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Cfa Level 1 2012 Formula Sheet
Cfa Level 1 2012 Formula Sheet
Cfa Level 1 2012 Formula Sheet
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(Fixed Income)
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QUANTITATIVE METHODS
QUANTITATIVE METHODS
PV = FV
(1+ r)N
PMT
PV(perpetuity) = I/Y
D 360
rBD = F t
where:
rBD = the annualized yield on a bank discount basis.
D = the dollar discount (face value – purchase price)
F = the face value of the bill
t = number of days remaining until maturity
where:
HPY = holding period yield
t = numbers of days remaining till maturity
HPY = (1 + EAY)t/365 - 1
Population Mean
Where,
xi = is the ith observation.
Sample Mean
Geometric Mean
Harmonic Mean
Percentiles
where:
y = percentage point at which we are dividing the distribution
Ly = location (L) of the percentile (Py) in the data set sorted in ascending order
Range
Range = Maximum value - Minimum value
Where:
n = number of items in the data set
= the arithmetic mean of the sample
Population Variance
where:
Xi = observation i
= population mean
N = size of the population
Sample Variance
Sample variance =
where:
n = sample size.
Coefficient of Variation
Coefficient of variation
where:
s = sample standard deviation
= the sample mean.
Sharpe Ratio
where:
= mean portfolio return
= risk-free return
s = standard deviation of portfolio returns
(X - X)
i
3
SK =
[ n
(n - 1)(n - 2) ] i=1
s
3
(X - X)
i=1
i
3
SK 3
n s
where:
s = sample standard deviation
Sample Kurtosis uses standard deviations to the fourth power. Sample excess kurtosis is
calculated as:
( )
n
KE = n(n + 1)
(X - X)
i=1
i
4
3(n - 1)
2
4
(n - 1)(n - 2)(n - 3) s (n - 2)(n - 3)
(X - X)
i=1
i
4
KE 4
3
n s
where:
s = sample standard deviation
For a sample size greater than 100, a sample excess kurtosis of greater than 1.0 would be
considered unusually high. Most equity return series have been found to be leptokurtic.
Conditional Probabilities
Expected Value
i=1
Where:
Xi = one of n possible outcomes.
i=1
Where:
E(X) = the unconditional expected value of X
E(X|S1) = the expected value of X given Scenario 1
P(S1) = the probability of Scenario 1 occurring
The set of events {S1, S2,..., Sn} is mutually exclusive and exhaustive.
Covariance
Cov (XY) = E{[X - E(X)][Y - E(Y)]}
Cov (RA,RB) = E{[RA - E(RA)][RB - E(RB)]}
Correlation Coefficient
Cov (RA,RB)
Corr (RA,RB) = (RA,RB) =
(A)(B)
Where:
Portfolio Variance
Bayes’ Formula
Counting Rules
The number of different ways that the k tasks can be done equals n1 n2 n3 …nk.
Combinations
Remember: The combination formula is used when the order in which the items are assigned the
labels is NOT important.
Permutations
Binomial Distribution
where:
p = probability of success
1 - p = probability of failure
= number of possible combinations of having x successes in n trials. Stated differently, it is the number
of ways to choose x from n when the order does not matter.
Confidence Intervals
z-Score
z = (observed value - population mean)/standard deviation = (x – )/
Shortfall Ratio
Sampling Error
where:
= the standard error of the sample mean
= the population standard deviation
n = the sample size
where:
= standard error of sample mean
s = sample standard deviation.
Confidence Intervals
where:
Point estimate = value of the sample statistic that is used to estimate the population
parameter
Reliability factor = a number based on the assumed distribution of the point
estimate and the level of confidence for the interval (1- ).
Standard error = the standard error of the sample statistic (point estimate)
where:
= The sample mean (point estimate of population mean)
z/2 = The standard normal random variable for which the probability of an
observation lying in either tail is / 2 (reliability factor).
