I-1

Index

A and transactions with associates/joint as component of earnings, 2:313–314 AAR. see average accounting rate of ventures, 2:31–34 discretionary vs. non-discretionary, return pooling of interests method, 2:37, 2:314 abandonment option 42n.29 earnings quality and measures of, for capital projects, 3:54 and residual income model, 4:516–529 2:313–318 defined, 3:52 accounting for intangible assets, in long-term equity investment case Abbott Laboratories, 4:168 4:526–528 study, 2:395–396 Abenomics, 1:588 accounting for nonrecurring items, accruals ratios, Nestlé, 2:396 AB InBev. see Anheuser-Busch InBev 4:528–529 accrued interest, for fixed-income abnormal earnings, 4:496 aggressive accounting practices, forwards and futures, 5:333, 334 abnormal returns, 1:347–348; 4:7 4:529 accumulated benefit obligation (ABO), ABO. see accumulated benefit balance sheet adjustments for fair 2:79n.5 obligation value, 4:525 accumulated other comprehensive ABS. see asset-backed securities clean surplus violations, 4:517–525 income (AOCI), 4:521 absolute convergence, 1:674 uniting of interests, 2:37 acquiring company (acquirer), 3:280 absolute risk aversion, 6:388 Accounting Quality Model, 2:314 acquisition(s). see also mergers and absolute valuation models, 4:23–25 accounting risk, 3:262 acquisitions absolute version of PPP, 1:565 accounting scandals, 3:209–210 bargain, 2:40 academic designations, order of, 1:174 accounting standards, international as business combination, 2:36 accelerated depreciation, capital differences in,4: 449–450. see also business valuations before, 4:559 projects, 3:31–34 specific standards and convertible bonds, 5:169 acceleration provisions, sinking fund Accounting Standards Codification defined, 3:280; 4:9 bond, 5:125–126 (ASC) financial report quality issues in, access to capital, 6:104 Business Combinations (ASC 805), 2:300–301 access to properties, 6:86 2:10; 4:561n.11, 578, 584 form of, 3:288–289 account information, regular statements Consolidation (ASC 810), 2:10, short-term stock return performance of, 1:77 43n.30, 52 in, 1:347–348 accounting Fair Value Measurements (ASC 820), acquisition capital (private equity class), book value, 6:353n.19 4:559n.5, 561n.12–13, 579 6:137 for capital project cash flows,3: 56 Financial Instruments (ASC 825), acquisition method for business clean surplus, 4:206n.12, 493n.3 2:20 combinations, 2:38–42 and book value/future earnings, Goodwill and Other Intangible Assets acquisition price less than fair value, 4:516 (ASC 350), 4:559n.5–6 2:40 and net income comparisons, 2:183 Investments–Debt and Equity assets and liabilities in, 2:38 and residual income model, 4:504 Securities (ASC 320), 2:10, 22n.12 contingent liabilities in, 2:38 violations of, 4:517–525 Investments–Equity Method and Joint financial assets and liabilities in, dirty-surplus, 2:183 Ventures (ASC 323), 2:10 2:39 fair value, 4:419–422; 6:353 Share-Based Payment (ASC 718), goodwill in, 2:39 gain-on-sale, 2:358 4:560n.7 indemnification assets in,2: 38–39 inventory, 4:390, 419, 525 accounting standard-setting bodies, post-combination balance sheet for, market-based, 5:317 regulatory recommendations of, 2:40–42 mark-to-market, 6:353n.19 (see also 1:703 acquisition price, fair value and, 2:40 fair value accounting) accounting systems, corporate ACRA. see Accounting and Corporate Accounting and Corporate Regulatory investments in, 2:9 Regulatory Authority Authority (ACRA), 1:704 account reviews Actavis Equity S.a r.l., 2:26 accounting choices, 2:293–294 firm policies on,1: 77 actions accounting estimates, 4:387n.12 regular, 1:94 investment (see also Investment accounting income, 3:59–61 systematic, 1:86 Analysis, Recommendations, and accounting information, for equity accounts Actions [Standard of Professional valuation, 4:18–22 with beneficial ownership,1: 158, 159 Conduct V]) accounting methods family, 1:80, 160–161 fair dealing in, 1:83–84 for cash flow,4: 433 in performance calculations, 1:100 firm policies on,1: 77 equity method, 2:24–35 working capital, 2:386 impact of, 1:12–13 at Deutsche Bank, 2:25–26 accounts receivable, earnings quality personal, 1:55 example, 2:24–25 and, 2:322, 327 unethical, 1:29 fair value option, 2:30 accrual periods activation function (neural network), and goodwill, 2:29–30 for interest rate options, 5:414, 415 1:386 impairment, 2:31 for Libor spot market, 5:325 active factor risk, 6:298 investment costs in excess of book for swaps, 5:345 active investment strategy, 6:253 value, 2:27–28 for swaptions, 5:418 active managers issues for analysts with, 2:34–35 accruals active risk and guidelines for, 6:297 and sale of inventory, 2:32–34 in Beneish model, 2:307 objectives of, 6:294

Cumulative_Ind_L2 1 June 14, 2018 9:39 PM I-2 Index

active portfolio management, 6:471–532 active weights AFS securities. see available-for-sale for bond portfolios, 5:20–24 in full fundamental law of active securities comparing strategies in, 6:505 management, 6:494 after-tax costs fundamental law of active for global equity portfolio, 6:501 of debt, 3:101–102 management, 6:487–515 sizing of, 6:491–492 of equity, 3:102 and active security returns, in value added calculations, 6:474 after-tax interest, FCFF and, 4:290 6:488–492 Actual/360 day count convention, AGA. see American Gas Association applications of, 6:499–512 1:549n.7 Agarway, Subath (case study), basic fundamental law, 6:492–494 actual default probability, 5:203, 204 1:212–216 ex ante measurement of skill with, actuarial gain, 2:80, 83–85 case facts, 1:212–214 6:512–513 actuarial loss, 2:80, 83–85 disclosure of conflicts [Standard and ex post performance, 6:497–499 ACWI. see MSCI All Country World VI(A)], 1:215–216 fixed-income strategies based on, Index independence and objectivity 6:506–512 Additional Compensation Arrangements [Standard I(B)], 1:215 full fundamental law, 6:494–497 [Standard IV(B)], 1:116–117 knowledge of the law [Standard I(A)], global equity strategy based on, application of the standard, 1:116–117 1:214–215 6:499–506 in case studies, 1:210–211, 219 age, depreciation and, 6:46–49 independence of investment compliance procedures, 1:116 age distribution, of population, 1:643 decisions, 6:513–514 guidance, 1:116 agency costs limitations of, 6:512–515 text of, 1:17, 116 of capital structure decisions, and modern portfolio theory, additional services, for select clients, 3:104–105 6:471–472 1:88 dividends to control, 3:144–147 multifactor models for, 6:301 add-on basis, interest rates on, 5:325n.10 of equity, 3:104 practice problems, 6:518–526 Adebonojo, Enitan, 2:290 agency problems, 3:207–210, 230; rebalancing in, 6:511–512 Adelphia Communications, 3:210, 233 4:557n.2 risk and return in, 6:477–487 adequate compliance procedures, agency relationships, 3:206–210, information ratio, 6:480–482, 1:119–121 230–234 486–487 adjusted earnings, 4:386 director–shareholder conflicts, optimal portfolio construction, adjusted funds from operations (AFFO) 3:233–234 6:482–487 in Capitol Shopping Center REIT Inc. information asymmetry in, 3:207–208 Sharpe ratio, 6:477–480 case study, 6:115, 118 manager–shareholder conflicts, rules-based, 6:301 growth in, 6:104 3:231–233 solutions to problems, 6:527–532 P/AFFO multiple, 6:104, 109–110 principal–agent relationships, value added metric, 6:472–477 adjusted historical estimates of equity 3:206–207 benchmarks for, 6:472–473 risk premium, 4:65–68 agency risk, for private equity calculations of, 6:473–475 adjusted present value (APV), 4:286n.2 investments, 6:157 for country equity markets, 6:475 adjusted price, for fixed-income agency writers, of insurance policies, decomposition of, 6:475–477 forwards/futures, 5:334 2:266 active returns, 6:294–296. see also value adjusted R2, 1:343–344 agendas, of board of directors, 3:252 added (metric) administrative costs, 6:157 agent options, 1:154 and active risk, 6:296–297 administrative law, 1:703 aggressive accounting choices, 2:293; calculating, 6:473–475 administrative regulations, 1:703 4:529 decomposition of, 6:294–296 ADR. see American Depositary Receipt aggressive estimates, 4:20 defined, 6:294 ADR ratio, 4:389–390 agriculture, 6:224, 225. see also grains and fundamental law of active advanced discounted cash flow method Ahold, 4:127–128, 146 management, 6:488–492 for real estate valuation, 6:41–45 AI. see artificial intelligence for global equity portfolio, 6:499–506 advanced economies. see also developed AIA Group, 2:278–279 and information ratio, 6:481 countries AICPA. see American Institute of optimal expected, 6:492–493 classification, 1:622n.1 Certified Public Accountants in optimal portfolio construction, convergence of developing and, 1:682 AIDS epidemic, 1:625 6:485 real GDP growth and real GDP per AIG, 5:277 scaling forecasts of, 6:491–492 capita, 1:621, 622 AIMR. see Association for Investment variance in, 6:498 advanced settle payment convention Management and Research active risk, 6:296–300 (advanced set), 5:326, 327, 414 Airbus, 3:206 and active manager guidelines, 6:297 adverse selection, 1:706 Air France-KLM, 4:168 and active return, 6:296–297 adviser-assisted digital wealth managers, airline industry comparing investments based on, 1:252 cost of goods sold in, 4:118 6:299–300 advisers credit spreads in, 6:432 decomposing, 6:297–299 robo-, 1:239, 241, 250–252 Albert Heijn, 4:118–119 defined, 6:296 selecting, 1:129 algorithmic trading, defined,1: 253; for fixed-income portfolios,6: 507 Aegon N.V., 2:274–276 6:534 for global equity portfolio, 6:499, 505 affiliates, income from,4: 132 algorithmic trading and high-frequency and information ratio, 6:480–481 AFFO. see adjusted funds from trading, 6:533–551 optimal, 6:497 operations algorithmic techniques as safety net, in optimal portfolio construction, Africa. see also specific countries 6:542–544 6:483–485 development strategies, 1:680, 681 real-time market monitoring/ active risk squared, 6:298 real GDP growth and real GDP per surveillance, 6:543–544 active share, 6:356, 481 capita, 1:622, 623 risk management, 6:542–543 active specific risk,6: 298–299 soft crops, 6:195 algorithm life cycle, 6:539–540

Cumulative_Ind_L2 2 June 14, 2018 9:39 PM Index I-3

evolution of, 6:540–542 American Institute of Certified Public Apple Inc. execution algorithms, 6:534–535 Accountants (AICPA), 4:18 long-term growth, 4:168 high-frequency trading algorithms, IGBVT, 4:560n.9 price increases, 4:145 6:535–540 IPRD Practice Aid, 4:574n.25, 578, tablet computers, 4:153–154 impact on securities markets, 595–596 terminal value, 4:167 6:545–547 standards required by, 4:595–596 applicable law latency minimization, 6:538–539 Stock Practice Aid, 4:573n.24, 596 and Code/Standards, 1:22–23 platforms and technologies, 6:542 American Petroleum Institute (API), on confidentiality,1: 102 algorithms 4:15n. in firm policy,1: 77 clustering, 1:388–389 American Society of Appraisers (ASA), global, 1:24–25 execution, 6:534–535 4:560n.9 and investment products, 1:23–25 for high-frequency trading, 6:535–540 American Stock Exchange, 1:351 providing information on, 1:27 machine learning, 1:383–390 America Online, 4:584 staying informed about, 1:26 market participation, 6:534 AmeriServe Food Distribution Inc., application programming interfaces supervised learning, 1:383–388 2:312 (APIs), 6:540 unsupervised learning, 1:388–390 amortization appraisal-based real estate indexes, volume-weighted average price, 6:534 of excess purchase price, 2:28–30 6:58–59 Alipay, 2:216 on pro forma cash flow statements, Appraisal Foundation, 4:578, 581n.34, Alleghany Corporation, 4:76–78 4:178 595, 596 all-in forward rate, 1:553, 554 of segments, 2:391 appraisal lag, 6:60–61 all-in return, uncovered interest rate Amylin Pharmaceuticals, 4:113 appraisals parity and, 1:559–560 analysis of variance (ANOVA) private company, 4:556n.1 allocations for linear regression with one variable, real estate minimum lot, 1:88–89 1:305–308 for commercial real estate, 6:22–25 trade allocation procedures, 1:85–86, for multiple linear regression, 1:331, growth explicit, 6:34 229–231 341–343 with level NOI, 6:36 transaction, 1:87–88 analyst adjustments with terminal value, 6:35–36 Allou Health & Beauty Care, Inc., for comparability, 4:390 appraisers, cash flow forecasts by, 2:315–316, 346 to funds from operations, 6:105–108 4:567–568 allowance for loan losses, 2:249–252 and net asset value per share, appreciation all risks yield (ARY), 6:30–31, 37 6:99–101 capital, 6:13, 82 ALM. see asset/liability matching analysts of currencies, 1:577 alpha buy-side, 4:31 in currency options, 5:457 ANOVA testing of, 1:306, 307 CFO adjustments by, 4:314–315 of equity market, 1:630 defined, 4:7 commodity market, 6:207 price, 6:13 expected, 4:54 communication with, 4:10 approval, for outside compensation, positive, 6:253 issues with intercorporate investment 1:117 as value added, 6:473–474 in associates, 2:34–35 approved lists of equity, 3:137 alpha discovery, 6:540 nonpublic information from, 1:65–66 APT. see arbitrage pricing theory AlphaGoZero program, 1:381n.73 probit models for coverage, 1:377–378 APV. see adjusted present value alternative data, 1:241, 243, 244, 281 roles and responsibilities of, 4:31–33 AQI. see asset quality index alternative hypotheses, 1:282–283 sell-side, 4:31–33; 6:250 Aqua America Inc., 4:216 alternative index approaches, 6:301 trailing P/E adjustments by, 4:386–390 AR(1). see first-order autoregression Altman model, 2:331–332 use of regression analysis, 1:328 AR(2). see second-order autoregression Altria Group, Inc., 4:473 analytical method of VaR estimation, AR(p). see pth-order autoregression A.M. Best, 2:266, 277 6:324. see also parametric method arbitrage Amazon, 1:246; 4:168 of VaR estimation and commodity contracts, 6:203–204 AmBev, 4:137 Anheuser-Busch Cos., 4:391 with convertible bonds, 5:170–171 AMC. see Asset Manager Code of Anheuser-Busch InBev (AB InBev), and credit default swaps, 5:293 Professional Conduct 4:137–140, 148, 460 defined, 6:280 Amendments to the Rules Governing the ANNs. see artificial neural networks with forward exchange rates, 1:548–550 Investment Company Act of 1940, annual compounding, currency forwards index, 6:536 3:236 with, 5:340, 341 in investment opportunities, 5:378n.1 American call options annual reports, 3:235 opportunities for, 5:77–78 European vs., 5:124, 391, 394–398 annuities portfolio returns for no arbitrage multiperiod binomial model for, discount factor for, 5:418 condition, 6:282–284 5:401 equivalent annual annuity approach, principle of no arbitrage, 5:76–77 notation for, 5:379 3:40 regulatory, 1:706–707 path-dependency of, 5:378 present value of, 5:417–418 risk, 6:280n.4 spreads with, 5:476n.36 risk measures and, 6:360 risk-arbitrage trading, 1:63 two-period binomial model for, ANOVA. see analysis of variance and spot exchange rate quotes, 5:390–398 Ansell Limited, 4:253 1:544–548 American Depositary Receipt (ADR), anticompetitive behavior, 3:213 statistical, 6:535–536 4:55, 389–390 antitrust regulations, 1:716; 3:210, triangular, 1:544–546 American Eagle Outfitters, Inc., 299–302 arbitrage-free models of term structure, 2:103–104 AOCI. see accumulated other 5:42–45 American Express Company, 6:249 comprehensive income equilibrium models vs., 5:39 American Gas Association (AGA), AOL Time Warner, 4:96, 101 Ho–Lee model, 5:42–44 4:15n. API. see American Petroleum Institute partial equilibrium model, 5:44

Cumulative_Ind_L2 3 June 14, 2018 9:39 PM I-4 Index

arbitrage-free valuation, 5:75–117 arbitrage pricing theory (APT) regulatory response to global financial about, 5:75–76 CAPM vs., 6:279–280 crisis, 1:707 arbitrage opportunities, 5:77–78 estimating risk premium with, 3:49 reverse stock splits, 3:133 binomial interest rate trees, 5:79–100 and multifactor models, 4:79; soft commodities, 6:195 binomial valuation method, 5:81–85 6:279–285 swaps market, 5:25 calibrating trees to match term assumptions in, 6:279–280 Asian Development Bank, 2:215 structures, 5:92–94 calculating expected return to Asian financial crisis (1997-1998),1: 594; construction of rate trees, 5:87–94 portfolio, 6:280–281 6:434 determining bond’s value at a node, Carhart four-factor model, 6:283–285 Asian Infrastructure Investment Bank, 5:85–87 parameters in one-factor APT model, 2:215 estimating interest rate volatility, 5:85 6:281–282 ask price, in FX market, 1:541 in pathwise valuation, 5:96–100 portfolio returns for no arbitrage ASM International, 4:449–450 pricing bonds with, 5:86–87 condition, 6:282–284 assessed value, of property, 6:23 and valuing bonds with spot rates, one-factor APT model, 6:281–282 asset allocation 5:79–80 arbitrage profit, borrowing,5: 313–315 multifactor models for, 6:293 valuing option-free bonds with, arbitrageurs strategic and tactical, 6:254–255 5:94–96 and commodity markets, 6:203–204, and time horizon, 6:262–263 confirming arbitrage-free values, 207 value added due to, 6:475–477 5:95–96 in financial markets,5: 378 asset-backed commercial paper (CP), of convertible bonds, 5:173 fundamental rules for, 5:308, 311–312, 5:248 defined, 5:76 376, 378 asset-backed securities (ABS), forward contracts, 5:309–343 ARCH. see autoregressive conditional 5:247–251. see also specific types carry arbitrage model for futures vs., heteroskedasticity expected exposure for, 5:249–250 5:342–343 ARCH(1). see first-order autoregressive probability of default for, 5:249 currency forwards, 5:338–342 conditional heteroskedasticity structure of, 5:250 equity forwards, 5:322–324 ARCH(p). see pth-order autoregressive asset beta, 3:98 fixed-income forwards,5: 333–334, conditional heteroskedasticity asset class(es), 5:248 337–338 Archer Daniels Midland Company, real estate vs. other, 6:9–11, 17–18 generic no-arbitrage forwards, 1:396, 421; 3:206 returns by, 6:13, 14, 82, 85 5:311–321 Argentina asset/liability matching (ALM), interest rate forwards, 5:324–333 Basel Committee membership, 2:217 6:227–228 pricing and valuation notation, economic growth, 1:626–628 asset liquidity, 6:262 5:309–311 exchange rate crisis, 1:588 asset management, 6:16 futures contracts, 5:322–343 natural resources, 1:641 Asset Manager Code of Professional carry arbitrage model for forwards openness of economy, 1:680 Conduct (AMC), 1:10, 27, 129 vs., 5:342–343 real GDP per capita, 1:622, 677, 678 asset managers, 6:355–358 currency futures, 5:338 sovereign credit risk, 6:433 asset pools equity futures, 5:322 ARGUS Valuation DCF, 6:28n.4 for covered bonds, 5:251 fixed-income futures,5: 333–337 arithmetic mean, 4:60, 63–64, 458–459 for securitized debt, 5:250 interest rate futures, 5:324–325 ARMA models. see autoregressive asset quality, in bank analysis, pricing and valuation notation, moving-average models of time- 2:223–228, 245–252 5:309–311 series analysis asset quality index (AQI), 2:307 implications of, 5:79 AR models. see autoregressive models asset risk, 3:262 law of one price, 5:77 for time-series analysis assets Monte Carlo method, 5:100–101 Arthur Andersen, 2:328 in acquisition method, 2:38, 39 options, 5:376–377, 401 Articles of Incorporation, 1:23 artificial price volatility,1: 70–72 practice problems, 5:104–111 artificial intelligence (AI) available-for-sale, 2:16–17 principle of no arbitrage, 5:76–77 as analytical tool, 1:244–245 average, 2:391 principles for forward commitments, fintech for,1: 240 of banks, 2:236 5:308–309 outside of finance,1: 246 base composition of, 2:384–385 risky bonds, 5:219–234 artificial neural networks (ANNs),1: 386 cash operating return on, 2:391–392 binomial interest tree for, 5:219–221 ARY. see all risks yield of Citigroup, 2:255–256 corporate bonds, 5:223–227 ASA. see American Society of Appraisers composition of, 2:225–226 floating-rate notes,5: 227–234 ASC. see Accounting Standards contingent, 2:55 government bonds, 5:221–222 Codification credit quality of, 2:226–228 solutions to problems, 5:112–117 ASF. see available stable funding current exchange rate for all (see swap contracts, 5:343–361 Asia. see also specific countries current rate method) currency swaps, 5:349–356 cash dividends paid, 3:127 custody of client, 1:74 equity swaps, 5:356–361 central banks in, 6:423 disclosure of net pension, 2:97 interest rate swaps, 5:345–349 commodity exchanges, 6:207 expenditures at Nestlé, 2:388–390 receive-fixed pay-floating swaps, corporate governance failures, 3:226 financial, 2:10–22 5:344–345 covered bonds in, 5:250 accounting treatments for, 2:9–10 receive-floating pay-fixed swaps, diversified REITs,6: 94 in acquisition method, 2:39 5:343–344 firms with negative book value for for asset quality evaluation, 2:224 arbitrage opportunities equity, 1:528 available-for-sale, 2:12–14, 16–17 defined, 6:280 publicly traded real estate equities, classification and measurement of, portfolio return as indicator of, 6:81 2:20–22 6:282–284 real GDP growth and real GDP per fair value through profit or loss, arbitrage portfolio, 6:283 capita, 1:621, 623 2:10

Cumulative_Ind_L2 4 June 14, 2018 9:39 PM Index I-5

held by financial institutions,2: 215 disclosure, 2:34 The Auditor’s Responsibility to held-to-maturity, 2:10–11 equity method of accounting for, Consider Fraud and Error in an impairment of, 2:15–19 2:24–35 Audit of Financial Statements as investment category, 2:9 fair value option, 2:30 (International Federation of loans and receivables, 2:12–14 and goodwill, 2:29–30 Accountants), 4:18 reclassification of,2: 14–15, 22 impairment, 2:31 audits, oversight of, 3:241–242 valuation of, 5:76 investment costs in excess of book augmented Solow approach to economic guideline assets, 4:379 value, 2:27–28 growth, 1:671 indemnification, 2:38–39 issues for analysts with, 2:34–35 AUM. see assets under management intangible and sale of inventory, 2:32–34 Australia in excess earnings method, 4:578 and transactions with associates, active return and weights for equities, in pre-money valuations, 6:149 2:31–34 6:499–504 and private company valuation, 4:556 as investment category, 2:9 algorithmic trading/HFT in, 6:541 in residual income valuations, transactions with, 2:31–34 Basel Committee membership, 2:217 4:526–528 Association for Investment Management bond spread, total returns and GDP leased, 2:52–53 and Research (AIMR), 4:32–33 growth, 6:420, 421 long positions in, 5:454, 468 assumptions break-even inflation rates,6: 410–412 long-term, 4:133 about error term, 1:290, 291, 334 commodity exchanges, 6:207 monetary, 2:145–147 about health care costs, 2:95–97 common law, 3:113 net asset balance sheet exposure, 2:148 about post-employment benefits, covered bonds in, 5:250 nonearning, 4:441 2:93–97 currency crisis in, 1:596 nonfinancial, 4:422 of arbitrage pricing model, dividend imputation tax system, nonmonetary, 2:145 6:279–280 3:151 nonoperating, 4:337, 563 in bankruptcy prediction models, equity REITs, 6:83 non-traded, 4:76–79 2:332 ex post equity risk premium, 6:445 and operating cash flow,2: 398 of BSM model, 5:377, 402–404 GDP growth rate, 4:211 outright long positions in, 5:454 of equilibrium term structure models, government bond risk premiums, personal-use, 4:564 5:39 6:422 of product groups, 2:394 financial statement reporting of historical equity risk premium, purchasing of, as form of acquisition, changes in, 2:90–91 4:61, 63 3:289 going-concern, 2:332; 4:8 ICT capital in GDP, 1:647 return on, 4:243, 244, 403n.25 homoskedasticity, 1:290, 349, 481 Kyoto Protocol, 3:260 risk-weighted, 2:221 in linear regression model, 1:289–291, money supply growth and inflation, synthetic, 5:454–456 334–339 1:264, 269, 294, 296 Assets Acquired in a Business in long-term forecasting, 4:168–169 natural resources, 1:639, 641 Combination to Be Used in Research normality, 1:291n.25 OECD Principles, 3:256n.18 and Development Activities (IPRD for real estate valuation, 6:41–43 publicly traded real estate equities, Practice Aid), 4:574n.25, 578, in simulations, 1:525 6:81 595–596 in stock option pricing models, R&D expenditures, 1:650 assets under management (AUM), 2:106–107 real GDP per capita, 1:621, 622, 677, 2:241 for venture capital method of 678 asset valuation valuation, 6:177 real yields, 6:396, 397, 400 economic factors in, 6:379–469 violations of regression analysis robo-advisory services, 1:250 asset values and expectations of assumptions, 1:348–363 Royal & Sun Alliance Group, 3:143 future cash flows,6: 383 and heteroskedasticity, 1:349–355 self-regulating organizations in, 1:704 bonds, 6:383–437 in model specification,1: 364 Australian dollar, 1:553, 605 commercial real estate, 6:452–457 and multicollinearity, 1:359–362 Australian Financial Services license, and connections of financial activity in multiple linear regression model, 1:250 with economy, 6:380 1:334–335 Australian Prudential Regulation equities, 6:437–451 and serial correlation, 1:355–359 Authority, 2:217 practice problems, 6:461–465 AstraZeneca PLC Australian Securities and Investments with present value model of asset Dickey–Fuller test for, 1:466 Commission, 1:250 valuation, 6:380–382 EPS adjustments for nonrecurring Austria solutions to problems, 6:466–469 items, 4:386–387 active return and weights for equities, and equity, 4:24–25 modeling unit root for, 1:466–469 6:500, 503, 504 expectations of future cash flows in, n-period moving average for, 1:470 historical equity risk premium, 4:61, 63 6:383 asymmetric information, 3:105, OECD Principles, 3:256n.18 for financial assets,5: 76 207–208 auto asset-backed securities (ABS), 5:248 present value model of, 6:380–382 at market, forward contracts, 5:310 autocorrelations for private companies, 4:562, 586–588 @RISK (software), 3:45; 6:139–140 of errors, 1:355–359, 450–452 asset weighing, 1:99 AT&T, 4:402–405, 458 of residuals, 1:450–452 Assicurazioni Generali, 5:450 at-the-money options, 3:244 of time-series data, 1:449 associated gas, 6:193 audit committees, 3:222, 241–242, 252, automated trading, 1:240 associates 253 automotive industry, 4:17 Deutsche Bank, 2:25 audit costs, 6:157 Autonomy Corporation, 2:356–357 intercorporate investment in, 2:23–35 auditors autoregressive conditional accounting treatment, 2:9–10 independent, 3:222 heteroskedasticity (ARCH) amortization of excess purchase opinions of, 2:346–350 testing for, 1:481–484 price, 2:28–30 auditor shopping, 2:350 in time-series forecasting, 1:490

Cumulative_Ind_L2 5 June 14, 2018 9:39 PM I-6 Index

autoregressive (AR) models for time- in current account, 1:576–579 Bank of Canada, 2:218; 4:212 series analysis, 1:447–460 debt sustainability channel, Bank of England, 2:218 challenges with, 1:436–437 1:578–579 Bank of France, 2:218 comparing forecast model flow supply/demand channel,1: 577 Bank of Italy, 2:218 performance, 1:456–458 portfolio balance channel, 1:577–578 Bank of Japan, 2:218; 6:425 with conditional heteroskedasticity, balance sheet modeling, 4:132–134 Bank of Korea, 2:218 1:481–484 balance sheet quality, 2:342–346 Bank of Mexico, 2:218 covariance-stationary series, 1:448–449 clear presentation, 2:346 Bank of Spain, 2:218 instability of regression coefficients, completeness, 2:343 Bank Recovery and Resolution Directive 1:458–460 Sealed Air Corporation, 2:344–346 (BRRD), 5:251 mean reversion, 1:452–453 unbiased measurement, 2:343 bank run, 2:214–215 moving-average, 1:480–481 balance sheets bankruptcy moving-average models vs., 1:469, adjustments for fair value on, 4:525 business valuation in, 4:559 472–474 assessing quality of expense and costs of financial distress,3: 103, multiperiod forecasts and chain rule of recognition with, 2:329 104 forecasting, 1:453–456 Capitol Shopping Center REIT Inc. as credit event, 5:272 seasonal lags in, 1:474–480 case study, 6:116 laws regarding, 1:714 serially correlated errors in, 1:449–452 common-size, 2:329 bankruptcy prediction models, autoregressive moving-average (ARMA) consolidated, 2:48–50, 225, 300–301 2:331–332 models of time-series analysis, of DB pension plans, 2:81–82 Altman model, 2:331–332 1:480–481 and due diligence for equity REITs, developments in, 2:332 availability 6:91 banks. see also specific banks debt, 4:571 exposures on, 2:147–148, 163–166 central of transactions, 4:584 foreign currency transactions on, business cycle and policy rates, available-for-sale assets, 2:16–17 2:133–135, 172–173 6:405–406 available-for-sale investments investment property on, 6:99 discount borrowing windows of, impairments for, 2:16–17 misstatement of items on, 2:299 1:723–724 intercorporate investments in, 2:12–14 modifications to,2: 378–379 estimates of potential GDP by, 1:630, reclassification of,2: 14–15 of Nestlé, 2:376–379, 395–396 631 unrealized changes in market value for, post-combination, 2:40–42 in exchange rate management, 1:595 4:517 pro forma, 4:181–182 purchase of US Treasuries by Asian available-for-sale (AFS) securities, quality of earnings indicators from, banks, 6:423 2:247–249 4:19 and slope, level, and curvature of available stable funding (ASF), 2:232–233 reclassifications on,2: 296–298 yield curve, 6:417 average accounting rate of return (AAR), and statements of cash flows,4: 314 commercial, 2:215–216 3:15–16 balloon payments, for real estate, 6:62 cooperative, 2:216 average assets, 2:391 Baltika, 4:140–144 corporate culture of, 2:239–240 average cost of inventory, 2:152 bank analyses, 2:220–264 defined, 2:220 average hours worked, economic growth analytical considerations not addressed deposits as liabilities of, 2:214–215 and, 1:646 by CAMELS, 2:238–242 government ownership of, 2:239 average return on equity, 4:388 banking-specific, 2:238–240 government support of, 2:238–239 average trading VaR, 2:261–262 relevant for any company, 2:240–242 market risk management by, 6:354 Avon Products, 1:500, 513; 4:120, 121 CAMELS approach to, 2:220–238 missions of, 2:239 Axis Manufacturing Company, Inc., asset quality, 2:223–228, 245–252 mortgage, 2:216 4:493–495 capital adequacy, 2:220–223, mutual, 2:216 242–245 promotion of economic growth, 1:623 B earnings, 2:228–232, 253–258 return requirement and risk tolerance Bachelier, Louis, 5:402 illustration of, 2:242–264 for, 6:261 backwardation liquidity position, 2:232–236, risk budgeting by, 6:362–363 defined, 6:209 259–260 supervision of, 1:723 and Insurance Theory,6: 213–214 management capabilities, 2:228, trust, 2:216 and roll return, 6:220–225 252–253 Barclays PLC, 3:179; 4:419–422 backward induction methodology, sensitivity to market risk, 2:236–238, bargain acquisition, 2:40 5:85–96 260–263 bargaining power, 4:137–139, 170, 171 for bonds at nodes of binomial trees, Bank for International Settlements (BIS), BARRA models, 6:293 5:85–87 2:217; 5:25, 277 BARRA US-E2 model, 6:291 in construction of binomial interest Bank Indonesia, 2:218 BARRA US-E4 model, 6:299 rate trees, 5:87–94 Banking and Financial Institutions base case scenarios for option-free bonds, 5:94–96 Supervisory Agency, 2:219 defined, 4:135 for risky bonds, 5:222, 228 banking industry, regulation in, 1:722 for technological developments, 4:161, backward integration, 3:280–281 Banking Regulation and Supervision 162 backwardness effect,1: 679 Authority, 2:218 base currency BaFin. see Federal Financial Supervisor banking sector in covered interest rate parity, 1:550 Authority credit spreads in, 6:432 in exchange rate quotes, 1:541 Baker Hughes Inc., 4:14 leverage in, 3:113–115 Basel Committee on Banking balance of payments flows regulation in, 1:714 Supervision, 1:707, 722; 2:217–220 capital flows,1: 579–585 banking services, 2:215–216 Basel I, 2:219 and equity market trends, 1:582–585 Bank of America Corporation, 3:174; Basel II, 2:219 and real interest rate differentials, 4:383. see also BofA Merrill Lynch Basel III, 2:219, 222, 232, 242, 259 1:580–582 Institutional Factor Survey base metals. see industrial metals

Cumulative_Ind_L2 6 June 14, 2018 9:39 PM Index I-7

base revenues, in simulations, 1:525 Bermudan-style bonds determining bond’s value at a node, BASF AG, 2:138–140; 3:298–299 callable, 5:124, 140 5:85–87 basic capital budgeting model, 3:58 putable, 5:141–142 estimating interest rate volatility, 5:85 basic earnings per share, 4:385 best execution (term), 1:76, 78 in pathwise valuation, 5:96–100 basic fundamental law of active Best Practice Guidelines Governing pricing bonds with, 5:86–87 management, 6:492–494 Analyst/Corporate Issuer Relations testing calibration of, 5:178 basis, 6:209 (CFA Institute), 1:33 and valuing bonds with embedded basis swap, 6:228 beta. see also factor sensitivities options, 5:133 basis trading, 5:291–293 asset, 3:98 and valuing bonds with spot rates, basket trading, 6:536 defined, 6:278n.1 5:79–80 BBA. see British Bankers Association as equity exposure measure, 6:339 valuing option-free bonds with, BCE Inc., 4:402–404, 437–438, 458 factor, 4:79 5:94–96 BCOM. see Bloomberg Commodity indexes and estimation of, 4:72 and valuing risky bonds in arbitrage- Index for nonpublic companies, 4:77–79 free framework, 5:219–221 bear case scenario, 4:136, 161–163 for private equity investments, 6:144 binomial lattices (binomial trees) bear hug, 3:292 for public companies, 4:73–77 for call option with dividends, 5:394 bear spreads, 5:473, 475–476 required rate of return from, 3:49, 51 of interest rates, 5:399 Bechtel, 4:556 standardized, 6:289 one-period, 5:379–380 beer markets for stock, 1:299–301 for put options, 5:391 Brazilian, 4:137–138 unlevering, 4:77, 78 two-period, 5:387, 388 European, 4:145–146 BEV. see business enterprise value binomial option valuation model, Russian, 4:140–144 Bharath, Sreedhar T., 2:332 5:378–401 United Kingdom, 4:138–139 BHP Billiton, 3:143; 6:216 about, 5:378–379 United States, 4:145, 146 bias BSM model vs., 5:406 behavior in accounting choices, 2:293 interest rate options, 5:399–401 anticompetitive, 3:213 and balance sheet quality, 2:343 multiperiod model, 5:401 ethical, 3:219–223 in bid–ask spread, 1:365–366 one-period model, 5:379–386 pre-dissemination, 1:85 in inflation forecasts,1: 303–305 call option, 5:382–385 unethical, 3:215–216 look-ahead, 4:461 expectations approach, 5:384–386 Beierdorf Consumer, 4:121 survivorship, 4:65 no-arbitrage approach, 5:379–384 BEIs. see break-even inflation rates bid–ask spread put option, 5:383–384, 386 Belgium multiple linear regression model for, two-period model, 5:386–398 active return and weights for equities, 1:329–333 American-style options, 5:390–398 6:500, 503, 504 and nonlinearity of functional form, European-style options, 5:387–390, Basel Committee membership, 2:217 1:366–370 394–398 default-free government bonds, 6:425 and variable bias, 1:365–366 expectations approach, 5:389–390 historical equity risk premium, 4:61, 63 bid evaluation, M&A, 3:314–318 no-arbitrage approach, 5:387–389 OECD Principles, 3:256n.18 bid–offer quotes binomial valuation method, 5:81–85 regulation and government bailouts, arbitrage constraints on, 1:544–548 bird in the hand argument, 3:136 1:722–723 example, 1:546–548 BIS. see Bank for International BelWertV, 6:57 in foreign exchange market, 1:541–543 Settlements benchmark(s) bid–offer spread bitcoin, 1:239, 255 for active management, 6:253 defined, 1:541 Black, Fischer, 5:216, 377, 402, 412; 6:471 for bond valuation, 5:25 for forward exchange rates, 1:551–554 black box, 6:539 earnings quality and, 2:319 from interbank markets vs. dealers, Black option valuation model, 5:412–419 for fund performance, 6:161 1:541–542 BSM model vs., 5:377 and investment performance and liquidity, 1:542–543, 554 for European options on futures, evaluation, 6:256 bid price 5:412–414 MSCI All Country World Index as, in foreign exchange markets, 1:541 for interest rate options, 5:414–417 6:499–505 implied, 1:545–546 for swaptions, 5:417–419 net asset value per share, 6:98 and spot exchange rate quotes, blackout periods, 1:159 for operating costs, 4:120 1:544–548 BlackRock, 2:252 for performance evaluation, 1:93 big-box centers, 6:92 Black–Scholes–Merton option valuation for swaps, 5:29 Big Data, 1:281 (BSM) model, 5:401–411 and term structure of credit spreads, challenges with, 1:244 assumptions in, 5:377, 402–404 5:243, 244 characteristics of, 1:242 binomial model vs., 5:406–407 for time value of money, 5:25, 26 and fintech,1: 241–244 Black model vs., 5:377, 412 for value added metric, 6:472–473 machine learning to analyze, 1:246, for call options, 5:404–409 benchmark bonds, 5:79, 234–235 378–379 with carry benefits,5: 377, 408 benchmark par curve, 5:81–82 risk analysis with, 1:252 for currency options, 5:410–411 benchmark tracking risk, 6:480. see also sources of, 1:242–244 hedging risk and, 5:422 active risk bill-and-hold basis, sales on, 4:427–428 history, 5:402 benchmark value of the multiple, bill-and-hold revenue practices, 2:320, implied volatility from, 5:429–430 4:398–399 323–324 and normal distribution, 5:405 beneficial ownership,1: 158, 159 binary classifiers,1: 379 for put options, 5:404, 406–409 benefit plans,2: 241 binomial interest rate trees, 5:79–100 stock and bond components of, 5:405, Beneish, Messod D., 2:306, 309 binomial valuation method, 5:81–85 407–408 Beneish model, 2:306–309 calibrating trees to match term for stock options, 5:409–410 Berkshire Hathaway, 4:20 structures, 5:92–94 for stocks, 5:404 Bermuda, 6:96 construction, 5:87–94 as structural model, 5:216

