
Describing and Analyzing an Industry and Principles of Strategic Analysis
Principles of Strategic Analysis
Barriers to Entry
Industry Concentration
Industry Capacity
Market Share Stability
Price Competition
Industry Life Cycle
External Influences on Industry
Macroeconomic Influences
Technological Influences
Demographic Influences
Governmental Influences
Social Influences
Environmental Influences
Industry Comparison
Company Analysis
Elements That Should Be Covered in a Company Analysis
Spreadsheet Modeling
Summary
References
Practice Problems
Solutions
Learning Module 6 Equity Valuation: Concepts and Basic Tools
Introduction
Estimated Value and Market Price
Categories of Equity Valuation Models
Background for the Dividend Discount Model
Dividends: Background for the Dividend Discount Model
Dividend Discount Model (DDM) and Free-Cash-Flow-to-Equity Model (FCFE)
Preferred Stock Valuation
The Gordon Growth Model
Multistage Dividend Discount Models
Multipler Models and Relationship Among Price Multiples, Present Value Models, and Fundamentals
Relationships among Price Multiples, Present Value Models, and Fundamentals
Method of Comparables and Valuation Based on Price Multiples
Illustration of a Valuation Based on Price Multiples
Enterprise Value
Asset-Based Valuation
Summary
References
Practice Problems
Solutions
Fixed Income
Learning Module 1 Fixed-Income Securities: Defining Elements
Introduction and Overview of a Fixed-Income Security
Overview of a Fixed-Income Security
Bond Indenture
Bond Indenture
Legal, Regulatory, and Tax Considerations
Tax Considerations
Principal Repayment Structures
Principal Repayment Structures
Coupon Payment Structures
Floating-Rate Notes
Step-Up Coupon Bonds
Credit-Linked Coupon Bonds
Payment-in-Kind Coupon Bonds
Deferred Coupon Bonds
Index-Linked Bonds
Callable and Putable Bonds
Callable Bonds
Putable Bonds
Convertible Bonds
Summary
Practice Problems
Solutions
Learning Module 2 Fixed-Income Markets: Issuance, Trading, and Funding
Introduction
Classification of Fixed-Income Markets
Classification of Fixed-Income Markets
Fixed-Income Indexes
Investors in Fixed-Income Securities
Primary Bond Markets
Primary Bond Markets
Secondary Bond Markets
Sovereign Bonds
Characteristics of Sovereign Bonds
Credit Quality of Sovereign Bonds
Types of Sovereign Bonds
Non-Sovereign, Quasi-Government, and Supranational Bonds
Non-Sovereign Bonds
Quasi-Government Bonds
Supranational Bonds
Corporate Debt: Bank Loans, Syndicated Loans, and Commercial Paper
Bank Loans and Syndicated Loans
Commercial Paper
Corporate Debt: Notes and Bonds
Maturities
Coupon Payment Structures
Principal Repayment Structures
Asset or Collateral Backing
Contingency Provisions
Issuance, Trading, and Settlement
Structured Financial Instruments
Capital Protected Instruments
Yield Enhancement Instruments
Participation Instruments
Leveraged Instruments
Short-Term Bank Funding Alternatives
Retail Deposits
Short-Term Wholesale Funds
Repurchase and Reverse Repurchase Agreements
Structure of Repurchase and Reverse Repurchase Agreements
Credit Risk Associated with Repurchase Agreements
Summary
Practice Problems
Solutions
Learning Module 3 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 Using Spot Rates
Prices and Yields: Conventions For Quotes and Calculations
Flat Price, Accrued Interest, and the Full Price
Matrix Pricing
Annual Yields for Varying Compounding Periods in the Year
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
Learning Module 4 Introduction to Asset-Backed Securities
Introduction: Benefits of Securitization
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
Mortgage Pass-Through Securities
Mortgage Pass-Through Securities
Collateralized Mortgage Obligations and Non-Agency RMBS
Sequential-Pay CMO Structures
CMO Structures Including Planned Amortization Class and Support Tranches
Other CMO Structures
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
Covered Bonds
Summary
Practice Problems
Solutions