= The standard error of the sample mean.
n
where:
= sample mean (the point estimate of the population mean)
= the t-reliability factor
= standard error of the sample mean
Test Statistic
Power of a Test
Power of a test = 1 - P(Type II error)
Confidence Interval
[( sample
)(
statistic
-
critical
value )( standard
error )] (
population
parameter ) [(
sample
)(
statistic
+
critical
value )( standard
error )]
x - (z) ( ) µ0 x + (z) ( )
Summary
Null Alternate Fail to reject
Type of test hypothesis hypothesis Reject null if null if P-value represents
One tailed H0 : µ µ0 Ha : µ µ0 Test statistic > Test statistic Probability that lies
(upper tail) critical value critical value above the computed
test test statistic.
One tailed H0 : µ µ0 Ha : µ µ0 Test statistic < Test statistic Probability that lies
(lower tail) critical value critical value below the computed
test test statistic.
Two-tailed H0 : µ =µ0 Ha : µ µ0 Test statistic < Lower critical Probability that lies
Lower critical value test above the positive
value statistic value of the computed
Test statistic > Upper critical test statistic plus the
Upper critical value probability that lies
value below the negative
value of the computed
test statistic
t-Statistic
x - µ0
t-stat =
Where:
x = sample mean
µ0= hypothesized population mean
s = standard deviation of the sample
n = sample size
z-Statistic
x - µ0 x - µ0
z-stat = z-stat =
Where: Where:
x = sample mean x = sample mean
µ0= hypothesized population mean µ0= hypothesized population mean
= standard deviation of the population s = standard deviation of the sample
n = sample size n = sample size
Where:
t-stat
Where:
Where:
d = sample mean difference
sd = standard error of the mean difference=
sd = sample standard deviation
n = the number of paired observations
Relationship Assumption
Population between regarding
distribution samples variance Type of test
Where:
n = sample size
s2 = sample variance
2 = hypothesized value for population variance
0
Where:
s12 = Variance of sample drawn from Population 1
s22 = Variance of sample drawn from Population 2
M = (V - Vx) 100
where:
M = momentum oscillator value
V = last closing price
Vx = closing price x days ago, typically 10 days
100
RSI = 100
1 + RS
Stochastic Oscillator
%K = 100
( C L14
H14 L14 )
where:
C = last closing price
L14 = lowest price in last 14 days
H14 = highest price in last 14 days
Arms Index
ECONOMICS
The demand function captures the effect of all these factors on demand for a good.
Equation 1 is read as “the quantity demanded of Good X (QDX) depends on the price of
Good X (PX), consumers’ incomes (I) and the price of Good Y (PY), etc.”
%QDx
EDPx = … (Equation 16)
%Px
Coefficient on own-
QDx price in market
%QDx QDx QDx Px
EDPx =
%Px
=
Px
Px
= ( Px )( )
QDx
… (Equation 17)
demand function
(Q0 - Q1)
100
% change in quantity demanded % Qd (Q0 + Q1)/2
EP = = =
% change in price % P (P0 - P1)
100
(P0 + P1)/2
Income elasticity of demand measures the responsiveness of demand for a particular good
to a change in income, holding all other things constant.
Same as coefficient
on I in market
demand function
(Equation 11)
QDx
%QDx QDx QDx I
EDI =
%I
=
I
I
= ( I )( )
QDx
… (Equation 18)
Cross elasticity of demand measures the responsiveness of demand for a particular good to
a change in price of another good, holding all other things constant.
Same as coefficient
on PY in market
demand function
(Equation 11) QDx
%QDx QDx QDx Py
EDPy =
%Py
=
Py
Py
= ( Py )( )
QDx
… (Equation 19)
he Utility Function
Accounting Profit
Economic Profit
Economic profit (also known as abnormal profit or supernormal profit) is calculated as:
Normal Profit
Revenue Calculation
Total revenue (TR) Price times quantity (P Q), or the sum of individual units
sold times their respective prices; (Pi Qi)
Marginal revenue (MR) Change in total revenue divided by change in quantity; (TR
/ Q)
Total fixed cost (TFC) Sum of all fixed expenses; here defined to include all
opportunity costs
Total variable cost (TVC) Sum of all variable expenses, or per unit variable cost
times quantity; (per unit VC Q)
Total costs (TC) Total fixed cost plus total variable cost; (TFC + TVC)
Average fixed cost (AFC ) Total fixed cost divided by quantity; (TFC / Q)
Average variable cost (AVC) Total variable cost divided by quantity; (TVC / Q)
Average total cost (ATC) Total cost divided by quantity; (TC / Q) or (AFC + AVC)
For a firm in perfect competition, MRP of labor equals the MP of the last unit of labor times
the price of the output unit.