Cumulative_Ind_L2 7 June 14, 2018 9:39 PM I-8 Index

Blackstone Group, 6:136, 141 bond market, 5:25–26, 291–292 put options, 5:124 blockage factors, 4:30 bond portfolios (fixed-income simple options, 5:123–124 “block and arrow” diagrams, 5:450 portfolios) floored floating-rate bonds,5: 163–166 blockchain distributed ledgers, active management of, 5:20–24 interest rate risk, 5:150–161 1:254–255 fundamental law of active management duration, 5:151–158 blogs, confidential firm information on, for, 6:506–512 effective convexity,5: 158–161 1:115 independence of investment decisions practice problems, 5:182–192 Bloomberg Barclays Capital Aggregate with, 6:513–514 putable bonds, 5:127–150 Bond Index, 6:82 interest rate swaps in management of, default-free bonds, 5:130–132, Bloomberg Barclays Capital Government 5:449 137–138, 140–145 Bond, 6:14 bond ratings. see debt ratings with interest rate volatility, Bloomberg Barclays Global Aggregate bonds (in general). see also specific types, 5:137–138, 140–145 Bond Index, 6:472 e.g.: government bonds interest rate volatility and value of Bloomberg Barclays US Aggregate analysis of, 5:169–172, 178 bonds, 5:132–134 Index, 6:476, 478 arbitrageur strategy of buying, 5:335 and optimal exercise of options, 5:131 Bloomberg Commodity Index (BCOM), and commercial real estate risky bonds, 5:145–150 6:230–233 investments, 6:452 and straight bonds/options, Bloomberg LP, 1:724; 4:73, 236–238; expected return on, 5:17–19 5:127–128 5:242, 243 exposure to yield curve movement of, and valuation of default-/option-free Blume adjustment, 4:73 5:45–47 bonds, 5:128–129 BM&FBOVESPA, 6:207, 542 pricing of (see also bond valuation) and yield curve, 5:136–137 BMW AG, 2:143–144, 189–190 with binomial interest rate trees, at zero interest rate volatility, BNIC. see Bureau National 5:86–87 5:130–131 Interprofessionnel du Cognac Monte Carlo method, 5:100–101 scenario analysis, 5:149–150 board of directors, 3:222, 235–248 quoted/clean price, 5:333 solutions to problems, 5:193–200 agenda of, 3:252 returns on bond valuation, 6:383–437 audit committees, 3:241–242, 251–253 real estate vs. bonds, 6:17–18 bonds with credit premiums, compensation committee, 3:243–245, realized and expected returns, 6:425–437 251 5:17–19 company-specific factors for, 6:433 compensation for, 3:253 stock vs. bonds, 1:279; 5:173–175; credit spreads and credit risk composition and independence, 6:17–18 premiums, 6:427–431 3:236–237 T-bills vs. bonds, 1:284 government bonds as, 6:425–426 conflicts of interest in,3: 252–253 risk measurements for, 6:353 industrial sectors and credit quality, election of directors, 3:239 sensitivity exposure measures, 6:431–432 functions of, 3:249 6:339–340 influences on credit premiums, independent chairman of, 3:237–238 spreads for, 5:282–283 6:436–437 legal and expert counsel, 3:245 swaps as portfolios of, 5:343 pricing formula, 6:426 nominating committee of, 3:242–243, bonds with embedded options, and sovereign credit risk, 6:433–436 251 5:121–200 callable bonds, 5:127–150 public responsibilities committee of, about, 5:122 default-free bonds, 5:129–132, 3:251 arbitrage-free valuation of, 5:80 137–140, 142–145 qualifications of directors,3: 238–239, bond analytics, 5:178 and interest rate volatility, 5:132–134 249–250 callable bonds, 5:127–150 with interest rate volatility, 5:137– responsibilities of, 3:259 default-free bonds, 5:129–132, 140, 142–145 responsiveness to shareholder proxy 137–140, 142–145 and optimal exercise of options, 5:131 votes, 3:248 with interest rate volatility, 5:137– risky bonds, 5:145–150 role of, 3:249 140, 142–145 and straight bonds/options, 5:127 self-assessment/self-evaluation by, interest rate volatility and value of and valuation of default-/option-free 3:240, 252 bonds, 5:132–134 bonds, 5:128–129 sessions of, 3:241 and optimal exercise of options, and yield curve, 5:134–136 size of, 3:251 5:131 at zero interest rate volatility, staggered, 3:295 risky bonds, 5:145–150 5:129–132 Board of Governors of the Federal and straight bonds/options, 5:127 capped floating-rate bonds,5: 161–163, Reserve System, 2:218; 3:110n.16 and valuation of default-/option-free 164–166 Boeing Company bonds, 5:128–129 commodity valuation vs., 6:203 calculating rate of return for, 4:96, 101 and yield curve, 5:134–136 convertible bonds, 5:172–173, 176–178 ethics at, 3:214 at zero interest rate volatility, default-free nominal coupon-paying P/B for, 4:537, 549 5:129–132 bonds, 6:402–425 pursuit of profit at,3: 205–206 capped floating-rate bonds,5: 161–163 conventional government bonds, regression of returns from, 1:405–406 convertible bonds, 5:166–178 6:410–413 BofA Merrill Lynch Institutional Factor analysis, 5:169–172 influences on short-term default-free Survey, 4:29, 207, 383, 431, 451, 460 features, 5:167–169 interest rates, 6:409 bond components of valuation models and risk–return of straight bonds/ pricing formula, 6:402–403 Black model, 5:412 underlying stock, 5:173–175 short-term nominal interest rates and BSM model, 5:405, 407–408, 411 valuation, 5:172–173, 176–178 business cycles, 6:403 swaption valuation model, 5:418 embedded option types, 5:123–127 T-bill rates and business cycles, bond futures. see interest rate futures call options, 5:123–124 6:404–409 bond indenture, 4:24 complex options, 5:124–127 yield curves and business cycles, bonding costs, 3:104 extension options, 5:124 6:413–425

Cumulative_Ind_L2 8 June 14, 2018 9:39 PM Index I-9

floored floating-rate bonds,5: 163–166 Borden, 2:312 breakeven price Monte Carlo method, 5:100–101 borrowed funds, share repurchase with, for bear spreads, 5:476 at nodes of binomial interest rate trees, 3:165–166 for bull spreads, 5:474–475 5:85–87 borrowing, as arbitrageur strategy, for collars, 5:471 option-free bonds 5:312–315, 329, 335 for covered calls, 5:462, 463 with binomial interest rate trees, Bosch, 4:556 in derivatives strategies, 5:485–487 5:94–96 Boston Beer Co., 4:391 for protective puts, 5:467 default-free, 5:128–129 Boston Scientific Corporation,3: 278–279 breakup value, 3:286; 4:26 with spot rates, 5:79–80 Botswana Brent crude oil, 1:471–472; 6:198 pathwise, 5:96–100 health care, 1:625 Breusch–Pagan test, 1:352–354 putable bonds, 5:127–150 natural resources, 1:640 brewers, 4:118 default-free bonds, 5:130–132, real GDP per capita, 1:622, 677 Bridgestone, 4:400 137–138, 140–145 bottom-up approach BrisConnections Investment Trust, 2:26 and interest rate volatility, 5:132–134 forecasting, 4:23 British Airways, 4:251 with interest rate volatility, investing, 4:22n.7 British American Tobacco, 4:473 5:137–138, 140–145 modeling operating costs, 4:114 British Bankers Association (BBA), and optimal exercise of options, modeling revenue, 4:111, 112 5:324n.9 5:131 working capital projections, 4:132 British Petroleum p.l.c. (BP) risky bonds, 5:145–150 bottom-up clustering, 1:388 forward P/E, 4:396 and straight bonds/options, Bowman, Thomas A.,4: 33n.17 and hedging pressure hypothesis, 6:216 5:127–128 Box–Pierce Q-statistic, 1:450n.20 motives for merger, 3:283 and valuation of default-/option-free Boyd Gaming Corp., 4:393–395 required return on equity, 4:75–76 bonds, 5:128–129 B/P. see book-to-market ratio scaled earnings surprise, 4:451 and yield curve, 5:136–137 BP. see British Petroleum p.l.c. British pound at zero interest rate volatility, brain drain, 1:624 AUD/GBP currency pair, 1:553 5:130–131 Brazil and BMW’s foreign currency exposure, real default-free bonds, 6:383–402 algorithmic trading/HFT in, 6:541–542 2:189, 190 default-free interest rates and Basel Committee membership, 2:217 correlation of exchange rate returns economic growth, 6:392–395 beer market, 4:137–138 for, 1:275–277 determination of real default-free coffee production,6: 202 currency code, 1:605 interest rates, 6:384–392 commodity exchanges, 6:207 day count convention for, 1:549n.7 real default-free interest rates and currency crisis in, 1:596 GBP/EUR currency pair, 1:545–546 business cycles, 6:395–402 dividend distribution, 3:153 USD/GBP currency pair, 1:542, risky bonds, in arbitrage-free economic growth, 1:654 545–546 framework, 5:219–234 economic statistics of India vs., British Sky Broadcasting Group, binomial interest tree for, 5:219–221 1:694–696, 699 4:251–252 corporate bonds, 5:223–227 equity REITs, 6:83 British Virgin Islands, 6:142 floating-rate notes,5: 227–234 estimates of potential GDP, 1:631 broken forward dates, points for, 1:552 government bonds, 5:221–222 exchange rate crisis, 1:588 brokerage arrangements, 1:76, 79; swap rate curve in, 5:26–27 exchange rate management in, 1:594 4:31n.14 bond yield plus risk premium (BYPRP) exports of, 1:681 broker recruiting, 1:107 method, 4:88–89 foreign exchange transaction tax, 1:580 brokers, 2:216 bonus compensation (bonuses), 1:116– foreign investment in, 1:625, 681 Brookfield Office Properties,6: 97 117; 3:243, 244 ICT capital and investment in GDP, Brother Industries, Ltd., 4:253–254 bonus issue of shares, 3:130. see also 1:647, 648 Brownian motion, geometric, 5:377, stock dividends labor and total factor productivity, 402–403 book-to-market ratio (B/P), 4:392 1:651 BRRD. see Bank Recovery and book value accounting, 6:353n.19 livestock investment in, 6:201 Resolution Directive book value of equity (book value). see natural resources, 1:639, 640 BSE Ltd., 1:473 also price to book value (P/B) openness of economy, 1:681 BSM model. see Black–Scholes–Merton adjusting, 4:419–422 real GDP per capita, 1:622, 677 option valuation model defined, 4:378, 414 real yields, 6:397 BT Group, 4:437–438 determining, 4:417–422 sovereign debt default, 6:433 buckets, 6:349–350 investment costs in excess of, 2:27–28 breadth budget deficits, potential GDP and,1: 631 negative, 1:528 calculation for, 6:491 budgeting and residual income, 4:505–506 in full fundamental law, 6:495 capital (see capital budgeting) in residual income model, 4:516 and independence of investment risk, 6:362–363 simulations with constraints on, decisions, 6:513 Buffett, Warren,4: 20 1:527–528 and mean–variance optimal active building retailers, pre-tax operating book value per share (BVPS), 4:206, 414 weight, 6:490 margin for, 1:524 computing, 4:417–418 and rebalancing in active management building societies, 2:216 and fair value accounting, 4:419–422 strategies, 6:511–512 build-up method net asset value per share vs., 6:98 break-even inflation rates (BEIs) for equity, 4:85–89 and share repurchases, 3:166–167 for conventional government bonds, for private company, 4:85–88, 570–571 tangible, 4:418–419 6:410–413 bull case scenario, 4:136, 161–163 bootstrapping and default-free yield curves, bull spreads of earnings, 3:284–285 6:413–415 defined, 5:473 of zero-coupon rates, 5:15, 80, 208 and government bond yields, refining, 5:476–479 Booz Allen Hamilton, 3:128–129 6:413–415 strategies using, 5:473–475

Cumulative_Ind_L2 9 June 14, 2018 9:39 PM I-10 Index

Bundesbank, 1:587 and T-bill rates, 6:404–409 callable bonds, 5:127–150 Bundesverband deutscher Banken and trailing P/E, 4:388–390 convertible, 5:167–168, 173 (Deposit Protection Fund), 2:220 and valuation of commercial real default-free bundling, of software products, 1:716 estate, 6:455–457 bonds at zero interest rate volatility, bunds, 5:29 and valuation of equities, 6:452 5:129–132 Bureau National Interprofessionnel du and yield curves for default-free bonds with interest rate volatility, Cognac (BNIC), 4:170 nominal coupon-paying bonds, 5:137–140, 142–145 Burger King, 6:216 6:413–425 effective convexity of,5: 158–161 business, forms of. see forms of business business cycle risk, 4:85; 6:301, 302 effective duration for,5: 152–154 business combinations, 2:35–56 business enterprise value (BEV), embedded options of, 5:123–124 accounting treatments for, 2:9–10 4:580n.32 interest rate volatility acquisition method of accounting for, business laws, 3:210–211 bonds at zero volatility, 5:129–132 2:38–42 business model, 4:13 bonds with volatility, 5:137–140, acquisition price less than fair value, business process data, 1:243, 244 142–145 2:40 business relationships, conflicts of and OAS for bonds, 5:147–148 assets and liabilities, 2:38 interest and, 1:152, 156 and value of bonds, 5:132–134 contingent liabilities, 2:38 business strategy(-ies) key rate durations for, 5:157 financial assets and liabilities,2: 39 ethical issues in, 3:211–214 one-sided duration for, 5:155 goodwill, 2:39 evaluating, 4:10 (see also competitive optimal exercise of options, 5:131 indemnification assets,2: 38–39 strategy) risky, 5:145–150 post-combination balance sheet, business summary, research report, 4:36 interest rate volatility and option- 2:40–42 business unit managers, agency adjusted spread, 5:147–149 comparability issues, 2:55–56 relationships of, 3:206–207 option-adjusted spread, 5:145–147 on consolidated financial statements “busted convertible” bonds, 5:173–174, scenario analysis of bonds with combinations with less than 100% 175 options, 5:149–150 acquisition, 2:42–43 butterfly spreads,5: 473n.33 scenario analysis, 5:149–150 consolidation process, 2:42 buybacks, 3:170–173; 4:201n.3, and straight bonds/options, 5:127 goodwill impairment, 2:46–48 218–219. see also share repurchases and valuation of default-/option-free noncontrolling interests, 2:43–46 buyers bonds, 5:128–129 financial statement presentation after, credit protection, 5:268–269, 271–272 and yield curve, 5:134–136 2:48–51 influence of (see customers) call options (calls), 5:123–124 IFRS and US GAAP comparability buyout transactions American (see American call options) issues, 2:55–56 LBO model, 6:146–148 bear spreads with, 5:476n.36 contingent assets and liabilities, 2:55 leveraged Black model for, 5:412 contingent consideration, 2:55 and credit default swaps, 5:292–293 BSM model for, 5:404–409 in-process R&D, 2:55–56 defined, 6:136 convertible bonds with, 5:169, 173 restructuring costs, 2:56 equity valuation for, 4:9 covered calls, 5:459–464, 468–473 as investment category, 2:9 LBO model, 6:146–148 applications, 5:487–490 with less than 100% acquisition, as private equity class, 6:137 and cash-secured puts, 5:468–469 2:42–43 share repurchases in, 3:297 and collars, 5:470–473 pooling of interests and purchase valuation issues, 6:146 defined, 5:459 methods in, 2:37 management, 6:137, 146, 150 investment objectives of, 5:459–464 special purpose entities, 2:51–55 mega, 6:141–142, 151 position equivalence for, 5:468 types of, 2:35–36 secondary, 6:150 profit and loss at expiration,5: 462–464 Business Combinations (ASC 805), 2:10; stages of, 6:137 risk with, 5:470 4:561n.11, 578, 584 venture capital vs., 6:144–145, 148–149 delta approximation for, 5:421, 422 Business Combinations (IFRS 3), 2:10 buy-side analysts, 4:31; 6:250 delta for, 5:420; 6:341 Business Combinations (IFRS 3R), 4:578 buy-side clients, 1:31 delta-plus-gamma approximations for, Business Combinations (SFAS 141R), buy-to-sell orientation, of private equity, 5:424–425 4:578 6:138 as embedded options (see callable business conditions, for private real BVPS. see book value per share bonds) estate investments, 6:15 Bylaws and Rules of Procedure for in Europa Venture Partners III case business context for equity valuation, Professional Conduct (Rules of study, 6:162 4:12–22 Procedure), 1:9, 23 European (see European call options) accounting information, 4:18–22 BYPRP method. see bond yield plus risk exercise values for, 5:379 financial reports,4: 14, 16 premium method gamma for, 5:424 industry and competitive analysis, impact of dividend payments on, 5:393 4:12–14 C interest rate, 5:414, 415 quality of earnings analysis, 4:18–22 CAD. see cash available for distribution on interest rates, 5:399–401 sources of information, 4:16–17 Cadbury Schweppes, 3:300 long, 5:492 business cycle(s) CAGR. see compound annual growth lower bounds of, 5:427 and credit spreads, 6:428 rate make-whole, 5:123 and oil demand, 6:193 calendar spreads, 5:480–481, 492; naked, 5:459n.18 and policy rates set by central banks, 6:209–210 notation for, 5:379 6:405–406 calibration, of binomial interest rate objectives for, 5:484 and real default-free interest rates, trees, 5:92–94 one-period binomial model for, 6:395–402 California, ESG risk exposures, 3:260 5:380–385 and short-term nominal interest rates, California Public Employees Retirement rho of, 5:428–429 6:403 System (CalPERS), 6:155 with sinking fund bonds, 5:125

Cumulative_Ind_L2 10 June 14, 2018 9:39 PM Index I-11

in strategies R&D expenditures, 1:650 rental price of, 1:634 covered calls, 5:459–464, 468–473, real estate operating companies, 6:97 replacement, 6:137 487–490 real GDP per capita, 1:621, 622, 677, 678 return on, 4:112 long calls, 5:492 regulatory requirements, 4:16 risk, 3:203–204 synthetic calls, 5:457 share repurchases, 3:161 ROIC, 1:301–303, 309–311 strike calls, 5:478 Taylor rule for policy rates, 6:407, 408 total, 6:433 synthetic, 5:457 Canadaco/Interco case study, 2:157–171 working in synthetic long position, 5:455 Canadian dollar and FCFF, 4:291 in synthetic short position, 5:455 CAD/USD currency pair, 1:541n.2, 543 and free cash flow,3: 307; 4:299–301 two-period binomial model for, correlation of exchange rate returns, on pro forma cash flow statements, 5:387–390, 393–398 1:275–277 4:178–179 and value of callable/straight bonds, currency code, 1:605 projections of, 4:132–133 5:127 and Japanese yen, 1:283–284 capital accounts vega of, 5:427 Canadian Institute of Chartered current account and, 1:576 call price, 5:123 Business Valuators, 4:560n.9 working capital, 2:386 calls. see call options canceled shares, 3:161 capital accumulation, economic growth Cal-Maine Foods, Inc., 3:157–158 candidacy in CFA program, referring to, and, 1:636, 666 CalPERS. see California Public 1:171–172 capital allocation Employees Retirement System Candidate Pledge, 1:167 for market risk management, CAMELS approach, to bank analyses, candidates, CFA. see Responsibilities as 6:364–365 2:220–238 a CFA Institute Member or CFA by product group, 2:392–395 asset quality, 2:223–228 Candidate [Standard of Professional by segment, 2:387–392 capital adequacy, 2:220–223 Conduct VII] and VaR measurement, 6:334 earnings, 2:228–232 cannibalization and working capital accounts/ratios, illustration of, 2:242–264 base case scenarios for, 4:161, 162 2:386 asset quality, 2:245–252 bull and bear case scenarios for, capital asset pricing model (CAPM), capital adequacy, 2:242–245 4:161–163 4:53 earnings, 2:253–258 as capital budgeting consideration, 3:9 and ANOVA, 1:306–307, 308n.38 liquidity position, 2:259–260 estimating impact of, 4:159–163 arbitrage pricing theory vs., management capabilities, 2:252–253 quantifying potential for, 4:153–159 6:279–280 overall CAMELS assessment, Canon, Inc., 4:506, 507 and arithmetic mean, 4:63–64 2:263–264 capabilities, from mergers and and Carhart four-factor model, 6:285 sensitivity to market risk, 2:260–263 acquisitions, 3:284 and equity risk premium, 4:59 liquidity position, 2:232–236 capacity-based measures, modeling expanded, 4:570 management capabilities, 2:228 revenue with, 4:112 FFM vs., 4:83 sensitivity to market risk, 2:236–238 CAPE. see real cyclically adjusted P/E and fundamental law of active Cameron, 4:14–15 capex. see capital investment management, 6:488 Canada capital. see also weighted average cost of heteroskedasticity and tests of, 1:351 active return and weights for equities, capital (WACC) investors’ expectations in, 4:54n.3 6:500, 503, 504 access to, 6:104 and multifactor models, 6:278–279 algorithmic trading/HFT in, 6:541 acquisition, 6:137 for private company, 4:87–88 average hours worked, 1:646 adequacy of, in bank analysis, and required rate of return for private Basel Committee membership, 2:218 2:220–223, 242–245 company, 4:570 bond spread, total returns and GDP appreciation of, 6:13, 82 required return on equity, 4:71–79 growth, 6:420, 421 cost of, 3:9, 108; 4:493–494; 6:15, 144 beta for nonpublic companies, break-even inflation rates,6: 412 debt, 6:10, 15 4:77–79 cash dividends paid, 3:127 economic, 6:354 beta for public companies, 4:73–77 common law, 3:113 fixed, 4:290–291 examples, 4:73–78 credit default swaps, 5:270 in growth accounting equation, and risk, 3:49 dividend payouts, 3:159, 178 1:637–638 strategic portfolio decision-making dividend policy, 4:201 human, 1:639, 646–647; 4:415 based on, 6:303 equity REITs, 6:83 ICT, 1:639, 647–649 capital budgeting, 3:5–92 ex post equity risk premium, 6:445 invested cash flow projections,3: 27–38 extendible bonds, 5:124 market value of invested capital, depreciation, 3:31–34 GDP and consumption, 6:441 4:444, 580 and effects of inflation on analysis, GDP growth rate, 4:211, 212 return on invested capital, 4:444, 3:37–38 government bond risk premiums, 495n.5 equation format, 3:29–31 6:422 total invested capital, 4:444 for replacement projects, 3:34–35 historical equity risk premium, 4:61, 63 investment, 6:157 spreadsheet modeling, 3:36–37 ICT capital and investment in GDP, marginal product of, 1:634 table format, 3:27–29 1:647 non-ICT, 1:639, 649 importance of, 3:6 impairment of capital rule, 3:153 output-to-capital ratio, 1:661, 662, 665, investment decision criteria, 3:10–27 index-linked bonds, 6:396 666 average accounting rate of return, and MSCI ACWI, 6:499 paid in, 6:160, 163 3:15–16 natural resources and economic physical, 1:647–649, 678, 679 discounted payback period, 3:14–15 growth, 1:640 for private equity investments, 6:157 internal rate of return, 3:11–12, OECD Principles, 3:256n.18 public, 1:639 18–25 publicly traded real estate equities, regulatory capital restrictions, net present value, 3:10–11, 17–22 6:81 1:527–528 payback period, 3:13–14

Cumulative_Ind_L2 11 June 14, 2018 9:39 PM I-12 Index

capital budgeting (Continued) capitalization-weighted market indexes, cap rate. see capitalization rate popularity and use of capital float-adjusted, 6:473 caps, interest rate, 5:416 budgeting methods, 3:25–27 capitalized cash flow method (CCM), Carbon Disclosure Project, 4:17 profitability index,3: 16–17 4:288n.3, 569, 575–577 care. see Loyalty, Prudence, and Care other income measures and valuation capitalized income method, 4:570 [Standard III(A)] models, 3:57–65 capital market expectations, 6:254 Cargill, 4:556; 6:216 basic capital budgeting model, 3:58 capital markets. see also Integrity of Carhart four-factor model, 6:283–285 claims valuation, 3:64–65 Capital Markets [Standard of factor risk premium for, 6:281 economic and accounting income, Professional Conduct II] return in excess of risk-free rate in, 3:58–61 and benefit of ethics to society,1: 12 6:279 economic profit,3: 62–63 perfect, 3:95, 135, 147 returns attribution with, 6:294–296 residual income, 3:63–64 sustainability of, 1:12–13 Carlsberg, 4:138, 140, 151 planning for, 3:7 capital mobility, monetary/fiscal policy The Carlyle Group,6: 136, 141 popularity and use of, 3:25–27 and, 1:586–587, 590–591 Carl Zeiss Meditec AG, 4:227–228, 230 practice problems, 3:69–82 capital per worker, 1:623 Carrefour SA principles, 3:8–10 capital position, 2:222–223 dividend discount model, 4:208 process, 3:6–8 capital ratio and European beer market, 4:146 project analysis and evaluation, 3:38–57 estimated sensitivities of, 2:262–263 input and product prices at, with capital rationing, 3:40–42 for insurance company analysis, 2:273 4:149–150 for mutually exclusive projects with capital rationing, 3:10, 40–42 justified P/E,4: 223–224 unequal lives, 3:38–40 capital requirement, 2:219, 222, 280 carried interest, 4:587n.37; 6:153 pitfalls, 3:55–57 capital returns, 6:58 carry arbitrage with real options, 3:52–55 capital structure, 3:93–123 in bond market, 5:335 risk analysis, 3:42–51 and acquisitions, 3:291 defined, 5:315 solutions to problems, 3:83–92 analysis of, 2:385–386 reverse, 5:316, 336 capital charge, 4:494 capital structure decisions, 3:94–108 carry arbitrage model capital controls, for exchange rate changing, 4:286 defined, 5:308 management, 1:594–595 defined, 3:94 forward contracts, 5:309–343 capital deepening and forecasting free cash flows, carry arbitrage model for futures vs., defined, 1:635 4:317–320 5:342–343 and economic growth, 1:635–637 importance of, 3:93–94 currency forwards, 5:338–342 and neoclassical model, 1:661, 667 and longer-term growth rates, 6:110–111 equity forwards, 5:322–324 capital expenditures and modeling financing expenses,4: 127 fixed-income forwards,5: 333–334, in FCFF calculation, 4:290–291 Nestlé, 2:385–386 337–338 in forecasts of FCFE, 4:311–312 practical issues, 3:109–115 generic no-arbitrage forwards, maintenance vs. growth, 4:133 debt ratings, 3:109–110 5:311–321 of Nestlé, 2:387–392 evaluating capital structure policy, interest rate forwards, 5:324–333 in valuation of real estate investments, 3:110–111 pricing and valuation notation, 6:43 and leverage in international setting, 5:309–311 of WorldCom, 2:328–329 3:111–115 futures contracts, 5:322–343 capital flows practice problems, 3:117–121 carry arbitrage model for forwards and convergence, 1:678–679 projections of, 4:133 vs., 5:342–343 and currency crises, 1:597 solutions to problems, 3:122–123 currency futures, 5:338 and currency exchange rate, 1:579–585 and stock dividends, 3:132 equity futures, 5:322 in developing vs. developed countries, in valuation of REIT stocks, 6:104 fixed-income futures,5: 333–337 1:625 capital structure decisions, 3:94–108 interest rate futures, 5:324–325 and exchange rate management, 1:593 agency costs, 3:104–105 pricing and valuation notation, capital gains costs of asymmetric information, 3:105 5:309–311 current income vs., 3:152 costs of financial distress,3: 103–104 swap contracts, 5:343–361 dividends vs., 3:139–140 and financial leverage/cost of equity, currency swaps, 5:349–356 capital investment (capex), 4:178 3:96–98 equity swaps, 5:356–361 capitalization irrelevance to value, 3:94–96 interest rate swaps, 5:345–349 life and health insurance companies, and static trade-off theory,3: 106–108 receive-fixed pay-floating swaps, 2:280 and taxes, 3:98–103 5:344–345 property and casualty insurance capital-to-labor ratio, 1:635–636, 678 receive-floating pay-fixed swaps, companies, 2:273 Capitol Shopping Center REIT Inc case 5:343–344 capitalization of earnings method, 4:570 study, 6:113–125 with underlying cash flows, capitalization rate (cap rate) dividend discount model approach to 5:318–321 for capitalized cash flow method,4: 576 valuation, 6:121–122 without underlying cash flows, defined, 6:28 net asset value per share, 6:120–121 5:311–318 for direct capitalization method, relative valuation, 6:119 cash flows for financed position in 6:29–31 selecting valuation method for, underlying, 5:312–313 for discounted cash flow method,6: 33 6:122–125 cash flows for financed position in going-in, 6:30, 34–36 caplets, 5:416 underlying combined with forward in Gordon growth model, 4:217 CAPM. see capital asset pricing model contract, 5:313–314 and net asset value per share, 6:99–100 capped floating-rate bonds (capped cash flows related to carrying and net operating income, 6:28–29 floaters), 5:161–163 underlying, 5:311–312 residual, 6:34 ratchet bonds, 5:162–163 cash flows with forward market price terminal, 6:30, 34–36, 43–44 valuation of, 5:161–162, 164–166 too high, 5:314–315

Cumulative_Ind_L2 12 June 14, 2018 9:39 PM Index I-13

cash flows with forward market price cash for FRA pricing, 5:328–330 too low, 5:315–316 as component of earnings, 2:313–314 for FRA valuation, 5:331–332 value of long forward position, and information ratio, 6:482 future, 4:199–201; 6:381–383 5:317–318 printing of, in Eurozone, 6:423n.24 income return vs., 6:59 carry benefits (γ) risk weighting of, 2:221 incremental, 3:9, 35 BSM model with, 5:377, 408 synthetic, 5:456 in long-term equity investment case carry arbitrage model with, 5:318–321 cash-and-carry arbitrage model. see study, 2:395–399 with currency options, 5:410 carry arbitrage model in no-arbitrage approach to options defined, 5:318 cash available for distribution (CAD), valuation, 5:377 for equity forwards, 5:322–323 6:105. see also adjusted funds from nominal, 3:37–38 and forward prices, 5:343 operations (AFFO) nonconventional, 3:9 carry costs (θ) cash crops. see soft commodities for offsetting long forward positions, BSM model with, 5:408 cash dividends 5:337, 341 carry arbitrage model with, 5:319–321 dividend reinvestment plans, 3:128 operating defined, 5:319 regular, 3:127–128 in equity valuation, 4:19 and forward prices, 5:343 of Russell 1000 companies, 3:175 free, 6:433 carry trades, 1:572–575 and share repurchase valuation, of Nestlé, 2:398–399 defined, 1:572–573 3:167–169 net income and, 2:314–318 example, 1:574–575 stock dividends vs., 3:132 overstatement of, 2:300 risks and rewards on, 1:573 cash flow(s),3: 8–10. see also free cash and price-to-cash flow,4: 432 types of, 5:23n.4 flow; price to cash flow (P/CF) quality of, 2:333–334 with US dollar and Turkish lira, and accounting methods, 4:433 reclassification of,2: 298 1:581–582 in arbitrage-free pricing and valuation, path-dependent, 5:100 yen, 1:579–580 5:308 and post-employment benefits, Carson, John, 1:711–712 capitalized cash flow method of 2:101–102 CART. see classification and regression valuation, 4:288n.3, 569, 575–577 in present value models, 4:201–207 trees for capital projects, 3:56 present value of, 6:44 carve-out, equity, 3:320 conventional, 3:9 from probabilistic risk assessment case studies (case examples) and corporate restructuring, 3:320 approaches, 1:531–532 Canadaco, 2:157–171 DCF models real, 3:37–38 Capitol Shopping Center REIT Inc, as absolute valuation model, 4:23–24 from real estate, 6:452–453 6:113–125 for equity valuation, 4:198 receive-fixed, pay-floating,5: 346 dividend discount model approach to forecasted fundamentals and receive-floating, pay-fixed,5: 346 valuation, 6:121–122 multiples in, 4:381 reinvesting of, 6:111 net asset value per share, 6:120–121 and free cash flows,4: 284 at settlement date, 1:554 relative valuation, 6:119 residual income model vs., 4:512 from simulations, 1:529–530 selecting valuation method for, and valuation based on forecasted simulations with constraints on, 1:528 6:122–125 fundamentals, 4:395–398 for swaps contracts, 5:345–346 earnings quality, 2:319–331 discounted cash flow analysis,3: 303–309 currency swaps, 5:350–351, 355, cost capitalization, 2:328–329 discounted cash flow method of 450–451 MicroStrategy, Inc., 2:324–326 valuation for receive-fixed swaps,5: 346, 348 revenue recognition, 2:320–326 of developing terminal value, 4:167 terminal year incremental after-tax Sunbeam Corporation, 2:320–324 expectations approach vs., 5:384–385 non-operating, 3:35 WorldCom Corp., 2:328–329 perpetuity calculations, 4:168 trailing price to cash flow,4: 434 ethical decision making for private companies, 4:569–570, 575 underlying Subath Agarway, 1:212–216 for private equity, 6:138, 144 carry arbitrage model with, 5:318–321 Preston Partners, 1:220–224 for private real estate investments, carry arbitrage model without, Peter Sherman, 1:216–219 6:33–45 5:311–318 Edvard Stark, 1:208–212 for publicly traded real estate for valuation of long forward position, Super Selection Investment Advisors, securities, 6:111–113 5:317 1:224–228 terminal value, 4:167 cash-flow-at-risk model,2: 189–190 Europa Venture Partners III, 6:161–164 valuation inputs, 4:182–183 cash flow from operations (CFO), long-term equity investment, 2:373–402 and discount rate selection, 4:92 4:204n.10 conclusions and recommendations, earnings-plus-noncash-charges adjusting, 4:301–306, 314–315 2:401–402 definition, 4:434 FCFE from, 4:301–306 data analysis, 2:374–401 estimation with private company FCFF from, 4:293–295, 301–306 data collection, 2:373 valuation, 4:567–569 and free cash flow,1: 370–372; 4:285 data processing, 2:374 in Europa Venture Partners III case and net income, 1:280–281 follow-up, 2:402 study, 6:163 and price to cash flow,4: 432, 434 purpose for analysis, 2:373 for FCFE and FCFF approach to free cash flow patterns, IRR vs. NPV and, off-balance sheet leverage from cash flow valuation,4: 285–286 3:18–20 operating leases, 2:403–406 for financed position in underlying, cash flow projections,3: 27–38 conclusions and recommendations, 5:312–314, 319–320 depreciation, 3:31–34 2:406 for fixed-income futures pricing, and effects of inflation on analysis, data analysis, 2:404–406 5:335–336 3:37–38 data collection, 2:403 with forward market price too high, equation format, 3:29–31 data processing, 2:404 5:314–315 for replacement projects, 3:34–35 follow-up, 2:406 with forward market price too low, spreadsheet modeling, 3:36–37 purpose for analysis, 2:403 5:315–316 table format, 3:27–29

Cumulative_Ind_L2 13 June 14, 2018 9:39 PM I-14 Index

cash flow quality,2: 333–342 Centurytel, 4:402–404, 458 change-of-control events, put options and classification shifting,2: 339–342 CEOs. see chief executive officers for, 5:169 evaluating, 2:334–342 C E P. see complex event processing changes indicators of quality, 2:333–334 Ceres, 4:17 in exchange rates, 1:557 Nautica Enterprises, 2:340–342 certainty-equivalent method, 3:49n.12 fund mandate, 1:142 Satyam Computer Services, 2:334–338 Certificate in Investment Performance to investment process, 1:142–144 Sunbeam, 2:338–339 Measurement (CIPM) certificants, uncovered interest rate parity in terms cash flow statements. see statement of 1:9 of, 1:560 cash flows CFA charterholders, 1:171 Channel Islands, 6:142 cash flow yield (CF/P),4: 392 CFA designation, 1:171, 172. see channel stuffing,2: 299, 320 cash-generating units, 4:559n.6 also Reference to CFA Institute, Chanos, James, 2:290, 311, 358 cash generation, of segments, 2:391 Designation and Program [Standard Chaplinsky, S., 6:155n.8 cash offering,3: 290, 291 VII(B)] Charles Schwab Corporation, 4:424 cash-on-cash return, for private real guidance on using, 1:171, 172 Chartered Financial Analyst. see entries estate debt, 6:62 order of professional and academic beginning CFA cash operating return, 2:391–392 designations with, 1:174 cheapest-to-deliver obligation, cash-secured puts, 5:468–469 right to use, 1:173 5:269–270 cash settlement stating facts about, 1:174 Chevron Corporation, 4:254, 271 and commodities pricing, 6:210 CFA examinations, 1:5 M&As for growth, 3:283 of credit default swaps, 5:273–274 bringing written material into exam net income of ExxonMobil and, for stock index futures, 5:453 room, 1:167 2:181–183 cash tax rate, 4:128–131 confidential information in, translation methods, 2:177 casualty insurance, 2:265 1:165–166 χ2 values, 1:738 catalyst, valuation, 4:8 expressing opinions about, 1:166 Chicago Board Options Exchange, 5:456 Caterpillar, Inc., 2:95–97 grading guidelines and results for, Chicago Board Options Volatility Index causal inferences, 1:379 1:169 (VIX), 5:430–431 causation, correlation and, 1:273 passing, in consecutive years, 1:173 Chicago Mercantile Exchange (CME) Cayman Islands, 6:142 sharing content of, 1:168–169 and commodities futures, 6:205, 207 CCM. see capitalized cash flow method sharing questions from, 1:167 and contango, 6:210 C/C++ programming language, 1:249 writing after exam period, 1:168 chief executive officers (CEOs) CDOs. see collateralized debt obligations CFA Institute. see also specific agency problems for, 3:207–210 CDS. see credit default swaps committees and programs agency relationships of, 3:206–207 CDS percentage price change, compromising integrity of, 1:169 on boards of directors, 3:222 5:284–285 ethical commitment of, 1:14–15 pay for, 3:208–209 CDS spread, 5:271 and ethics, 1:11, 12 child orders, 6:535 CDS swaptions, 5:269n.4 mission of, 1:7 Chile, 1:588; 2:219 CDX HY index, 5:275 referring to (see Reference to CFA China CDX IG index, 5:275 Institute, Designation and Program Basel Committee membership, 2:218 CEICs. see closed-end investment [Standard VII(B)]) cash dividends paid, 3:127 companies on valuation process, 4:16 cognac industry, 4:170 Celler-Kefauver Act, 3:299 values of, 1:15 commodity exchanges, 6:207 Central America, 6:202. see also specific website, 1:15, 129 convergence with advanced countries, countries website of, 1:23 1:682 Central Bank of Argentina, 2:217 CFA Institute Investment Foundations current account surplus and exchange Central Bank of Brazil, 2:217 certificate program,1: 8 rates, 1:579 Central Bank of Chile, 2:219 CFA members and candidates economic growth, 1:654, 656–658, Central Bank of Germany (Deutsch knowledge of the law [Standard I(A)], 679–680 Bundesbank), 2:218 1:26 education spending, 1:624 Central Bank of Malaysia, 2:219 responsibilities of (see Responsibilities exports, 1:681; 2:130 Central Bank of Sweden (Sveriges as a CFA Institute Member or CFA foreign direct investment in, 1:681 Riksbank), 2:218 Candidate [Standard of Professional gold and, 6:195 Central Bank of the Republic of Turkey, Conduct VII]) ICT capital and investment in GDP, 2:218 CFA Program. see also Reference to CFA 1:647, 648 Central Bank of the Russian Federation, Institute, Designation and Program index-linked bonds, 6:396 2:218 [Standard VII(B)] labor and total factor productivity, Central Bank of the United Arab conduct restrictions for candidates and 1:651–652 Emirates, 2:219 members, 1:166, 167 labor supply, 1:641 central banks confidential information about, mergers and acquisitions, 1:347–348 business cycle and policy rates of, 1:165–166 natural resources, 1:640 6:405–406 stating facts about, 1:174 online payment companies, 2:216 discount borrowing windows of, testing policies for, 1:167 openness of economy, 1:681 1:723–724 CFO. see cash flow from operations population growth, 1:642 estimates of potential GDP by, 1:630, CF/P. see cash flow yield private real estate valuation, 6:57 631 CFTC. see Commodity Futures Trading R&D expenditures, 1:650 in exchange rate management, 1:595 Commission real default-free interest rates, 6:393 purchase of US Treasuries by Asian, chain rule of forecasting, 1:453 real estate operating companies, 6:97 6:423 chairman of board of directors, real GDP per capita, 1:621, 623, 677 and slope, level, and curvature of yield 3:237–238 REIT-type legislation, 6:83 curve, 6:417 Chamber of Commerce v. SEC, 1:719n.23 revenue analysis, 4:109–111