MRPLabor = PriceLabor
MRP1 MRPn
= ... =
Price of input 1 Price of input n
MR = P[1 – (1/EP)]
In a monopoly, MC = MR so:
P[1 – (1/EP)] = MC
N-firm concentration ratio: Simply computes the aggregate market share of the N largest
firms in the industry. The ratio will equal 0 for perfect competition and 100 for a monopoly.
Herfindahl-Hirschman Index (HHI): Adds up the squares of the market shares of each of the
largest N companies in the market. The HHI equals 1 for a monopoly. If there are M firms
in the industry with equal market shares, the HHI will equal 1/M.
Nominal GDP refers to the value of goods and services included in GDP measured at current
prices.
Real GDP refers to the value of goods and services included in GDP measured at base-year
prices.
GDP Deflator
Nominal GDP
GDP deflator = 100
Real GDP
GDP = C + I + G + (X M)
Expenditure Approach
Under the expenditure approach, GDP at market prices may be calculated as:
Income Approach
Under the income approach, GDP at market prices may be calculated as:
National income equals the sum of incomes received by all factors of production used to
generate final output. It includes:
The capital consumption allowance (CCA) accounts for the wear and tear or depreciation
that occurs in capital stock during the production process. It represents the amount that must
be reinvested by the company in the business to maintain current productivity levels. You
should think of profits + CCA as the amount earned by capital.
… (Equation 4)
S = I + (G – T) + (X – M) … (Equation 7)
The IS Curve (Relationship between Income and the Real Interest Rate)
S – I = (G – T) + (X – M) … (Equation 7)
The LM Curve
where :
k = I/V
M = Nominal money supply
MD = Nominal money demand
MD/P is referred to as real money demand and M/P is real money supply.
Equilibrium in the money market requires that money supply and money demand be equal.
Y = AF(L,K)
Where:
Y = Aggregate output
L = Quantity of labor
K = Quantity of capital
A = Technological knowledge or total factor productivity (TFP)
Potential GDP growth rate = Long-term growth rate of labor force + Long-term labor
productivity growth rate
ULC = W/O
Where:
The Fischer effect states that the nominal interest rate (RN) reflects the real interest rate (RR)
and the expected rate of inflation (e).
RN = RR + e
where:
SDC/FC = Nominal spot exchange rate
PFC = Foreign price level quoted in terms of the foreign currency
PDC = Domestic price level quoted in terms of the domestic currency
Ft = St+1
Where:
X = Share of exports in total trade
M = Share of imports in total trade
X = Price elasticity of demand for exports
M = Price elasticity of demand for imports
2
Exhibit 10, pg 72, Vol 3, CFA Program Curriculum 2012
Basic EPS
Basic EPS = Net income – Preferred dividends
Weighted average number of shares outstanding
Diluted EPS
Diluted EPS =
[ Net income -
Preferred
dividends ] +
Convertible
preferred +
dividends
[
Convertible
debt (1 - t)
interest
]
Shares from Shares from
Weighted Shares
conversion of conversion of
average + + + issuable from
convertible convertible
shares stock options
preferred shares debt
Comprehensive Income
Net income + Other comprehensive income = Comprehensive income
CFO
Inflows Outflows
Cash collected from customers. Cash paid to employees.
Interest and dividends received. Cash paid to suppliers.
Proceeds from sale of securities held for trading. Cash paid for other expenses.
Cash used to purchase trading
securities.
Interest paid.
Taxes paid.
CFI
Inflows Outflows
Sale proceeds from fixed assets. Purchase of fixed assets.
Sale proceeds from long-term investments. Cash used to acquire LT investment
securities.
CFF
Inflows Outflows
Proceeds from debt issuance. Repayment of LT debt.
Proceeds from issuance of equity instruments. Payments made to repurchase stock.
Dividends payments.
Bank overdrafts Included as a part of cash equivalents. Not considered a part of cash equivalents
and included in CFF.
Presentation Format
CFO Direct or indirect method. The former is Direct or indirect method. The former is
(No difference in CFI and preferred. preferred. However, if the direct method
CFF presentation) is used, a reconciliation of net income
and CFO must be included.
Disclosures
Taxes paid should be presented separately If taxes and interest paid are not explicitly
on the cash flow statement. stated on the cash flow statement, details
can be provided in footnotes.
Inventory Turnover
Cost of goods sold
Inventory turnover =
Average inventory
Receivables Turnover
Revenue
Receivables turnover =
Average receivables
Payables Turnover
Purchases
Payables turnover =
Average trade payables
Current Ratio
Current assets
Current ratio =
Current liabilities
Quick Ratio
Cash + Short-term marketable investments + Receivables
Quick ratio =
Current liabilities
Cash Ratio
Cash + Short-term marketable investments
Cash ratio =
Current liabilities
Debt-to-Assets Ratio
Total debt
Debt-to-assets ratio =
Total assets
Debt-to-Capital Ratio
Total debt
Debt-to-capital ratio =
Total debt + Shareholders’ equity
Debt-to-Equity Ratio
Total debt
Debt-to-equity ratio =
Shareholders’ equity
Pretax Margin
EBT (earnings before tax, but after interest)
Pretax margin =
Revenue
Return on Assets
Net income
ROA =
Average total assets
Net income + Interest expense (1 – Tax rate)
Adjusted ROA =
Average total assets
Operating income or EBIT
Operating ROA =
Average total assets
Return on Equity
Net income
Return on equity =
Average total equity
ROA Leverage
3-Way Dupont Decomposition
Net income Revenue Average total assets
ROE =
Revenue Average total assets Average shareholders’ equity
EBITDA
EBITDA per share =
Average number of shares outstanding
LIFO versus FIFO (with rising prices and stable inventory levels.)
LIFO FIFO
COGS Higher Lower
Income before taxes Lower Higher
Income taxes Lower Higher
Net income Lower Higher
Cash flow Higher Lower
EI Lower Higher
Working capital Lower Higher
Effect on Effect on
Type of Ratio Numerator Denominator Effect on Ratio
Profitability ratios. Income is lower Sales are the same Lower under LIFO.
NP and GP margins under LIFO because under both.
COGS is higher
Debt to equity Same debt levels Lower equity under Higher under LIFO
LIFO
Current ratio Current assets are Current liabilities Lower under LIFO
lower under LIFO are the same.
because EI is lower.
Quick ratio Assets are higher as Current liabilities Higher under LIFO
a result of lower are the same
taxes paid
Total asset turnover Sales are the same Lower total assets Higher under LIFO
under LIFO
When the cost is expensed Net income decreases by the entire after-tax
amount of the cost.
No related asset is recorded on the balance
sheet and therefore, no depreciation or
amortization expense is charged in future
periods.
Operating cash flow decreases.
Expensed costs have no financial statement
impact in future years.
Capitalizing Expensing
Net income (first year) Higher Lower
Net income (future years) Lower Higher
Total assets Higher Lower
Shareholders’ equity Higher Lower
Cash flow from operations Higher Lower
Cash flow from investing Lower Higher
Income variability Lower Higher
Debt to equity Lower Higher
Accelerated Depriciation
2
DDB depreciation in Year X = Book value at the beginning of Year X
Depreciable life
Deferred tax asset Recognized if it is probable that Deferred tax assets are
recognition. sufficient taxable profit will be recognized in full and then
available in the future. reduced by a valuation
allowance if it is likely that
they will not be realized.
DEFERRED TAX PRESENTATION
Offsetting of deferred Offsetting allowed only if the Same as in IFRS.
tax assets and liabilities. entity has right to legally enforce
it and the balance is related to a
tax levied by the same authority.
Leverage Ratios
Debt-to-capital ratio Measures the percentage Total debt Total debt + Total
of a company’s total capital shareholders’ equity
(debt + equity) financed by
debt.