Cumulative_Ind_L2 14 June 14, 2018 9:39 PM Index I-15

steady state of growth in, 1:661–662 disclosure to, 1:150–151 on inside information, 4:16 stock dividends, 3:131 duties to (see Duties to Clients notification of,1: 114 China Banking Regulatory Commission, [Standard of Professional Conduct and Professional Conduct Program, 2:218 III]) 1:9–10 China Insurance Regulatory fair dealing between, 1:90 research reporting requirements in, Commission, 2:220 gifts and entertainment from, 1:39 4:36–37 China Vanke, 6:97 identifying, 1:75, 80–81, 93 and Standards of Practice Council, Chinese yuan, 1:579; 2:189, 190 informing, of investment process, 1:10–11 cigarette products, taxes and regulation 1:138–139 in Standards of Practice Handbook, on, 1:721 interests of, 1:78 1:3, 5–7, 14 CIPM certificants. see Certificate loyalty to, 1:81 text of, 1:15–16 in Investment Performance maintaining lists of, 1:85 and values of CFA Institute, 1:15 Measurement certificants preferences for capital gains vs. codes of ethics (in general) CIR model. see Cox–Ingersoll–Ross dividends, 3:139–140 adopting, 1:120 model priority of personal trading vs. trading commitment to, 1:14 Cisco Systems, 1:497, 499–500 for, 1:157 developing, 1:26–27, 54 Citigroup, Inc., 2:242–264 relationship with, 1:543 and moral courage, 3:220 investment management at, 6:249 risk profile of,1: 91 organizational culture in, 3:223 P/B ratio of, 4:416 select, additional services for, 1:88 coefficient of determination (R2) reverse stock split at, 3:134 soliciting former, 1:109–114 adjusted, 1:343–344 share repurchases and dividends for, status of, 1:102 for linear regression with one variable, 3:174 client updates, 1:131–132 1:295–297 city banks, 2:216 Clorox, 4:120n.2, 121 model selection based on, 1:464 civilian unemployment rate (UER), CLOs. see collateralized loan and multicollinearity, 1:360, 361 1:494–498, 502, 510–512, 514 obligations multiple, 1:332 civil law legal systems, 3:113 closed-end funds, 2:216 coffee, 6:202–203 claims valuation, 3:64–65 closed-end investment companies cognac industry, 4:170–171. see also classical model of economic growth, (CEICs), 4:587, 590 Rémy Cointreau Group 1:659 closed-end private equity funds, 6:152 COGS. see cost of goods sold classification, 1:380n.72 closet index funds, 6:481 cointegrated unit roots, 1:485–488 clustering vs., 1:388 clothing, commodity hedging and, co-investment provisions, 6:156 in data analytics, 1:379 6:216 Colgate-Palmolive Company (Colgate) and financial reporting quality, club convergence, 1:675 effective tax rate reconciliation, 2:200–202, 296–298 clustering 2:184–186 as supervised machine learning, 1:383 algorithms for, 1:388–389 operational cost structure of L’Oreal classification and regression trees in data analytics, 1:379–380 vs., 4:120, 121 (CART), 1:384–385 CMA. see Competition & Markets share repurchases, 4:415–416 classification shifting Authority collars cash flow,2: 339–342 CMBS. see commercial mortgage-backed on existing holdings, 5:471–472 recurring earnings, 2:312–313 securities risks with, 5:472–473 classification trees,1: 384–385 CME. see Chicago Mercantile Exchange same-strike, 5:472 classifiers CME Group, 5:29 strategies using, 5:470–473, 490 binary, 1:379 CNA Financial Corp., 2:270 collateralized debt obligations (CDOs), random forest, 1:385–386 CNH Global N.V., 2:95–97 5:293; 6:142 clawback provisions, 6:155 Coase Theorem,1: 709 collateralized loan obligations (CLOs), Clayton Antitrust Act, 3:299 Cobb–Douglas production function, 6:142 clean price, for bonds, 5:333 1:633–635 collateralized mortgage-backed clean surplus accounting, 4:206n.12, and growth accounting equation, securities (MBSs), 1:724 493n.3 1:637–638 collateral pools, 5:248, 251 and book value/future earnings, and neoclassical model of economic collateral return, 6:221–222 4:516 growth, 1:659–660 collinearity and net income comparisons, 2:183 Coca-Cola multi-, 1:359–362 and residual income model, 4:504 acquisition of Cadbury Schweppes, perfect, 1:335n.14, 359–360 violations of, 4:517–525 3:300 co-location (co-lo), 6:539 clean surplus relation, 4:500–501 price increases, 4:145 Colorpak Ltd., 4:459–460 clearance process, 1:256 share-based compensation, 2:108 combinations, option, 5:473, client commission practices, 1:78–80 Coca-Cola Bottling Company 481–483 clientele effect,3: 137–141 Consolidated, 4:202–204 combined ratio, 2:266–267, 269 client–plan participants, identifying, CoCoCos. see convertible contingent combined ratio after dividends, 1:78 convertible bonds 2:269 clients CoCos. see contingent convertible Comisión Nacional Bancaria y de approval from, 1:77 bonds Valores (National Banking and buy-side, 1:31 Code of Ethics (CFA Institute), 1:5–15 Securities Commission), 2:218 communication with (see adoption of, 1:10 commerce, regulation of, 1:713–716 Communication with Clients and and analyst’s position of trust, 4:33; commercial banks, 2:215–216 Prospective Clients [Standard 6:265 commercial code, in IOSCO framework, V(B)]) and applicable law, 1:22–23 1:713–714 cross-border mergers and acquisitions evolution of, 1:6 commercial mortgage-backed securities to follow, 3:287 and importance of ethics, 1:11–15 (CMBS), 5:248; 6:80

Cumulative_Ind_L2 15 June 14, 2018 9:39 PM I-16 Index

commercial real estate commodity futures markets, 6:190, forecasting performance of, 4:11, defined, 6:11 205–225 22–23 economic value, 6:21–22 futures returns, 6:213–225 guideline, 4:379 industrial and warehouse properties, components of, 6:219–225 insurance, 2:217; 3:300 (see also 6:20 theories of, 6:213–217, 213–219 specific types) multi-family properties, 6:21 market participants, 6:205–208 neglected company effect,1: 398–399 office properties,6: 19–20 commodity exchanges, 6:207 in net asset value approach, 6:101 in portfolio, 6:79–80 commodity hedgers, 6:206 no-growth, 4:220–221 retail properties, 6:20–21 commodity investors, 6:207 non-dividend-paying, 4:229–230 types of, 6:19–22 commodity market analysts, 6:207 nonpublic, 4:77–79 valuation of, 6:22–54, 452–457 commodity regulators, 6:208 online payment, 2:216 appraisals in, 6:22–25 commodity traders, 6:207 peer-company multiples for P/E, and business cycles, 6:455–457 spot and futures pricing, 6:208–213 4:401–405 cost approach, 6:46–51 Commodity Futures Trading public and highest and best use value, Commission (CFTC), 6:208 beta estimation for, 4:73–77 6:26–27 commodity hedging, 6:216 independence and objectivity of, income approach, 6:27–46 commodity sectors, 6:191–196 1:33 international, 6:56–57 energy, 6:191–193 valuation of private vs., 4:556–558 market value, 6:23–25 crude oil, 6:191–193 re-engineering of, 6:141 overview of approaches, 6:25–27 natural gas, 6:193 reinsurance, 2:217, 265, 268 pricing formula, 6:453–455 refined products,6: 193 residual income model for valuation, reconciliation of, 6:53–54 grains, 6:194 4:503–504 regular cash flows from real estate, industrial (base) metals, 6:194 similar, 6:143–144 6:452–453 livestock, 6:194–195 size of, 4:557, 563 sales comparison approach, 6:51–53 precious metals, 6:195 software, 1:521–522 commercial real estate (CRE) loans, softs (cash crops), 6:195–196 target, 3:280, 303–314 2:221; 5:248 commodity swaps, 6:226–229 technology, 1:532 commissions, 1:78–80 defined, 6:226 terminal value of, 6:144, 171 Committee of European Securities market participant structure, tobacco, 3:213 Regulators, 5:37 6:226–227 company analysis. see financial commodities, 6:189–241 Common Equity Tier 1 Capital, forecasting about, 6:190 2:221–222, 242–243, 262–263 company costs, 4:151 carry costs with, 5:319 common law, 3:113 company fundamental factors, 6:292 defined, 6:190 common-size balance sheets, 2:329 company law, in IOSCO framework, life cycle, 6:196–203 common stock 1:713 coffee, 6:202–203 required return for, 4:83–84 company limited by shares (structure), energy, 6:197–199 risk and return of convertible/straight 6:152 grains, 6:201–202 bonds vs., 5:173–175 company models, 4:170–183 industrial/precious metals, 6:199–200 communication(s) company overview, 4:171–172 livestock, 6:200–201 different forms of,1: 139 industry overview, 4:170–171 softs (cash crops), 6:202–203 to employees of material nonpublic pro forma balance sheet, 4:181–182 practice problems, 6:237–239 information, 1:63 pro forma cash flow statements, probabilistic approaches for companies interdepartmental, 1:61 4:177–182 in, 1:532 Communication with Clients and capital investment forecast, 4:178 sectors, 6:191–196 Prospective Clients [Standard V(B)], depreciation forecast, 4:178 energy, 6:191–193 1:137–146 and forecasted balance sheet, grains, 6:194 application of the standard, 4:181–182 industrial (base) metals, 6:194 1:141–146 working capital forecast, 4:178–179 livestock, 6:194–195 and changes in investment objectives, pro forma income statements, precious metals, 6:195 1:233–234 4:172–177 softs (cash crops), 6:195–196 compliance procedures, 1:140–141 corporate income tax, 4:177 solutions to problems, 6:240–241 eleventh edition revision, 1:8 cost of goods sold, 4:173 valuation of, 6:203–205 guidance, 1:138–140 non-operating expenses, 4:176–177 Commodities Research Bureau, 6:233 different forms of communication, operating profit,4: 175–176 commodity derivative contracts, 6:203 1:139 revenue forecasts, 4:172–173 commodity futures indexes, 6:230–234 facts vs. opinions in reports, 1:140 selling, general, and administrative Bloomberg Commodity Index identifying risks and limitations, costs, 4:173–175 (BCOM), 6:230–232 1:139–140 valuation inputs, 4:182–183 Deutsche Bank Liquid Commodity informing clients of investment company overview, 4:171–172 Index (DBLCI), 6:230–232 process, 1:138–139 company promotion, 1:69 key characteristics, 6:230–232 report presentation, 1:140 company sales, 4:147–149 rebalancing frequency, 6:233 text of, 1:18, 137–138 company share-related factors, Rogers International Commodity Index communities, as stakeholders, 3:202, 6:292–293 (RICI), 6:230–233 203, 205 company-specific factors S&P GSCI, 6:230–232 community shopping centers, 6:92 in bond valuation, 6:433 summary, 6:233–234 company(-ies). see also real estate in forecast time horizon, 4:164 Thomson Reuters/CoreCommodity operating companies (REOCs) for private company valuation, CRB Index (TR/CC CRB), 6:230, acquiring, 3:280 4:557–558 231, 233 closed-end investment, 4:587, 590 company strategy, sales and, 4:149

Cumulative_Ind_L2 16 June 14, 2018 9:39 PM Index I-17

company value. see also private company for managers, 3:243–245 concentration of funding, 2:233 valuation notification of,1: 116–117 Conceptual Framework for Financial dividend policy and company value, outside, 1:117 Reporting, 2:292n.3 3:134–147 and research independence, 1:40 conclusions bird in the hand argument, 3:136 share-based employee, 4:10, 299, 559 of equity valuation process, 4:11, clientele effect,3: 137–141 compensation committee, 3:222, 31–33 controlling agency costs with 243–245 of financial statement analysis, dividends, 3:144–147 compensation expenses, for stock 2:401–402, 406 information content of dividend options, 2:108 research report, 4:36 actions, 3:141–144 compensation reviews, 3:254 Condit, Phil, 3:206 irrelevance of dividend policy, competence, 1:54 conditional convergence, 1:674–675 3:135–136 competition conditional heteroskedasticity, summary, 3:147 among banks, 2:240 1:352–354 tax argument, 3:136–137 with current employer, 1:112 autoregressive models for time-series irrelevance of capital structure noncompete agreements, 1:109 analysis with, 1:481–484 decisions to, 3:94–96 for private equity investments, 6:156 Breusch–Pagan test for, 1:352–354 in long-term equity investment case regulatory, 1:706–707 conditional probabilities of default, study, 2:399–401 unfair, 1:715 5:205 ROIC and, 1:301–303 competition law, in IOSCO framework, conditional VaR (CVaR), 6:336–337 terminal, 6:144, 171 1:714 Conduct as Participants in CFA Institute company-value model, 5:216–217, 242 Competition & Markets Authority Programs [Standard VII(A)], comparability, analyst adjustments for, (CMA), 1:282 1:165–169 4:390 competitive analysis, 4:12–15 application of the standard, comparable company analysis, competitive environment, industry costs 1:167–169 3:309–312 in, 4:151 eleventh edition revision, 1:8 advantages, 3:312 competitive forces, 4:136–145 guidance, 1:165–167 disadvantages, 3:312 for Anheuser-Busch InBev, additional CFA restrictions, 1:166, example, 3:310–312 4:137–139 167 comparables (comps), 4:379 and financial forecasts,4: 136–145 confidential program information, comparables-based valuation and government regulation, 4:139 1:165–166 enterprise value to EBITDA, in Russian beer market, 4:140–144 expressing opinions, 1:166 4:444–446 competitive strategy, business context text of, 1:19, 165 for markets, 4:379–381 for valuation and, 4:13 confidence intervals, regression analysis, P/E, 4:398–410 compiled financial statements,4: 566 1:297–298 Fed Model, 4:407–409 completeness, balance sheet, 2:343 confidence risk,4: 84; 6:301, 302 historical P/E of company as complex event processing (CEP), 6:535, confidential information comparable, 4:409–410 538, 542, 543 about CFA program, 1:165–166 industry and sector multiples, 4:405 compliance officers,1: 36 accidental disclosure of, 1:104–105 overall market multiple, 4:405–409 compliance procedures of firm,1: 115 peer-company multiples, 4:401–405 adequate, 1:119–121 intentional disclosure of, 1:103–104 Yardeni model, 4:408 adoption of, 1:120 possessing, 1:103 price to book value, 4:423–424 education and training confidentiality. see also Preservation of price to cash flow,4: 436 implementation, 1:121 Confidentiality [Standard III(E)] price to dividends, 4:438–439 inadequate, 1:124 of CFA program information, price to sales, 4:430–431 and incentive structure, 1:122 1:165–166 for private equity, 6:143–144, 158–159 as responsibility of supervisors, maintaining, 1:78 for real estate, 6:25–26, 51–52 1:120–121 of private equity funds, 6:155 in relative valuation models, 4:25, 26 compliance valuations, of private confirmations of transactions, duplicate, with terminal price multiples, 4:413 companies, 4:559–560 1:160 comparable transaction analysis, composite construction, conflicts 3:312–314 misrepresenting, 1:52 director–shareholder, 3:233–234 advantages, 3:314 composite variables, 1:389 of IRR and NPV, 3:18–22 disadvantages, 3:314 compound annual growth rate (CAGR), manager–shareholder, 3:231–233 example, 3:313–314 4:157, 158 conflicts of interest comparative advantage, regulation of compounding for boards of directors, 3:252–253 commerce and, 1:715–716 annual, 5:340, 341 and business relationships, comparative multiple analysis, 6:118 and arbitrage-free forwards, 5:312 1:152, 156 compensation. see also Additional continuous, 1:440; 5:321, 322, 340, and business stock ownership, 1:152 Compensation Arrangements 341 and compensation arrangement, [Standard IV(B)] pricing currency forwards with, 5:340, 1:153–154 for board of directors, 3:253 341 and directorship, 1:154–155 bonus, 1:116–117 comprehensive income, 4:516, 521–525. disclosure of, 1:77 (see also Disclosure and conflict of interest,1: 153–154 see also other comprehensive of Conflicts [Standard VI(A)]) disclosure of, 1:77 income (OCI) with equity REITs, 6:88 and earnings normalization, 4:564 Compustat, 4:73 and personal stock ownership, 1:153 employee (see employee compensation) Computer Associates, 3:210, 213 and personal trading, 1:155 executive, 2:103–104 computerized trading. see algorithmic and priority of transactions, 1:157 externally compensated assignments, trading and high-frequency regulations for, 1:709–710 1:113 trading and requested favors, 1:155

Cumulative_Ind_L2 17 June 14, 2018 9:39 PM I-18 Index

Conflicts of Interest [Standard of Consolidation-Special Purpose Entities for call options, 5:404–409 Professional Conduct VI], (SIC-12), 2:36 with carry benefits,5: 377, 408 1:149–164 constant dividend payout ratio policy, for currency options, 5:410–411 Disclosure of Conflicts [Standard 3:155, 157–158 history, 5:402 VI(A)], 1:149–156 constant-growth FCFE model, 4:289 and normal distribution, 5:405 application of the standard, constant-growth FCFF model, for put options, 5:404, 406–409 1:152–156 4:288–289 stock and bond components of, in case studies, 1:211–212, 215–216, constant returns to scale, 1:634 5:405, 407–408 219, 226 constraints for stock options, 5:409–410 compliance procedures, 1:152 book value, 1:527–528 for stocks, 5:404 guidance, 1:149–152 cash flow,1: 528 Greeks, 5:420–429 text of, 1:18, 149 earnings, 1:528 delta, 5:420–423 Priority of Transactions [Standard investor, 6:261–264 gamma, 5:423–426 VI(B)], 1:157–162 in investment policy statements, 1:93 rho, 5:428–429 application of the standard, legal and regulatory factors, 6:263 theta, 5:426–427 1:160–162 liquidity, 6:262 vega, 5:427–428 in case studies, 1:228 in portfolio management, 6:251 implied volatility, 5:429–433 compliance procedures, 1:158–160 tax concerns, 6:263 and BSM model, 5:429–430 guidance, 1:157–158 time horizon, 6:262–263 in option trading, 5:431–433 text of, 1:18, 157 unique circumstances, 6:263–264 variability in, 5:430 Referral Fees [Standard VI(C)], for market risk management, and volatility indexes, 5:430–431 1:162–164 6:361–366 no-arbitrage approach to valuation, application of the standard, position limits, 6:363 5:376–377 1:162–164 risk budgeting, 6:362–363 practice problems, 5:436–442 compliance procedures, 1:162 risk measures and capital allocation, solutions to problems, 5:443–446 guidance, 1:162 6:364–365 contingent consideration, 2:55; 4:584 text of, 1:18, 162 scenario limits, 6:363–364 contingent convertible bonds (CoCos), conglomerate discounts, 4:28–29 stop-loss limits, 6:364 5:172n.9 conglomerate mergers, 3:281 in market risk management, 6:361–366 contingent liabilities, 2:38, 55 Connecticut, ESG risk exposures, 3:260 market value, 1:528 contingent obligations consensus, in distributed ledger simulations with, 1:527–528 information about risk in, 2:351–355 networks, 1:254, 255 consumer asset-backed securities (ABS), notes about, 2:351 conservative accounting choices, 2:293 5:248 contingent puts, 5:163 Consideration of Fraud in a Financial consumer cyclical sector, 6:432 continuing earnings, 4:386 Statement Audit (American consumer goods market, 4:146–147 continuing residual income, 4:507 Institute of Certified Public consumer loans, 2:251–252 continuing value, 4:228 Accountants), 4:18 consumer non-cyclical sector, 6:432 continuous compounding consistency, in regulation, 1:708 consumers, regulation of financial carry arbitrage model with, 5:321 consolidated affiliates,4: 132 markets for, 1:717 equity futures price with, 5:322 Consolidated and Separate Financial consumption, GDP and, 6:441–442 exponential growth with, 1:440 Statements (IAS 27), 2:36 consumption hedging, 6:438–439 pricing currency forwards with, 5:340, consolidated balance sheets, 2:48–50, contango, 6:210 341 225, 300–301 defined, 6:209 continuous dividend yield, stock indexes consolidated financial statements Hedging Pressure Hypothesis, with, 5:321 balance sheets, 2:48–50, 300–301 6:214–216 continuously compounded dividend business combinations on and roll return, 6:220–225 yield, 5:408 combinations with less than 100% and Theory of Storage,6: 216 continuously compounded foreign risk- acquisition, 2:42–43 Continental AG, 4:400 free interest rate, 5:410 consolidation process, 2:42 contingencies, embedded options on, continuously compounded interest, in goodwill impairment, 2:46–48 5:125 BSM model, 5:404 noncontrolling interests, 2:43–46 contingent assets, 2:55 continuous risk, 1:531 income statements, 2:49–51, 300–301 contingent claims, 5:268, 375–446 contract law, 1:713–714; 3:210 Consolidated Financial Statements (IFRS about, 5:376 contracts 10), 2:10, 36, 43n.30, 52 binomial option valuation model, expiration date for, 5:378 consolidated income statements 5:378–401 forward (see forward contracts after mergers and acquisitions, about, 5:378–379 [forwards]) 2:300–301 interest rate options, 5:399–401 futures (see futures [futures contracts]) of GlaxoSmithKline, 2:49–51 multiperiod model, 5:401 and inflation/deflation,4: 150–151 of Rémy Cointreau, 4:174–175 one-period model, 5:379–386 initiation date for, 5:378 consolidated securitization transactions, two-period model, 5:386–398 for management and private equity 2:53–55 Black option valuation model, 5:412–419 firms, 6:143 consolidation for European options on futures, multiple-element, 2:324–326 other business combinations vs., 2:36; 5:412–414 option (see options [options contracts]) 3:280 for interest rate options, 5:414–417 purchase, 2:343 process of, 2:42–48 for swaptions, 5:417–419 smart, 1:254 proportionate, 2:23–24 Black–Scholes–Merton option swap (see swap[s] [swap contracts]) Consolidation (ASC 810), 2:10, 43n.30, 52 valuation model, 5:401–411 contract surrenders, 2:276 Consolidation of Variable Interest assumptions, 5:377, 402–404 contractual maturity mismatch, Entities (FIN 46[R]), 2:406 binomial model vs., 5:406 2:233–234

Cumulative_Ind_L2 18 June 14, 2018 9:39 PM Index I-19

contractual restrictions, on dividend corn (maize), 6:194, 197 corporate performance policy, 3:153 corporate board seats, for private equity and CEO pay, 3:208–209 control(s) firms, 6:143 and stakeholders, 3:202–206 capital, 1:594–595 corporate bonds profitability and profit growth, drawdown, 6:364 benchmark bonds vs., 5:234–235 3:204–206 of equity real estate investment trusts, in credit risk modeling, 5:202 role of stockholders, 3:203–204 6:88 credit spread calculations with, stakeholder impact analysis, 3:203 for exchange rate management, 5:236–238 corporate raiders, 3:282 1:593–595 credit spreads for, 6:427–431 corporate restructuring, 3:319–320 internal, 3:242 fair value calculations, 5:239–240 corporate sustainability reports (CSRs), jointly controlled entities, 2:25 historic rates of default on, 4:17 lack of control discounts, 4:590 5:212–213 corporations, conflicts of interest in, noncontrolling business interests, probability of default calculations, 3:229–230 2:43–46 5:240 correction, of unintentional errors, and private company stock, 4:558 recovery rate calculations, 5:240 1:48 in private equity investments, 6:140 and stock returns, 1:279 correlated errors, testing trend models puts for change-of-control events, transition matrices for, 5:214 for, 1:446–447 5:169 valuation of, in arbitrage-free correlation(s). see also autocorrelations; and required return for private framework, 5:223–227 serial correlation companies, 4:87 corporate culture, 1:12; 2:239–240 across risks, 1:531 control premiums, 4:30, 581–582 corporate events, evaluating, 4:9 credit, 5:270 convenience yield, 6:216 corporate governance, 3:201–210, in data analytics, 1:379 conventional cash flow,3: 9 225–275 ex ante risk-weighted, 6:490 conventional government bonds, agency relationships, 3:206–210, pairwise, 1:360 6:410–413 230–234 positive serial, 1:356–358 convergence, 1:674–678 agency problems for CEOs, for probabilistic variables, 1:522, 529 absolute, 1:674 3:207–210 spurious, 1:273 club, 1:675 director–shareholder conflicts, style analysis, 1:274–275 conditional, 1:674–675 3:233–234 unstable, 1:529 defined, 5:310 information asymmetry, 3:207–208 correlation analysis, 1:264–285 and endogenous growth theory, 1:673, manager–shareholder conflicts, correlation coefficient,1: 265–270 676 3:231–233 about, 1:265–268 and neoclassical model, 1:667 principal–agent relationships, calculating and interpreting, non-convergence trap, 1:675 3:206–207 1:268–270 in open economies, 1:678–679, 682 defined, 3:226 significance tests of,1: 282–285 conversion, forced, 5:169 ensuring ethical behavior with, 3:222 of debt and equity returns, 1:278–279 conversion factor, for fixed-income ESG risk exposures, 3:260–262 defined, 1:265 forwards and futures, 5:333–334 evaluations, 3:234–260 evaluating economic forecasts with, conversion period, 5:167 board of directors, 3:235–248 1:273–274 conversion price, 5:167, 168, 171–172 examples, 3:248–260 exchange rate correlations, 1:275–277 conversion ratio, 5:168 forms of business, 3:227–230 of large datasets, 1:281–282 conversion value, bond, 5:170 corporations, 3:229–230 limitations of, 1:270–273 convertible bonds, 5:125, 166–178 partnerships, 3:229 of net income, CFO, and FCFF, analysis, 5:169–172 sole proprietorships, 3:228–229 1:280–281 downside risk, 5:172 objectives and guiding principles, and scatter plots, 1:264–265 features, 5:167–169 3:227 spurious correlation, 1:273 historical scenarios for, 6:344 practice problems, 3:266–272 of stock index returns, 1:277–278 market conversion premium per share, for private equity funds, 6:154–156 style analysis correlations, 1:274–275 5:171–172 solutions to problems, 3:273–275 uses of, 1:273–282 market conversion premium ratio, stakeholders and corporate correlation coefficient,1: 265–270 5:171–172 performance, 3:202–206 about, 1:265–268 market conversion price, 5:171–172 profitability and profit growth, calculating and interpreting, 1:268–270 minimum value, 5:170–171 3:204–206 significance tests of,1: 282–285 risk–return of straight bond/ role of stockholders, 3:203–204 correlation risk, 6:335 underlying stock vs., 5:173–175 stakeholder impact analysis, 3:203 correlation triangle, 6:489 upside potential, 5:172 valuation implications, 3:262–263 corruption, 3:214 valuation, 5:172–173, 176–178 Corporate Governance Handbook (New cost(s) convertible contingent convertible bonds York Society of Securities Analysts), administrative, 6:157 (CoCoCos), 5:172n.9 3:234, 237 after-tax, 3:101–102 convertible preferred equity certificates The Corporate Governance of Listed agency, 3:104–105, 144–147 (CPECs), 6:142 Companies (CFA Institute), audit, 6:157 convexity, 5:158–161; 6:340 3:235–236 average cost of inventory, 2:152 cookie jar reserves, 4:529 corporate income tax, 4:128–131, 177 bonding, 3:104 cooperative banks, 2:216 corporate insiders, regulations for, 1:709, company, 4:151 Cooper Tire and Rubber, 4:400 710 development, 2:55–56 Cootner, Paul H., 6:214 corporate investments, categories of, 2:9 of equity REITs, 6:88 copies, maintaining, 1:47 corporate loans finance, 4:176–177 copper, 6:194, 198 and loan losses, 2:251–252 of financial distress,3: 103–104 core earnings, 2:312; 4:386 risk weighting of, 2:221 fixed, 4:114–115

Cumulative_Ind_L2 19 June 14, 2018 9:39 PM I-20 Index

cost(s) (Continued) cost of capital. see also weighted average coupon rates, 5:219, 220 flotation, 3:136, 152–153 cost of capital (WACC) coupons, CDS, 5:271n.6 funding, 1:723–724 in capital budgeting, 3:9 courage, moral, 3:222–223 health care, 2:95–97 and financial leverage,3: 108 Courtois, Yves, 6:140n.1 implementation, 1:718–719 for private real estate equity covariance indirect, 1:719 investments, 6:15, 144 and correlation coefficient,1: 268–270 industry, 4:150–151 and residual income, 4:493–494 in factor analysis models, 6:285 in-process R&D, 2:55–56 cost-of-carry arbitrage model. see carry for risky assets, 6:390–391 input, 4:145–153 arbitrage model covariance-stationary time series at Carrefour SA, 4:149–150 cost of debt in autoregressive models, 1:448–449 and company costs, 4:151 after-tax, 3:101–102 and first-differencing transformations and company sales, 4:147–149 and relative debt availability, 4:571 of variables, 1:462–464 and industry costs, 4:151 and required rate of return, 4:54 in regressions with multiple time and industry sales, 4:145–147 cost of equity series, 1:484–485 at Nestlé and Lindt, 4:151–153 agency, 3:104 in time-series forecasting, 1:489–490 investment, in excess of book value, effect of financial leverage on,3: 96–98 and unit test of nonstationarity, 2:27–28 effect of taxes on,3: 102 1:465–469 investment vehicle fund setup, 6:157 private equity, 6:157 coverage line, 2:328 and required rate of return, 4:54 pre-tax interest, 6:433 of mimicking, 3:142 cost of equity capital, 4:493–494 prior, 1:38 monitoring, 3:104 cost of goods sold (COGS), 4:117–119, probit models for, 1:377–378 operating, 4:114–126 173 coverage ratios opportunity, 3:9, 42, 57; 4:205 cost of inventory, average, 2:152 debt service, 6:62 overhead, 3:56; 4:120 cost projections, 4:150–153 defined, 3:179 periodic pension company costs and inflation/deflation, and dividend safety, 3:180–182 and actuarial gains/losses, 2:83 4:151–153 interest, 2:406 for DB pension plans, 2:82–85 industry costs and inflation/deflation, liquidity, 2:232, 259 on income statements, 2:98–101 4:150–151 covered bonds, as securitized debt, as other comprehensive income, 2:98 and input costs, 4:151–153 5:250–251 total, 2:98 counterparties, 1:541; 5:325 covered calls, 5:459–464, 468–473 re-leasing, 6:90 counterparty risk, 2:226; 5:449 applications, 5:487–490 replacement, 6:46–49, 139 country equity markets, 6:475 and cash-secured puts, 5:468–469 replicating strategy, 5:406 country factors, 6:293 and collars, 5:470–473 reproduction, 6:46n.13 country risk, in private equity valuation, defined, 5:459 research and development, 2:55–56 6:140 investment objectives of, 5:459–464 restructuring, 2:56, 303–304 country risk rating model, 4:90; 6:140n.1 position equivalence for, 5:468 sunk, 1:715; 3:9, 57 country spread model, 4:90; 6:140n.1 profit and loss at expiration,5: 462–464 transaction, 6:10, 157, 255 coupon bonds, 6:402–425 risk with, 5:470 unintended, 1:719 default-free nominal coupon-paying covered interest rate parity variable, 4:114, 156–157 bonds, 6:402–425 for currency derivative contracts, 5:338 WACC conventional government bonds, equation, 1:550 and company valuation, 1:301–303 6:410–413 in exchange rate determination, 1:558 defined, 3:94 influences on short-term default-free and international parity conditions, discounting free cash flows with, interest rates, 6:409 1:570 3:307, 308 pricing formula, 6:402–403 in prediction of spot rates, 1:560–564 and present value of FCFF, 4:287 short-term nominal interest rates and Cox–Ingersoll–Ross (CIR) model, and required rate of return for business cycles, 6:403 5:39–41 private company, 4:571 T-bill rates and business cycles, CPECs. see convertible preferred equity as required return, 3:51 6:404–409 certificates and returns, 4:90–92 yield curves and business cycles, CPI. see US Consumer Price Index return to invested capital and, 6:413–425 CPIENG. see US Consumer Price Index 1:309–311 fixed-, 5:123 for Energy cost approach floating- CPI-U. see US Consumer Price Index for to private company valuation, capped, 5:161–166 All Urban Consumers 4:586–588 fixed- vs.,5: 123 Craft Brew Alliance, Inc., 4:391 to real estate valuation, 6:46–51 floored, 5:163–166 crash risk, with FX carry trades, 1:574 advantages and disadvantages, 6:53 ratchet, 5:162–163 crawling peg exchange rate regime, estimating depreciated replacement zero- 1:579 cost, 6:46–49 break-even inflation rates for,6: 410 credit analysis, 5:201–266 example, 6:49–51 calculating forward rates on, 5:9–10 about, 5:201–202 income and sales comparison credit valuation adjustment for, analysis of credit risk, 5:208–210 approaches vs., 6:25–27 5:204–208 credit ratings, 5:212–215 cost arrangements, restricting, 1:36 current forward curve and spot rates credit risk measures, 5:202–204 cost–benefit analysis, for regulations, for, 5:21–22 credit scoring, 5:210–212 1:718–720 negative key rate durations for, 5:157 credit spreads, 5:234–247 cost capitalization, earnings quality and, pathwise valuation of, 5:98 interpreting changes in, 5:234–240 2:328–329 and spot curve, 5:7 term structure of, 5:240–247 cost model, of investment property swap curve in valuation of, 5:26–27 credit valuation adjustment, 5:204–208 valuation, 6:98–99 viewing securities as, 5:79 practice problems, 5:253–257

Cumulative_Ind_L2 20 June 14, 2018 9:39 PM Index I-21

reduced-form models, 5:216–219 credit risk premiums (credit premiums) Crystal Ball™, 1:526n.6; 6:139–140 for securitized debt, 5:247–251 bonds with, 6:425–437 CSRs. see corporate sustainability solutions to problems, 5:258–266 company-specific factors for,6: 433 reports structural models, 5:216–219 credit spreads and credit risk culture valuation of risky bonds in arbitrage- premiums, 6:427–431 corporate, 1:12; 2:239–240 free framework, 5:219–234 government bonds as, 6:425–426 organizational, 3:215, 220 binomial interest tree for, 5:219–221 industrial sectors and credit quality, cumulative abnormal returns, corporate bonds, 5:223–227 6:431–432 1:347–348 floating-rate notes,5: 227–234 influences on credit premiums, cumulative probabilities for standard government bonds, 5:221–222 6:436–437 normal distribution, 1:735–736 credit cards, 5:248 pricing formula for, 6:426 curable physical deterioration, 6:46 credit cooperatives, 2:216 and sovereign credit risk, 6:433–436 currency(-ies). see also entries beginning credit correlation, 5:270 and credit spreads, 6:427–431 foreign currency credit crisis (2008-2009), 6:111 defined, 6:426 base, 1:541, 550 credit curve, 5:240–247, 281–282 government bonds with, 6:425–426 digital, 1:256 credit default swaps (CDS), 5:267–302 influences on,6: 436–437 domestic currency designation, applications, 5:286–293 for Royal Bank of Scotland, 6:436 1:541n.1 basis trading, 5:291–293 credit scoring, 5:210–212 foreign currency designation, 1:541n.1 managing credit exposure, 5:287–291 credit spread duration, 6:353n.18 functional, 2:131, 149–154 credit derivatives, 5:267–268 credit spreads, 5:234–247, 473 funding, 1:572 credit events, 5:272–273 for banking and airline sector, 6:432 high-yield, 1:572–573, 582 defined, 5:268 calculation of, 5:206, 224 local, 2:131 features of, 5:270–272 and convertible bond valuation, 5:175 low-yield, 1:572–573 index, 5:270, 274–275 for credit default swaps, 5:281–285 presentation, 2:131, 151–154 practice problems, 5:295–299 and credit risk premiums, 6:427–431 price, 1:541, 550 pricing, 5:277–286 defined, 5:202 triangular arbitrage among, 1:544–546 basic concepts, 5:278–281 interpreting changes in, 5:234–240 currency codes, 1:605 conventions in, 5:282–284 migration of, 5:215 currency crises credit curve, 5:281–282 term structure of, 5:240–247 capital flows in,1: 580 monetizing gains and losses, and transition matrices, 5:214 exchange rates in, 1:596–600 5:285–286 credit unions, 2:216 currency exchange rates, 1:539–618; settlement protocols, 5:273–274 credit valuation adjustment (CVA) 2:241–242. see also current rate solutions to problems, 5:300–302 in calculations of credit spreads, method; monetary/nonmonetary succession events, 5:273 5:236–238 method types of, 5:269–270 for corporate bonds, 5:223–227 and balance of payments, 1:576–585 valuation of, 5:284–285 in credit analysis, 5:204–208 capital flows,1: 579–585 credit default swaps (CDS) market example of, 5:209 current account imbalances, bond vs., 5:291–292 for floating-rate notes,5: 229 1:576–579 characteristics of, 5:276–277 CRE loans. see commercial real estate carry trade strategies, 1:572–575 governing body for, 5:270 loans changes in, 2:167–172 credit derivatives, 5:267–268, 276 critical value, for hypothesis testing, correlations of, 1:275–277 credit events, 5:268, 272–273 1:298 and cross-country comparisons of credit exposure, 5:287–291 cross-border mergers and acquisitions, GDP, 1:622 credit-linked notes, 5:248 3:286–287 currency codes, 1:605 credit losses, provisions for, 2:253 clients, 3:287 currency crises, 1:596–600 credit migration, 5:215, 237 government policy, 3:286 exchange rate management, 1:593–595 creditors, 3:202, 205 market imperfections, 3:286 forecasting, 1:540 credit protection buyer, 5:268–269, product differentiation,3: 287 foreign exchange markets, 1:540–556 271–272 technology transfer, 3:287 conventions in, 1:540–543 credit protection seller, 5:268–269 cross-border trading, 6:542 forward, 1:548–556 credit quality cross-departmental conflicts,1: 151 spot exchange rate quotes in, of assets, 2:226–228 cross-rate bids, arbitrage constraints on, 1:544–548 industrial sector and, 6:431–432 1:544–546 historical, 2:145 in term structure of credit spreads, cross-sectional data long-term framework for, 1:556–572 5:241–242 defining probability distributions based international parity conditions, credit rating agencies. see also specific on, 1:521–522 1:557–572 agencies regression analysis of, 1:286, 335 terminology, 1:556–557 debt ratings by, 3:109 cross-sectional dependence, 6:514 monetary approach to, 1:587–588 opinions of, 1:33–34 cross-sectional regression, for P/E, and monetary policy, 1:585–592 regulatory activities by, 1:703, 724–725 4:397–398 example, 1:588–590 use of potential GDP, 1:631 cross-validation, 1:391 historical relationship, 1:588 credit ratings, 5:212–215; 6:433 crown jewel defense, 3:297 Mundell–Fleming model, 1:585–587 credit risk crude oil, 6:191–193 portfolio balance approach, analysis of, 5:208–210 hedging by refiners,6: 226–227 1:590–591 with CDS, 5:276 life cycle as commodity, 6:197–198 practice problems, 1:606–613 currency exchange rates and, 1:543, 554 refined products,6: 193 quoting, 5:410 default risk vs., 5:202 and Theory of Storage,6: 216 as random walks, 1:462–464 measures of, 5:202–204 cryptocurrencies, 1:256 required return on equity and, 4:89 sovereign, 6:433–436 cryptography, 1:254 solutions to problems, 1:614–618

Cumulative_Ind_L2 21 June 14, 2018 9:39 PM I-22 Index

currency exchange rates (Continued) CVA. see credit valuation adjustment DDMs. see dividend discount models spot CVaR. see conditional VaR dead-hand provision, 3:294 and arbitrage, 1:544–548 cyclical businesses, 4:388 dealers in foreign exchange market, 1:541 cyclical equities bid–offer currency prices,1: 541, 543 in forward exchange rate quotes, business cycle and earnings for, bid–offer spread for forward swaps, 1:551–552 6:442–444 1:554 and forward exchange rates/interest equity premiums for, 6:450–451 as investment industry intermediaries, rates, 1:570–572 cyclicality, industry, 4:163–164 2:216 forward rates vs., 1:549–552 Czech Republic, 3:256n.18 swap, 6:226 predictors of future, 1:560–564 death-put bonds, 5:125 of US dollar and Turkish lira, 2:155–157 D debit spreads, 5:473 currency forwards, 5:338–342 Daimler AG, 3:179 debt. see also collateralized debt in derivatives strategies, 5:492 Dalian Commodity Exchange, 6:207 obligations (CDOs) and foreign exchange transaction risk, Danone, 4:119 and benchmark bonds, 5:79 2:143 dark pools, 6:547 correlations of equity returns and, hedging with currency futures vs., Darwinian trading, 6:538 1:278–279 5:451n.8 data analysis cost of, 3:101–102; 4:54, 571 pricing, 5:338–341 long-term equity investment case equivalent option interpretation of, valuation, 5:341–342 study, 2:374–401 5:218 currency futures, 5:450–452 accruals and earnings quality, free operating cash flow/total debt in derivatives strategies, 5:450–452 2:395–396 ratio, 6:433 pricing and valuation, 5:338 asset base composition, 2:384–385 government, 4:60–63 currency options capital allocation, 2:387–392 market value of, 4:90–91, 287 BSM model for, 5:410–411 capital structure analysis, 2:385–386 from private real estate investments, and foreign exchange transaction risk, cash flow relationships,2: 396–399 6:61–64 2:143 company valuation, 2:399–401 securitized, 5:247–251 position equivalences for, 5:457–458 DuPont analysis, 2:374–385 sovereign, 5:79 two-period binomial model for, 5:398 segment analysis, 2:386–387 subordinated debt holders, 6:430–431 currency pairs, 1:541n.1, 542. see also off-balance sheet leverage from total debt/total capital ratio, 6:433 under specific currencies operating leases case study, debt availability, 4:571 currency spot exchange rate, future 2:404–406 debt capital, 6:10, 15 value of, 5:339 data analytics, 1:379–380 debt financing, value creation and,6: 142 currency swaps, 5:349–356 databases, data science, 1:249 debt investors, real estate, 6:7, 8 about, 5:349–350 data capture, 1:247 debt management, with ratchet bonds, with bond hedges, 5:350–352, 355 data classification,1: 379 5:162–163 cash flows for,5: 350–351 data collection, for financial statement debt ratings, 3:109–110 defined, 5:349 analysis, 2:373, 403 debt ratio, 4:311 in derivatives strategies, 5:450–451 data curation, 1:247 debt securities pricing, 5:350–354 data mining, 1:363 accounting for investments in, 2:17–19 synthetic floating-rate bonds for,5: 345 data processing available-for-sale, 2:12 valuation, 5:351–352, 354–356 for financial statement analysis,2: 374, impairments for, 2:15–17 current account, 1:576–579 404 measurement of, 2:224 current income, capital gains vs., 3:152 methods of, 1:247 reclassification, 2:14 current P/E. see trailing P/E data science, 1:247–249 debt service, 6:62 current period values, in autoregressive datasets, fintech analysis of,1: 240 debt service coverage ratio (DSCR), 6:62 model, 1:447–448 data storage, 1:247 debt sustainability channel, in current current rate method data visualization, 1:247–248 account, 1:578–579 analytical issues, 2:160–163, 167–169 day count convention, 1:549 deceit, 1:55 defined, 2:145 days sales outstanding (DSO) decision making effect of currency exchange rate and earnings quality, 2:327 credit analysis in, 5:225–226 movement on financial statements, modeling working capital accounts ethical considerations in, 3:215, 221 2:172 with, 4:132 ethical framework for, 1:13–14 and temporal method, 2:176–177 at Sunbeam, 2:321–323 group, 1:129 translating assets and liabilities with, days sales receivable index (DSR), 2:307 simulations for, 1:526–527 2:145–146 DBLCI. see Deutsche Bank Liquid strategic portfolio, 6:303 translating foreign currency financial Commodity Index time frame for dissemination and, statements with, 2:148, 149 DB pension plans. see defined-benefit 1:84–85 current ratio, 2:280 pension plans decision rule, for NPV, 3:11 curvature, yield curve, 5:47; 6:416, 417 DBS, 2:302 decisions curve duration, 5:151 DC. see Determinations Committee capital structure, 3:94–108 curve risk, 6:358–359 DCF analysis. see discounted cash flow agency costs, 3:104–105 curve trade, CDS, 5:290 analysis costs of asymmetric information, custodial relationships, 1:32 DC/FC notation, 5:338 3:105 custody of client assets, 1:74 DCF method of valuation. see discounted costs of financial distress,3: 103–104 customers (buyers) cash flow method of valuation and financial leverage/cost of equity, bargaining power of, 4:137–139, 171 DCF models. see discounted cash flow 3:96–98 in beer markets, 4:138, 139 models irrelevance to value, 3:94–96 in industry structure, 4:13 DC pension plans. see defined- and static trade-off theory,3: 106–108 as stakeholders, 3:202, 205 contribution pension plans and taxes, 3:98–103