Financial leverage ratio Measures the amount of Average total assets Average shareholders’
total assets supported by equity
one money unit of equity.
Coverage Ratios
Fixed charge coverage ratio Measures the number of EBIT + Lease Interest payments +
times a company’s earnings payments Lease payments
(before interest, taxes and
lease payments) can cover
the company’s interest and
lease payments.
EIFIFO = EILIFO + LR
where
LR = LIFO Reserve
Net income after tax under FIFO will be greater than LIFO net income after tax by:
Change in LIFO Reserve (1 - Tax rate)
Gross investment in fixed assets Accumulated depreciation Net investment in fixed assets
= +
Annual depreciation expense Annual depreciation expense Annual depreciation expense
Unrealized and
Balance Sheet Realized Gains and Income (Interest &
Classification Value Losses Dividends)
Held-to-maturity Amortized cost Unrealized: Not Recognized on
(Par value +/- reported income statement.
unamortized Realized:
premium/ discount). Recognized on
income statement.
Permits inventory
IFRS Lower of cost or net FIFO.
realizable value. Weighted Average write downs,
Cost. and also reversals of
write downs.
Long-Term Investments
Percent Ownership Extent of Control Accounting Treatment
Long-Term Contracts
CORPORATE FINANCE
where
CFt = after-tax cash flow at time, t.
r = required rate of return for the investment. This is the firm’s cost of capital adjusted
for the risk inherent in the project.
Outlay = investment cash outflow at t = 0.
Profitability Index
Where:
wd = Proportion of debt that the company uses when it raises new funds
rd = Before-tax marginal cost of debt
t = Company’s marginal tax rate
wp = Proportion of preferred stock that the company uses when it raises new funds
rp = Marginal cost of preferred stock
we = Proportion of equity that the company uses when it raises new funds
re = Marginal cost of equity
Valuation of Bonds
where:
P0 = current market price of the bond.
PMTt = interest payment in period t.
rd = yield to maturity on BEY basis.
n = number of periods remaining to maturity.
FV = Par or maturity value of the bond.
Dp
Vp =
rp
where:
Vp = current value (price) of preferred stock..
Dp = preferred stock dividend per share.
rp = cost of preferred stock.
re = RF + i[E(RM) - RF]
where
[E(RM) - RF] = Equity risk premium.
RM = Expected return on the market.
i = Beta of stock . Beta measures the sensitivity of the stock’s returns to
changes in market returns.
RF = Risk-free rate.
re = Expected return on stock (cost of equity)
where:
P0 = current market value of the security.
D1= next year’s dividend.
re = required rate of return on common equity.
g = the firm’s expected constant growth rate of dividends.
Rearranging the above equation gives us a formula to calculate the required return on equity:
Q (P – V)
DOL =
Q (P – V) – F
where:
Q = Number of units sold
P = Price per unit
V = Variable operating cost per unit
F = Fixed operating cost
Q (P – V) = Contribution margin (the amount that units sold contribute to covering fixed
costs)
(P – V) = Contribution margin per unit
where:
Q = Number of units sold
P = Price per unit
V = Variable operating cost per unit
F = Fixed operating cost
C = Fixed financial cost
t = Tax rate
Q (P – V)
DTL =
[Q(P – V) – F – C]
where:
Q = Number of units produced and sold
P = Price per unit
V = Variable operating cost per unit
F = Fixed operating cost
C = Fixed financial cost
Break point
PQ = VQ + F + C
where:
P = Price per unit
Q = Number of units produced and sold
V = Variable cost per unit
F = Fixed operating costs
C = Fixed financial cost
F+C
QBE =
P–V
PQOBE = PV + F
F
QOBE =
P–V
365
Inventory turnover
Accounts payable
Number of days of payables =
Average day’s purchases
Accounts payable 365
=
Purchases / 365 Payables turnover
PORTFOLIO MANAGEMENT
Pt – Pt-1 + Dt P – Pt-1 D
R= = t + t = Capital gain + Dividend yield
Pt-1 Pt-1 Pt-1
PT + DT
= -1
P0
where:
Pt = Price at the end of the period
Pt-1 = Price at the beginning of the period
Dt = Dividend for the period
where:
R1, R2,..., Rn are sub-period returns
Annualized Return
n
rannual = (1 + rperiod) - 1
where:
r = Return on investment
n = Number of periods in a year
Portfolio Return
Rp = w1R1 + w2R2
where:
Rp = Portfolio return
w1 = Weight of Asset 1
w2 = Weight of Asset 2
R1 = Return of Asset 1
R2 = Return of Asset 2
2
(R - )
t=1
t
2
=
T
where:
Rt = Return for the period t
T = Total number of periods
= Mean of T returns
2
(R - R)
t=1
t
2
s =
T-1
where:
R = mean return of the sample observations
2
s = sample variance
T T
(R - )
t=1
t
2
(R - R)
t=1
t
2
= s=
T T-1
N
2
=
P w w Cov(R ,R )
i,j = 1
i j i j
N N
2
=
P w Var(R ) +
i=1
2
i i
i,j = 1, i j
wiwjCov(Ri,Rj)
Utility Function
2
U = E(R) A
2
where:
U = Utility of an investment
E(R) = Expected return
2
= Variance of returns
A = Additional return required by the investor to accept an additional unit of risk.