Cumulative_Ind_L2 22 June 14, 2018 9:39 PM Index I-23

dividend vs. share repurchase, T-bill rates and business cycles, default risk, 5:202; 6:382. see also credit 3:169–177 6:404–409 risk; risky bonds and dilution from employee stock yield curves and business cycles, default risk screen (DRSK), 5:242–243 options, 3:170 6:413–425 default time, 5:216 example, 3:175–177 pricing of two-period, 6:389–390 defensive investments, 6:441 financial leverage,3: 170–173 real, 6:383–402 deferred payoffs,5: 400n.8 managerial flexibility,3: 170 default-free interest rates and deferred taxes, 4:298–299; 6:105 share price, 3:170 economic growth, 6:392–395 defined-benefit (DB) pension plans, tax advantages, 3:170 determination of real default-free 2:81–85 investment interest rates, 6:384–392 balance sheet presentation, 2:81–82 about commercial real estate, real default-free interest rates and characteristics, 2:79 6:454–455 business cycles, 6:395–402 defined, 2:77–78; 6:249n.2 exchange rate movements and, 1:576 risk premium for, 6:420–423 obligations, 2:79–80, 86–89 execution of, 6:255 valuation periodic pension cost, 2:82–85 independence of, 6:513–514 callable bonds, 5:129–132, 137–140, return requirements and risk tolerance market-based factors in, 4:460–461 142–145 of, 6:261 investment decision criteria for capital with interest rate volatility, risk measures of, 6:358 budgeting, 3:10–27 5:137–145 defined-contribution (DC) pension plans average accounting rate of return, option-free bonds, 5:128–129 characteristics, 2:79 3:15–16 putable bonds, 5:130–132, 137–138, defined, 2:77 internal rate of return, 3:11–12, 140–145 financial statement reporting for, 18–25 at zero interest rate volatility, 2:81 net present value, 3:10–11, 17–22 5:129–132 return requirements and risk tolerance payback period, 3:13–14 zero-coupon, 6:410 of, 6:261 popularity and use of capital default-free interest rates definition of value (term),4: 560–562 budgeting methods, 3:25–27 and business cycles, 6:395–402 definitive merger agreement,3: 292 profitability index,3: 16–17 determination of, 6:384–392 deflation, 4:145–153 decision trees and inter-temporal rate of cost projection effects,4: 150–153 about, 1:533 substitution, 6:384–388 sales projection effects,4: 145–150 for capital budgeting projects, 3:53 and premiums on risky assets, company sales, 4:147–149 defined, 1:519 6:389–392 industry sales, 4:145–147 and risk-adjusted value, 1:529, 531, uncertainty and risk premiums in, degrees of freedom 532 6:387–389 for hypothesis testing, 1:298 scenario analysis vs., 1:530–531 and economic growth, 6:392–395 in multiple linear regression, 1:332 simulations vs., 1:520, 530–531 influences on,6: 409 in standard error of estimate, 1:293 decision-useful information, in financial real, 6:384–392, 395–402 Delaware, 3:295n.7 reports, 2:292 short-term, 6:409, 417 delivery deep learning, 1:246 default-free nominal coupon-paying fixed-income forwards and futures, deep learning nets, 1:246, 387 bonds, 6:402–425 5:333 DeepMind, 1:246 conventional government bonds, physical, 6:210–211 DeepStack, 1:246 6:410–413 for sinking fund bonds, 5:126 DEF 14A Form, 3:235, 237 influences on short-term default-free Dell default, 5:216 interest rates, 6:409 code of ethics at, 3:220–221 loss given, 5:279–280 pricing formula, 6:402–403 IPO of, 3:203–204 for corporate bonds, 5:224 short-term nominal interest rates and Dell, Michael, 3:220 in credit risk modeling, 5:203 business cycles, 6:403 delta for floating-rate notes,5: 229, 230 T-bill rates and business cycles, option, 5:420–423; 6:340–341 for zero-coupon bonds, 5:205 6:404–409 position, 5:468, 470 probability of, 5:278–279 yield curves and business cycles, delta approximation, 5:421–422 of asset-backed securities, 5:249 6:413–425 delta hedging, 5:420–421, 423 of corporate bonds, 5:224, 240 default-free yield curves delta neutral portfolio, 5:421 and credit ratings, 5:212, 237 and break-even inflation rates, delta neutral trading strategies, 6:536 in credit risk modeling, 5:203–204 6:413–415 delta-plus-gamma approximations, credit spreads for bonds with high, business cycle and spread of, 5:424–425 5:247 6:417–419 demand of floating-rate notes,5: 229, 230 and business cycles, 6:413–425 for commercial real estate, 6:19–21 in valuation of risky bonds, 5:146 and interest rates, 6:419–420 credit spreads and, 5:242 of zero-coupon bonds, 5:205, investor expectations and slope of, in current account, 1:577 244–245 6:417 default-free yield curves and, 6:423 default-free bonds in Japan, 6:424–425 price elasticity of, 4:146, 147 discount rate and return from, 6:381 level, slope, and curvature of, and REITs, 6:94–95 nominal coupon-paying, 6:402–425 6:415–417 demand-side estimates of equity risk conventional government bonds, and risk premium for default-free premiums, 4:69n.28 6:410–413 bonds, 6:420–423 DE Masterblenders, 4:151 influences on short-term default-free spread of, 6:417–419 demographic influences interest rates, 6:409 supply and demand factors influencing, on private real estate equity pricing formula, 6:402–403 6:423 investments, 6:16 short-term nominal interest rates and default intensity, 5:216 on real estate investment trusts, 6:93 business cycles, 6:403 default rates, 6:428, 429 denial-of-service attacks, 6:546

Cumulative_Ind_L2 23 June 14, 2018 9:39 PM I-24 Index

Denmark combinations, 5:473, 481–483 swaps active return and weights for equities, covered calls, 5:459–464, 468–473 currency swaps, 5:450–451 6:500, 503, 504 applications, 5:487–490 equity swaps, 5:452–453, 490 GDP growth rate, 4:212 and cash-secured puts, 5:468–469 interest rate swaps, 5:448–449, historical equity risk premium, 4:61, 63 and collars, 5:470–473 492–493 OECD Principles, 3:256n.18 defined, 5:459 De Roon, Frans A., 6:214 share repurchases, 3:161 investment objectives of, 5:459–464 descriptions of securities, 1:141–142 departments, physical separation of, 1:61 position equivalence for, 5:468 descriptive statistics, 3:312 dependent variables profit and loss at expiration, detection procedures, 1:119–120 defined, 1:286, 328 5:462–464 deterioration, physical, 6:46–49 forecasting past values of, 1:374 risk with, 5:470 determination, coefficient of. see improper treatment of, 1:372–373 exercise in, 5:483 coefficient of determination lagged, 1:355–356, 373 forwards Determinations Committee (DC), in linear regression, 1:289–290, 334 currency, 5:492 5:273 linear trends in, 1:437 synthetic assets with forwards, 5:456 Deutsch Bundesbank (Central Bank of partial elasticity of, 1:367 futures Germany), 2:218 predicting, in multiple linear currency, 5:450–452 Deutsche Bank regression model, 1:339–341 interest rate, 5:448–450 impairments at, 2:16–17 qualitative, 1:376–378 stock index, 5:453 investments in associates/joint DEPI. see depreciation index synthetic assets with futures, 5:456 ventures, 2:25–27, 34 depositing, as arbitrageur strategy, investment objectives Deutsche Bank Liquid Commodity 5:328–329 of covered calls, 5:459–464 Index (DBLCI), 6:230–232 Depository Trust and Clearinghouse necessity of setting, 5:483–484 Deutschemarks, German, 1:580–581 Corporation, 5:277 of protective puts, 5:464–468 Deutsche Postbank AG, 2:26 Deposit Protection Fund long positions, 5:454–455 developed countries. see also advanced (Bundesverband deutscher Banken), market risk with, 5:484–485 economies 2:220 position equivalences, 5:454–459 carry trade returns for, 1:574 deposits, 2:214–215 for covered calls, 5:468 convergence with developing depreciated replacement cost, 6:46–49 foreign currency options, 5:457–458 countries, 1:675–676 depreciation, 3:31–34 for protective puts, 5:468 economic growth in developing accelerated, 3:31–34 synthetic assets with futures/ countries vs., 1:620–628 of currencies, 1:560, 577, 578 forwards, 5:456 for Argentina and Venezuela, EBITDA, 3:145 synthetic call options, 5:457 1:626–628 and funds from operations, 6:105 synthetic long assets, 5:454–455 education and health care, for physical deterioration, 6:46–49 synthetic put options, 5:456–457 1:624–625 on pro forma cash flow statements, synthetic short assets, 5:455 financial markets and intermediaries, 4:178 practice problems, 5:495–500 1:623–624 of real estate, 6:10 protective puts, 5:459, 464–468, 473 free trade and capital flows, of segments, 2:391 and collars, 5:470–473 1:625–626 and steady state of growth, 1:664 defined, 5:459 political stability, rule of law, and straight-line, 3:31, 32 investment objectives of, 5:464–468 property rights, 1:624 depreciation index (DEPI), 2:307 position equivalence for, 5:468 savings and investment, 1:623 derivatives (derivative contracts) profit and loss at expiration for, tax and regulatory systems, 1:625 accounting for, 2:258 5:466–467 ICT capital and investment in GDP, applications of, 5:286 risk with, 5:470 1:647 credit, 5:267–268, 276 put options, 5:491 sovereign credit risk in, 6:435 and liquidity, 6:262 cash-secured puts, 5:468–469 developing countries. see also emerging and valuation of commodities, 6:203 protective puts, 5:459, 464–468, 473 markets derivatives strategies, 5:447–504 synthetic puts, 5:456–457 classification, 1:622n.1 about, 5:448 writing, 5:491 in convergence clubs, 1:675 applications, 5:487–493 risk exposures, 5:448–454 convergence with advanced/developed calendar spreads, 5:492 currency futures, 5:450–452 countries, 1:675–676, 682 call options, 5:492 currency swaps, 5:450–451 economic development strategies of, collars, 5:490 equity swaps, 5:452–453 1:680–681 covered calls, 5:487–490 interest rate futures, 5:448–450 economic growth in developed currency forwards, 5:492 interest rate swaps, 5:448–449 countries vs., 1:620–628 equity swaps, 5:490 stock index futures, 5:453 for Argentina and Venezuela, interest rate swaps, 5:492–493 short positions, 5:455–456 1:626–628 put options, 5:491 solutions to problems, 5:501–504 education and health care, straddles, 5:491–492 spreads, 5:473–481 1:624–625 and breakeven price, 5:485–487 bear spreads, 5:473, 475–476 financial markets and intermediaries, call options bull spreads, 5:473–479 1:623–624 covered calls, 5:459–464, 468–473 calendar spreads, 5:480–481, 492 free trade and capital flows, long calls, 5:492 refining, 5:476–479 1:625–626 synthetic calls, 5:457 risk with, 5:480 political stability, rule of law, and collars, 5:470–473, 490 straddles, 5:481–483 property rights, 1:624 on existing holdings, 5:471–472 analytics for, 5:486–487 savings and investment, 1:623 risks with, 5:472–473 applications, 5:491–492 tax and regulatory systems, 1:625 same-strike collars, 5:472 defined, 5:473 equity risk premium in, 4:66–67

Cumulative_Ind_L2 24 June 14, 2018 9:39 PM Index I-25

ICT capital and investment in GDP, conflicts with shareholders, translation methods for financial 1:647 3:233–234 statements, 2:177–183 jewelry demand in, 6:195 education of, 3:254 at Chevron Corporation, 2:181–183 productivity in, 1:651–652 election of, 3:239 at Exxon Mobil Corporation, real default-free interest rates in, independence of, 3:236–237, 2:181–183 6:393 250–251 and net income, 2:182–183 real GDP growth and real GDP per non-employee, 3:252, 253 at Yahoo! Inc., 2:178–181 capita, 1:621–623 qualifications of,3: 238–239, 249–250 Disclosure of Conflicts [Standard VI(A)], development costs, 2:55–56 selection of, 3:251 1:149–156 Dexia, 1:722–723 separate sessions of, 3:241 application of the standard, DIC Asset AG, 5:124 succession plans for, 3:253 1:152–156 Dickey, David, 1:465 Directory of Registered Investment in case studies, 1:211–212, 215–216, Dickey–Fuller test for unit root Advisors (Standard & Poor’s), 219, 226 with multiple time series, 1:484, 486, 6:248 compliance procedures, 1:152 488 direct ownership, of real estate, 6:6 guidance, 1:149–152 with one time series, 1:465 direct writers, of insurance policies, conflicts as a director,1: 151–152 Diebold, Inc., 4:427–428 2:266 cross-departmental conflicts, difference principle,3: 219 dirty-surplus accounting, 2:183 1:151 Digilog, Inc., 2:302 dirty-surplus items, 2:183 disclosure to clients, 1:150–151 digital currencies, 1:256 Disciplinary Review Committee (DRC), disclosure to employers, 1:150 digital wealth managers, 1:252 1:9 stock ownership conflicts,1: 151 diligence, 1:127, 135 disclosure text of, 1:18, 149 Diligence and Reasonable Basis Basel III requirements, 2:242 Disclosure of Interests in Other Entities [Standard V(A)], 1:126–137 compensation expenses and vesting for (IFRS 12), 2:10 application of the standard, 1:130–137 stock options, 2:108 discount borrowing windows, of central in case studies, 1:211, 227 confidential information,1: 103–105 banks, 1:723–724 compliance procedures, 1:130 conflicts of interest,1: 77 discounted abnormal earnings model, guidance, 1:126–129 in corporate governance, 3:246–247, 4:496 developing quantitatively oriented 258–259 discounted cash flow (DCF) analysis techniques, 1:129 discount window borrowers, for capital projects with real options, diligence and reasonable basis 1:723–724 3:53 defined, 1:127 event-specific, 2:358 for mergers and acquisitions, group research and decision making, executive compensation, 2:103–104 3:303–309 1:129 gains and losses in foreign currency discounted cash flow (DCF) method of quantitatively oriented research, transactions, 2:138–143 valuation 1:128 intercorporate investment in of developing terminal value, 4:167 secondary or third-party research, associates, 2:34 expectations approach vs., 5:384–385 1:127–128 interdepartmental referral perpetuity calculations in, 4:168 selecting external advisers and arrangements, 1:163 for private companies, 4:569–570, subadvisers, 1:129 investment system, 1:141, 143 575 text of, 1:18, 126 issuer-paid research, 1:48 for private equity, 6:138, 144 diluted earnings per share, 4:385 level of service, 1:86 for private real estate investments, dilution material information, 1:60–61, 64 6:33–45 and convertible bonds, 5:167 by multinational operations, advanced DCF method, 6:41–45 defined, 4:385n.10 2:186–190 discount rate and cap rate, 6:33 in efficient markets,6: 173n.22 performance calculation methodology, and equivalent yield, 6:40–41 from employee stock options, 3:170 1:100–101 and lease structure, 6:37–40 and flip-over pill,3: 294 personal investing policies, 1:160 terminal capitalization rate, 6:34–36 for private equity funds, 6:157 personal trading, 1:160, 161 for publicly traded real estate dimension reduction, 1:380, 389–390 possible illegal activity, 1:104 securities, 6:111–113 diminishing marginal productivity post-employment benefit,2: 92–102 Capitol Shopping Center REIT Inc. (term), 1:634–635 assumptions, 2:93–97 case study, 6:121–122 Dimson, Elroy, 4:89 cash flow information,2: 101–102 direct capitalization method vs., 6:27 direct capitalization method of real classification of periodic pension factors affecting longer-term growth estate valuation, 6:29–33 costs in P&L, 2:99–101 rates, 6:111–113 capitalization rate and discount rate, net pension liabilities/assets, 2:97 forecasting longer-term growth rates, 6:29–30 periodic pension costs in P&L vs. 6:110 defining capitalization rate,6: 29–31 OCI, 2:98 valuation inputs for, 4:182–183 discounted cash flow method vs.,6: 27 total periodic pension costs, 2:98 discounted cash flow (DCF) models. with gross income multiplier, 6:32–33 US health care costs, 2:95–97 see also specific types, e.g.: dividend with stabilized NOI, 6:31–32 private equity fund, 6:155 discount model (DDM) directed brokerage, 1:76 pro forma income, 2:313 as absolute valuation model, 4:23–24 direct lending, 6:6 referral arrangements, 1:162–164 for equity valuation, 4:198 direct market access (DMA), 6:535, 543 in regulation of financial market, forecasted fundamentals and multiples direct negotiation, for share repurchases, 1:717–718 in, 4:381 3:162–163, 169 risk information, 2:350–351, 358 and free cash flows,4: 284 directors selective, 1:64, 86, 88 residual income model vs., 4:512 conflicts of interest for,1: 151–152, on social media, 1:89 and valuation based on forecasted 154–155 trade allocation procedures, 1:86 fundamentals, 4:395–398

Cumulative_Ind_L2 25 June 14, 2018 9:39 PM I-26 Index

discounted dividend valuation, discounting distributed to paid in (DPI), 6:160 4:197–279 with carry arbitrage model, 5:321 distribution(s) about, 4:198–199 future cash flows,6: 381 in Europa Venture Partners III case dividend discount model, 4:207–210 in venture capital method of valuation, study, 6:162, 163 for multiple holding periods, 6:171–172 funds/cash available for, 6:105 4:208–210 discount margin (DM), of floating-rate life and health insurance companies, for single holding period, 4:207–208 notes, 5:230–231, 234 2:273–276 Gordon growth model, 4:210–225 discount rates property and casualty insurance dividend growth, earnings growth, for cash flows from simulations, companies, 2:265–266 and value appreciation in, 1:529–532 distribution area laws, 1:26 4:217–218 for commercial real estate, 6:453–454 distribution expenses, 4:119, 173–174 equation, 4:210–217 and decision trees/scenario analysis, distribution waterfall, for private equity estimating required return, 1:531–532 funds, 6:155 4:224–225 errors with, 3:57 diversification examples, 4:212–217 in expectations approach to options commodities and, 6:190 implied dividend growth rate, valuation, 5:385 with equity REITs, 6:86 4:219–220 and key rate durations, 5:157 of L&H insurance investments, with negative growth, 4:217 nominal, 4:92 2:278–279 for noncallable fixed-rate perpetual overnight index swap rate as, 5:327n.11 and Loyalty, Prudence, and Care preferred stock, 4:216–217 in present value models, 4:199–200; [Standard III(A)], 1:77 and present value of growth 6:381–382 with mergers and acquisitions, 3:284 opportunities, 4:220–222 for private companies, 4:567, 571–574 with private equity investments, 6:157 and price-to-earnings ratio, for private equity investments, 6:144 with private real estate investments, 4:222–224 for private real estate investments, 6:13 and share repurchases, 4:218–219 6:29–30, 33, 44 and Suitability [Standard III(C)], 1:92 growth rates in, 4:241–247 real, 4:92, 320–321 diversified real estate investment trusts, financial models and dividends, and required rates of return, 3:9; 4:571 6:91, 94 4:246–247 and returns, 4:57 divestiture, 3:319; 4:9 and retention rate/ROE analysis, risk-adjusted, 1:529–532 Dividend Aristocrats, 3:142–143 4:243–246 for risky bonds, 5:145 dividend coverage ratio, 3:179–182 sustainable, 4:241–242 selection of, 4:92 dividend discount models (DDMs), multistage models, 4:225–240 and uncertainty of future cash flows, 4:207–210 H-model, 4:230–232 6:381, 382 as absolute valuation model, 4:23–24 for non-dividend-paying companies, discounts, 4:588–595 Capitol Shopping Center REIT Inc. 4:229–230 application of, 4:592–594 case study, 6:121–122 spreadsheet modeling, 4:237–238 conglomerate, 4:28–29 for Coca-Cola Bottling Company and three-stage model, 4:232–237 on convertible bonds, 5:171n.8 Hormel Foods, 4:202–204 two-stage dividend discount model, defined, 4:199 and dividends as returns, 4:201–204 4:226–229 forward, 1:550, 561 FCFF and FCFE vs., 4:284 practice problems, 4:251–266 illiquidity, 4:30 for multiple holding periods, present value models, 4:199–207 lack of control, 4:590 4:208–210 for Coca-Cola Bottling Company and lack of marketability, 4:30, 591–592 multistage (see multistage dividend Hormel Foods, 4:202–204 and premiums, 4:588–589 discount models) definitions of cash flows for, in present value models, 4:64 and residual income model, 4:500–501, 4:201–207 for risk, 6:390–392 512–514 dividends in, 4:201–204 discrete dividends, equity forward pricing and share repurchases, 4:218–219 free cash flows in,4: 204–205 and valuation with, 5:322–323 for single holding period, 4:207–208 for future cash flows,4: 199–201 discrete risk, 1:531 for valuation of REITs and REOCs, residual income in, 4:205–206 discretionary accruals, 2:314 6:110 required return from, 4:239–240 discriminant analysis, for qualitative dividend displacement of earnings, solutions to problems, 4:267–279 dependent variables, 1:377 4:242, 437 discounted payback period, 3:14–15 dispersion, 5:486 dividend imputation tax system, 3:151 discount factor disproportionate returns, 4:590 dividend index point, 5:321 annuity, 5:418 dispute resolution system, in IOSCO dividend payout ratio for benchmark government bonds, framework, 1:714 constant, 3:155, 157–158 5:219–220 dissemination of information, 1:60, defined, 3:129 for corporate bonds, 5:224 84–85, 161–162 and dividend safety, 3:179–183 defined, 5:7 dissociation, 1:26–28 and FFO/AFFO, 6:115 for floating-rate notes,5: 229, 230 distressed securities (private equity global trends in, 3:177–178 for forward rate agreements, 5:327 class), 6:137 dividend policy, 3:125–197 for interest rate options, 5:415 distributed ledgers, 1:254–255 and company value, 3:134–147 and two-period binomial model, distributed ledger technology (DLT) bird in the hand argument, 3:136 5:389 fintech for,1: 239, 241, 253–257 clientele effect,3: 137–141 for zero-coupon bonds, 5:205 adding transactions to ledgers, 1:255 controlling agency costs with discount for lack of control (DLOC), challenges, 1:257 dividends, 3:144–147 4:590 investment management applications, information content of dividend discount for lack of marketability 1:256–257 actions, 3:141–144 (DLOM), 4:30, 591–592 permissioned and permissionless irrelevance of dividend policy, discount function, 5:7 networks, 1:255 3:135–136

Cumulative_Ind_L2 26 June 14, 2018 9:39 PM Index I-27

summary, 3:147 initiations of, 3:141–142 currency code, 1:605 tax argument, 3:136–137 irregular, 3:128–130 and Japanese yen, 1:283–284 and coverage ratio, 3:180–182 liquidating, 3:130, 153 dollar, New Zealand, 1:605 dividend safety, 3:179–183 with negative growth, 4:217 dollar, US of European Union, 4:201, 202 preferences for capital gains vs., BMW’s foreign currency exposure, factors affecting,3: 147–154 3:139–140 2:189, 190 contractual and legal restrictions, in present value models, 4:201–204 CAD/USD currency pair, 1:541n.2, 543 3:153 for private equity firms,6: 143 and capital flows,1: 580 and expected volatility of future regular cash, 3:127–128 correlation of exchange rate returns, earnings, 3:148–149 and share prices, 3:143 1:275–277 and financial flexibility,3: 149 signaling of information with, currency code, 1:605 flotation costs,3: 152–153 3:141–144 currency translation, 2:155–157 investment opportunities, 3:148 special, 3:128–130 and current account deficit,1: 578–579 summary, 3:154 spreadsheet model for, 4:246–247 demand for financial assets,1: 580 taxes, 3:149–152 stock, 3:130–132 DEM/USD currency pair, 1:580–581 forms, 3:127–134 and stock splits, 3:132–134 exchange rate with Swiss franc, extra dividends, 3:128–130 and synthetic assets with futures, 1:434–435 liquidating dividends, 3:130 5:456n.14 international risk premium estimation, regular cash dividends, 3:127–128 two-period binomial model for options 4:89 special dividends, 3:128–130 with, 5:393–394 JPY/USD currency pair, 1:544–545 stock dividends, 3:130–132 of US banks, 3:174 bid–offer spread for,1: 542 stock splits, 3:132–134 dividend safety, 3:179–183 equity market trends and exchange in income statement modeling, 4:132 dividends per share (DPS), 3:155 rates, 1:582 payout policies, 3:155–161 dividends received, 4:432 exchange rate as random walk, constant dividend payout ratio policy, dividends to policyholders ratio, 2:269 1:462–464 3:157–158 dividends to shareholder ratio, 2:269 forward points for, 1:552n.9 defined, 3:126 dividend vs. share repurchase decision, triangular arbitrage with, 1:544–545 global trends, 3:177–178 3:169–177 real GDP per capita, 1:621–622 residual dividend policy, 3:159–161 and dilution from employee stock real interest rate differentials and value stable dividend policy, 3:155–157 options, 3:170 of, 1:580–581 practice problems, 3:187–192 example, 3:175–177 swap rates of, 5:243–244 share repurchases, 3:161–177 financial leverage,3: 170–173 and Turkish lira, 1:581–582 dividend vs. share repurchase managerial flexibility,3: 170 USD/EUR currency pair, 1:541, 542, decision, 3:169–177 share price, 3:170 544–545 financial statement effects,3: 164–167 tax advantages, 3:170 arbitrage constraints for exchange methods for, 3:162–164 dividend yield (D/P), 4:436–439 rate quotes, 1:544–545 valuation of cash dividends vs., calculation of, 4:437–438 exchange rate quotes for, 1:541, 542 3:167–169 and comparables, 4:439 liquidity in, 1:542 solutions to problems, 3:193–197 and forecasted fundamentals, 4:438–439 spot and forward rate quotes, dividend rate, 4:437 forward, 4:218 1:551–552 dividend reinvestment plans (DRPs), in fundamental factor models, USD/GBP currency pair, 1:542, 545–546 3:128 6:289–290 domestic currency designation, 1:541n.1 dividends. see also discounted dividend and price-to-dividends, 4:392 dominance, 5:78 valuation; price to dividends (P/D) and stock splits, 3:132 Donaldson, Thomas,3: 218n.27 BSM model with, 5:408–409 DJ-UBS (Dow Jones-UBS Commodity Donaldson Company, Inc., 4:27–28 in Capitol Shopping Center REIT Inc. Index). see Bloomberg Commodity Dornbusch, Rudiger, 1:587 case study, 6:118 Index (BCOM) Dornbusch Overshooting model, cash DLOC. see discount for lack of control 1:587–588 dividend reinvestment plans, 3:128 DLOM. see discount for lack of double counting of risk, 1:529–530, 532, regular cash dividends, 3:127–128 marketability 533 Russell 1000 companies, 3:175 DLT. see distributed ledger technology double taxation system, 3:150–151 share repurchase valuation, DM. see discount margin, of floating- Dow 30 Index, 4:507 3:167–169 rate notes Dow Jones, 4:399 and stock dividends, 3:132 DMA. see direct market access Dow Jones Industrial Average, 4:389n.17 continuous yield, 5:321 documentation, of trade allocation Dow Jones Select Dividend Index, 3:137 controlling agency costs with, procedures, 1:85–86 Dow Jones-UBS Commodity Index 3:144–147 documents, former employers’, 1:110 (DJ-UBS). see Bloomberg and conversion price, 5:168 Dodd, David L., 4:382 Commodity Index (BCOM) defined, 3:126 Dodd–Frank Act, 1:707, 709, 719–720, down factor, in binomial model, 5:380, 387 discrete, 5:322–323 724 DOWNREIT structure, 6:84, 88 extra, 3:128–130 Dojima Rice Exchange, 6:205 downside risk, with convertible bonds, and FCFE, 4:302, 319 dollar, Australian 5:172 and FCFF, 4:319 currency code, 1:605 downstream transactions, 2:31, 33–34 financial policies and growth rate of, mark-to-market of forward contracts D/P. see dividend yield 4:244 for, 1:553 DPI. see distributed to paid in free cash flow vs.,4: 315–317 dollar, Canadian DPS. see dividends per share GAAP and IFRS on, 4:293–294 CAD/USD currency pair, 1:541n.2, 543 drag along rights, private equity funds’, in Gordon growth model, 4:217–218 correlation of exchange rate returns, 6:156 implied growth rate of, 4:219–220 1:275–277 drawdown, 6:357–358

Cumulative_Ind_L2 27 June 14, 2018 9:39 PM I-28 Index

drawdown control, 6:364 Dutch guilder, 1:640n.13 E DRC. see Disciplinary Review Committee Duties to Clients [Standard of E. I. DuPont de Nemours and Company Dreyfus Appreciation Fund, 1:307–308 Professional Conduct III], 1:73–105 (DuPont), 4:228–229 drift Fair Dealing [Standard III(B)], 1:82–90 early exercise in equilibrium models, 5:39, 41 application of the standard, 1:86–90 of American-style call options with in Monte Carlo method of valuation, in case studies, 1:209–210, 222–223 dividends, 5:393–394 5:100 compliance procedures, 1:84–86 of American-style put options, random walks with, 1:464 guidance, 1:82–84 5:390–393 DRPs. see dividend reinvestment plans text of, 1:17, 82 early warning systems, for currency DRSK. see default risk screen and trade allocation, 1:230 crises, 1:596–598 Druyun, Darleen, 3:205, 206 Loyalty, Prudence, and Care [Standard earnings. see also price to earnings ratio DSCR. see debt service coverage ratio III(A)], 1:73–81 (P/E) DSO. see days sales outstanding application of the standard, 1:78–81 abnormal, 4:496 DSR. see days sales receivable index in case studies, 1:227 adjusted, 4:386 dual recourse principle, 5:251 compliance procedures, 1:77–78 bootstrapping, 3:284–285 due diligence guidance, 1:73–77 CAMELS approach to bank analyses, for equity REITs, 6:90–91, 95–96 text of, 1:17, 73 2:228–232, 253–258 and failed investments, 1:135 and trade allocation, 1:230 capitalization of earnings method, in financial research and analysis,1: 33 Performance Presentation [Standard 4:570 for private equity valuation, 6:158 III(D)], 1:97–101 in Capitol Shopping Center REIT Inc. for private real estate investments, application of the standard, 1:98–101 case study, 6:118 6:54–55 compliance procedures, 1:98 continuing, 4:386 by sell-side analysts, 4:32 guidance, 1:97–98 core, 4:386 in submanager selection, 1:132–133 text of, 1:17, 97 discounted abnormal earnings model, sufficient, 1:130, 133–134 Preservation of Confidentiality 4:496 Duffie, Darrell,5: 216 [Standard III(E)], 1:101–105 dividend displacement of, 4:242, 437 Duke Energy, 4:439 application of the standard, and equity REITs vs. REOCs, 6:87 dummy variables, in regression analysis, 1:103–105 excess earnings method 1:344–348 compliance procedures, 1:103 for private companies, 4:569, 570, Dunlap, “Chainsaw” Al, 2:320 guidance, 1:101–102 577–578 DuPont. see E. I. DuPont de Nemours text of, 1:17, 101 for residual income valuation, and Company Suitability [Standard III(C)], 1:90–97 4:501n.10 DuPont analysis application of the standard, 1:94–97 future, 3:148–149, 154; 4:516 data for, 2:379–380 in case studies, 1:210, 221–222, in Gordon growth model, 4:217–218 expanded, 2:380–381 227–228 life and health insurance companies, and goodwill impairments, 2:381–382 and changes in investment objectives, 2:276–277 in long-term equity investment case 1:233–234 mean reversion, 2:318–319 study, 2:374–385 compliance procedures, 1:93–94 of Nestlé, 2:399–401 net profit margin spread,2: 384 guidance, 1:90–93 normalized, 4:164, 563–564 and provisions, 2:381–382 text of, 1:17, 90 persistent, 4:386 of ROE Duties to Employers [Standard of potential GDP and growth of, 1:628 and forecasting dividend growth Professional Conduct IV], 1:105–126 press releases about, 4:16 rates, 4:241, 243 Additional Compensation in private equity valuation, 6:138 for long-term equity investment, Arrangements [Standard IV(B)], property and casualty insurance 2:383 1:116–117 companies, 2:266–270 and residual income valuation, application of the standard, 1:116–117 quality of earnings analysis, 4:18–22 4:516–517 in case studies, 1:210–211, 219 recurring, 2:310–313 in spreadsheet modeling, 4:238 compliance procedures, 1:116 retained, 2:152–153 in valuation based on forecasted guidance, 1:116 scaled earnings surprise, 4:451 fundamentals, 4:429 text of, 1:17, 116 simulations with constraints on, 1:528 duration(s), 5:151–158 Loyalty [Standard IV(A)], 1:105–115 standardized unexpected, 4:452–453 curve, 5:151 application of the standard, sustainability of, 2:292–293 defined, 4:65n.21 1:109–115 trailing P/E with negative, zero, or low, effective, 5:51–52, 151–155 in case studies, 1:217–219 4:390–392 of interest rate futures, 5:449–450 compliance procedures, 1:109 underlying, 4:386 interest rates and changes in (see guidance, 1:105–109 unexpected, 4:451–453 effective convexity) text of, 1:17, 105 earnings before interest, taxes, of interest rate swaps, 5:449 Responsibilities of Supervisors depreciation, and amortization key rate, 5:51, 52, 156–158 [Standard IV(C)], 1:118–126 (EBITDA) modified, 5:151, 449n.2 application of the standard, adjusting, 4:307–308 one-sided, 5:155–156 1:122–126 bond indenture covenants with as sensitivity risk measure, 6:339–340 in case studies, 1:223–226 minimums on, 3:145 yield, 5:151 compliance procedures, 1:120–122 as cash flow approximation,4: 434n.48, Durbin–Watson test statistic eleventh edition revision, 1:7–8 435 for autoregressive models, 1:449 guidance, 1:118–120 enterprise value to (see enterprise value critical values, 1:743 text of, 1:18, 118 to EBITDA) and serial correlation, 1:356–358 dynamic portfolios, replicating option and FCFE, 4:285, 306–308 for time-series trend models, 1:447 payoffs with,5: 377 and FCFF, 4:285, 306–308, 316–317 Dutch auction, 3:162 dynamic replication, 5:387, 388 forecasting free cash flow with, Dutch disease, 1:640 Dynegy, 3:210 4:316–317

Cumulative_Ind_L2 28 June 14, 2018 9:39 PM Index I-29

and market value of invested capital, EBITDA. see earnings before importance to investors, 1:620 4:580 interest, taxes, depreciation, and in Ireland, 1:653–656 from net operating income, 6:106 amortization and labor quality, 1:646–647 earnings before interest, taxes and EC. see European Commission and labor supply, 1:641–646 amortization (EBITA), 4:446 ECB. see European Central Bank average hours worked, 1:646 earnings before interest and taxes (EBIT) economic capital, 6:354 labor force participation, 1:642–643 adjusting, 4:307–308 economic conditions, credit spreads and, net migration, 1:644–645 bond indenture covenants with 5:242 population growth, 1:641–642 minimums on, 3:145 economic cycles, 6:439–444 and natural resources, 1:639–641 enterprise value to, 4:446 Economic Development Board (EDB), neoclassical model, 1:659–671 FCFE from, 4:306–308 1:704 comparative statics and transitional FCFF and FCFE vs., 4:285 economic development strategies, growth, 1:668–670 FCFF from, 4:306–308 developing countries’, 1:680–681 extensions of, 1:670–671 forecasting, 4:310–311 economic disruption, 4:167 implications of, 1:666–667 in segment analysis, 2:387–395 economic drivers, for equity REITs, steady state rate of growth, earnings growth, 6:439–444 6:94–96 1:660–666 earnings management, 2:293 economic factors in asset valuation, and oil, 6:192 earnings per share (EPS), 3:155 6:379–469 in open economies, 1:678–686 basic, 4:385 asset values and expectations of future China and India, 1:679–680 and capital projects, 3:56 cash flows,6: 383 convergence, 1:682 diluted, 4:385 bonds, 6:383–437 Spain, 1:682–686 historical average, 4:388 bonds with credit premiums, and physical capital, 1:647–649 for nonrecurring items, 4:386–388 6:425–437 and potential GDP, 1:628–633 normalized, 4:388–389 default-free nominal coupon-paying practice problems, 1:690–696 and P/E multiples, 4:379, 383 bonds, 6:402–425 and production function, 1:633–635, and share repurchases, 3:164–167, 170 real default-free bonds, 6:383–402 639 and technological cannibalization, commercial real estate, 6:452–457 and public infrastructure, 1:653 4:157–159, 161–163 and business cycles, 6:455–457 and real yields, 6:396–401 trailing, 4:386–387 pricing formula for, 6:453–455 solutions to problems, 1:697–700 earnings persistence, 2:313–318 regular cash flows from,6: 452–453 and technology, 1:635–637, 649–653 earnings-plus-noncash-charges and connections of financial activity theories of, 1:658–678 definition of cash flow,4: 434 with economy, 6:380 economic income, 3:58–61 earnings quality, 2:310–333 equities, 6:437–451 economic management, 1:593 bankruptcy prediction models, with bad consumption hedging economic obsolescence, 6:48 2:331–332 properties, 6:438–439 economic profit,3: 62–63; 4:496 defined, 2:290 earnings growth and economic economic rate of return, 3:61 indicators of quality, 2:310–319 cycles, 6:439–444 economic rationale for regulation, beating benchmarks, 2:319 investment strategies for, 6:448–451 1:705–708 earnings persistence and measures of pricing formula for, 6:437 regulatory interdependencies, accruals, 2:313–318 quantifying risk premiums for, 1:706–708 external indicators of low-quality 6:444–445 regulatory tools, 1:708–710 earnings, 2:319 risk premium for, 6:437–438 self-regulation in securities markets, mean reversion in earnings, 2:318–319 valuation multiples for, 6:445–447 1:711–713 recurring earnings, 2:310–313 practice problems, 6:461–465 economic reality, financial reporting in long-term equity investment case with present value model of asset and, 2:301–305 study, 2:395–396 valuation, 6:380–382 economic reasoning, for model relationship of financial reporting solutions to problems, 6:466–469 specification, 1:363 quality and, 2:291 economic growth, 1:619–700 economic responses, capital projects SEC case examples, 2:319–331 bias in forecasts of, 1:305 and, 3:56 assessing quality of expense and capital deepening, 1:635–637 economic sectors, 4:399–401 recognition, 2:330–331 in China and India, 1:656–658 banking, 1:714; 3:113–115; 6:432 assessing quality of revenues, classical model, 1:659 commodity, 6:191–196 2:326–328 convergence of, 1:674–678 consumer cyclical and non-cyclical, cost capitalization, 2:328–329 and default-free interest rates, 6:432 MicroStrategy, Inc., 2:324–326 6:392–395 and control premiums, 4:581 revenue recognition, 2:320–326 determinants of, 1:633–658 energy, 6:191–193, 197–199 Sunbeam Corporation, 2:320–324 in developed vs. developing countries, average annual sector roll return, WorldCom Corp., 2:328–329 1:582, 620–628 6:224, 225 earnings smoothing, 2:293 Argentina and Venezuela, 1:626–628 and commodity hedging, 6:216 earnings surprise, 4:451–453 education and health care, 1:624–625 commodity life cycle, 6:197–199 earnings yield, 4:391, 392 financial markets and intermediaries, crude oil, 6:191–193 earn-outs, for private equity firms,6: 143 1:623–624 natural gas, 6:193 East Asia, 1:639, 680. see also specific free trade and capital flows, refined products,6: 193 countries 1:625–626 in Rogers International Commodity Eastern Europe. see specific countries political stability, rule of law, and Index (RICI), 6:233 Eastman Kodak Company, 2:347–349 property rights, 1:624 fundamental and valuation statistics, EBIT. see earnings before interest and savings and investment, 1:623 4:447–448 taxes tax and regulatory systems, 1:625 price multiples for, 4:405 EBITA. see earnings before interest, endogenous growth theory, 1:671–674 regulation of, 1:720–725 taxes and amortization and growth accounting, 1:637–638 ROE for, 4:509–510