The CAL has an intercept of RFR and a constant slope that equals:
2 2 2 2 2
= w1 f + (1 - w1) m + 2w1(1 - w1)Cov(Rf,Rm)
Equation of CML
E(Rm) - Rf
E(Rp) = Rf + p
m
where:
y-intercept = Rf = risk-free rate
E(Rm) - Rf
slope = = market price of risk.
m
Return-Generating Models
k k
Ri = i + iRm + ei
Calculation of Beta
Sharpe ratio
Rp Rf
Sharpe ratio =
p
Treynor ratio
Rp Rf
Treynor ratio =
p
2
M-squared (M )
2 m
M = (Rp Rf) Rm Rf
p
Jensen’s alpha
Ri RfiiRm Rf)
EQUITY
The price at which an investor who goes long on a stock receives a margin call is calculated
as:
(1 - Initial margin)
P0
(1 – Maintenance margin)
nP
i=1
i i
VPRI =
D
where:
VPRI = Value of the price return index
ni = Number of units of constituent security i held in the index portfolio
N = Number of constituent securities in the index
Pi = Unit price of constituent security i
D = Value of the divisor
Price Return
VPRI1 VPRI0
PRI =
VPRI0
where:
PRI = Price return of the index portfolio (as a decimal number)
VPRI1 = Value of the price return index at the end of the period
VPRI0 = Value of the price return index at the beginning of the period
Pi1 Pi0
PRi =
Pi0
where:
PRi = Price return of constituent security i (as a decimal number)
Pi1 = Price of the constituent security i at the end of the period
Pi0 = Price of the constituent security i at the beginning of the period
The price return of the index equals the weighted average price return of the constituent
securities. It is calculated as:
Total Return
where:
TRI = Total return of the index portfolio (as a decimal number)
VPRI1 = Value of the total return index at the end of the period
VPRI0 = Value of the total return index at the beginning of the period
IncI = Total income from all securities in the index held over the period
The total return of the index equals the weighted average total return of the constituent
securities. It is calculated as:
Given a series of price returns for an index, the value of a price return index can be calculated
as:
where:
VPRI0 = Value of the price return index at inception
VPRIT = Value of the price return index at time t
PRIT = Price return (as a decimal number) on the index over the period
where:
VTRI0 = Value of the index at inception
VTRIT = Value of the index at time t
TRIT = Total return (as a decimal number) on the index over the period
Price Weighting
Pi
wiP = N
P
i=1
i
Equal Weighting
1
wiE =
N
where:
wi = Fraction of the portfolio that is allocated to security i or weight of security i
N = Number of securities in the index
Market-Capitalization Weighting
QiPi
wiM = N
QP
j=1
j j
where:
wi = Fraction of the portfolio that is allocated to security i or weight of security i
Qi = Number of shares outstanding of security i
Pi = Share price of security i
N = Number of securities in the index
fiQiPi
wiM = N
fQP
j=1
j j j
where:
fi = Fraction of shares outstanding in the market float
wi = Fraction of the portfolio that is allocated to security i or weight of security i
Qi = Number of shares outstanding of security i
Pi = Share price of security i
N = Number of securities in the index
Fundamental Weighting
Fi
wiF = N
F
j=1
j
where:
Fi = A given fundamental size measure of company i
NIt NIt
ROEt = =
Average BVEt (BVEt + BVEt-1)/2
where:
Pn = Price at the end of n years.