Cumulative_Ind_L2 29 June 14, 2018 9:39 PM I-30 Index

economic terms, for private equity EMIR. see European Market refined products,6: 193 funds, 6:153–154 Infrastructure Regulation in Rogers International Commodity economic value added (EVA), 3:62n.17; Employee Benefits (IAS 19), 2:76 Index (RICI), 6:233 4:496 employee compensation, 2:75–127 Engelhard Corporation, 3:298–299 economic value of commercial real post-employment benefits,2: 76–102 England, 3:113. see also United Kingdom estate, 6:21–22 DB pension plan obligations, 2:79–80 Engle, Robert F., 1:481–483, 486 economies of scale, 3:280; 4:115 disclosure, 2:92–102 Engle–Granger test for unit roots, 1:486 economy financial statement reporting, enhanced index investment strategy, financial activity and,6: 380 2:81–92 6:253–254 private equity in, 6:136 types of, 2:77–79 Enron Corporation, 3:263; 5:216 EDB. see Economic Development Board practice problems, 2:112–121 accounting scandal, 3:210 education share-based compensation, 2:102–109 business structure and profitability, compliance, 1:121 American Eagle Outfitters, Inc., 6:444 in developing vs. developed countries, 2:103–104 corporate governance failure, 1:624 equity valuation for, 4:10 3:231–232 and labor quality, 1:646–647 as noncash charges, 4:299 due diligence requirements after Edwards–Bell–Ohlson model, 4:496 private company valuation for, 4:559 collapse, 4:32 EEM. see excess earnings method SABMiller plc, 2:103 early recognition of financial problems EEOC. see US Equal Employment stock appreciation rights, 2:109 at, 2:290 Opportunity Commission stock grants, 2:105–106 hiding of financial information,3: 246 Efes, 4:140 stock options, 2:106–108 net income and operating cash flow, effective convexity,5: 158–161 solutions to problems, 2:122–127 2:316–317 effective duration. see also one-sided value of, 2:76 non-recurring items, 2:310–312 durations Employee Retirement and Income risk information in financial press of bonds with embedded options, Security Act (ERISA), 2:101; 6:263 about, 2:358 5:151–155 employees unethical leadership, 3:216 and yield curve risk, 5:51–52 checking references of, 1:54 ensemble learning, 1:385–386 effective interest method,2: 11n.4 classifications of,1: 109 enterprise, relationship of stakeholders effective tax rate,2: 184–186; 4:128–131 independent contractors vs., 1:108 and, 3:202 effective yield, of property,6: 41 as stakeholders, 3:202, 205 enterprise value (EV) The Effects of Changes in Foreign employee stock options defined, 4:580n.32 Exchange Rates (IAS 21), 2:12n.5, BSM model for, 5:409–410 and invested capital, 1:309–311 155–157 as compensation, 2:106–108; 3:243, in market-based valuation, 4:440–446 efficiency, market,4: 7; 6:173n.22 244 and returns to invested capital, efficiency ratios,4: 132 dilution from, 3:170 1:301–303 Egypt pricing models for, 2:106–107 enterprise value multiples, 4:440–448 natural resources, 1:640 employee stock ownership plans alternative denominators in, 4:446–447 real GDP per capita, 1:621, 677 (ESOPs), 3:204; 4:559 defined, 4:378, 440 EIA. see Energy Information employer(s) enterprise value to EBITDA, Administration competing with current, 1:112 4:440–446 8-K, Form, 2:358 disclosure of conflicts to,1: 150, 156 alternatives to, 4:446–447 Elan Corporation, plc, 2:303 duties to (see Duties to Employers determining enterprise value, election, of directors, 3:239 [Standard of Professional Conduct 4:441–444 electricity markets, 1:532 IV]) valuation based on comparables, electric utilities, 3:146–147 leaving, 1:106–107, 115 4:444–446 electronic information, confidentiality misrepresentation of work for, 1:46 valuation based on forecasted of, 1:102 responsibilities of, 1:106 fundamentals, 4:444 Eli Lilly, 4:113 employment, nature of, 1:108–109 enterprise value to sales, 4:447 embedded options, 5:123–127. see also EMS. see execution management system method of comparables for, 4:380 bonds with embedded options endogenous growth theory, 1:671–674 price multiples vs., 4:447–448 call, 5:123–124, 419 adjusting, for an open economy, 1:679 enterprise value-to-earnings before complex, 5:124–127 and convergence, 1:676 interest, taxes, depreciation, and defined, 5:123 neoclassical model vs., 1:673–674 amortization (EV/EBITDA), 6:104 extension, 5:124 endowments, 6:261, 303 enterprise value to earnings before optimal exercise of, 5:131 Energen, 4:234–236 interest, taxes and amortization put, 5:124 Energizer, 4:121 (EV/EBITA), 4:446 simple, 5:123–124 Energy Information Administration enterprise value to earnings before EMC Corporation, 4:444–445 (EIA), 4:15n. interest and taxes (EV/EBIT), 4:446 emerging markets. see also developing energy resources enterprise value to EBITDA (EV/ countries and economic growth, 1:640–641 EBITDA), 4:440–446 capital flows,1: 580, 593–595 regulation of financial products on, alternatives to, 4:446–447 carry trade returns, 1:574 1:721 determining enterprise value, corporate governance and returns, 3:263 energy sector, 6:191–193, 197–199 4:441–444 country spread model, 4:90 average annual sector roll return, valuation based on comparables, economic growth and price stability, 6:224, 225 4:444–446 1:582 and commodity hedging, 6:216 valuation based on forecasted international Fisher effect,1: 569 commodity life cycle, 6:197–199 fundamentals, 4:444 private equity valuation, 6:140 crude oil, 6:191–193 enterprise value to EBITDAR (EV/ sovereign credit risk, 6:433–434 natural gas, 6:193 EBITDAR), 4:446

Cumulative_Ind_L2 30 June 14, 2018 9:39 PM Index I-31

enterprise value to free cash flow to the equities valuation, 6:437–451. see also hotel REITs, 6:91, 93–95 firm (EV/FCFF),4: 446 stock valuation industrial REITs, 6:91–93 enterprise value to sales (EV/S), 4:447 business cycles and, 6:452 market for, 6:82–84 entertainment earnings growth and economic cycles, multi-family/residential REITs, 6:93, 95 with clients, 1:39 6:439–444 office REITs,6: 91, 92, 94, 95 with related parties, 1:38–39 for equities with bad consumption property subtypes, 6:91–96 entry price, 4:561 hedging properties, 6:438–439 real estate operating companies vs., Environment Agency (UK), 4:17 equity risk premiums in, 6:437–438 6:86–87, 96–97 environmental, social, and governance pricing formula, 6:437 retail REITs, 6:94, 95 (ESG) factors quantifying equity risk premiums, shopping center/retail REITs, 6:91–92 in free cash flow valuation,4: 331–336 6:444–445 storage REITs, 6:93, 94 long/short trade with, 5:288–289 valuation multiples for, 6:445–447 structure of, 6:84 sources of information, 4:17 equity. see also free cash flow to equity Equity REIT Index, 6:14 environmental, social, and governance (FCFE) equity risk premium, 4:58–71 (ESG) risk exposures, 3:260–262 after-tax cost of, 3:102 and capital asset pricing model, 4:59 environmental conditions, real estate agency cost of, 3:104 demand-side estimates, 4:69n.28 investments and, 6:16 approved lists of, 3:137 in equities valuation, 6:437–438 environmental degradation, 3:214 book value of (see book value of equity) ex post, 6:444–445 environmental projects, cost-benefit of Citigroup, 2:256–257 forward-looking estimates, 4:68–71 analysis for, 3:8 cost of, 3:96–98, 102, 104; 4:54 Gordon growth model, 4:68–69 Environmental Protection Agency equivalent option interpretation of, macroeconomic model, 4:69–71 (EPA), 3:261; 4:17 5:218 surveys, 4:71 environmental regulations, 1:725; 6:193 free cash flow to (see free cash flow to historical estimates, 4:59–68 E.ON AG, 3:155–156 equity [FCFE]) adjusted, 4:65–68 Eonia. see Euro OverNight Index Average legal lists of, 3:137 arithmetic/geometric mean, 4:63–64 EPA. see Environmental Protection long-term (see long-term equity in developing markets, 4:66–67 Agency investment case study) government bonds vs. bills, 4:64–65 EPS. see earnings per share management equity program, 6:148 and returns of stocks vs. government equality, 3:219 market value of, 4:90–91, 287 debt, 4:60–63 equation format for cash flow negative book value for, 1:528 quantifying, 6:444–445 projections, 3:29–31 required return on (see required return and required return on equity, 4:58–59 Equifax, 5:210 on equity) supply-side estimates, 4:69–71 equilibrium return on equity (see return on equity) equity swaps, 5:356–361 in capital asset pricing model, 4:71 seasoned equity offering,3: 231 applications of, 5:490 exchange rate equilibrium level, 1:578 shareholders’, 4:414 cash flows,5: 356–359 purchasing power parity, 1:565 valuation of (see equity valuation) defined, 5:356 steady state of growth as, 1:662–665 equity capital, cost of, 4:493–494 pricing, 5:359–360 equilibrium models of term structure, equity carve-out, 3:320 risk exposures with, 5:452–453 5:38–42 equity charge, 4:493–494 synthetic floating-rate bonds for,5: 345 characteristics of, 5:39 equity dividend rate, for private real valuation, 5:359–361 Cox–Ingersoll–Ross model, 5:39–41 estate debt, 6:62–63 equity valuation, 4:5–49 Vasicek model, 5:41–42 equity exposure, as sensitivity risk about, 4:5–6 equilibrium price, 6:386, 387 measure, 6:339 absolute valuation models, 4:23–25 Equinix, 4:402–404, 458, 459 equity forwards, 5:322–324 applications, 4:9–11 equitable treatment, of shareholders, equity futures, 5:322 for asset-based valuation, 4:24–25 3:258 equity investors, real estate, 6:7, 8 and market expectations, 4:10–11 equities (equity securities). see also equity IPOs, 1:158–159 models for, 4:23–30 share(s); stock(s) equity markets, country, 6:475 practice problems, 4:41–46 with bad consumption hedging equity method of accounting, 2:24–35 relative valuation models, 4:25–26 properties, 6:438–439 at Deutsche Bank, 2:25–26 research reports, 4:33–37 and commercial real estate example, 2:24–25 contents, 4:33–35 investments, 6:452 fair value option, 2:30 formats, 4:35–36 commodity valuation vs., 6:203 and goodwill, 2:29–30 responsibilities for reporting, 4:36–37 correlations of debt returns and, impairment, 2:31 with residual income, 4:495–496 1:278–279 investment costs in excess of book solutions to problems, 4:47–49 currency exchange rate and trends in, value, 2:27–28 sum-of-the-parts valuation, 4:26–29 1:582–585 issues for analysts with, 2:34–35 types of value, 4:6–9 cyclical, 6:442–444, 450–451 and sale of inventory, 2:32–34 fair market/investment value, 4:8 economic growth and appreciation of, and transactions with associates/joint going-concern/liquidation value, 4:8 1:630 ventures, 2:31–34 intrinsic value, 4:6–8 fundamental law of active management Equity Office,6: 150 summary, 4:9 for global, 6:499–506 equity premium puzzle, 4:64n.19 valuation process, 4:11–33 impairment for, 2:15–17 equity real estate investment trusts, applying valuation conclusions, 4:31–33 investment strategies for, 6:448–451, 6:82–97 business context in, 4:12–22 499–506 characteristics of, 6:84–90 conversion of forecasts to valuations, negative book value for, 1:528 diversified REITs,6: 91, 94 4:30 non-cyclical, 6:442–444, 450–451 due diligence, 6:90–91, 95–96 forecasting company performance, and potential GDP, 1:632–633 economic drivers for, 6:94–96 4:22–23 valuation multiples for, 6:445–447 health care REITs, 6:91, 93–95 selecting valuation models, 4:23–30

Cumulative_Ind_L2 31 June 14, 2018 9:39 PM I-32 Index

equivalent annual annuity approach, of equity risk premium of directors, 3:252–253 3:40 demand-side estimates, 4:69n.28 ensuring ethical behavior, 3:219–223 equivalent number, for underlying, forward-looking estimates, 4:68–71 ethical issues in strategy, 3:211–214 5:406 historical estimates, 4:59–68 firms commitment to,1: 14 equivalent yield, in real estate valuation, supply-side estimates, 4:69–71 and investment industry, 1:11–15 6:40–41 ex ante, 4:68–71 philosophical approaches to, Erb, Claude, 4:90n.53 of expected value, 1:527 3:216–219 Erb, Harvey, and Viskanta model, of intrinsic value, 4:55–57 and regulations, 1:13 6:140n.1 of matrix price, 4:441n.55 societal benefit of,1: 12 ERISA. see Employee Retirement and of parameters in linear regression, and trade allocation, 1:229–231 Income Security Act 1:287, 349n.31 ethics officers,3: 221–222 ERM. see European Exchange Rate of pension obligation, 2:93–94 Ethiopia Mechanism point, 1:527 growth in real GDP per capita, 1:677, Ernst & Young, 3:212 of potential GDP, 1:630, 631 678 errors. see also standard error of of required rate of return, 4:570–574 natural resources, 1:640 estimate (SEE) of required return, 4:224–225 real GDP per capita, 1:622, 623 ARCH(1), 1:483 of returns from factor sensitivities, E*TRADE Financial Corp., 4:424 autocorrelations of, 1:355–359, 6:288–289 EU. see European Union 450–452 standard error of (see standard error of Euribor. see European Interbank Offered correlated, 1:446–447 estimate [SEE]) Rate Fisher effect with,1: 374–376 estimation euro heteroskedastic, 1:349–355 of beta, 1:299–301; 4:72–79; 6:144 currency code, 1:605 in-sample, 1:456 of cannibalization impact, 4:159–163 GBP/EUR currency pair, 1:545–546 known, 1:48 capital ratio sensitivities, 2:262–263 USD/EUR currency pair mean squared error, 1:341–342, 356 of cash flows,4: 567–569 arbitrage constraints for exchange notification of,1: 144 of depreciated replacement cost, rate quotes, 1:544–545 out-of-sample, 1:456 6:46–48, 46–49 exchange rate quotes for, 1:541, 542 prediction, 1:309 of expenses, 1:523–526 liquidity in, 1:542 in real estate valuation, 6:45–46 historical, 4:59–68; 5:85 spot and forward rate quotes, residual, in autoregressive models, of inputs, 1:526–527 1:551–552 1:436–437 of interest rate volatility, 5:85 Euro-bund forwards, 5:337–338 root mean squared error, 1:457, 458 of liabilities, 2:267 Euro-bund futures, 5:336–337 serially correlated, 1:355–359, 449–452 for private equity investments, 6:144, Eurodollar futures, TED spread and, template, 3:56 171 5:32 time-series misspecification from for real estate investments, 6:34–36 Eurodollar time deposits, 5:324 measurement errors, 1:372–376 of required rate of return, 4:570–574 euro financial crisis,6: 426 tracking, 6:296–298, 337, 356–357 of required return, 4:224–225 Euro OverNight Index Average (Eonia), Type I, 1:343, 356; 2:308 of returns from factor sensitivities, 5:32–33 Type II, 2:308 6:288–289 Europa Venture Partners III case study, unintentional, 1:48 of revenues, 1:523–526 6:161–164 error term (linear regression) of risk premium, 3:49; 4:68–71, 89 Europe. see also specific countries assumptions about, 1:290, 291, 334 of terminal value, 6:34–36, 144, 171 algorithmic trading/HFT, 6:541 defined, 1:286 of trends, 1:443 banking supervision, 1:723 ERV. see estimated rental value of value at risk, 6:322–333, 324, 335 beer market, 4:145–146 escrow method of options valuation, ethical behavior, 3:219–223 cash dividends paid, 3:127 5:393–394 and corporate governance procedures, CDS contracts, 5:270 ESG factors. see environmental, social, 3:222 civil law, 3:113 and governance factors in decision-making processes, 3:221 commodity and futures regulation, ESG risk exposures. see environmental, and ethics officers,3: 221–222 6:208 social, and governance risk in hiring and promotion, 3:219–220 commodity exchanges, 6:207 exposures and moral courage, 3:222–223 corporate governance failures, 3:226 ESMA. see European Securities and and organizational culture/leadership, covered bonds, 5:250 Markets Authority 3:220 disclosure of private equity funds, ESOPs. see employee stock ownership ethical decision making, 1:207–228 6:155 plans Subath Agarway case study, 1:212–216 diversified REITs,6: 94 ESRB. see European Systemic Risk Board framework, 1:13–14, 207–208 dividend payouts, 3:178 Essay on the Principle of Population Preston Partners case study, 1:220–224 index CDS, 5:274 (Malthus), 1:659 Peter Sherman case study, 1:216–219 labor supply and economic growth, established rivals Edvard Stark case study, 1:208–212 1:641 in beer markets, 4:138, 139 Super Selection Investment Advisors moving average for Brent Crude Oil in cognac industry, 4:170 case study, 1:224–228 prices, 1:471–472 and financial forecasts,4: 137–139 ethical responsibilities, portfolio naked CDS trading, 5:288 estate puts, bonds with, 5:125 managers’, 6:265 private equity investments, 6:137 Estée Lauder, 4:121 ethics, 1:11–15; 3:210–223. see also publicly traded real estate equities, estimated rental value (ERV), 6:37 Code of Ethics; Standards of 6:81 estimates Professional Conduct real estate equities market, 6:82 accounting, 4:387n.12 causes of unethical behavior, 3:215–216 real estate valuation standards, aggressive, 4:20 and changes in investment objectives, 6:56n.17–18 of beta, 1:299–301 1:233–234 real GDP per capita, 1:622

Cumulative_Ind_L2 32 June 14, 2018 9:39 PM Index I-33

regulatory code overhaul, 3:246 European Venture Capital Association ex ante version of PPP, 1:565, 570, 571 regulatory response to global financial (EVCA), 6:136–137, 158 Excel VBA (programming language), crisis, 1:707 EUROPIA. see European Petroleum 1:249 revenue analysis, 4:109, 110 Industry Association excess earnings method (EEM). see also self-regulating organizations, Eurozone residual income model 1:704–705 Gordon growth model, 4:68 for private companies, 4:569, 570, share repurchases, 3:161, 178 printing of cash, 6:423n.24 577–578 valuers, 6:54n.16 yield spread on government bonds, for residual income valuation, 4:501n.10 Europe 350 Index, 3:142–143 6:424n.25 excessive trading, 1:80, 89 European call options, 5:124 EV. see enterprise value excess purchase price, amortization of, American vs., 5:391, 394–398 EVA. see economic value added 2:28–30 Black model for, 5:412–414 evaluation(s) excess return swap, 6:227 Black–Scholes–Merton model for, bid, 3:314–318 excess spread, 5:250 5:404–410 board of directors, 3:235–248 exchange rate management, 1:593–595 exercise values of, 5:379 capital budgeting projects, 3:38–57 exchange rates. see currency exchange on futures, 5:412–414 with capital rationing, 3:40–42 rates; current rate method on interest rates, 5:400–401, 416–417 mutually exclusive projects with exchange ratio, 3:290 lower bounds of, 5:427 unequal lives, 3:38–40 exchange-traded funds, 2:216 multiperiod binomial model for, 5:401 pitfalls, 3:55–57 excise duty, 4:141 notation for, 5:379 with real options, 3:52–55 ex-dividend (share), 3:138 one-period binomial model for, corporate governance, 3:234–260 ex-dividend date, 3:138 5:380–386 financial report quality,2: 305–309 ex-dividend price, 3:136 path-dependency of, 5:378 cash flow quality,2: 334–342 execution algorithms, 6:534–535 swaptions, 5:419 classification shifting,2: 339–342 execution management system (EMS), two-period binomial model for, Nautica Enterprises, 2:340–342 6:535, 542 5:387–391, 394–398 Satyam Computer Services, execution-only responsibilities, 1:81 European Central Bank (ECB). see also 2:334–338 execution step (portfolio management), Survey of Professional Forecasters Sunbeam, 2:338–339 6:254–255 (SPF) general steps in process, 2:305–306 executive compensation, 2:103–104 economic forecasting survey, 1:273n.6 likelihood of misreporting, exercise date, 2:107 as institutional representative, 2:218 2:306–309 exercise price, for bull spreads, 5:474 monetary policy of, 1:588 Beneish model, 2:306–309 exercise rates, for interest rate options, NLP-based analysis, 1:250 limitations of quantitative models, 5:416 sovereign debt purchases by, 2:309 exercise value. see intrinsic value 1:724–725 variables for detecting exercising the option (exercise) European Central Bank Single misstatement, 2:309 consequences of, 5:483 Supervisory Mechanism, 2:218 EVCA. see European Venture Capital conversion option, 5:175 European Commission (EC), 1:704–705; Association early, 5:390–394 3:299, 300; 4:17 EV/EBIT. see enterprise value to embedded options, 5:131 European Environment Agency, 4:17 earnings before interest and taxes and key rate duration, 5:157 European Exchange Rate Mechanism EV/EBITA. see enterprise value to existing competitors. see established (ERM), 1:594 earnings before interest, taxes and rivals European Group of Valuers’ amortization existing holdings, collars on, 5:471–472 Associations, 6:56n.17 EV/EBITDA. see enterprise value-to- exit price, 4:561 European Interbank Offered Rate earnings before interest, taxes, exit routes, for private equity (Euribor), 5:25, 165–166 depreciation, and amortization investments, 6:149–151 European Market Infrastructure EV/EBITDAR. see enterprise value to exit year, 6:146 Regulation (EMIR), 1:705 EBITDAR exogenous factors, for private equity European Mortgage Federation, 6:56n.18 events transactions, 6:139 European options. see European call algorithmic trading, 6:535 expanded CAPM, 4:570 options change-of-control, 5:169 expanded DuPont analysis, 2:380–381 European Petroleum Industry corporate, 4:9 expansionary fiscal policy,1: 585–586, Association (EUROPIA), 4:15n. credit, 5:268, 272–273 590–591 European Securities and Markets extreme, 6:335 expansionary monetary policy, 1:586 Authority (ESMA), 2:358n.29; 6:208 faithful representation of economic, expansion projects, 3:7 European Systemic Risk Board (ESRB), 2:292n.3 expansion stage (private equity), 6:137 1:709 shock, 5:465 expectations European Union (EU), 5:251; 6:56n.18 succession, 5:273 capital market, 6:254 Basel Committee member, 2:218 EV/FCFF. see enterprise value to free investor, 6:417, 423 commodity regulators, 6:208 cash flow to the firm local expectations theory, 5:33–34 corporate governance reports, 3:235 EV/S. see enterprise value to sales market, 4:9–11; 6:254 dividend payouts, 3:178 ex ante alpha, 4:54 pure expectations theory, 5:33 dividend policy, 4:201, 202 ex ante estimates, 4:68–71 unbiased expectations theory, 5:33 European System Risk Board, 1:709 ex ante information ratios, 6:481 expectations approach insurance company capitalization, ex ante measurement of skill, 6:512–513 for interest rate options, 5:399 2:273 ex ante risk and return, 6:472, 477–478 one-period binomial model, 5:384–386 regulatory bodies, 1:704–705 ex ante risk-weighted correlation, 6:490 two-period binomial model, 5:389–390 regulatory function of credit ratings, ex ante tracking error, 6:337, 356–357. expected active return, 6:499–506 1:724–725 see also relative VaR expected active risk, 6:499

Cumulative_Ind_L2 33 June 14, 2018 9:39 PM I-34 Index

expected alpha, 4:54 Experian, 5:210 extraordinary items, under US GAAP, expected changes experience, in machine learning, 1:380 2:307n.9 in exchange rates, 1:557 expert counsel, board of directors’, 3:245 extreme events, VaR and, 6:335 uncovered interest rate parity in terms expert networks, 1:67 ExxonMobil Corporation of, 1:560 experts, 1:59–60 commodity price risk, 6:216 expected exposure expert system, 1:244 and credit derivatives, 5:276n.13 for asset-backed securities, 5:249–250 expiration currency translations, 2:177 with binomial interest trees, 5:219 of collar, 5:471 dividends, 3:143 for corporate bonds, 5:223, 227 of covered calls, 5:462–464 and horizontal mergers, 3:280 in credit risk modeling, 5:202–203 forward value at, 5:311 income of Chevron Corporation vs., for floating-rate notes,5: 229–230 of interest rate swaps, 5:449 2:181–183 for zero-coupon bonds, 5:204–205 of protective puts, 5:466–467 M&A for growth, 3:283 expected holding-period return, 4:53 expiration date required return on equity, 4:75 expected loss, 5:205, 279–280 in binomial option valuation model, unexpected earnings, 4:452–453 expected return, 4:54–57 5:378, 379 active, 6:492–493, 499–506 CDS, 5:271 F on bonds, 5:17–19 expiration value factor(s) impact of credit migration on, 5:215 of covered calls, 5:462, 463 blockage, 4:30 and intrinsic value, 4:55–57 of protective puts, 5:466, 467 company fundamental, 6:292 to portfolio, 6:280–281 exploitation, of value chain members, company share-related, 6:292–293 and required rate of return, 4:54 3:213–214 company-specific, 4:164, 557–558; and risk, 6:477–478 exponential growth, log-linear trend 6:433 Expected Returns (Ilmanen), 6:220–221 models for, 1:440–441 country, 6:293 expected risk, 6:477–478, 499 ex post alpha, 4:54 defined, 6:277 expected shortfall, 6:336. see also ex post equity risk premium, 6:444–445 discount conditional VaR (CVaR) ex post information ratios, 6:481 annuity, 5:418 expected tail loss, 6:336. see also ex post performance measurement, for benchmark government bonds, conditional VaR (CVaR) 6:497–499 5:219–220 expected terminal option payoffs,5: 389 ex post risk and return, 6:472, 477, 478 for corporate bonds, 5:224 expected value, distributions vs. point ex post tracking error, 6:356–357 defined, 5:7 estimates of, 1:527 exposure for floating-rate notes,5: 229, 230 expected value added, 6:486–487 credit, 5:287–291 for forward rate agreements, 5:327 expected volatility of future earnings, equity, 6:339 for interest rate options, 5:415 3:148–149, 154 fixed-income, 6:339–340 and two-period binomial model, 5:389 expenditures with index CDS, 5:275 for zero-coupon bonds, 5:205 on assets at Nestlé, 2:388–390 risk down, 5:380, 387 capital with currency futures, 5:450–452 environmental, social, and governance, in FCFF calculation, 4:290–291 with currency swaps, 5:450–451 4:17, 331–336; 5:288–289 in forecasts of FCFE, 4:311–312 with derivatives strategies, 5:448–454 exogenous, 6:139 maintenance vs. growth, 4:133 with equity swaps, 5:452–453 in fundamental factor models, 6:285, of Nestlé, 2:387–392 ESG, 3:260–262 292–293 in valuation of real estate foreign exchange, 2:132–135 HML, 4:80; 6:284, 294–296 investments, 6:43 with interest rate forwards, 5:450 industry, 4:581; 6:293 of WorldCom, 2:328–329 with interest rate futures, 5:448–450 legal, 6:263 research and development with interest rate swaps, 5:448–449 LIQ, 4:83 in endogenous growth model, net asset balance sheet, 2:148 macroeconomic, 6:293, 394–395 1:672–673 net liability balance sheet, 2:148 in macroeconomic factor models, and price to book value, 4:415 with stock index futures, 5:453 6:285 and residual income, 4:528 transaction, 2:132 pull, 1:593 as share of GDP, 1:649–650 transaction, 2:132 push, 1:593 variability of, 4:120 extendible bonds, 5:124, 142 regulatory, 6:423–424 expense recognition, quality of, 2:330–331 extension options, 5:124 RMRF, 4:79, 80; 6:284, 294–296 expense reimbursement, in real estate, external advisers, selecting, 1:129 SMB, 4:80; 6:284, 294–296 6:19, 42 external growth, 3:283 in statistical factor models, 6:285 expenses external indicators of earnings quality, style, 6:293 compensation, 2:108 2:319 surprises in, 6:286–287, 289, 290 distribution, 4:119, 173–174 externality(-ies) up, 5:380, 387 financing, 4:127–128 in capital budgeting, 3:9 WML, 6:284, 294–296 general and administrative, 6:106 and need for regulations, 1:706, 714 factor analysis models, 6:285 interest, 4:127–128 as spillover effects,1: 705n.13 factor betas (factor loadings). see factor minority interest, 4:132 and systemic risk, 1:709 sensitivities non-operating, 4:126–131, 176–177 externally compensated assignments, factor portfolio, 6:281 operating, 6:42–43 1:113 factor price, 6:281 as quality of earnings indicators, 4:19 external manager, travel expenses from, factor risk premium, 4:79; 6:281 research and development, 2:304 1:39–40 factor sensitivities (factor betas) selling, general, and administrative, external obsolescence, 6:47 defined, 6:287 4:119–120, 173–175 external stakeholders, 3:202 estimating returns from, 6:288–289 simulations for estimating, 1:523–526 external sustainability approach, 1:578 in fundamental factor models, travel, 1:36–37, 39–40 extra dividends, 3:128–130 6:289–290

Cumulative_Ind_L2 34 June 14, 2018 9:39 PM Index I-35

in macroeconomic factor models, farmland, 6:12 information ratio, 6:481, 482 6:287–289 FASB. see Financial Accounting Sharpe ratio, 6:479 in multifactor models for ROE, 4:79 Standards Board Fidelity Select Technology Fund facts, opinions and, 1:140, 141 fast food, 6:216 (FSPTX) factual presentations, misrepresentation fast markets, 5:484 and multicollinearity, 1:360–362 and, 1:46–47 fat finger trades,6: 543 multiple linear regression, 1:337–339 FAD. see funds available for distribution favors, requested, 1:155 and unit roots, 1:487 failed investments, due diligence and, FCF. see free cash flow fiduciary puts. see cash-secured puts 1:135 FCFE. see free cash flow to equity FIFO valuation method. see first-in, first- failure to pay, 5:272 FCFF. see free cash flow to the firm out valuation method Fair, William, 5:210n.3 FCMs. see futures commission FIIs. see Fundos de Investimento fair dealing, 1:86–88, 90 merchants Imobiliaro Fair Dealing [Standard III(B)], 1:82–90 FDI. see foreign direct investment files application of the standard, 1:86–90 FDIC. see US Federal Deposit Insurance current, maintaining, 1:26 in case studies, 1:209–210, 222–223 Corporation of former employers, 1:110 compliance procedures, 1:84–86 feature engineering, 1:381 finance costs,4: 176–177 developing firm policies,1: 84–86 features, in machine learning, 1:381 finance industry, artificial intelligence disclosure of level of service, 1:86 Federal Deposit Insurance Corporation outside of, 1:246 disclosure of trade allocation (FDIC), 1:721; 3:300 financial account,1: 576n.19 procedures, 1:86 Federal Financial Supervisor Authority Financial Accounting Standards Board systematic account reviews, 1:86 (BaFin), 2:218 (FASB) guidance, 1:82–84 federally related transactions, 4:595n.47 business combination standards, 2:37 investment action, 1:83–84 Federal Reserve on financial assets,2: 20 investment recommendations, approval for bank mergers by, 3:300 regulations referencing, 1:703 1:82–83 bank support from, 2:239 on special purpose entities, 2:52 text of, 1:17, 82 and correlation of inflation with stock financial activity, economy and,6: 380 and trade allocation, 1:230 returns, 1:272 financial assets,2: 10–22 Fair Isaac Corporation, 5:210, 211 on disclosure of discount window accounting treatments for, 2:9–10 fair market value, 4:8, 560 borrowers, 1:724 in acquisition method, 2:39 fairness opinions, rendering, 4:10 historical exchange rates and monetary available-for-sale, 2:12, 16–17 fair price amendments, 3:295 policy, 1:588 classification and measurement of, fair value inflation and policy of,1: 458, 459 2:20–22 and acquisition price, 2:40 NLP-based analysis of evaluation of, 2:224 balance sheet adjustments, 4:525 communications, 1:250 fair value through profit or loss, of corporate bonds, 5:223, 225, quantitative easing, 1:588 2:11–12 239–240 quantitative easing by, 5:35–36 held by financial institutions,2: 215 defined, 4:8, 422n.33, 561 Taylor rule and policy rates from, held-to-maturity, 2:10–11 of floating-rate notes,5: 232 6:407 impairment of, 2:15–19 impact of interest rate volatility on, Federal Reserve Bank of New York, as investment category, 2:9 5:227 2:218 loans and receivables, 2:12–14 for intercorporate investment in Federal Reserve Bank of Philadelphia, reclassification of,2: 14–15, 22 associates, 2:30 1:273n.6 valuation of, 5:76 investments designated at, 2:11–12 Federal Trade Commission (FTC), 3:299, Financial Conduct Authority, 1:250; standards for, 4:595–596 300 4:584 of zero-coupon bonds, 5:206 Federal Trade Commission Act (1914), financial contagion,1: 709; 2:214 fair value accounting 3:299 financial crisis (2007-2009). see global and book value per share, 4:419–422 Fed Model, 4:407–409 financial crisis (2007-2009) risk measurements for portfolios with, feedback step (portfolio management), financial distress, costs of,3: 103–104 6:353 6:255–256 financial flexibility,3: 149, 154 fair value hierarchy, 2:229, 271–272 fees. see also Referral Fees [Standard financial forecasting,4: 107–195 Fair Value Measurement (IFRS 13), VI(C)] about, 4:108 4:561n.12 management, 6:153, 157 company models, 4:170–183 Fair Value Measurements (ASC 820), performance, 6:157 company overview, 4:171–172 4:559n.5, 561n.12–13, 579 placement, 6:157 industry overview, 4:170–171 Fair Value Measurements (SFAS 157), private equity fund, 6:153, 157 pro forma balance sheet, 4:181–182 4:30n.13, 559n.5, 561n.13 service, 1:40 pro forma cash flow statement, fair value model, for investment transaction, 6:153 4:177–182 property, 6:98–99 fences. see collars pro forma income statement, fair value through other comprehensive FFM. see Fama–French model 4:172–177 income, 2:20–22 FFO. see funds from operations valuation inputs, 4:182–183 fair value through profit or loss, Fiat S.p.A., 2:93, 94 competitive forces, 4:136–145 2:11–13, 20–22 FICO scores, 5:210–211, 249 for Anheuser-Busch InBev, faithful representation of economic fictitious financial reports,2: 294–296 4:137–139 events, 2:292n.3 fictitious name,1: 174 five forces framework,4: 136–145 Fama, Eugene, 4:79; 6:450n.30 fictitious orders,6: 544 and government regulation, 4:139 Fama–French model (FFM), 4:79–83, Fidelity Magellan mutual fund in Russian beer market, 4:140–144 398 decomposition of value added for, financial modeling,4: 108–136 family accounts, 1:80, 160–161 6:476–477 balance sheet, 4:132–134 family offices,6: 249 expected value added, 6:486, 487 cash flow statement,4: 132, 134

Cumulative_Ind_L2 35 June 14, 2018 9:39 PM I-36 Index

financial forecasting (Continued) financial modeling,4: 108–136 for private company valuation, income statement, 4:108–132 balance sheet, 4:132–134 4:559–560 scenario and sensitivity analyses, defined, 6:318 quality spectrum of, 2:292 4:135–136 of growth rates, 4:246–247 financial risk,3: 262 inflation/deflation, 4:145–153 income statement, 4:108–132 Financial Services Agency, 2:218, 220 cost projection effects,4: 150–153 scenario and sensitivity analyses, Financial Services Authority (FSA), sales projection effects,4: 145–150 4:135–136 6:263, 543 long-term, 4:163–169 and Standards of Practice Handbook Financial Services Reform Act (2001), assumptions in, 4:168–169 updates, 1:9 1:704 historical valuation multiples in, financial policies, ROA/dividend growth Financial Stability Board, 2:219 4:166–167 rate and, 4:244 financial statement analysis. see also normalized revenue case study, financial press,2: 358–359 integration of financial statement 4:164–169 financial ratios,4: 400–401; 6:433 analysis practice problems, 4:185–191 Financial Reporting Council, 2:347n.24 for foreign currency transactions, solutions to problems, 4:192–195 Financial Reporting in Hyperinflationary 2:135–138 technological developments, 4:153–163 Economies (IAS 29), 2:154 framework for, 2:371–372 base case scenarios for, 4:161, 162 Financial Reporting Manual (SEC financial statements. see also specific bull and bear case scenarios for, Division of Corporation Finance), financial statements 4:161–163 2:355 after business combinations, 2:48–51 estimating impact of cannibalization, financial reporting quality,2: 289–370 compiled, 4:566 4:159–163 about, 2:290–291 consolidated quantifying potential for balance sheet quality, 2:342–346 balance sheets, 2:48–50, 300–301 cannibalization, 4:153–159 clear presentation, 2:346 business combinations on, 2:42–48 Financial Industry Regulatory Authority completeness, 2:343 income statements, 2:49–51, 300–301 (FINRA), 1:703–704 Sealed Air Corporation, 2:344–346 foreign currency (see foreign currency financial information, quality of, unbiased measurement, 2:343 financial statements) 4:557–558 cash flow quality,2: 333–342 notes to financial institutions,2: 213–286 classification shifting,2: 339–342 disclosure of translation methods in, about, 2:213–214 evaluating, 2:334–342 2:178 bank analyses, 2:220–264 indicators of quality, 2:333–334 information about risk in, 2:346–347, analytical considerations not Nautica Enterprises, 2:340–342 350–355 addressed by CAMELS, 2:238–242 Satyam Computer Services, 2:334–337 of Royal Dutch Shell, 2:351–355 CAMELS approach to, 2:220–238 Sunbeam, 2:338–339 reporting post-employment benefits features of, 2:214–220 conceptual framework, 2:291–293 on, 2:81–92 global organizations, 2:217–220 earnings quality, 2:310–333 assumptions and actuarial gains/ and regulatory authorities, 2:220 bankruptcy prediction models, losses, 2:85–92 types of institutions, 2:215–217 2:331–332 DB pension plans, 2:81–85 insurance company analyses, 2:264–280 indicators of quality, 2:310–319 DC pension plans, 2:81 life and health insurance companies, relationship of earnings and financial reviewed, 4:566 2:273–280 reporting quality, 2:291 share repurchases and, 3:164–167 property and casualty insurance SEC case examples, 2:319–331 financial strength, investors’,6: 258 companies, 2:265–273 evaluating, 2:305–309 Financial Supervisory Service, 2:218 swap rate and internal operations of, general steps in process, 2:305–306 financial technology. see fintech 5:26 likelihood of misreporting, Financial Times Stock Exchange (FTSE), Financial Instruments (ASC 825), 2:20 2:306–309 4:399 Financial Instruments (IAS 9), 2:10 information about risk, 2:346–359 financial transactions,4: 581 Financial Instruments (IFRS 9), 2:20–22 auditor’s opinions, 2:346–350 financing classification and measurement, event-specific disclosures,2: 358 multiple rounds of private equity, 2:20–22 financial press,2: 358–359 6:174–175 intercorporate investments, 2:8–10 legal proceedings and contingencies, replicating call options with, 5:382–383 reclassification of investments,2: 22 2:351–355 replicating put options with, 5:383–384 Financial Instruments: Disclosures Management Discussion and financing activities, cash flow from, (IFRS 7), 2:22n.12 Analysis, 2:355–357 4:293–294 Financial Instruments: Recognition and Notes to Financial Statements, financing expenses,4: 127–128 Measurement (IAS 39), 2:10–19 2:346–347, 350–351 financing transactions, private company, available-for-sale investments, 2:12–14 potential problems, 2:293–305 4:559 fair value through profit or loss, accounting warning signs, 2:299–300 Finansinspektionen (Financial 2:11–12 classification choices,2: 296–298 Supervisory Authority), 2:218 held-to-maturity investments, 2:10–11 compliant reporting that diverges Finland and IFRS 9, 2:20 from economic reality, 2:301–305 active return and weights for equities, impairments, 2:15–19 issues in mergers and acquisitions, 6:500, 503, 504 intercorporate investments, 2:8, 9 2:300–301 historical equity risk premium, 4:61, 63 loans and receivables, 2:12–14 reported amounts and timing of OECD Principles, 3:256n.18 reclassification of investments,2: 14–15 recognition, 2:293–296 FINRA. see Financial Industry financial intermediaries, in developing practice problems, 2:362–367 Regulatory Authority vs. developed countries, 1:623–624 solutions to problems, 2:368–370 fintech, 1:239–261 financial leverage. see leverage financial reports about, 1:239–240 financial liabilities,2: 39 for equity valuation, 4:14, 16 analytical tools, 1:244–246 financial markets. see markets fictitious, 2:294–296 and Big Data, 1:241–244

Cumulative_Ind_L2 36 June 14, 2018 9:39 PM Index I-37

and data science, 1:247–249 fixed-income exposure,6: 339–340 justified P/E,4: 395–397 defined, 1:240–241 fixed-income forwards of markets, 4:381–382 distributed ledger technology, 1:253–257 unique features of, 5:333–334 price to book value, 4:422–423 investment management applications, valuation of, 5:337–338 price to cash flow,4: 435–436 1:249–253 fixed-income futures,5: 333–337 price to dividends, 4:438 firewalls, 1:32, 61 pricing of, 5:334–337 price to earnings, 4:395–398 firm policies unique features of, 5:333–334 price to sales, 4:429–430 for fair dealing, 1:84–86 fixed income investors, potential GDP forecasts. see also financial forecasting on loyalty, prudence, and care, 1:77–78 for, 1:631–633 by appraisers and management, firm results, overemphasis of,1: 53 fixed income portfolios. see bond 4:567–568 firms portfolios capital investment, 4:178 commitment to ethics by, 1:14 fixed-income securities. see arbitrage-free of company performance, 4:11, compliance with Code of Standards, valuation; entries beginning with bond 22–23 1:10 fixed interest rates, in swaps,5: 449 corporate income tax, 4:177 free cash flow to (see free cash flow to fixed leg, interest rate swap,5: 27, 345 correlation analysis of, 1:273–274 the firm [FCFF]) fixed operating expenses,6: 42 currency exchange rate, 1:540 informing, of referral arrangements, fixed price, share repurchases at,3: 162 depreciation, 4:178 1:163 fixed price tender offer,3: 162 dividend, 4:246–247 knowledge of the law, 1:26–27 fixed-rate perpetual preferred stock, equity valuations from, 4:11, 30 records as property of, 1:147, 148 4:216–217 FCFE, 4:310–312, 314 sell-side, 6:535 fixed rates, forward rate agreements FCFF, 4:310–314 starting new, 1:112 with, 5:330 of free cash flow (see free cash flow, first-differencing transformation, fixed receiver counterparty,5: 325 forecasts of) 1:462–464 fixed swap rate,5: 347–348 growth, 4:244–246 first-in, first-out (FIFO) valuation FIX (financial information exchange) inflation, 1:303–305 method, 2:152; 4:390, 419 order, 6:535 longer-term growth rates, 6:110–111 first-order autoregression (AR[1]) “flash crash” (6 May, 2010),6: 539 of past values of dependent variables, equation for, 1:447–448 flash reports,1: 85 1:374 in-sample forecast errors with, flexibility per-share residual income, 1:456–457 of equity REITs and REOCs, 6:87 4:498–499 instability in, 1:458–460 financial, 3:149, 154 revenue, 4:172–173 in model specification testing,1: 450 managerial, 3:170 sales, 4:314 out-of-sample forecast errors with, flexibility options,3: 52, 53 with time-series analysis 1:457–458 flexible exchange rates,1: 585 moving-average models, 1:472–474 for random walks, 1:462–464 “flight to quality,”6: 347 multiperiod forecasts and chain rule and seasonal lag, 1:474–480 flip-in pill,3: 294 of forecasting, 1:453–456 serial correlations and forecasting flip-over pill,3: 294 steps, 1:489–490 quality, 1:456 float, 2:264 uncertainty in, 1:488 testing, for ARCH, 1:481–484 float-adjusted capitalization-weighted working capital, 4:178–179 first-order autoregressive conditional market indexes, 6:473 foreign currency as functional currency heteroskedasticity (ARCH[1]), floaters. see floating-rate bonds (floating- method, 2:150–151 1:481–484 coupon bonds) foreign currency designation, 1:541n.1 first-order serial correlation,1: 356 floating interest rates, in swaps,5: 449 foreign currency financial statements, fiscal policy, currency exchange rate and, floating leg, interest rate swap,5: 27, 345 2:143–183 1:590–591 floating-rate bonds (floating-coupon analytical issues with, 2:160–172 Fisher, Irving, 1:352 bonds) balance sheet exposure, 2:147–148, Fisher effect capped, 5:161–166 163–166 and conditional heteroskedasticity/ fixed- vs.,5: 123 companies with multiple translation correlation, 1:352–354 floored, 5:163–166 methods for, 2:176–177 international, 1:568–570 ratchet, 5:162–163 current rate method with lagged dependent variable, 1:373 floating-rate notes,5: 227–234 analytical issues, 2:160–163, 167–169 with measurement error, 1:374–376 floating-rate swaps,5: 354 defined, 2:145 and real interest rate parity, 1:567–570 floating receiver counterparty,5: 325 and exchange rate movement, 2:172 and unit roots, 1:484 floored floating-rate bonds,5: 163–166 and temporal method, 2:176–177 Fitch Ratings Service, 3:109; 5:212; floorlets, 5:416 translating assets and liabilities with, 6:427n.27 floors, interest rate,5: 416 2:145–146 fitted parameters, in linear regression, floor value, convertible bond,5: 170–171 translating foreign currency financial 1:287 flotation costs,3: 136, 152–153 statements with, 2:148, 149 five-factor BIRR model,4: 84–85 flow supply/demand channel in current disclosure of translation methods, five forces framework,4: 136–145, account, 1:577 2:177–183 170–171. see also competitive follow-up, for financial statement for Chevron Corporation, 2:181–183 forces; competitive strategy analysis, 2:402, 406 for Exxon Mobil Corporation, fixed capital, FCFF and,4: 290–291 food retailers, 4:147–148 2:181–183 fixed costs,4: 114–115 forced conversion, 5:169 and net income, 2:182–183 fixed-coupon bonds (fixed-rate bonds), forced equity issuance, 6:89 for Yahoo! Inc., 2:178–181 5:123 Ford Motor Company, 2:93, 94; 3:129, 145 in hyperinflationary economies fixed-for-fixed currency swaps forecasted fundamentals-based valuation balance sheet, 2:172–173 pricing for, 5:350–351 enterprise value to EBITDA, 4:444 example, 2:174–176 valuation of, 5:354–355 forward P/E, 4:395–398 income statement, 2:173–174

Cumulative_Ind_L2 37 June 14, 2018 9:39 PM I-38 Index

foreign currency financial statements former employers, 1:99, 110 risk exposure with, 5:450 (Continued) forms of business, 3:227–230 time points in transactions, 5:325–326 monetary/nonmonetary method corporations, 3:229–230 valuation of FRAs, 5:331–333 analytical issues, 2:160–167 partnerships, 3:229 at market, 5:310 balance sheet exposures with, sole proprietorships, 3:228–229 mark-to-market values of, 1:552–556 2:163–166 Form 10-K, 2:355 pricing and valuation notation, combined with current rate method, forward commitments, 5:307–373 5:309–311 2:176–177 about, 5:307 synthetic assets with forwards, 5:456 and currency exchange rate arbitrage-free pricing and valuation valuation of, 5:7 movement, 2:172 principles for, 5:308–309 forward curve translating assets and liabilities with, defined, 5:307 defined, 5:7 2:146–147 forward contracts, 5:309–343 evolution of spot rates and current, for translating foreign currency carry arbitrage model for futures vs., 5:21–22 financial statements,2: 148 5:342–343 and forward rates, 5:7 translation methods, 2:148–160 currency forwards, 5:338–342 relationship of spot curve and, 5:11–14 Canadaco case study, 2:157–171 equity forwards, 5:322–324 yield curve movement and, 5:19–20 foreign currency as functional fixed-income forwards,5: 333–334, forward discounts, 1:550, 561 currency method, 2:150–151 337–338 forward dividend yield, 4:218 functional currency determination, generic no-arbitrage forwards, forward exchange rates 2:149 5:311–321 calculation of, 1:548–551 in highly inflationary economies, interest rate forwards, 5:324–333 quotes of, 1:551–554 2:154–157 pricing and valuation notation, and spot exchange rates/interest rates, parent’s presentation currency 5:309–311 1:570–572 as functional currency method, futures contracts, 5:322–343 forward integration, 3:281 2:151–154 carry arbitrage model for forwards forward-looking estimates of equity risk for retained earnings, 2:152–153 vs., 5:342–343 premium, 4:68–71 translation of concepts, 2:144–148 currency futures, 5:338 Gordon growth model, 4:68–69 foreign currency forward contracts. see equity futures, 5:322 macroeconomic model, 4:69–71 currency forwards fixed-income futures,5: 333–337 surveys, 4:71 foreign currency futures. see currency interest rate futures, 5:324–325 forward markets, 1:548–556 futures pricing and valuation notation, calculation of forward exchange rates, foreign currency options. see currency 5:309–311 1:549–551 options practice problems, 5:363–368 on commodities, 6:190 foreign currency transactions, 2:131–143 solutions to problems, 5:369–373 and covered interest rate parity, 1:550 analytical issues, 2:135–138 swap contracts, 5:343–361 forward exchange rate quotes, defined, 2:131 currency swaps, 5:349–356 1:551–554 disclosures of gains and losses in, equity swaps, 5:356–361 mark-to-market values of forward 2:138–143 interest rate swaps, 5:345–349 contracts, 1:552–556 and foreign exchange risk, 2:132–135 receive-fixed pay-floating swaps, forward P/E with intervening balance sheet dates, 5:344–345 defined, 4:381, 384 2:133–135 receive-floating pay-fixed swaps, and equity risk premium, 6:445–446 with settlement before balance sheet 5:343–344 in market-based valuation, 4:392–397 date, 2:132–133 forward contracts (forwards), 5:309–343 forward points, of exchange rate quotes, foreign direct investment (FDI), 1:625 arbitrageur strategy of buying, 5:337 1:551–552 foreign exchange carry trades. see carry arbitrageur strategy of selling, forward premiums, 1:550, 561 trades 5:313–315, 337 forward prices. see forward rates foreign exchange component, of BSM carry arbitrage model for futures vs., forward pricing model, 5:7 model, 5:411 5:342–343 forward rate agreements (FRAs) foreign exchange (FX) markets, 1:540–556 currency forwards, 5:338–342 defined, 5:325 arbitrage constraints on spot exchange case example, 5:492 and interest rate options, 5:414 rate quotes, 1:544–548 currency futures vs. forwards, 5:451n.8 interest rates and payments on, conventions in, 1:540–543 disclosures related to, 2:143 5:326–328 forward markets, 1:548–556 pricing, 5:338–341 notation for, 5:325 foreign exchange options. see currency valuation, 5:341–342 pricing, 5:328–330 options equity forwards, 5:322–324 time points in transactions, 5:325–326 foreign exchange risk fixed-income forwards,5: 333–334, valuation, 5:331–333 and bid-offer spread,1: 542, 543 337–338 forward rate model, 5:8–16 with currency futures, 5:451 unique features, 5:333–334 and active bond portfolio management, disclosures about, 2:189–190 valuation of forwards, 5:337–338 5:20–21 exposure to, 2:132–135 generic no-arbitrage forwards, defined, 5:8 and hedging, 2:143 5:311–321 and forward/spot curves, 5:11–14 in Notes to Financial Statements, carry arbitrage model without relationship of forward and spot rates/ 2:353–354 underlying cash flows,5: 311–318 prices, 5:9–12 foreign investment, 1:625 carry arbitrage model with forward rate parity, 1:560–564 Form 6-K, 4:16 underlying cash flows,5: 318–321 forward rates (forward prices) Form 8-K, 2:358 interest rate forwards, 5:324–333 active bond portfolio management, Form 10-K, 3:261; 4:16, 427–428 interest rates and FRA payments, 5:20–24 Form 10-Q, 4:16 5:326–328 all-in, 1:553, 554 Form 20-F, 4:16 and Libor spot market, 5:324–325 for benchmark government bonds, former clients, soliciting, 1:109–114 pricing of FRAs, 5:328–330 5:219, 220

Cumulative_Ind_L2 38 June 14, 2018 9:39 PM Index I-39

and binomial interest rate trees, 5:82–85 regulation and government bailouts, from EBITDA, 4:306–308 in carry arbitrage model, 5:342–343 1:722–723 environmental, social, and governance cash flows with forward market price share repurchases, 3:161 factors for, 4:332–336 too high, 5:314–315 franking credit, 3:151 FCFE from, 4:301–306 cash flows with forward market price FRAs. see forward rate agreements forecasting, 4:310–314 too low, 5:315–316 fraud, 1:55; 2:328–329 and free cash flow as returns,4: 204, in construction of binomial trees, fraudulent reporting, 2:317–318 205 5:88–91 fraudulent revenue recognition, free cash flow valuation approach, currency forwards, 5:338–341 2:320–324 4:285–289 currency spot rates vs., 1:549–552 free cash flow (FCF) constant-growth FCFF model, defined, 5:7, 309 and cash flow of operations,1: 370–372 4:288–289 equity forwards, 5:322–324 dividends vs., 4:315–317 defining cash flow,4: 285–286 interest rate forwards, 5:328–330 forecasts of, 4:289–320 present value of FCFF, 4:286–287 in liquidity preference theory, 5:34 analyst adjustments to CFO, sensitivity analysis of, 4:321–322 in local expectations theory, 5:33–34 4:314–315 and net income, 1:280–281, 284–285 no-arbitrage forwards, 5:314–316 and capital structure, 4:317–320 from net income, 4:289–293 notation for pricing, 5:309–311 free cash flow vs. dividends, present value of, 4:286–287 and spot curve, 5:19–20 4:315–317 for private companies, 4:567–568 and spot prices/rates, 5:8–12 in LBO model, 6:146 residual income model vs., 4:512 from yield curve, 5:129 mistakes with net income and from statement of cash flows, forwards. see forward contracts EBITDA, 4:316–317 4:293–295 forward value noncash charges, 4:295–301 three-stage growth model, 4:330–336 in carry arbitrage model, 5:342 working capital effects,4: 299–301 two-stage free cash flow model,4: 323 currency forwards, 5:341–342 in present value models, 4:204–205 on uses-of-free-cash-flow-basis, defined, 5:309, 310 for private companies, 4:567–569, 4:308–310 equity forwards, 5:322–324 569–570, 575 free cash flow to the firm (FCFF) fixed-income forwards,5: 337–338 and sales, 4:311–314 valuation model, 4:24 at initiation and expiration, 5:311 in target company valuation, free cash flow valuation,4: 283–376 interest rate forwards, 5:331–333 3:303–309 about, 4:284–285 long forward position, 5:317–318, free cash flow hypothesis,3: 105 environmental, social, and governance 320–321 free cash flow to equity (FCFE) considerations in, 4:331–336 notation for pricing, 5:309–311 and agency costs, 3:144–145 FCFE approach, 4:285–289 foundations, 6:261 from CFO, 4:302–306 constant-growth FCFE model, 4:289 four-factor model. see Carhart four- defined, 3:65, 153, 304n.13; 4:285 defining cash flow,4: 285–286 factor model and dividend coverage ratios, present value of FCFE, 4:287 FPL Group, Inc., 4:224 3:180–182 FCFF approach, 4:285–289 franc, Swiss from EBIT, 4:306–308 constant-growth FCFF model, currency code, 1:605 from EBITDA, 4:306–308 4:288–289 and Mexican peso, 1:542 from FCFF, 4:301–306 defining cash flow,4: 285–286 and required return on equity, 4:89 and flotation costs,3: 153 present value of FCFF, 4:286–287 and US dollar, 1:434–435 forecasting, 4:310–312, 314 forecasting free cash flow,4: 289–320 France, 2:215 and free cash flow as returns, analyst adjustments to CFO, active return and weights for equities, 4:204–205 4:314–315 6:499, 501, 503, 504 free cash flow valuation approach, and capital structure, 4:317–320 average hours worked, 1:646 4:285–289 FCFE and FCFF from EBIT/EBITDA, Basel Committee membership, 2:218 constant-growth FCFE model, 4:289 4:306–308 break-even inflation rates,6: 412 defining cash flow,4: 285–286 FCFE and FCFF on uses-of-free- commercial property values, 6:456 present value of FCFE, 4:287 cash-flow basis,4: 308–310 default-free government bonds, 6:425 sensitivity analysis, 4:321–323 FCFE from FCFF, 4:301–306 divided imputation tax system, 3:151 negative, 4:286 FCFF from net income, 4:289–293 ex post equity risk premium, 6:445 from net income, 4:302–306 FCFF from statement of cash flows, foreign tax credits, 3:50 present value of, 4:287 4:293–295 GDP growth rate, 4:212 and price of cash flow,4: 432, 434–435 forecasting FCFE and FCFF, government bond risk premiums, for private companies, 4:567–568 4:310–314 6:422 residual income model vs., 4:512 free cash flow vs. dividends, historical equity risk premium, 4:61, 63 from sales forecasts, 4:314 4:315–317 ICT capital and investment in GDP, single-stage model, 4:320–321 mistakes with net income and 1:647, 648 three-stage growth model, 4:330 EBITDA, 4:316–317 index-linked bonds, 6:396, 397 two-stage free cash flow model, noncash charges, 4:295–301 labor force participation rate, 1:643, 645 4:323–330 working capital effects,4: 299–301 natural resources, 1:640 on uses-of-free-cash-flow-basis, model variations, 4:320–336 OECD Principles, 3:256n.18 4:308–310 for international stocks, 4:320–321 population growth, 1:642 free cash flow to equity (FCFE) valuation and sensitivity analysis of FCFF and portfolio weights, 6:475 model, 4:24 FCFE valuations, 4:321–323 private real estate valuation, 6:57 free cash flow to the firm (FCFF) single-stage model, 4:320–321 publicly traded real estate equities, and cash flow from operations, three-stage model, 4:330–331 6:81 1:280–281 two-stage model, 4:323–330 R&D expenditures, 1:649 claims valuation with, 3:65 for nonoperating assets, 4:337 real GDP per capita, 1:621, 677, 678 defined, 3:304n.13; 4:285 practice problems, 4:340–358 real yields, 6:400 from EBIT, 4:306–308 solutions to problems, 4:359–376

Cumulative_Ind_L2 39 June 14, 2018 9:39 PM I-40 Index

Freedom of Information Act, 1:724; macroeconomic factor models vs., distribution waterfall for, 6:155 6:155 6:290–292, 294 drag along rights for, 6:156 free operating cash flow/total debt ratio, return attribution with, 6:293–294 economic terms for, 6:153–154 6:433 risk attribution with, 6:298–300 performance of, 6:159–161, 164 free trade, 1:625–626, 715–716 statistical factor models vs., 6:293 risks and costs of investing, French, Kenneth, 4:79; 6:450n.30 structure, 6:289–293 6:156–157 FRI basis. see full repairing and insuring fundamental law of active management, structures of, 6:152–156 basis 6:487–515 valuation of, 6:158–159 Friedman, Milton, 3:216–217 and active security returns, 6:488–492 unlimited, 3:10 friendly mergers, 3:291–292 applications of, 6:499–512 funds available for distribution (FAD), friendly transaction, 3:280 basic, 6:492–494 6:105. see also adjusted funds from front-end loading, 4:432 and ex ante measurement of skill, operations (AFFO) Frontier Communications Corp., 6:512–513 funds from operations (FFO) 4:402–404, 458, 459 ex post performance from, 6:497–499 in Capitol Shopping Center REIT Inc. front-running, 1:159 fixed-income strategies based on, case study, 6:115, 118 front running, 6:544 6:506–512 growth in, 6:104 FRS17 accounting rule, 6:423 full, 6:494–497 in real estate valuation, 6:105–108 FSA. see Financial Services Authority global equity strategy based on, future cash flows FSPTX. see Fidelity Select Technology 6:499–506 discounting of, 6:381 Fund and independence of investment expectations of, 6:383 F-statistic tests, 1:305–306 decisions, 6:513–514 for present value models, 4:199–201 distribution table, 1:739–742 limitations of, 6:512–515 uncertainty about, 6:381, 382 and heteroskedasticity, 1:349 “The Fundamental Law of Active future earnings and multicollinearity, 1:360 Management” (Grinold), 6:472 expected volatility of, 3:148–149, 154 with multiple linear regression, fundamental options, 3:52, 55 in residual income model, 4:516 1:341–343 fundamental P/E, 4:222–224 future price risk, reducing, 5:456 and serial correlation, 1:356 fundamentals. see also forecasted futures (futures contracts), 5:322–343 FTC. see Federal Trade Commission fundamentals-based valuation arbitrageur strategy of selling, 5:335 FTSE. see Financial Times Stock currency crisis warning systems based Black option valuation model for, Exchange on, 1:596 5:412–414 FTSE 100 Index, 1:277–278 currency exchange rate models based carry arbitrage model for forwards vs., FTSE All-Share Index, 1:277–278 on, 1:540 5:342–343 FTSE Global Classification System, defined, 4:9 currency, 5:338, 450–452 4:399 forward P/E based on, 4:395–398 equity, 5:322 FTSE NAREIT All Equity REITs Index, market-based valuation with, 4:381–382 Eurodollar, 5:32 6:82 in peer-group comparison, 4:403–405 European options on, 5:412–414 FTSE Small Cap Excluding Investment terminal price multiples based on, 4:412 fixed-income, 5:333–337 Companies Index, 1:277–278 fundamental theorem of welfare pricing, 5:334–337 Fuji Electric Co., Ltd, 2:303 economics, 1:705–706 unique features, 5:333–334 Fuller, Wayne Arthur, 1:465 fund flows,6: 195 interest rate, 5:324–325, 448–450 full fair value accounting, risk funding pricing and valuation notation, measurements for portfolios with, available stable, 2:232–233 5:309–311 6:353 concentration of, 2:233 stock index, 5:453 full fundamental law of active overfunding, 6:358 synthetic assets with, 5:456 management, 6:494–497 private equity fund, 6:152–153 futures commission merchants (FCMs), full repairing and insuring (FRI) basis, stable, 2:219, 232 1:123 6:20 travel, 1:35 futures component, of Black model, full risk analysis, 1:530–531 underfunding, 6:358 5:412 fully automated digital wealth managers, funding costs, for regulation, 1:723–724 futures market 1:252 funding currencies, 1:572 commodities, 6:205–225 fully let property, 6:30 fund manager relationships, 1:32, 42 futures returns, 6:213–225 functional currency fund mandate, change in, 1:142 market participants, 6:205–208 defined, 2:131 Fundos de Investimento Imobiliaro spot and futures pricing, 6:208–213 determination of, 2:149 (FIIs), 6:83 futures options, two-period binomial foreign currency as, 2:150–151 funds model for, 5:398 parent’s presentation currency as, borrowed, 3:165–166 futures price 2:151–154 closed-end, 2:216 in carry arbitrage model, 5:343 functional form closet index, 6:481 currency futures, 5:338 model misspecification of,1: 364–372 exchange-traded, 2:216 defined, 5:309; 6:209 nonlinearity and bid–ask spread, fair dealing between, 1:86–87 equity futures, 5:322 1:366–370 mutual, 1:720–721; 2:216 fixed-income futures,5: 334–337 scaling and CFO/free cash flow pension globalization of, 6:211 relationship, 1:370–372 market risk management, 6:358–359 interest rate futures, 5:324–325 variable bias and bid–ask spread, private equity from, 6:155 notation for pricing, 5:309–311 1:365–366 risk budgeting, 6:363 and spot prices, 6:203, 204 functional obsolescence, 6:47 private equity, 6:152–156 futures value fundamental factor models, 6:289–293 closed-end private equity funds, 6:152 in carry arbitrage model, 5:343 defined, 6:285 corporate governance terms for, currency futures, 5:338 factors in, 6:285, 292–293 6:154–156 defined, 5:309, 310

Cumulative_Ind_L2 40 June 14, 2018 9:39 PM Index I-41

equity futures, 5:322 General Motors gilts, 5:29. see also UK gilt curve fixed-income futures,5: 337 DDM for valuing, 4:251, 267 GIPS. see Global Investment interest rate futures, 5:324–325 debt ratings, 3:109, 110 Performance Standards notation for valuation, 5:309–311 estimations of pension obligations, GlaxoSmithKline, plc FX markets. see foreign exchange 2:93, 94 corporate investment categories, 2:9 markets special dividends, 3:129 financial statement presentation, use of residual income, 4:492 2:48–51 G general partnerships (GPs), 6:152–156 stock options at, 2:106–107 G–10, 1:587, 595 general price index (GPI), 2:173, 176 glide path, 6:359 G–20, 1:707; 2:219 general public, as stakeholders, 3:202, Glitnir, 1:598 GAAP. see generally accepted accounting 203, 205 Global and Industry Classification principles general purpose technologies (GPTs), System (GICS), 4:77, 399–400, 448 G&A expenses. see general and 1:649n.16 global economy, private equity in, 6:136 administrative expenses general three-stage dividend discount global equity strategy, 6:499–506 gain(s) model, 4:232–233 Global Exchange, 3:212 actuarial, 2:80, 83–85 genetic tuning, 6:538 global financial crisis (2007-2009) capital, 3:139–140, 152 geographic analysis of revenue, 4:109 and credit default swaps, 5:277, 287 disclosure of, 2:138–143 geometric Brownian motion (GBM), credit rating agencies in, 1:724 from foreign currency transactions, 5:377, 402–403, 412 and credit scores, 5:211 2:135–143 geometric mean, 4:60, 63–64 credit spreads in, 6:435 on income statement, 2:136–137 Georgia State University, 3:262 disclosure of discount window maximum German Deutschemarks, 1:580–581 borrowers in, 1:724 for bear spread, 5:475–476 Germany economic disruption in, 4:167 for bull spread, 5:474 active return and weights for equities, equity market trends and exchange for covered calls, 5:462, 463 6:499, 501–504 rates, 1:582–583 for protective put, 5:467 age distribution, 1:643 government support of banks during, for spreads, 5:480 average hours worked, 1:646 2:238, 239 monetizing, 5:285–286 banking regulations in, 2:215 and illiquidity, 2:232 nonoperating, 4:528–529 Basel Committee membership, 2:218 and Lehman Brothers bankruptcy, 2:240 purchasing power, 2:173 benchmark for swaps, 5:29 money market mutual fund collapse as quality of earnings indicators, 4:19 boards of directors composition, 3:238 in, 1:721 remeasurement, 2:152 commercial property values, 6:456 real default-free yields after, 6:400–401 gain-on-sale accounting, 2:358 covered bonds, 5:250 and regulation of financial markets, Gala Coral, 1:281–282 cross-border bank mergers, 3:287 1:717, 722 Galderma, 2:375 dividend payout ratios, 3:159 regulatory interdependency in, 1:707 gamma (γ), 5:423–426; 6:341. see also economic growth, 1:653 sovereign debt in, 6:436 carry benefits equity REITs, 6:83 and systemic risk, 2:214 gamma risk, 5:425–426 exports, 2:130 VIX in, 5:430 Gap, 6:216 ex post equity risk premium, 6:445 yield curve movement in, 5:45–46 GARCH. see generalized autoregressive fiscal and monetary policy,1: 587 Global Investment Performance Standards conditional heteroskedasticity GDP growth rate, 4:212 (GIPS), 1:98, 129; 6:159–160 GATX Corporation, 4:400 government bond market, 5:25 globalization, regulation of commerce GBM. see geometric Brownian motion historical equity risk premium, 4:61, 63 and, 1:714–715 GDP. see gross domestic product ICT capital and investment in GDP, global organizations, financial GE Capital Corporation, 3:149; 5:125 1:647, 648 institutions as, 2:217–220 Gelbtuch, Howard, 6:57n.19 index-linked bonds, 6:396 global recession, 3:179 general and administrative (G&A) labor and total factor productivity, Global Reporting Initiative (GRI), 3:261 expenses, 6:106 1:650–651 global trends, in payout policy, General Electric (GE) labor force participation rate, 1:643, 3:177–178 conglomerate merger, 3:281 645 global warming, regulatory corporate governance, 3:248–254 mortgage lending value, 6:24 interdependency on, 1:707 DDM for valuing, 4:251, 267 natural resources, 1:640 GMI. see gross margin index dividend cuts, 3:179, 182–183 OECD Principles, 3:256n.18 going-concern assumption, 2:332; 4:8 financial flexibility,3: 149 population growth, 1:642 going-concern value, 4:8, 586 value creation, 6:141, 143 portfolio weights, 6:475 going-in capitalization rate, 6:30, 34–36 generalized autoregressive conditional private real estate valuation, 6:57 gold, 6:195, 225 heteroskedasticity (GARCH), probability of government default, 6:381 golden parachutes, 3:296 1:483–484 R&D expenditures, 1:649 goodwill generalized least squares method, 1:354 real GDP per capita, 1:621 in acquisition method, 2:39 generalized linear model, 1:383 share repurchases, 3:161 adjustments to book value for, 4:419 generally accepted accounting principles sovereign credit risk, 6:435 and balance sheet quality, 2:343–346 (GAAP). see also US GAAP Getinge AB, 4:429–431 and business combinations, 2:46–48 adjusted earnings, 4:386 GGM. see Gordon growth model defined, 4:495 and financial reporting quality, GICS. see Global and Industry in equity method, 2:29–30 2:292–293 Classification System impairment of, 2:46–48, 381–382 and sales on bill-and-hold basis, 4:427, gifts and intercorporate investment in 428 from clients, 1:39 associates, 2:29–30 sales order backlogs, 2:304 limiting, 1:36 in mergers and acquisitions, 2:301 General Mills, 2:186–187 from related parties, 1:38–39 and net asset value per share, 6:100

Cumulative_Ind_L2 41 June 14, 2018 9:39 PM I-42 Index

Goodwill and Other Intangible Assets equity risk premia relative to, 4:61, in equity risk premium estimate, (ASC 350), 4:559n.5–6 63–65 4:69–71 Goodwill and Other Intangible Assets long-term, 4:64–65 government bond spread, total return (SFAS 142), 4:559n.5 sovereign credit risk with, 6:433–436 and growth in, 6:420–421 goodwill impairment stock returns and, 1:279 growth rate of, 4:211–212 for AOL–Time Warner merger, 4:584 total return, GDP growth, and spread growth relative to GDP growth in consolidation process, 2:46–48 for, 6:420–421 approach, 4:111 and DuPont analysis, 2:381–382 yields on, 6:413–415 industrial product demand and growth in private company valuation, 4:556, government bond market, 5:25 in, 6:194 559–560 government budget deficits, potential in macroeconomic factor models, and residual income models, 4:495 GDP and, 1:631 6:286–288 Goodyear Tire & Rubber Company, government debt, returns for stock vs., nominal, 1:487; 4:212 4:400 4:60–63 potential, 1:620, 628–633 Google, Inc. government ownership, of banks, 2:239 real, 1:524–525, 620–623 and cannibalization of PC market, government policy, cross-border M&As real per capita, 1:620–623, 676–677 4:154 and, 3:286 and real risk-free rate, 6:395 long-term growth, 4:168 government regulation(s) gross income multiplier, 6:32–33 Microsoft’s challenge of, 1:716 of commerce, 1:714–715 gross internal rate of return, 6:160 present value of growth opportunities, and competitive forces, 4:139 gross leases, 6:19, 20, 93 4:221 and long-term forecasts, 4:167–168 Grossman–Stiglitz paradox, 4:6 residual income model for valuation, for private equity investments, 6:157 gross margin 4:503–504 and taxes/subsidies in economic and cost of goods sold, 4:118–119 Google Translate app, 1:246 sectors, 1:721–723 Intel Corporation, 1:451–453 Gordon, Myron, 3:136 tools for, 1:708–710 gross margin index (GMI), 2:307 Gordon growth model (GGM), governments, as stakeholders, 3:202, 203 gross unrealized losses, 2:248–249 4:210–225 government-sponsored enterprises groundwater contamination lawsuits, dividend growth in, 4:217–218 (GSEs), 5:124 2:351–352 dividend yield from, 4:438 government support, of banks, group decision making, 1:129 earnings growth in, 4:217–218 2:238–239 Groupe Eurotunnel, 3:142 equation, 4:210–217 GPCM. see guideline public company Group of Ten. see G–10 equity risk premium from, 4:68–69 method Group of Twenty. see G–20 examples, 4:212–217 GPI. see general price index Groupon, 2:313, 349–350; 4:428 expected rate of return from, GPs. see general partnerships group research, 1:129, 132 4:224–225 GPTs. see general purpose technologies growth. see also Gordon growth model future dividend growth pattern, 4:209 Graham, Benjamin, 3:136; 4:20–21, 382 (GGM) implied dividend growth rate, grains, 6:194, 201–202 constant-growth FCFE model, 4:289 4:219–220 Granger, Clive W. J., 1:486 constant-growth FCFF model, 4:288–289 justified P/B from,4: 422 grant date, 2:107 dividend, 4:217–218 justified P/E from,4: 222–224, 395 granularity, of sensitivity risk measures, earnings, 6:439–444 with negative growth, 4:217 6:349–350 economic (see economic growth) for noncallable fixed-rate perpetual great moderation, 6:399 and equity risk premium, 4:70 preferred stock, 4:216–217 Great Plains Energy, 4:252 exponential, 1:440–441 and present value of growth Great Recession, 5:45–46. see also global external, 3:283 opportunities, 4:220–222 financial crisis (2007-2009) forecasting, 4:244–246 and price-to-earnings ratio, 4:222–224 Greece internal, 6:110 P/S estimates from, 4:429 average hours worked, 1:646 long-term, 4:168 required return from, 4:224–225 default-free government bonds, 6:425 Malthusian model of, 1:659 and share repurchases, 4:218–219 labor force participation rate, 1:643, 645 negative, 4:217 and terminal price multiples, 4:412–414 OECD Principles, 3:256n.18 no-growth company, 4:220–221 in two-stage dividend discount model, population growth, 1:642 organic, 3:283 4:226 sovereign credit risk, 6:435 in perpetuity calculations, 4:168 value appreciation in, 4:217–218 Greek debt crisis, 5:273 population, 1:641–642 governance. see also corporate Greeks (option Greeks), 5:420–429 present value of growth opportunities, governance about, 5:377 4:220–222 commodity indexes and, 6:228 delta, 5:420–423 profit, 3:204–206 ESG factors, 4:17, 331–336; 5:288–289 gamma, 5:423–426 retail sales, 6:94–95 ESG risk exposures, 3:260–262 rho, 5:428–429 revenue, 3:209 statement of governance policies, theta, 5:426–427 sales, 4:313, 328–330 3:245–246 vega, 5:427–428 supernormal, 4:225 government bills, 4:61–62, 64–65. see greenmail, 3:163, 282n.2, 296 transitional, 1:668–670 also US Treasury bills (T-bills) Greenspan, Alan, 1:540; 6:447 value of, 4:220–222 government bond(s). see also US GRI. see Global Reporting Initiative growth accounting equation, 1:637–638 Treasury bonds (T-bonds) Grinold, Richard, 6:472 growth capital expenditures, 4:133 as benchmark for risky bond valuation, grocery segment, gross margins in, growth options, 3:52 5:219–222 4:118–119 growth phase, company, 4:225, 413–414 break-even inflation rates for,6: 410–415 gross domestic product (GDP), 6:94–95 growth rates conventional, 6:410–413 and consumption, 6:441–442 compound annual, 4:157, 158 with credit premiums, 6:425–426 default-free interest rates and growth in dividend discount valuation, in credit risk modeling, 5:202 in, 6:392, 393 4:241–247

Cumulative_Ind_L2 42 June 14, 2018 9:39 PM Index I-43

forecasting of, 6:110 health care real estate investment trusts, High Dividend Universe (HDU), 3:183 implied dividend, 4:219–220 6:91, 93–95 highest and best use, 6:26–27 longer-term, 6:111–113 health insurance policies, 2:273 highest requirement, following, 1:28 mature, 4:226 HealthSouth, 3:210 high-frequency trading (HFT), 1:253; and retention rates, 4:243–246 hedge fund managers, market risk 6:535–540. see also algorithmic steady state, 1:660–666 management by, 6:357–358 trading and high-frequency trading and capital deepening, 1:660–661 hedge ratios highly inflationary economies, foreign in China, Japan, and Ireland, in one-period binomial model, 5:381, currency financial statements in, 1:661–662 383 2:154–157 as equilibrium, 1:662–665 in two-period binomial model, 5:388 high minus low (HML) risk factor, 4:80; impact of parameters on, 1:663–665 hedgers, in commodity markets, 6:206 6:284, 294–296 sustainable, 4:238, 241–242 hedges high-quality earnings, 2:229, 290–293, in three-stage dividend discount BSM model and, 5:406–407 310 model, 4:234–236 derivatives as, 2:258 high-quality financial reporting, in two-stage model for free cash flow as investment industry intermediaries, 2:291–293 valuation, 4:324–330 2:216 high tech bubble, 6:407 growth relative to GDP growth optimal number of units as, 5:421 high yield bonds, 1:279 approach, 4:111 hedge wrappers. see collars high-yield currencies growth stocks, 6:448–450 hedging in carry trades, 1:572–573 Grupo Aeroportuario del Sureste, 4:169 of consumption, 6:438–439 real value of, 1:582 Grupo Schincariol, 4:137 of foreign exchange risk, 2:143 hiring, 3:219–220 GSEs. see government-sponsored with index credit default swaps, 5:275 historical analysis, business context for enterprises strategies for, 4:118, 150–151 valuation and, 4:13 GTM. see guideline transactions method Hedging Pressure Hypothesis, historical average earnings per share, Guidant Corporation, 3:278–279 6:214–216 4:388 guideline assets, 4:379 hedging risk, BSM model and, 5:422 historical data, probability distributions guideline companies, 4:379 hedonic index, 6:59–60 based on, 1:520–521 guideline public company method Heineken NV historical default probability, 5:203, 204 (GPCM), 4:570, 579–583 in Brazilian beer market, 4:137 historical estimation Guidelines and Regulations on Corporate effective tax rate reconciliation of equity risk premium, 4:59–68 Governance (Monetary Authority of disclosure, 2:184–185 adjusted, 4:65–68 Singapore), 3:255–256 foreign currency transactions, arithmetic/geometric mean, 4:63–64 guideline transactions method (GTM), 2:140–142 in developing markets, 4:66–67 4:579, 584–586 in Russian beer market, 4:140 for long-term government bonds guilder, Dutch, 1:640n.13 in UK beer market, 4:138 vs. short-term government bills, held for trading investments, 2:11 4:64–65 H held-to-maturity investments and returns of stocks vs. government Halliburton Co., 3:214; 4:14 impairments for, 2:16 debt, 4:60–63 Hammond, P. Brett, 4:71 intercorporate investments in, 2:10–11 of interest rate volatility, 5:85 Hansen’s method of adjusting standard reclassification of,2: 14–15 historical exchange rates, 2:145 errors, 1:358–359 held-to-maturity (HTM) securities, 2:249 historical P/E. see trailing P/E Hansen–White standard errors, Henkel, 4:120, 121 historical scenarios, 6:344–346. see also 1:358n.49 Hennessy, 4:175 scenario analysis; scenario risk hard capital rationing, 3:42 Henry, E., 4:449n.57 measures harmonic mean, 4:457–459 Herfindahl–Hirschman Index (HHI), historical simulation method Harmonised Index of Consumer Prices 3:300–302 parametric method vs., 6:329–330 (HICP) Hertz, David, 1:528–529 VaR estimation, 6:327–330 bias in forecasts of, 1:303–305 heterogeneity, real estate, 6:9–10 historical tables, research report, 4:36 and inflation,1: 273–274 heteroskedasticity, 1:362–363 historical valuation multiples, 4:166–167 linear regression of forecasts for, and assumptions of regression analysis, HKex Group, 6:207 1:291–292 1:349–355 HML risk factor. see high minus low risk “Harrod neutral” technical change, conditional, 1:352–354, 481–484 factor 1:660n.21 consequences of, 1:349–351 H-model, 4:226, 230–233 Hartford Financial Services Group, correcting for, 1:354–355 holding period returns, 4:52–53; 6:58 2:269, 270 defined, 1:349, 481 holding periods Hart–Scott–Rodino Antitrust testing for, 1:352–354 DDM for multiple, 4:208–210 Improvements Act (1976), 3:299 heteroskedasticity-consistent standard DDM for single, 4:207–208 Harvard University, 3:263 errors, 1:354n.42 hold-out sample, 1:391n.86 Harvey, Campbell R., 4:90n.53 Hewlett, Bill, 3:215 Ho–Lee model, 5:42–44 Hawawini, Gabriel, 4:133n.4, 133n.5 Hewlett-Packard Company (HP), 2:356; Home Depot, 1:500–501, 523–526; hazard rate, 5:205, 278–280 3:215 3:208 HCA, Inc., 6:150 HFT. see high-frequency trading homemade leverage, 3:135n.9 HDU. see High Dividend Universe HHI. see Herfindahl–Hirschman Index home prices, demand for multi-family health care “Hicks neutral” technical change, properties and, 6:21 in developing vs. developed countries, 1:660n.21 homogeneity, in securitized debt, 1:625 H I C P. see Harmonised Index of 5:248–249 government subsidies and regulation Consumer Prices homoskedasticity assumption, 1:290, for, 1:721–722 hidden value, from mergers and 349, 481 US cost of, 2:95–97 acquisitions, 3:286 Honda Motor Company, 4:409–410