1
D0 (1 + gc) D1
PV = 1 =
(ke - gc) ke - g c
gc = RR ROE
where:
Analysts may calculate the intrinsic value of the company’s stock by discounting their
projections of future FCFE at the required rate of return on equity.
FCFEt
V0 = (1 + k )
t=1 e
t
When preferred stock is non-callable, non-convertible, has no maturity date and pays dividends
at a fixed rate, the value of the preferred stock can be calculated using the perpetuity formula:
D0
V0 =
r
For a non-callable, non-convertible preferred stock with maturity at time, n, the value of the
stock can be calculated using the following formula:
n Dt F
V0 = (1 + r)
t=1
t
+
(1 + r)
n
where:
V0 = value of preferred stock today (t = 0)
Dt = expected dividend in year t, assumed to be paid at the end of the year
r = required rate of return on the stock
F = par value of preferred stock
Price Multiples
P0 D1/E1
=
E1 r-g
where:
Book value of common shareholders’ equity =
(Total assets - Total liabilities) - Preferred stock
EV/EBITDA
where:
EV = Enterprise value and is calculated as the market value of the company’s common stock
plus the market value of outstanding preferred stock if any, plus the market value of debt,
less cash and short term investments (cash equivalents).
FIXED INCOME
Bond Coupon
Coupon = Coupon rate Par value
Nominal spread
Nominal spread (Bond Y as the reference bond) = Yield on Bond X – Yield on Bond Y
Yield Ratio
Yield on Bond X
Yield ratio =
Yield on Bond Y
After-Tax Yield
After-tax yield = Pretax yield (1- marginal tax rate)
Taxable-Equalent Yield
Tax-exempt yield
Taxable-equivalent yield =
(1 – marginal tax rate)
Bond Value
Maturity value
Bond Value =
(1+i) years till maturity 2
where i equals the semiannual discount rate
where:
w = Fractional period between the settlement date and the next coupon payment date.
Current Yield
Annual cash coupon
Current yield =
Bond price
Bond Price
Bond price
where:
Bond price = Full price including accrued interest.
CPNt = The semiannual coupon payment received after t semiannual periods.
N = Number of years to maturity.
YTM = Yield to maturity.
Z-Spread
Z-spread = OAS + Option cost; and OAS = Z-spread - Option cost
Duration
V- - V+
Duration =
2(V0)(y)
where:
y = change in yield in decimal
V0 = initial price
V- = price if yields decline by y
V+ = price if yields increase by y
Portfolio Duration
Portfolio duration = w1D1 + w2D2 + …..+ wNDN
where:
N = Number of bonds in portfolio.
Di = Duration of Bond i.
wi = Market value of Bond i divided by the market value of portfolio.
Convexity
V+ + V- - 2V0
C= 2
2V0(y)
DERIVATIVES
FRA Payoff
Floating rate at expiration – FRA rate (days in floating rate/ 360)
1 + [Floating rate at expiration (days in floating rate/ 360)
Numerator: Interest savings on the hypothetical loan. This number is positive when the floating rate
is greater than the forward rate. When this is the case, the long benefits and expects to receive a payment
from the short. The numerator is negative when the floating rate is lower than the forward rate. When this
is the case, the short benefits and expects to receive a payment from the long.
Denominator: The discount factor for calculating the present value of the interest savings.
Option Premium
Option premium = Intrinsic value + Time value
Put-Call Parity
C0 + X = P0 + S0
T
(1 + RF)
= Max (0, Underlying rate at expiration - Exercise rate) (Days in underlying Rate) NP
360
where: NP = Notional principal
= Max (0, Exercise rate – Underlying rate at expiration) (Days in underlying rate) NP
360
where:
NP = Notional principal
Covered Call