Cumulative_Ind_L2 43 June 14, 2018 9:39 PM I-44 Index

Hongkong Land, 6:96 The Identification of Contributory Assets capitalized income method, 4:570 Hong Kong Monetary Authority, 2:218 and the Calculation of Economic comprehensive, 4:516, 521–525 Hong Kong SAR Rents (Appraisal Foundation), from consolidated affiliates,4: 132 active return and weights for equities, 4:578, 596 covered calls for generating, 5:460–461 6:500, 503, 504 idle cash, share repurchase with, economic, 3:58–61 Basel Committee membership, 2:218 3:164–165 in equity risk premium estimate, 4:70 equity REITs, 6:83 IEA. see International Energy Agency gross income multiplier, 6:32–33 Financial Stability Board, 2:219 IFRS. see International Financial interest, 4:126–127 FX market hours, 1:542 Reporting Standards net publicly traded real estate equities, IGBVT. see International Glossary of adjusting, 4:302–306 6:81 Business Valuation Terms in capital budgeting, 3:56 real estate equities market, 6:82 IKEA, 4:556 and FCFE, 4:302–306 horizontal merger, 3:280 illegal activity, disclosure of, 1:104 and FCFF, 1:280–281, 284–285; Hormel Foods, 4:202–204 illiquidity, of commercial real estate, 4:289–293, 302–306 hospitality properties, 6:12 6:453–454 on foreign currency financial hostile mergers, 3:282, 292–293 illiquidity discounts, 4:30 statements, 2:182–183 hostile transactions, 3:280 Ilmanen, Antti, 6:220–221 interest, 2:237, 258 hotel real estate investment trusts, 6:91, IMF. see International Monetary Fund and mistakes in forecasting free cash 93–95 Immelt, Jeffrey,3: 149 flows, 4:316–317 hot issue securities, 1:84 impairment and operating cash flow,2: 314–318 hours worked, average, 1:646 of available-for-sale assets, 2:16–17 and other comprehensive income, H P. see Hewlett-Packard Company for debt securities, 2:15–17 2:304–305 HSBC Holdings plc, 2:220 at Deutsche Bank, 2:16–17 and two-stage model for free cash asset quality, 2:225–228 for equity securities, 2:15–17 flows, 4:326–328 capital position, 2:222–223 and financial reporting quality, net interest, 2:237, 258 earnings, 2:229–232 2:303–304 nonoperating, 2:99–101 liquidity position, 2:234–236 goodwill operating market risk, 2:236–238 for AOL–Time Warner merger, 4:584 net, 6:27–33, 36, 43, 48, 99–100, 106 HTM. see held-to-maturity securities in consolidation process, 2:46–48 normalized, 4:129 Huamao Property Holdings, Ltd., 2:26 and DuPont analysis, 2:381–382 overstatement/non-sustainability of, Hua Xia Bank Company Limited, 2:26 in private company valuation, 4:556, 2:299 hubris hypothesis, 3:318–319 559–560 reclassifying components of, 2:99–101 human capital, 1:639, 646–647; 4:415 and residual income models, 4:495 other comprehensive, 4:521–525 Hungary, 3:256n.18 for held-to-maturity investments, 2:16 accumulated, 4:521 hurdle rates, 6:154, 365 and intercorporate investment in as dirty surplus item, 4:505n.12 hybrid approach associates, 2:31 fair value through, 2:20–22 modeling operating costs, 4:114 and intercorporate investments in and net, 2:304–305 modeling revenue, 4:111, 112 financial assets,2: 15–19 and periodic pension cost, 2:82–83, 98 hybrid REITs, 6:82 for loans, 2:229 and residual income, 4:521–525 hyperinflationary economies,2: 172–176 Impairment of Assets (IAS 36), 4:559n.5–6 persistence of, 4:511 hyperparameters, neural network, 1:386 impairment of capital rule, 3:153 from private real estate investments, hypothesis testing implementation costs, of regulation, 6:13, 41 with linear regression model for one 1:718–719 pro forma, 2:313 variable, 1:297–305 implementation shortfall algorithms, from publicly traded real estate bias in inflation forecasts,1: 303–305 6:534 securities, 6:82, 85, 89 company value and returns to implied bid price, of currency, rental, 6:452 invested capital, 1:301–303 1:545–546 residual, 4:493–497 (see also residual estimating beta of stock, 1:299–301 implied dividend growth rate, 4:219–220 income model; residual income with multiple linear regression model, implied risk-neutral probability, 5:43 valuation) 1:341–343 implied volatility, 5:85, 429–433 calculation, 4:493–495 hypothetical scenarios, 6:346–347 about, 5:377 for capital budgeting, 3:63–64 from BSM model, 5:429–430 commercial implementations, I and options prices, 5:486 4:496–497 IAIS. see International Association of in option trading, 5:431–433 continuing residual income, 4:507 Insurance Supervisors variability in, 5:430 determinants of, 4:505–506 IAS19 accounting rule, 6:423 and volatility indexes, 5:430–431 equity valuation with, 4:495–496 IASB. see International Accounting inadequate compliance procedures, per-share, 4:498–499 Standards Board 1:124 in present value models, 4:205–206 IBM. see International Business inadequate supervision, 1:124–125 returns as, 4:205–206 Machines Corporation incentives sales comparison approach to valuing, IC. see information coefficient creating appropriate incentive 6:25–27 ICB. see Industrial Classification structures, 1:122 shareholders preference for capital Benchmark for mergers and acquisitions, 3:285 gains vs., 3:152 ICE. see Intercontinental Exchange incident-reporting procedures, 1:109 sustainability of, 2:230 Iceland, 1:598–599; 3:256n.18 income. see also income measures; net income approach to private company ICT capital. see information, computer, operating income (NOI) valuation, 4:562, 569–578 and telecommunications capital accounting, 3:59–61 capitalized cash flow method,4: 575–577 idea generation, in capital budgeting from affiliates,4: 132 and discount rate for private company, process, 3:6 capital gains vs. current, 3:152 4:571–574

Cumulative_Ind_L2 44 June 14, 2018 9:39 PM Index I-45

excess earnings method, 4:577–578 Independence and Objectivity [Standard economic growth, 1:654, 656–658, free cash flow method,4: 575 I(B)] 679–680 required rate of return from, application of the standard, 1:36–42 economic statistics of Brazil vs., 4:570–574 in case studies, 1:215, 219 1:694–696, 699 income approach to private equity compliance procedures, 1:35–36 education spending, 1:624 valuation, 6:138 guidance, 1:30–35 equity REITs, 6:83 income approach to real estate valuation, buy-side clients, 1:31 equity risk premium, 4:66–67, 90 6:27–46 credit rating agency opinions, exports and foreign direct investment advantages and disadvantages, 6:45 1:33–34 in, 1:681 cost and sales comparison approaches fund manager and custodial foreign investment in, 1:625 vs., 6:25–27 relationships, 1:32 ICT capital and investment in GDP, direct capitalization method, 6:29–33 influence in manager selection/ 1:647, 648 discounted cash flow method,6: 33–45 procurement process, 1:34 inflation-indexed bonds,6: 396 advanced, 6:41–45 investment banking relationships, labor and total factor productivity, discount rate and cap rate, 6:33 1:32–33 1:651 and equivalent yield, 6:40–41 issuer-paid research, 1:34–35 labor supply, 1:641 and lease structure, 6:37–40 performance measurement and natural resources, 1:640 terminal capitalization rate, 6:34–36 attribution, 1:33 population growth, 1:642 errors in analysis, 6:45–46 public companies, 1:33 precious metals, 6:195 in Germany, 6:56 travel funding, 1:35 R&D expenditures, 1:650 net operating income in, 6:28–29 text of, 1:16, 30 real default-free interest rates, 6:393 income measures, 3:57–65 independence policies, 1:36 real GDP per capita, 1:621, 623, 677 basic capital budgeting model as, 3:58 independent analysis, 1:69 share repurchases, 3:161 for economic and accounting income, independent contractors, 1:108–109 indirect costs, of regulation, 1:719 3:58–61 independent practice, 1:106 indirect lending, 6:6 for economic profit,3: 62–63 independent projects, 3:10 indirect ownership, of real estate, 6:6 for residual income, 3:63–64 independent regulators, 1:703 individual investors income models of valuation, 4:23n.8 independent variable(s) alternative data from, 1:243, 244 income-producing real estate assumptions about, 1:290, 334, 335 investment management for, 6:249 properties, 6:11. see also correlation of errors with, 1:372–376 return requirement and risk tolerance commercial real estate defined, 1:286, 328–329 of, 6:261 income return, for appraisal-based lagged, 1:436, 448 individual stock selection, 6:505–506 indexes, 6:58–59 and lagged dependent variables, Indonesia income statement modeling, 4:108–132 1:355–356 Basel Committee membership, 2:218 non-operating costs, 4:126–131 linear regression model with one, commodity exchanges, 6:207 operating costs, 4:114–126 1:286–289, 305–308 natural resources, 1:640 revenue, 4:108–114 measurement errors with, 1:372–376 real GDP per capita, 1:621, 677 income statements model misspecification due to, Indonesia Financial Services Authority, consolidated, 2:49–51, 300–301 1:365–366 2:218 foreign currency, 2:173–174 omission of, 1:365–366 Industrial Classification Benchmark gains and losses on, 2:136–137 time-series analysis with multiple, (ICB), 4:77, 399, 400 IFRS and US GAAP on, 4:108 1:487–488 industrial conglomerates, 4:400 of Nestlé, 2:375–376 index arbitrage, 6:536 industrial (base) metals periodic pension costs in, 2:82–83, index CDS, 5:270, 274–275 average annual sector roll return, 98–101 indexes. see also specific indexes 6:224, 225 pro forma, 4:172–177 alternative index approaches, 6:301 commodity life cycle, 6:199–200 corporate income tax, 4:177 commodity futures, 6:230–234 as commodity sector, 6:194 cost of goods sold, 4:173 enhanced index investment strategy, industrial properties, 6:11–12, 20 non-operating expenses, 4:176–177 6:253–254 industrial real estate investment trusts, operating profit,4: 175–176 and estimation of beta, 4:72 6:91–93 revenue forecasts, 4:172–173 hedonic, 6:59–60 industrial sectors selling, general, and administrative managing to, 1:93 and credit quality, 6:431–432 costs, 4:173–175 profitability, 3:16–17 selection of stock based on, reclassifications on,2: 298 real estate, 6:57–61 6:505–506 income tax, corporate, 4:128–131, 177 and relative strength indicators, industry(-ies) incremental cash flows,3: 9, 35 4:454–456 classifications of,4: 399–401 incremental VaR (IVaR), 6:337 repeat sales, 6:59–60 comparison of company’s earnings incumbent companies, rivalries with. see rules-based, 6:228 with, 2:323 established rivals security market, 6:473 price multiples for, 4:405 incurable physical deterioration, 6:46 selection-based, 6:228 industry analysis, 4:12–14. see also indemnification assets,2: 38–39 stock, 1:277–278; 5:321 financial forecasting indenture, 3:153 as value added benchmarks, 6:473 industry costs, 4:150–151 independence volatility, 5:430–431 industry experts, 1:59–60 of board of directors, 3:236–237, Index Industry Association, 6:228 industry factors, 4:581; 6:293 250–251 indexing, 6:253 industry life cycle, 3:287–288 of chairman of board, 3:237–238 index-linked bonds, 6:396–401 industry overview, 4:170–171 of committee members, 3:252 India industry sales, 4:145–147 of investment decisions, 6:513–514 Basel Committee membership, 2:218 industry structure, as context for of legal and expert counsel, 3:245 common law, 3:113 valuation, 4:12–13

Cumulative_Ind_L2 45 June 14, 2018 9:39 PM I-46 Index

inflation, 4:145–153 multiperiod forecast, 1:454–456 in full fundamental law of active bias in forecasts of, 1:303–305 out-of-sample forecast comparisons, management, 6:495 break-even inflation rate,6: 410–415 1:457–458 and investor skill, 6:512–513 and capital budgeting analysis, 3:37–38 testing for ARCH(1), 1:482–483 and mean–variance optimal weights, and capital structure, 3:114, 115 inflation risk,4: 84; 6:301, 302 6:490 cost projection effects,4: 150–153 inflection points, long-term forecast, information ratio, 6:480–482 company costs, 4:151–153 4:167–168 ex ante and ex post, 6:481 industry costs, 4:150–151 information expected value added based on, input costs at Lindt and Nestlé, account, 1:77 6:486–487 4:151–153 on applicable laws, 1:27 in fixed-income strategies,6: 507–508, and due diligence for equity REITs, asymmetric, 3:105, 207–208 510 6:90 confidential in optimal portfolio construction, and equity risk premium, 4:70 about CFA program, 1:165–166 6:483, 485, 487 and exchange rates, 1:565–566 accidental disclosure of, 1:104–105 as relative reward-to-risk measure, and Fed Model, 4:408 of firm,1: 115 6:477 and foreign currency financial intentional disclosure of, 1:103–104 in risk attribution, 6:296–297 statements possessing, 1:103 Sharpe ratio vs., 6:481–482 in highly inflationary economies, considering, before taking action, 1:77 infrastructure, public, 1:653 2:154–157 decision-useful, 2:292 initial coin offerings,1: 256 in hyperinflationary economies, dissemination of, 1:60, 84–85, 161–162 initial conversion price, 5:168 2:172–176 dividends as signals of, 3:141–144 initial public offerings (IPOs) and gold, 6:195 electronic, 1:102 appraisals for, 4:10 and Harmonised Index of Consumer for equity valuation, 4:16–22 exiting private equity investments with, Prices, 1:273–274, 291–292 manipulation of, 3:213 6:149–150 and interest rates, 1:352–354, 522 material, 1:57, 64 fair dealing in, 1:87 in macroeconomic factor models, material nonpublic (see material limited participation in, 1:158–159 6:286–288 nonpublic information) manager-shareholder conflicts in, and money supply misrepresentation of (see 3:231 coefficient of determination, misrepresentation) private company valuation for, 1:296–297 nonpublic 4:559 correlation, 1:283 acting on, 1:63, 66 quantifying lack of marketability covariance and standard deviation, analyst recommendations as, discounts with, 4:591–592 1:269–270 1:65–66 risk capital in, 3:203–204 fitted regression line,1: 288 controlling, 1:64 initiation date linear regression, 1:287–289 defined, 1:58 in binomial option valuation model, scatter plot, 1:264–265 standards for priority of transactions 5:378, 379 standard error of estimate, 1:294–295 with, 1:158 forward value at, 5:311 and P/E, 4:410–412 out-of-date, 1:52–53 in-process research and development, and private real estate equity potential misrepresentation of, 1:49 2:55–56 investments, 6:13, 15–16 for private equity investments, input costs and publicly traded real estate 6:139–140 at Carrefour SA, 4:149–150 securities, 6:82 for private real estate equity and company costs, 4:151–153 and real exchange rates, 1:557 investments, 6:16 and company sales, 4:147–149 risk premium for uncertainty in, quality of, 1:531; 4:557–558 and industry costs, 4:151 6:402–403 regulatory, 4:16 and industry sales, 4:145–147 sales projection effects,4: 145–150 relevant, 2:292n.3 at Nestlé and Lindt, 4:151–153 company sales, 4:147–149 retention of, on new media, 1:147 inputs industry sales, 4:145–147 risk, 2:346–359 estimation of, 1:526–527 input costs at Carrefour SA, auditor’s opinions, 2:346–350 in fair value hierarchy, 2:229–230 4:149–150 event-specific disclosures,2: 358 model, 1:72 and single-stage model of valuation, financial press,2: 358–359 probabilistic, 1:522 4:320–321 legal proceedings and contingencies, simulation, 1:526–527, 529 and slope of yield curves, 5:15–16 2:351–355 valuation, 4:182–183 and S&P 500 Index returns, 1:271–272, Management Discussion and in-sample forecast errors, 1:456 294 Analysis, 2:355–357 insider trading and Taylor rule, 6:407 Notes to Financial Statements, and algorithmic surveillance, and T-bill returns 2:346–347, 350–355 6:543–544 conditional heteroskedasticity of, segment, 2:241 regulations for, 1:709, 710 1:353, 355 verification of outside,1: 47 insider transactions, 3:247–248 Fisher effect,1: 373–376, 484 information, computer, and insolvency laws, in IOSCO framework, serial correlation of, 1:359 telecommunications (ICT) capital, 1:714 and US Consumer Price Index 1:639, 647–649 Institute of Business Appraisers, correlated error testing, 1:447 informational asymmetry, 1:706 4:560n.9 Durbin–Watson statistic for, 1:447 informational friction, 1:706 institutional environment, leverage in, in-sample forecast comparisons, information-based manipulation, 1:68, 3:112–114 1:456–457 72–73 institutional investors, 5:452–453; 6:103, instability in time-series models, information coefficient (IC) 249 1:459–460 in correlation triangle, 6:489 Institutional Shareholder Services (ISS), linear trend models for, 1:438–440 and expected active returns, 6:500–501 3:262

Cumulative_Ind_L2 46 June 14, 2018 9:39 PM Index I-47

insurance guidance, 1:68–69 practice problems, 2:58–68 casualty, 2:265 text of, 1:16, 68 solutions to problems, 2:69–73 CDS vs., 5:276–277 Material Nonpublic Information interdepartmental communications, 1:61 health insurance policies, 2:273 [Standard II(A)], 1:56–67 interdepartmental referral arrangements, liability, 2:265 application of the standard, 1:63–67 disclosure of, 1:163 life, 2:273; 6:360 compliance procedures, 1:60–63 interdependencies, regulatory, portfolio, 6:364 guidance, 1:56–60 1:706–708 property insurance policies, 2:266 text of, 1:16, 56 interest protective puts as, 5:464–465 Intel Corporation accrued, 5:333, 334 insurance companies, 2:217; 3:300. see functional currency, 2:131 carried, 4:587n.37; 6:153 also specific types initial public offering,3: 203–204 effective, 2:11n.4 insurance company analyses, 2:264–280 market expectations and stock price, FCFF and after-tax, 4:290 life and health insurance companies, 4:10–11 under GAAP and IFRS, 4:293–294 2:273–280 predicting gross margins for, interest coverage ratio, 2:406 capitalization, 2:280 1:451–453 interest expense, 4:127–128 earnings characteristics, 2:276–277 sales, 1:447, 487 interest income, 4:126–127 investment returns, 2:278–279 intellectual property, 1:715; 3:210 interest-only loans, 6:62 liquidity, 2:279–280 intensity-based default rate models, interest paid, 4:432 products and distributions, 5:216 interest rate caps, 5:416 2:273–276 interbank market, bid–offer currency interest rate floors,5: 416 property and casualty insurance prices from, 1:541–543 interest rate forwards, 5:324–333 companies, 2:265–273 Interco/Canadaco case study, 2:157–171 interest rates and FRA payments, capitalization, 2:273 Intercontinental Exchange (ICE), 5:326–328 earnings characteristics, 2:266–270 5:324n.9; 6:205, 207 and Libor spot market, 5:324–325 investment returns, 2:270–271 intercorporate investments, 2:7–73 pricing of FRAs, 5:328–330 liquidity, 2:271–273 about, 2:8 risk exposure with, 5:450 products and distributions, 2:265–266 in associates, 2:23–35 time points in transactions, 5:325–326 Insurance Theory,6: 213–214 amortization of excess purchase valuation of FRAs, 5:331–333 insurers, market risk management by, price, 2:28–30 interest rate futures 6:359–360 disclosure, 2:34 in derivatives strategies, 5:448–450 intangible assets equity method of accounting for, pricing and valuation of, 5:324–325 in excess earnings method, 4:578 2:24–35 interest rate options in pre-money valuations, 6:149 fair value option, 2:30 binomial option valuation model for, and private company valuation, 4:556 and goodwill, 2:29–30 5:399–401 in residual income valuations, impairment, 2:31 Black option valuation model for, 4:526–528 investment costs in excess of book 5:414–417 Intangible Assets (IAS 38), 4:559n.5, value, 2:27–28 deferred payoffs for,5: 400n.8 578n.29 issues for analysts with, 2:34–35 rho for, 5:429n.17 integration of financial statement and ROE, 2:383 interest rate parity analysis, 2:371–414 and sale of inventory, 2:32–34 covered in financial statement analysis and transactions with associates, with currency forwards and futures, framework, 2:371–372 2:31–34 5:338 long-term equity investment case business combinations, 2:35–56 equation, 1:550 study, 2:373–402 acquisition method, 2:38–42 in exchange rate determination, 1:558 conclusions and recommendations, comparability issues, 2:55–56 and international parity conditions, 2:401–402 consolidation process, 2:42–48 1:570 data analysis, 2:374–401 financial statement presentation after, in prediction of spot rates, 1:560–564 data collection, 2:373 2:48–51 forward rate parity, 1:560–564 data processing, 2:374 IFRS and US GAAP comparability international, 1:557–572 follow-up, 2:402 issues, 2:55–56 covered interest rate parity, 1:558 purpose for analysis, 2:373 pooling of interests and purchase Fisher effect and real interest rate off-balance sheet leverage from methods, 2:37 parity, 1:567–570 operating leases case study, special purpose entities, 2:51–55 forward rate parity, 1:560–564 2:403–406 types of, 2:35–36 predictors of future spot rates, conclusions and recommendations, corporate investment categories, 1:560–564 2:406 2:9–10 and purchasing power parity, data analysis, 2:404–406 in financial assets,2: 10–22 1:564–567 data collection, 2:403 available-for-sale investments, relationships among conditions, data processing, 2:404 2:12–14 1:570–572 follow-up, 2:406 classification and measurement, uncovered interest rate parity, purpose for analysis, 2:403 2:20–22 1:558–560 practice problems, 2:408–412 fair value through profit or loss, real, 1:567–570 solutions to problems, 2:413–414 2:11–13 uncovered integrity, 1:55, 169, 717 held-to-maturity investments, and carry trades, 1:572 Integrity of Capital Markets [Standard of 2:10–11 in exchange rate determination, Professional Conduct II], 1:56–73 impairments, 2:15–19 1:558–560 Market Manipulation [Standard II(B)], loans and receivables, 2:12–14 and international parity conditions, 1:68–73 reclassification of investments, 1:570, 571 application of the standard, 1:69–73 2:14–15, 22 in prediction of spot rates, 1:560–564

Cumulative_Ind_L2 47 June 14, 2018 9:39 PM I-48 Index

interest rate risk, 5:150–161 from yield curve, 5:128–129 internal controls, 3:242 banks’ exposure to, 2:236 yield to maturity, 5:16–19 internal growth, in forecasting of growth duration, 5:151–158 in swap pricing, 5:350 rates, 6:110 effective duration,5: 151–155 swap rate curve, 5:24–33 internal rate of return (IRR) key rate durations, 5:156–158 about, 5:24–25 for capital budgeting, 3:11–12, 18–25 one-sided durations, 5:155–156 determination of, 5:27–28 multiple IRR problem, 3:22–24 effective convexity,5: 158–161 reasons for valuing bonds with curve, no IRR problem, 3:24–25 and forward exchange rates, 1:554 5:25–26 capital decisions based on, 3:56 for pension funds, 6:358–359 spread as price quotation convention, and equivalent yield, 6:40–41 Royal Dutch Shell’s disclosure of, 2:353 5:30–33 and fund performance, 6:159–160, and swaps, 5:276 and swap spread, 5:29–31 164 interest rates, 5:5–74 in valuation process, 5:26–27 gross, 6:160 about, 5:6 term structure, 5:33–45 leveraged vs. unleveraged, 6:63–64 and arbitrage-free forwards, 5:312 arbitrage-free models, 5:42–45 net, 6:160 average, 2:255–256 calibrating binomial interest rate and net operating income, 6:30–31 for binomial trees, 5:88 trees to match, 5:92–94 in net present value, 4:57–58, 69 and business cycles, 6:395–402, 404–409 equilibrium models, 5:38–42 ranking conflicts of NPV and IRR, default-free liquidity preference theory, 5:34 3:18–22 and business cycles, 6:395–402 local expectations theory, 5:33–34 due to cash flow patterns,3: 18–20 determination of, 6:384–392 modern models, 5:38–45 due to project scale, 3:21–22 and economic growth, 6:392–395 preferred habitat theory, 5:35–36 venture capital method of valuation in influences on,6: 409 segmented markets theory, 5:35 terms of, 6:169–171 real, 6:384–392, 395–402 traditional theories, 5:33–38 for zero-coupon bonds, 5:206–207 short-term, 6:409, 417 on US Treasury bills, 6:404–409 internal stakeholders, 3:202 and default-free yield curves, 6:419–420 and valuation of convertible bonds, International Accounting Standards, differentials in,1: 580–582 5:175 4:204n.10 fixed, in swaps,5: 449 volatility of (see interest rate volatility) Consolidated and Separate Financial forward rates, 5:8–24 yield curve factor models, 5:45–54 Statements (IAS 27), 2:36 active bond portfolio management, bonds’ exposure to yield curve The Effects of Changes in Foreign 5:20–24 movement, 5:45–47 Exchange Rates (IAS 21), 2:12n.5, and binomial interest rate trees, managing yield curve risks, 5:51–53 155–157 5:82–85 maturity structure of yield curve Employee Benefits (IAS 19), 2:76 in construction of binomial trees, volatilities, 5:50–51 Financial Instruments (IAS 9), 2:10 5:88–91 shape of yield curve, 5:47–50 Financial Instruments: Recognition and defined, 5:7 interest rate swaps, 5:345–349 Measurement (IAS 39), 2:10–19 in liquidity preference theory, 5:34 cash flows in,5: 345–346 Financial Reporting in in local expectations theory, 5:33–34 currency swaps vs., 5:450 Hyperinflationary Economies (IAS and spot prices/rates, 5:8–12 in derivatives strategies, 5:492–493 29), 2:154 from yield curve, 5:129 pricing, 5:27, 346–348 IAS19 accounting rule, 6:423 and FRA payments, 5:326–328 risk exposures with, 5:448–449 Impairment of Assets (IAS 36), and inflation,1: 352–354, 522 valuation, 5:348–349 4:559n.5–6 mean reversion of, 5:39–40 interest rate trees. see binomial interest Intangible Assets (IAS 38), 4:559n.5, nominal, 1:352–354, 567–568 rate trees 578n.29 P/E of market and, 4:408–409 interest rate volatility Interests in Joint Ventures (IAS 31), 2:9 practice problems, 5:56–66 about, 5:132–134 Investments in Associates and Joint real, 1:352–354, 631 and binomial interest rate trees, 5:83, Ventures (IAS 28), 2:9, 10, 23 default-free real interest rates, 221 Separate Financial Statements (IAS 6:384–392, 395–402 callable bonds with, 5:137–140, 142–145 27), 2:8–10 differentials in,1: 580–582 callable bonds without, 5:129–132 International Accounting Standards in Fisher effect,1: 352–354 changes in, 5:226–227 Board (IASB) and potential GDP, 1:631 estimating, with binomial interest rate on business combinations, 2:36, 37 real risk-free interest rates, 6:395 trees, 5:85 on fair value expensing of stock risk-free, 5:428, 429; 6:395 in Ho–Lee model, 5:44 options, 3:244n.15 sensitivity of duration to (see effective and option-adjusted spread, 5:147–149 on intercorporate investments, 2:8 convexity) and putable bonds, 5:132–134 regulations referencing, 1:703 short-term nominal, 6:403 putable bonds with, 5:137–138, 140–145 on special purpose entities, 2:52 solutions to problems, 5:67–74 putable bonds without, 5:130–132 International Association of Deposit and spot/forward exchange rates, in tests of bond analytics, 5:178 Insurers, 2:220 1:570–572 and yield curve volatility, 5:50 International Association of Insurance spot rates, 5:6–24 interest received, 4:432 Supervisors (IAIS), 2:220, 273 active bond portfolio management, interests International Bank for Reconstruction 5:20–24 business and Development, 2:215 from benchmark par curve, 5:82 minority, 4:441n.53 International Business Machines current forward curve and evolution noncontrolling, 2:43–46 Corporation (IBM) of, 5:21–22 pooling of interests accounting classification shifting at,2: 313 defined, 5:7 method, 2:37, 42n.29 cost of equity, 4:88–89 and forward prices/rates, 5:8–12 uniting of interests accounting dividend actions, 3:143 and spot curve, 5:7 method, 2:37 forecasting growth for, 4:244–246 valuation of option-free bonds with, client, 1:78 forward P/E, 4:393 5:79–80 Interests in Joint Ventures (IAS 31), 2:9 product differentiation,3: 287

Cumulative_Ind_L2 48 June 14, 2018 9:39 PM Index I-49

sustainable growth rate calculation, share-based compensation, 4:299, inventory(-ies) 4:238 560n.7 average cost of, 2:152 three-stage DDM, 4:233 and US GAAP, 2:55–56; 4:449–450 in financial statements,2: 152 weighted cost of capital, 4:91–92 and US SEC reconciliation projecting future, 4:132 international considerations requirement, 4:449 sale of, 2:32–34 for market-based valuation, 4:449–450 international Fisher effect,1: 568–570 Theory of Storage and,6: 216 with required return on equity, International Glossary of Business inventory accounting 4:89–90 Valuation Terms (IGBVT), and comparability, 4:390, 419 for residual income model, 4:529–530 4:560n.9, 563 and fair value, 4:525 International Development Association, International Monetary Fund (IMF) inventory turnover, 4:132 2:215 developing/advanced country inverse price ratios, 4:391–392 International Energy Agency (IEA), classification, 1:622n.1 invested capital, 4:133n.4 4:15n. estimates of potential GDP, 1:630 market value of, 4:444, 580 International Federation of Accountants, labor projections, 1:644 return on 4:18 International Organization of Securities and balance sheet modeling, 4:133 International Financial Reporting Commissions (IOSCO), 1:707–708 company value from, 1:301–303 Standards (IFRS) as commodities regulator, 6:208 defined, 4:444, 495n.5 on accounting for derivatives, 2:258 and financial stability,2: 220 and WACC, 1:309–311 adjusted earnings, 4:386 regulation framework of, 1:710 total, 4:444 on asset classification,2: 245 regulation of commerce by, 1:713–714 investing, portfolio perspective on, 6:250 available-for-sale investments, 4:517 international parity conditions, investing activities book value of equity, 4:504–505, 515 1:557–572 cash flow from,4: 293–294 business combinations, 2:35–37, covered interest rate parity, 1:558 in forecasts of growth rates, 6:110 49–56; 4:578 Fisher effect and real interest rate investment actions. see also Investment classification shifting,2: 339 parity, 1:567–570 Analysis, Recommendations, and depreciation deductions, 6:105 forward rate parity, 1:560–564 Actions [Standard of Professional employee compensation, 2:76, 103, predictors of future spot rates, Conduct V] 105, 106 1:560–564 fair dealing in, 1:83–84 equity investments, 2:224 purchasing power parity, 1:564–567 firm policies on,1: 77 fair value, 2:229; 4:559n.5, 561, 595 relationships among conditions, impact of, 1:12–13 goodwill impairment, 2:47; 4:559 1:570–572 investment alternatives, for capital income statements, 4:108 uncovered interest rate parity, projects, 3:57 intangible assets, 4:556 1:558–560 investment amounts, in venture capital intercorporate investments, 2:9–10 international private real estate method of valuation, 6:172–176 interest and dividends, 4:293–294 investments, 6:56–57 assumptions for, 6:177 interest classifications,4: 434 international stocks, free cash flow examples, 6:173–174, 176 investment property, 6:98–99 valuation for, 4:320–321 with multiple rounds of financing, investments in associates, 2:23, 27, 31, International Swaps and Derivatives 6:174–175 34 Association (ISDA), 5:270, 273; 6:208 investment analysis investments in financial assets, International Valuation Standards (IVS), due diligence in, 1:33 2:10–22 4:595 independent, 1:69 joint ventures, 2:23 International Valuation Standards Council limitations of, 1:139–140 LIFO inventory accounting, 4:525 (IVSC), 4:561, 595, 596; 6:56n.17 Investment Analysis, Recommendations, multinational operations, 2:130 internet, regulation of commerce and, and Actions [Standard of accounting for dirty-surplus items, 1:715 Professional Conduct V], 1:126–148 2:183 Internet Explorer, 3:213 Communication with Clients and accounting for foreign currency Internet of Things,1: 243 Prospective Clients [Standard V(B)], transactions, 2:133, 135 interpolated spread. see I-spread 1:137–146 preparation of foreign financial inter-temporal rate of substitution, application of the standard, statements, 2:144, 172, 178 6:384–388 1:141–146 rules for translation of foreign intervention, in exchange rates, and changes in investment objectives, currency financial statements, 1:593–595 1:233–234 2:153–154 In the Matter of McKenzie Walker compliance procedures, 1:140–141 translation methods for financial Investment Management, Inc. and eleventh edition revision, 1:8 statements, 2:144, 149, 151–154, Richard McKenzie, Jr., 1:229–231 guidance, 1:138–140 163, 176 in the money expiration, probability of, text of, 1:18, 137–138 net asset value, 6:102 5:408 Diligence and Reasonable Basis non-controlling interests, 2:43 intrafirm pressure,1: 37, 42 [Standard V(A)], 1:126–137 nonfinancial assets,4: 422 intra-industry rivalry, 4:12 application of the standard, operating cash flow,4: 432 intrinsic value (exercise value) 1:130–137 post-employment benefits defined, 4:561–562 in case studies, 1:211, 227 convergence with US GAAP, 2:77 and discount rate, 4:57 compliance procedures, 1:130 disclosure of benefits,2: 92, 94, 97–99 of equities, 4:6–8 guidance, 1:126–129 financial statement reporting of estimates of, 4:55–57 text of, 1:18, 126 benefits, 2:81–86 and internal rate of return, 4:57–58 Record Retention [Standard V(C)], measuring pension obligations, and multiples of FFO and AFFO, 6:109 1:146–148 2:79–80 and net asset value per share, 6:98 application of the standard, 1:148 prevalence of, 4:530 for options, 5:379, 460 compliance procedures, 1:147 R&D expenditures, 4:415, 528 from residual income model, guidance, 1:146–147 residual income, 4:505 4:497–500, 505 text of, 1:18, 146

Cumulative_Ind_L2 49 June 14, 2018 9:39 PM I-50 Index

investment banking, 1:32–33 investment practice, impact of investors investment capital, for private equity misrepresentation on, 1:44 ability to take risk, 6:257–259, 262–263 investments, 6:157 investment process in commodity markets, 6:207 Investment Company Act (1940), changes to, 1:142–144 ex ante measurement of skill for, 1:702n.2; 3:236 informing clients of, 1:138–139 6:512–513 investment costs in excess of book value, investment products, applicable laws for, exit routes of, 6:149–151 2:27–28 1:23–25 expectations of, 6:417, 423 investment decision criteria for capital investment professionals, ethical importance of economic growth to, budgeting, 3:10–27 responsibilities of, 6:265 1:620 average accounting rate of return, investment properties, 6:98–99 importance of potential GDP to, 3:15–16 Investment Property Databank (IPD), 1:628–633 discounted payback period, 3:14–15 6:41, 59 individual, 1:243, 244; 6:249, 261 internal rate of return, 3:11–12, 18–25 investment rate, neoclassical model and, institutional, 5:452–453; 6:103, 249 net present value, 3:10–11, 17–22 1:671 liquidity requirements of, 6:262 payback period, 3:13–14 investment returns marginal, 3:138–139 popularity and use of capital budgeting life and health insurance companies, objectives of, 6:251, 257–261 methods, 3:25–27 2:278–279 qualified, 6:153, 156 profitability index,3: 16–17 property and casualty insurance real estate equity and debt, 6:7, 8 investment decisions companies, 2:270–271 re-engineering of companies by, 6:141 about commercial real estate, 6:454–455 investments. see also intercorporate regulations for protection of, exchange rate movements and, 1:576 investments; private real estate 1:717–718 execution of, 6:255 investments REIT, 6:84 independence of, 6:513–514 available-for-sale, 2:12–14, 16–17; return desire of, 6:259–260 market-based factors in, 4:460–461 4:517 return requirements of, 6:259–261 investment horizon, 6:410. see also corporate, 2:9 short-term, 4:558 scenario analysis defensive, 6:441 venture capital, 4:559 investment industry, ethics in, 1:11–15 in developing vs. developed countries, willingness to take risk, 6:257–259 investment management 1:623 investor sentiment, asset values and, fintech applications,1: 249–253 evaluation of soundness of, 2:247 6:383 algorithmic trading, 1:253 failed, 1:135 inward-oriented development strategies, distributed ledger technology, held for trading, 2:11 1:680–681 1:256–257 held-to-maturity, 2:10–11, 14–16 IOSCO. see International Organization natural language processing, non-cyclical, 6:441 of Securities Commissions 1:253–254 passive, 2:10 iPad, 4:153–154 risk analysis, 1:252–253 restricting, 1:36 IPD. see Investment Property Databank robo-advisory services, 1:250–252 venture capital investments, 6:167 IPOs. see initial public offerings text analytics, 1:249 Investments–Debt and Equity Securities IPRD Practice Aid. see Assets Acquired and portfolio management, 6:248–250 (ASC 320), 2:10, 22n.12 in a Business Combination to Be investment objectives Investments–Equity Method and Joint Used in Research and Development changes in, 1:233–234 Ventures (ASC 323), 2:10 Activities for covered call strategies, 5:459–464 Investments in Associates and Joint IPSs. see investment policy statements defined, 6:251 Ventures (IAS 28), 2:9, 10, 23 Iraq, 6:198 establishing, 1:77 investment strategy(-ies) Ireland in IPSs, 1:93, 148 comparing, 6:505 active return and weights for equities, necessity of setting, 5:483–484 for equities, 6:448–451, 499–506 6:500, 503, 504 in portfolio management, 6:257–261 fixed-income, 6:506–512 average hours worked, 1:646 for protective put strategies, 5:464–468 forecast time horizon and, 4:163 commercial property values, 6:455, 456 return objective, 6:259–261 in portfolio management, 6:253–254 default-free government bonds, 6:425 risk objective, 6:257–259 rebalancing in, 6:511–512 economic growth, 1:653–656 investment opportunities, dividend with US Treasury bonds, 6:508–510 exports and foreign direct investment policy and, 3:148 investment system, disclosure of, 1:141, in, 1:681 investment personnel. see personnel 143 historical equity risk premium, 4:61, 63 investment policy statements (IPSs) investment value ICT capital and investment in GDP, and asset allocation, 6:254 defined, 4:561 1:647, 648 in compliance procedures, 1:93 and fair market value, 4:8 labor and total factor productivity, conditions for portfolio revision in, market vs., 6:23, 24 1:651 6:254–255 investment vehicle fund setup costs, labor force participation rate, 1:643 creating, 6:251, 253–254 6:157 natural resources, 1:640 defined, 6:248 investor constraints, 6:261–264 net migration, 1:644 developing, 1:91 in investment policy statements, OECD Principles, 3:256n.18 investor constraints in, 6:261–264 1:93 population growth, 1:642 investor objectives in, 6:257–261 legal and regulatory factors, 6:263 R&D expenditures, 1:650 requirements and limitations of, liquidity, 6:262 real GDP per capita, 1:621, 622, 677 1:95–96 in portfolio management, 6:251 regulation and government subsidies, retention of objectives/ tax concerns, 6:263 1:722 recommendations in, 1:148 time horizon, 6:262–263 sovereign credit risk, 6:435 reviews of, 1:96 unique circumstances, 6:263–264 steady state of growth, 1:661–662 trades not aligned with, 1:92–93 investor questionnaires, for robo- IRIS. see NAIC Insurance Regulatory updating, 1:92, 95 advisory services, 1:251 Information System

Cumulative_Ind_L2 50 June 14, 2018 9:39 PM Index I-51

IRR. see internal rate of return ex post equity risk premium, 6:445 jewelry, 6:195 irregular dividends, 3:128–130 GDP growth rate, 4:212 job creation, REITs and, 6:94–95 irrelevance argument, 3:135–136 government bond market, 5:25 Johnson & Johnson, 1:501–502; Isaac, Earl, 5:210n.3 government bond risk premiums, 3:278–279; 4:239–240 ISDA. see International Swaps and 6:422 Joint Arrangements (IFRS 11), 2:9, 10, Derivatives Association historical equity risk premium, 23n.15 ISDA Master Agreement, 5:270 4:61–63 Joint Forum, 2:220 I-spread (ISPRD, interpolated spread), ICT capital and investment in GDP, jointly controlled entities, 2:25 5:29n.6, 31 1:647, 648 joint products, regulation of, 1:721 Israel, 6:500, 503, 504 labor and total factor productivity, joint ventures ISS. see Institutional Shareholder 1:651 accounting treatments for, 2:9–10 Services labor force participation rate, 1:643 defined, 2:23 ISS Corporate Governance Quotient, labor supply, 1:641 intercorporate investment in, 3:262 money supply growth and inflation, 2:23–35 issuer-paid research, 1:34–35, 48 1:264, 269, 294, 296 amortization of excess purchase issuer relationship pressure, 1:37–38 month-of-the year effects on stock price, 2:28–30 Italy returns, 1:345–346 disclosure, 2:34 active return and weights for equities, natural resources, 1:639, 640 equity method of accounting for, 6:500, 503, 504 OECD Principles, 3:256n.18 2:24–35 average hours worked, 1:646 openness of economy, 1:680 fair value option, 2:30 Basel Committee membership, 2:218 population growth, 1:642 and goodwill, 2:29–30 break-even inflation rates,6: 412 portfolio weights, 6:475 impairment, 2:31 commercial property values, 6:456 potential GDP, 1:631 investment costs in excess of book default-free government bonds, 6:425 private real estate valuation, 6:57 value, 2:27–28 GDP growth rate, 4:212 publicly traded real estate equities, issues for analysts with, 2:34–35 government bond risk premiums, 6:81 and sale of inventory, 2:32–34 6:422 R&D expenditures, 1:650 and transactions with associates, historical equity risk premium, real default-free interest rates, 6:393 2:31–34 4:61, 63 real GDP per capita as investment category, 2:9 ICT capital and investment in GDP, and growth in real GDP per capita, Jones Model, 2:314 1:647 1:677, 678 J.P. Morgan Chase & Company, 3:174; index-linked bonds, 6:396 and real GDP growth, 1:621, 622, 4:96, 101 labor force participation rate, 1:642, 626, 627 JP Morgan Bond fund, 6:479, 482 643, 645 real yields, 6:396, 397, 400 JSE All Share Index, 1:485 natural resources, 1:641 revenue analysis, 4:109, 110 justice theories, 3:218–219 OECD Principles, 3:256n.18 reverse stock splits, 3:133 justified P/B,4: 422–423, 505–506 R&D expenditures, 1:650 share repurchases, 3:161 justified P/CF,4: 435–436 real GDP per capita, 1:621, 677, 678 steady state of growth, 1:661–662 justified P/E,4: 222–224, 395–397 real yields, 6:397, 400 swap market, 5:25 justified price multiples,4: 382 sovereign credit risk, 6:435 technology transfer, 1:676 justified P/S,4: 429–430 iTraxx Crossover index, 5:275 trust banks, 2:130 just say no defense, 3:296 iTraxx Main index, 5:275 yield curve factors for government IVaR. see incremental VaR securities, 5:49–50 K IVS. see International Valuation yield curve movements, 5:46 Kahn, Jeremy, 2:334 Standards Japanese yen Kaldor, Nicholas, 6:216 IVSC. see International Valuation and Canadian dollar, 1:283–284 Kansas City Southern Preferred, 4:217 Standards Council correlation of exchange rate returns, Kant, Immanuel, 3:217 1:275–277 Kantian ethics, 3:217 J currency code, 1:605 Kaupthing, 1:598 Jamaica, 6:202 and current account surplus, 1:579 Kenya Japan JPY/USD currency pair coffee harvesting,6: 202 active return and weights for equities, bid–offer spread for,1: 542 natural resources, 1:641 6:499, 501, 503, 504 equity market trends and exchange real GDP per capita, 1:622, 623, algorithmic trading/HFT in, 6:541 rates, 1:582 677 average hours worked, 1:646 exchange rate as random walk, key man clause, 6:154 banking regulations in, 2:215–216 1:462–464 Keynes, John M., 6:213, 220 Basel Committee membership, 2:218 forward points for, 1:552n.9 key rate duration(s) break-even inflation rates,6: 412 triangular arbitrage with, 1:544–545 for bonds with embedded options, cash dividends paid, 3:127 and monetary policy, 1:588 5:156–158 commercial property values, 6:456 yen carry trades, 1:579–580 and yield curve risk, 5:51, 52 commodity exchanges, 6:207 Jarrow, Robert, 5:216 Keystone XL pipeline, 6:198 default-free yield curves in, 6:424–425 Java, 6:202 Kimberly-Clark, 4:120n.2, 121 dividend payouts, 3:178 Java programming language, 1:249 KKR. see Kohlberg Kravis Roberts dividend policy, 4:201 JBS, 6:195 K-means algorithm, 1:388–389 Dojima Rice Exchange, 6:205 J curve effect,6: 152 Knight, Phil, 3:211 economic growth, 1:652–654 Jensen, M., 6:142n.3–4 Knight Capital, 6:546 education spending, 1:624 Jensen, Michael, 3:105 knowingly (term), 1:43 equity REITs, 6:83 Jensen’s free cash flow hypothesis, knowledge of the law, failure to maintain exchange rates, 1:579, 588 6:142 knowledge, 1:29

Cumulative_Ind_L2 51 June 14, 2018 9:39 PM I-52 Index

Knowledge of the Law [Standard I(A)] LASSO regression. see least absolute types of, 1:245–246, 381–382 application of the standard, 1:27–29 shrinkage and selection operator vocabulary, 1:381 in case studies, 1:214–215 regression reinforcement, 1:381 compliance procedures, 1:26–27 last-in, first-out (LIFO) valuation supervised CFA members and candidates, 1:26 method algorithms, 1:383–388 dissociation, 1:26 balance sheet adjustments for, 4:525 defined, 1:245–246, 381 distribution area laws, 1:26 comparisons of companies using FIFO training in, 1:390–391 firms, 1:26–27 and, 4:390, 419 unsupervised legal counsel, 1:26 on foreign currency financial algorithms, 1:388–390 guidance, 1:21–25 statements, 2:152 defined, 1:246, 381 Code/Standards and applicable law, latency, 6:536–539 leases 1:22–23 Latin America. see also specific countries and due diligence for equity REITs, 6:90 investment products and applicable development strategies, 1:680, 681 gross, 6:19, 20, 93 law, 1:23–25 non-convergence traps, 1:675 income from existing, 6:41 violations by others, participation or real GDP growth and real GDP per for industrial properties, 6:20, 92 association with, 1:23 capita, 1:621–623 international, 6:56–57 text of, 1:16, 21 law(s). see also applicable law for multi-family properties, 6:21, 93 known errors, noncorrection of, 1:48 administrative, 1:703 net, 6:19, 20, 92, 93 Kodak, 4:167, 168 banking, 1:714 for office properties,6: 19–20, 92 Kohlberg Kravis Roberts (KKR), 6:136, bankruptcy, 1:714 operating, 2:343, 403–406 141 business, 3:210–211 percentage, 6:20 Kolb, Robert W., 6:214 civil, 3:113 renewal of, 6:41–42 Koninklijke Philips Electronics N.V., common, 3:113 for retail properties, 6:20–21, 91–92 4:434 company, 1:713 and SPEs, 2:52–53 Korea. see South Korea competition, 1:714 for storage facilities, 6:93 Korean won, 1:605 contract, 1:713–714; 3:210 structure of, 6:37–40 krona, Swedish, 1:275–277, 605 distribution area, 1:26 for warehouse properties, 6:20 kth order autocorrelation, of time-series insolvency, 1:714 least absolute shrinkage and selection data, 1:449 knowledge of (see Knowledge of the operator (LASSO) regression, 1:384 Kyoto Protocol, 3:260 Law [Standard I(A)]) least common multiple of lives more strict, 1:22 approach, 3:39–40 L procedural, 1:705 leaving an employer, 1:106–107, 115 labor religious tenets as basis for, 1:28–29 ledgers capital-to-labor ratio, 1:635–636, 678 restrictive takeover, 3:294–295 adding transactions to, 1:255 in Cobb–Douglas production function, rule of law in developing countries, distributed ledger technology, 1:239, 1:634 1:624 241, 253–257 in growth accounting equation, securities, 3:210, 302–303 legal counsel, 1:26; 3:245 1:637–638 substantive, 1:705 legal environment, 3:112–114; 6:263 in production function, 1:639 tax, 1:714 legal lists of equity, 3:137 quality of, 1:646–647 tort, 3:210 legal proceedings, risk information from, regulations about, 1:725 law of one price 2:351–355 sweatshop, 3:211–212, 214 and arbitrage-free valuation, 5:77, 308, legal restrictions and total factor productivity, 377 on dividend policy, 3:153 1:651–652 and method of comparables, on takeovers, 3:294–295 “labor augmenting” technical change, 4:380–381 legal risk, 3:261 1:660n.21, 666n.23 and purchasing power parity, 1:564 legal system labor force Lay, Ken, 3:216 of developing countries, 1:624 average hours worked by, 1:646 layering, 6:544 and framework of IOSCO, 1:713–714 and labor supply, 1:641 layer method, 6:39–40 and regulation of commerce, 1:715 participation rate of, 1:642–643 LBO model, 6:146–148 legislative risk, 3:260–261 and steady state of growth equilibrium, LBOs. see leveraged buyouts Lehman Brothers 1:664, 665 LCR. see Liquidity Coverage Ratio collapse of, 1:722; 6:397, 401, 415, 431 labor supply, 1:641–646 leadership, ethical behavior and, 3:216, hidden debt at, 5:216 average hours worked, 1:646 220 off-balance-sheet items at,2: 240 labor force participation, 1:642–643 leading dividend yield, 4:437 Leibowitz, Martin L., 4:71 net migration, 1:644–645 leading P/E, 4:222–223, 384 lender of last resort financing,1: 723 population growth, 1:641–642 lead time, for real estate equity lending La Charte de l’Expertise en Évaluation investments, 6:15 direct vs. indirect, 6:6 Immobilière, 6:57 learning mortgage lending value, 6:24 lack of control discounts, 4:590 deep, 1:246 Lenovo, 3:287 lack of marketability discounts, 4:30, ensemble, 1:385–386 less strict (LS) countries, 1:24–25 591–592 machine, 1:378–391 letter of intent, 6:55 Ladbrokes, 1:281–282 algorithms, 1:383–390 level, default-free yield curve, 6:415–417 lagged dependent variables, 1:355–356, analytical investment applications, Level 1 inputs, in fair value hierarchy, 373 1:245–246 2:229–230 lagged independent variables, 1:436, 448 and data analytics focuses, 1:379–380 Level 2 inputs, in fair value hierarchy, Landsbanki, 1:598 defined, 1:245, 380 2:229–230 large-cap stocks, 6:449–450 for risk analysis, 1:253 Level 3 inputs, in fair value hierarchy, Larsen & Toubro Ltd, 4:73–75, 97, 102 supervised, 1:390–391 2:229–230

Cumulative_Ind_L2 52 June 14, 2018 9:39 PM Index I-53

level movement, yield curve, 5:47 life and health (L&H) insurance liquidity level of service, disclosure of, 1:86 companies, 2:273–280; 6:261 asset, 6:262 leverage capitalization, 2:280 bid–offer spread and,1: 542–543, 554 and buyouts, 6:141–142, 146–148 earnings characteristics, 2:276–277 of commercial real estate, 6:453–454 in capital structure decisions, as financial institutions,2: 217 illiquidity discounts, 4:30 3:96–98 investment returns, 2:278–279 as investor constraint, 6:262 and cost of capital, 3:108 liquidity, 2:279–280 life and health insurance companies, and dividend vs. share purchase products and distributions, 2:273–276 2:279–280 decision, 3:170–173 property and casualty insurance marketability vs., 4:84 and FCFE/FCFF, 4:319 companies vs., 2:264 of private company stock, 4:558 financial, 4:403n.25, 410; 6:141 life cycle of private equity investments, 6:140, 156 homemade, 3:135n.9 commodity, 6:196–203 property and casualty insurance in international setting, 3:111–115 coffee, 6:202–203 companies, 2:271–273 financial markets and banking sector, energy, 6:197–199 of real estate investments, 6:8, 10, 16, 85 3:113–115 grains, 6:201–202 requirements related to, 2:219 institutional and legal environment, industrial/precious metals, 6:199–200 of swap markets, 5:25 3:112–114 livestock, 6:200–201 swap spreads for measuring, 5:29 macroeconomic environment, 3:114, softs, 6:202–203 Z-spread for measuring, 5:30 115 company’s stage in, 4:557 liquidity aggregation, 6:537, 541 off-balance sheet,2: 403–406 industry, 3:287–288 liquidity and credit crisis, 6:411, 412 and private real estate equity life insurance, 2:273; 6:360 Liquidity Coverage Ratio (LCR), 2:232, investments, 6:16–17 LIFO valuation method. see last-in, first- 259 and publicly traded real estate out valuation method liquidity gap, 6:354 securities, 6:82, 89, 91 light crude oil, 6:192 liquidity position, in bank analysis, and ROE, 4:243 limited liability, 3:229 2:232–236, 259–260 leveraged buyouts (LBOs) limited partnerships (LPs), 6:152–156 liquidity preference theory, 5:34 and credit default swaps, 5:292–293 limits, on private placements, 1:159 liquidity premiums, 5:34 defined, 6:136 Lin, S., 4:449n.57 liquidity requirements, investors’, 6:262 equity valuation for, 4:9 Lindt, 4:151–153 liquidity risk, 6:262, 382 LBO model, 6:146–148 linear association of variables, lira, Turkish, 2:155–157 as private equity class, 6:137 1:265–266 litigation, 3:296; 4:560, 561 share repurchases in, 3:297 linear regression Litterman, Robert, 5:47 valuation issues, 6:146 defined, 1:286 Livent, Inc., 4:21–22 leveraged collateralized loan obligations multiple, 1:329, 484 livestock, 6:194–195 (LL CLOs), 5:248 with one independent variable, average annual sector roll return, leveraged IRR, 6:63 1:286–289, 305–308 6:224, 225 leveraged recapitalization, 3:297 linear regression model, 1:285–311. commodity life cycle, 6:200–201 leverage index (LEVI), 2:307 see also multiple linear regression LL CLOs. see leveraged collateralized leverage ratios, 2:405; 4:133; 6:354 model loan obligations L&H insurance companies. see life and analysis of variance, 1:305–308 LNG. see liquefied natural gas health insurance companies assumptions in, 1:289–291, 334–339 loans, 2:12–14 liability(-ies) coefficient of determination,1: 295–297 allowance and provision for losses on, in acquisition method, 2:38, 39 hypothesis testing with, 1:297–305 2:249–252 of banks, 2:214–215, 236 bias in inflation forecasts,1: 303–305 asset quality of, 2:224 of Citigroup, 2:256–257 company value and returns to collateralized loan obligations, 6:142 contingent, 2:38, 55 invested capital, 1:301–303 commercial real estate, 2:221 current exchange rate for, 2:145–147 estimating beta of stock, 1:299–301 consumer, 2:251–252 disclosure of net pension, 2:97 limitations, 1:311 corporate with equity REITs, 6:86 with one independent variable, and loan losses, 2:251–252 estimation of, for insurance companies, 1:286–289 risk weighting of, 2:221 2:267 prediction intervals, 1:308–311 evaluation of, 2:245, 247 financial, 2:39 regression with one independent impairment allowances for, 2:229 investors’, 6:258 variable, 1:286–289, 305–308 interest-only, 6:62 limited, 3:229 standard error of estimate, 1:292–295 net loan charge-offs,2: 249–250 monetary, 2:145–147 linear trend models (time-series non-accrual, 2:251 net liability balance sheet exposure, analysis), 1:437–440 non-performing, 2:250 2:148 inflation and Consumer Price Index, on real estate, 6:62 nonmonetary, 2:145 1:438–440 loan-to-value ratio (LTV), 6:16–17, 62 off-balance sheet,4: 419 sales at Starbucks, 1:441–444 lobbying, 1:720 pseudo, 6:258 linear trends, 1:437 local communities, 3:202, 203, 205 liability insurance, 2:265 line costs, at WorldCom, 2:328 local currency, 2:131 liability risk, 3:262 LinkedIn, 4:169 local expectations theory, 5:33–34 liberty, 3:219 links, neural network, 1:386 local public goods, regulation of, 1:706 Libor. see London Interbank Offered Lintner, John, 3:136, 156 local requirements, for record retention, Rate LIQ factor, 4:83 1:147 Libor–OIS spread, 5:32–33 liquefied natural gas (LNG),6: 193 location, of real estate, 6:9–10, 19 Libor/swap curve, 5:29 liquidating dividends, 3:130, 153 locational obsolescence, 6:47–48 Libya, 6:198, 216 liquidation, 3:320; 6:143, 150 Lockheed Martin, 3:205 licensing, revenue from, 2:325–326 liquidation value, 4:8 lockout period, 5:123–124, 169

Cumulative_Ind_L2 53 June 14, 2018 9:39 PM I-54 Index

logit models, 1:377 long-term framework for exchange rate lot allocations, minimum, 1:88–89 log-linear trend models, for time-series determination, 1:556–572 Louis Dreyfus, 6:216 analysis, 1:440–446 international parity conditions, low earnings, trailing P/E with, log-log regression model, 1:330 1:557–572 4:391–392 lognormal distribution, in BSM model, covered interest rate parity, 1:558 low-quality earnings 5:402 Fisher effect and real interest rate defined, 2:290, 310 London, England, 1:542, 543 parity, 1:567–570 external indicators of, 2:319 London Interbank Offered Rate (Libor) forward rate parity, 1:560–564 and financial reporting quality, and CDS spread, 5:271 predictors of future spot rates, 2:290–291 and credit spread, 5:281 1:560–564 low-quality financial reporting, floating rates based on,5: 24–25 purchasing power parity, 1:564–567 2:291–293, 299–300 for forward rates, 1:549–551 relationships among conditions, low-yield currencies, carry trades with, FRA payments and interest on, 1:570–572 1:572–573 5:327–328 uncovered interest rate parity, Loyalty, Prudence, and Care [Standard and interest rate forwards, 5:324–325 1:558–560 III(A)], 1:73–81 and mark-to-market value of forward terminology, 1:556–557 application of the standard, 1:78–81 contracts, 1:554 long-term government bonds, 4:64–65 in case studies, 1:227 and profit from basis trade,5: 291–292 long-term growth, 4:168 compliance procedures, 1:77–78 and trader collusion, 6:544 look-ahead bias, 4:461 client approval, 1:77 and valuation of capped floaters, lookback period, 6:322 firm policies,1: 77–78 5:161–162, 164–165 L’Oréal regular account information, 1:77 and valuation of floored floaters, IFRS adoption by, 2:375 guidance, 1:73–77 5:164–166 and Nestlé market capitalization, client’s portfolio, developing, London Metals Exchange, 6:207 2:399–401 1:75–76 London Stock Exchange, 6:209 Nestlé’s equity investment in, 2:375 identifying actual investment client, long (term), 5:272 operational cost structure of, 1:75 Long, Austin, 6:161 4:120–122 proxy voting policies, 1:76–77 long calls, strategies using, 5:492 loss(es) soft commission policies, 1:76 longer-term growth rates, 6:111–113 actuarial, 2:80, 83–85 understanding application of long forward positions allowance and provision for loan, standard, 1:74–75 cash flows for offsetting,5: 337, 341 2:249–252 text of, 1:17, 73 valuation of, 5:317–318, 320–321 with CDS, 5:285, 286 and trade allocation, 1:230 long positions with collars, 5:471–472 Loyalty [Standard IV(A)], 1:105–115 adding short legs to, 5:476–478 credit, 2:253 application of the standard, 1:109–115 in assets, 5:454, 468 disclosure of, 2:138–143 in case studies, 1:217–219 market value of, 5:310 expected, 5:205, 279–280 compliance procedures, 1:109 synthetic, 5:454–455 at expiration competition policy, 1:109 long-run exchange rate movements, for covered calls, 5:462–464 employee classification,1: 109 1:557 for protective puts, 5:466–467 incident-reporting procedures, long/short trade, CDS, 5:288–289 fair value through, 2:11–13, 20–22 1:109 long straddles, 5:126, 483, 491–492 from foreign currency transactions, termination policy, 1:109 long-term assets, projections of, 4:133 2:135–143 guidance, 1:105–109 long-term bonds, stock returns and, gross unrealized, 2:248–249 employer responsibilities, 1:106 1:279 impairment, 2:303–304 independent practice, 1:106 long-term equity investment case study, on income statement, 2:136–137 leaving employers, 1:106–107 2:373–402 and loss adjustment expense ratio, nature of employment, 1:108–109 conclusions and recommendations, 2:269 social media, 1:108 2:401–402 maximum whistleblowing, 1:108 data analysis, 2:374–401 for bear spreads, 5:475 text of, 1:17, 105 accruals and earnings quality, for bull spreads, 5:474 loyalty to clients, 1:81 2:395–396 for collars, 5:471 LPs. see limited partnerships asset base composition, 2:384–385 for covered calls, 5:462, 463 LS countries. see less strict countries capital allocation, 2:387–392 for protective puts, 5:466, 467 LT V. see loan-to-value ratio capital structure analysis, 2:385–386 for spreads, 5:480 Luxembourg, 2:218; 3:256n.18; 6:142, cash flow relationships,2: 396–399 monetizing, 5:285–286 152 company valuation, 2:399–401 on private equity investments, 6:157 LWC. see SPDR Bloomberg Barclays DuPont analysis, 2:374–385 purchasing power, 2:173 Long-Term Corporate Bond ETF segment analysis, 2:386–387 as quality of earnings indicators, 4:19 data collection, 2:373 remeasurement, 2:152 M data processing, 2:374 residual, 3:104 McAfee, 2:131 follow-up, 2:402 on short puts, 5:469 McDonald’s Corp, 3:143; 4:221; 6:216 purpose for analysis, 2:373 loss given default, 5:279–280 McGrady, C., 6:159n.13 long-term financial forecasting, for corporate bonds, 5:224 machine learning (ML), 1:378–391 4:163–169 in credit risk modeling, 5:203 algorithms, 1:383–390 assumptions in, 4:168–169 for floating-rate notes,5: 229, 230 analytical investment applications, historical valuation multiples in, for zero-coupon bonds, 5:205 1:245–246 4:166–167 loss rates, credit spread and, 6:428, 430 and data analytics focuses, 1:379–380 normalized revenue case study, loss reserves, 2:267–268 defined, 1:245, 380 4:164–169 loss severity, 5:203 for risk analysis, 1:253

Cumulative_Ind_L2 54 June 14, 2018 9:39 PM Index I-55

supervised, 1:390–391 management buyouts (MBOs), 6:137, method based on forecasted algorithms, 1:383–388 146, 150 fundamentals, 4:381–382 defined, 1:245–246, 381 Management Commentary (IFRS method of comparables, 4:379–381 training in, 1:390–391 Practice Statement), 2:355 momentum indicators, 4:451–456 types of, 1:245–246, 381–382 Management Discussion and Analysis relative strength indicators, unsupervised (MD&A) 4:453–456 algorithms, 1:388–390 disclosure of sales growth in, scaled earnings surprise, 4:451 defined, 1:246, 381 2:186–187 and unexpected earnings, 4:451–453 vocabulary, 1:381 disclosure of translation methods in, multiple indicators in, 4:459–463 McKenzie, Richard, Jr., 1:229–231 2:178 practice problems, 4:468–480 McKenzie Walker Investment information about risk in, 2:355–357 price multiples, 4:382–439 Management, Inc., 1:229–231 Management Discussion and Analysis of price to book value, 4:414–424 McKinnell, Hank, 3:208–209 Financial Condition and Results of price to cash flow,4: 431–436 macroeconomic environment, leverage Operations, 3:261 price to dividends and dividend yield, in, 3:114, 115 management equity program (MEP), 4:436–439 macroeconomic factor models, 6:148 price to earnings ratio, 4:382–414 6:286–289 management fees, 6:153, 157 price to sales, 4:425–431 defined, 6:285 managerial flexibility,3: 170 solutions to problems, 4:481–489 estimating returns from factor managerialism theories, 3:285 market bubbles, 4:426; 6:53, 159 sensitivities with, 6:288–289 mandates market capitalization, 4:406 fundamental factor models vs., following, 1:95 market conversion premium per share, 6:290–292, 294 investment, 6:261 5:171–172 portfolio construction with, 6:301–302 managing to, 1:93 market conversion premium ratio, structure, 6:286–289 notification of change in,1: 142 5:171–172 macroeconomic factors, 6:293, 394–395 Mannesmann AG, 3:280 market conversion price, 5:171–172 macroeconomic model margin market data, in private equity valuation, for equity risk premium, 4:69–71 discount, 5:230–231, 234 6:143–144 for required return on equity, 4:84–85 gross, 1:451–453; 4:118–119 market efficiency,4: 7 macroeconomic variables, in currency pre-tax operating, 1:521–522, 524, 525 market expectations crises, 1:596 profit, 2:343 for capital markets, 6:254 MACRS. see modified accelerated cost quoted, 5:227 and equity valuation, 4:10–11 recovery system marginal investor, 3:138–139 inferring, 4:9–11 Macy’s Inc., 4:221 marginal productivity, diminishing, market fragmentation, 6:541 Madoff, Bernie,2: 350 1:634–635 market growth and market share Madrid Stock Exchange General Index, marginal product of capital, 1:634 approach, 4:111–112 1:682 marginal utility, 6:387–388 market making, 1:63 Maine, ESG risk exposures, 3:260 marginal VaR (MVaR), 6:337 Market Manipulation [Standard II(B)], maintenance capital expenditures, Markel Corp., 2:269, 270 1:68–73 4:133 marketability application of the standard, 1:69–73 make-whole calls, 5:123 lack of marketability discounts, 4:30, guidance, 1:68–69 Malaysia, 1:594; 2:219; 3:113 591–592 information-based manipulation, Malthus, Thomas,1: 659 liquidity vs., 4:84 1:68 Malthusian model of growth, 1:659 of private equity investments, 6:140 transaction-based manipulation, 1:68 MA(1) model. see moving average model and required return for private text of, 1:16, 68 of order 1 companies, 4:86–87 market multiple, for P/E, 4:405–409 MA(q) model. see qth order moving market approach to private company market participation algorithms, 6:534 average model valuation, 4:562, 579–586 market rent analysis, for equity REITs, management (managers), 4:557, 567 guideline public company method, 6:90 access to, 3:254 4:580–583 market risk, 6:317–375 active, 6:294, 297 guideline transactions method, analysis of, 3:49–51 agency relationships of, 3:206 4:584–586 defined, 6:318 asset, 6:16 prior transactions method, 4:586 with derivatives strategies, 5:484–485 in bank analysis, 2:228, 252–253 market-based accounting, forward value managing compensation reviews for, 3:254 and, 5:317 constraints, 6:361–366 conflicts with shareholders,3: 231–233 market-based bankruptcy prediction position limits, 6:363 digital wealth, 1:252 models, 2:332 risk budgeting, 6:362–363 and equity REITs, 6:86, 91 market-based valuation, 4:377–489 risk measures and capital allocation, external, 1:39–40 about, 4:378–379 6:364–365 fund relationships with, 1:32, 42 enterprise value multiples, 4:440–448 scenario limits, 6:363–364 hedge fund, 6:357–358 alternative denominators in, stop-loss limits, 6:364 mind-set about M&As, 3:291–293 4:446–447 measuring, 6:319–361 personal incentives for M&As, 3:285 enterprise value to EBITDA, risk measure applications, 6:352–361 of pooled investment vehicles, 2:216 4:440–446 scenario risk measures, 6:343–347 portfolio, 1:31, 274–275; 6:265, 363 enterprise value to sales, 4:447 sensitivity risk measures, 6:339–343 of private equity funds, 6:142–143 price multiples vs., 4:447–448 VaR, 6:319–338 property, 6:8, 10, 12, 16 harmonic mean, 4:457–459 practice problems, 6:369–373 selection of, 1:34, 41–42, 136 international considerations, for private equity investments, 6:157 submanagers, 1:96, 132–133 4:449–450 sensitivity to, 2:236–238, 260–263 travel expenses from, 1:39–40 issues with, 4:457–463 solutions to problems, 6:374–375

Cumulative_Ind_L2 55 June 14, 2018 9:39 PM I-56 Index

markets slow, 5:484 material information defined,1: 57 algorithmic monitoring of, 6:543–544 speed of, 5:484 mosaic theory, 1:58–59 algorithmic trading/HFT and, spot, 6:190 nonpublic information defined,1: 58 6:545–547 swap social media, 1:59 arbitrageurs in, 5:378 CDS, 5:270, 276–277 text of, 1:16, 56 beer, 4:137–144 liquidity of, 5:25 Mathonet, Pierre-Yves, 6:158n.10 bond, 5:25–26, 291–292 market share, 4:111–112 matrix price estimates, 4:441n.55 capital (see also Integrity of Capital Markets in Financial Instruments mature growth phase, 4:226, 413–414 Markets [Standard of Professional Directive (MiFID), 6:208 mature growth rate, 4:226 Conduct II]) market sustainability, ethics and, maturity. see also yield to maturity and benefit of ethics to society,1: 12 1:12–13 of forward exchange rates, 1:551n.8 perfect, 3:95, 135, 147 market timing, 1:363–364; 6:256 and key rate durations, 5:157 sustainability of, 1:12–13 market timing risk, 4:85; 6:301, 302 and preferred habitat theory, commodity futures, 6:190, 205–225 market-to-book-ratio, 1:374n.63 5:35–36 futures returns, 6:213–225 market value maturity mismatch, contractual, market participants, 6:205–208 in analysis of long-term equity 2:233–234 spot and futures pricing, 6:208–213 investments, 2:399–401 maturity structure, yield curve country equity, 6:475 of commercial real estate, 6:23–25 volatilities’, 5:50–51 covered calls for improving, 5:461 defined, 4:561 Maximum Contaminant Level, developed, 6:435 simulations with constraints on, 1:528 3:261–262 in developing vs. developed countries, market value added (MVA), 4:497 maximum drawdown, 6:357–358 1:623–624 market value of common equity (MVCE; maximum gain efficient, 6:173n.22 MV[Equity]), 4:90–91, 287 for bear spreads, 5:475–476 electricity, 1:532 market value of debt (MVD; MV[Debt]), for bull spreads, 5:474 emerging (see also developing countries) 4:90–91, 287 for covered calls, 5:462, 463 capital flows,1: 580, 593–595 market value of invested capital (MVIC), for protective puts, 5:467 carry trade returns, 1:574 4:444, 580 for spreads, 5:480 corporate governance and returns, Markit, 5:274, 275 maximum loss 3:263 Markowitz, Harry, 6:250, 278, 471 for bear spreads, 5:475 country spread model, 4:90 mark-to-market accounting, 6:353n.19. for bull spreads, 5:474 economic growth and price stability, see also fair value accounting for collars, 5:471 1:582 mark-to-market value, of forward for covered calls, 5:462, 463 international Fisher effect,1: 569 contracts, 1:552–556 for protective puts, 5:466, 467 private equity valuation, 6:140 Marsh, Paul, 4:89 for spreads, 5:480 sovereign credit risk, 6:433–434 Marshall, Alfred, 4:492 maximum profit, for collar,5: 471 for equity REITs, 6:82–84 M&As. see mergers and acquisitions MBOs. see management buyouts fast, 5:484 Massachusetts, ESG risk exposures, MBSs. see mortgage-backed securities financial, 1:623–624, 717–718 3:260 MD&A. see Management Discussion foreign exchange, 1:540–556 Massachusetts trust, 6:83 and Analysis arbitrage constraints on spot Masters, Blythe, 5:276n.13 mean exchange rate quotes, 1:544–548 material information, 1:57, 64 arithmetic, 4:60, 63–64, 458–459 conventions in, 1:540–543 materiality, determining, 1:64, 67 in autoregressive models, 1:437 forward markets, 1:548–556 material nonpublic information of covariance-stationary series, 1:448 forward, 1:548–556 adopting compliance procedures for, geometric, 4:60, 63–64 calculation of forward exchange 1:60 harmonic, 4:457–459 rates, 1:549–551 analyst recommendations as, 1:65–66 mean regression sum of squares (MSR), on commodities, 6:190 Material Nonpublic Information 1:341–342 and covered interest rate parity, 1:550 [Standard II(A)], 1:56–67 mean reversion forward exchange rate quotes, application of the standard, 1:63–67 in algorithmic and high-frequency 1:551–554 compliance procedures, 1:60–63 trading, 6:536 mark-to-market values of forward achieving public dissemination, 1:60 of autoregressive models, 1:452–453 contracts, 1:552–556 adopting, 1:60 in earnings, 2:318–319 government bond, 5:25 adopting disclosure procedures, of interest rates, 5:39–40 imperfections in, 3:286 1:60–61 in Monte Carlo method of valuation, implied volatility in options trading appropriate interdepartmental 5:100 across, 5:432 communications, 1:61 mean squared error (MSE), 1:341–342, implied volatility in options trading communication to employees, 1:63 356 within, 5:432 firewall elements,1: 61 “The Measurement and Application of industrial, 1:593–595 issuing press releases, 1:61 Market Participant Acquisition leverage in, 3:113–115 personal trading limitations, 1:62 Premiums” (Appraisal Foundation), perfect capital, 3:95, 135, 147 physical separation of departments, 4:581n.34 power from M&As, 3:283–284 1:61 measurement error, Fisher effect with, regulation of, 1:717–718 preventing personnel overlap, 1:62 1:374–376 secondary, 6:149–151 proprietary trading procedures, 1:63 Medco Containment Services, 3:281 securities record maintenance, 1:62 medical device manufacturing, 4:168 algorithmic trading and, 6:545–547 reporting systems, 1:62 meetings, of non-employee directors, regulation of, 1:711–713, 717–718 guidance, 1:56–60 3:252 segmented, 4:72; 5:35 industry experts, 1:59–60 mega buyouts, 6:141–142, 151 share repurchases in, 3:162 investment research reports, 1:60 MELA Sciences, 3:133

Cumulative_Ind_L2 56 June 14, 2018 9:39 PM Index I-57

members, CFA. see Responsibilities as method of comparables. see also minority interest, 4:441n.53 a CFA Institute Member or CFA comparables-based valuation minority interest expense, 4:132 Candidate [Standard of Professional market-based valuation with, 4:379–381 Misconduct [Standard I(D)], 1:53–56 Conduct VII] in relative valuation models, 4:25, 26 application of the standard, 1:54–56 Membership Agreement, 1:23 MetLife, Inc., 2:274–277 compliance procedures, 1:54 membership status, CFA Institute, Metrick, Andrew, 6:145n.a guidance, 1:53–54 1:170–171, 173 Mexican peso text of, 1:16, 53 Mendocino Brewing Company, Inc., 4:391 crisis (1994), 1:594 mispricing, 4:7–8 MEP. see management equity program currency code, 1:605 misreporting, likelihood of, 2:306–309 Merck & Co., 2:296–298; 3:281 and Swiss franc, 1:542 Beneish model, 2:306–309 mergers and acquisitions (M&As), Mexico limitations of quantitative models, 2:309 3:277–334 age distribution, 1:643 variables for detecting misstatement, about, 3:278–279 average hours worked, 1:646 2:309 analysis, 3:303–318 Basel Committee membership, 2:218 misrepresentation bid evaluation, 3:314–318 convergence with advanced countries, avoiding, 1:52 target company valuation, 3:303–314 1:682 potential, 1:49 benefits of,3: 318–319 economic growth, 1:654 Misrepresentation [Standard I(C)], classifications, 3:280–281 exports and foreign direct investment 1:43–53 and convertible bonds, 5:169 in, 1:681 application of the standard, 1:48–53 and corporate restructuring, 3:319–320 ICT capital and investment in GDP, compliance procedures, 1:46–47 definitions, 3:280 1:647, 648 factual presentations, 1:46–47 equity valuation for, 4:9 labor and total factor productivity, maintaining webpages, 1:47 financial report quality in,2: 300–301 1:651 plagiarism policy, 1:47 Guidant–Boston Scientific merger, labor force participation rate, 1:643, qualification summary,1: 47 3:278–279 645 verifying outside information, 1:47 history of, 3:281–282 labor supply, 1:641 guidance, 1:43–46 motives, 3:282–288 natural resources, 1:640 impact on investment practice, 1:44 bootstrapping earnings, 3:284–285 OECD Principles, 3:256n.18 omissions, 1:45 capability and resource acquisition, population growth, 1:642 performance reporting, 1:44–45 3:284 R&D expenditures, 1:650 plagiarism, 1:45–46 cross-border, 3:286–287 real GDP per capita, 1:622, 677 social media, 1:45 diversification, 3:284 sovereign credit risk, 6:433 work completed for employer, 1:46 growth, 3:283 Meyer, Thomas,6: 158n.10 text of, 1:16, 43 hidden value, 3:286 mezzanine financing,6: 137 mission, of banks, 2:239 and industry life cycle, 3:287–288 Michelin, 4:400 misstatement, variables for detecting, market power, 3:283–284 Microsoft Corporation 2:309 personal incentives of managers, bundling of software products, 1:716; Mitchell Hutchins Asset Management, 3:285 3:213 1:233–234 synergy, 3:283 cannibalization factor of tablet mixed offering,3: 290 tax considerations, 3:286 computers for, 4:153–163 mixed-use developments, 6:11 other business combinations vs., 2:35 dividends, 3:144, 145, 160 ML. see machine learning practice problems, 3:323–330 initial public offering,3: 203–204 MNCs. see multinational corporations regulation, 3:299–303 NTM P/E, 4:392–393 Mobil, 3:280 antitrust regulations, 3:299–302 required return on shares, 4:56–57, model(s) securities laws, 3:302–303 81–83 defined, 6:318 short-term stock return performance Microsoft Excel, 3:36 manipulating inputs for, 1:72 in, 1:347–348 MicroStrategy, Inc., 2:324–326 in quantitatively oriented research, solutions to problems, 3:331–334 mid-cap stocks, 6:449–450 1:128–129 takeovers, 3:293–299 Middle East. see also specific countries specification of,1: 363–376 Engelhard Corporation, 3:298–299 natural resources, 1:639 and functional form, 1:364–372 post-offer defense mechanisms, real GDP growth and real GDP per principles of, 1:363–364 3:296–298 capita, 1:621, 623 testing, for autoregressive model, pre-offer defense mechanisms, Middlesex Water Company, 4:213–216 1:450–452 3:293–296 MiFID. see Markets in Financial and time-series, 1:372–376 transaction characteristics, 3:288–293 Instruments Directive for time-series analysis, 1:489 form of acquisition, 3:288–289 migration, net, 1:644–645 understanding technical aspects of, method of payment, 3:290–291 Miller, M., 6:141n.2 1:136–137 mind-set of management, 3:291–293 Miller, Merton, 3:94. see also Modigliani Model Request for Proposal, 1:129 Merrill Lynch Institutional Factor Survey. and Miller theory model training, 1:390–391 see BofA Merrill Lynch Institutional mimicking, costs of, 3:142 modern portfolio theory (MPT) Factor Survey minimum capital requirement, 2:219, and active portfolio management, Merton, Robert, 5:216, 402; 6:250 222, 280 6:471–472 Metallgesellschaft AG, 6:216 minimum liquidity requirement, 2:219 and multifactor models, 6:278–279 metals, 6:216. see also industrial (base) minimum lot allocations, 1:88–89 and portfolio perspective, 6:250 metals; precious metals minimum rent, for retail properties, 6:20 modified accelerated cost recovery method based on forecasted minimum value, convertible bond, system (MACRS), 3:31–33 fundamentals, 4:381–382. see also 5:170–171 modified country spread model, forecasted fundamentals-based Ministry of Land, Infrastructure, 6:140n.1 valuation Transport and Tourism, 6:57 modified duration,5: 151, 449n.2

Cumulative_Ind_L2 57 June 14, 2018 9:39 PM I-58 Index

modified Goldman model,6: 140n.1 linear regression, 1:287–289 forecasting time series with, 1:472–474 Modified Jones Model,2: 314 scatter plot, 1:264–265 smoothing past values with, 1:470–472 Modigliani, Franco, 3:94; 6:141n.2 standard error of estimate, 1:294–295 MPT. see modern portfolio theory Modigliani and Miller theory money trusts, 2:216 MSCI. see Morgan Stanley Capital market value and capital structure in, monitoring International 3:111 algorithmic, 6:543–544 MSCI All Country World Index (ACWI) and optimal capital structure, 3:106 in capital budgeting process, 3:7 as benchmark for actively managed perfect capital market assumptions for, portfolio, 6:255 portfolios, 6:499–505 3:135, 147 monitoring costs, 3:104 Sharpe ratio, 6:478 and private equity returns, 6:141–142 monopolies, 3:213 as value added benchmark, 6:472 Proposition I monotonically increasing sequences, MSCI All-Country World Sector with taxes, 3:98–101 5:34n.8 Indexes, 3:138 without taxes, 3:94–96 Monte Carlo arbitrage-free valuation MSCI EAFE Index, 6:475, 478, 499 Proposition II method, 5:100–101 MSCI Emerging Markets Index, 6:499 with taxes, 3:99–103 Monte Carlo simulations MSCI High Dividend Yield Index, 3:137 without taxes, 3:96–98 and extreme events, 6:335 MSCI Japan Small Cap Index, 1:345–346 and regulatory impact on funding market risk evaluation with, 2:260–261 MSCI World Index, 3:183; 4:72 costs, 1:723 for private equity investments, M-score, 2:307–309 Molodovsky, Nicholas, 4:388n.15 6:139–140 MS countries. see more strict countries Molodovsky effect,4: 388 for risk analysis of capital projects, MSE. see mean squared error Molson-Coors Brewing Co., 4:138, 391 3:45–48 MSR. see mean regression sum of squares momentum indicators, 4:451–456 for VaR estimation, 6:330–333 multicategory classification, in data defined, 4:379 month-of-the year effects on stock analytics, 1:379 relative strength indicators, 4:453–456 returns, 1:345–346 multicollinearity, 1:359–362 scaled earnings surprise, 4:451 Moody’s Investors Service consequences of, 1:360 and unexpected earnings, 4:451–453 business cycle and credit spreads, correcting for, 1:362–363 momentum stocks, 6:284 6:431 with cross sectional regressions, 4:398 Mondelez International, 4:151 categories of credit ratings, 5:212; detecting, 1:360–362 monetary approach to currency 6:427n.27 multifactor models for required return exchange rates, 1:587–588 corporate bond yield, 4:408 on equity, 4:79–85 monetary assets, 2:145–147 debt ratings, 3:109 and arithmetic mean, 4:64 Monetary Authority of Singapore, 2:218; financial ratios and credit ratings, Fama-French model, 4:79–83 3:255–256 6:433 macroeconomic, 4:84–85 monetary liabilities, 2:145–147 Moody’s KMV Corporation, 5:218 Pastor–Stambaugh model, 4:83–84 monetary/nonmonetary method Moody’s REAL index, 6:60 statistical, 4:84 analytical issues, 2:163 moral compass, 3:218 multifactor models of portfolios, balance sheet exposures with, moral courage, 3:222–223 6:277–315 2:163–166 moral hazard, 1:706 applications, 6:293–303 and currency exchange rate movement, more strict (MS) countries, 1:24–25 portfolio construction, 6:300–302 2:172 more strict law, 1:22 return attribution, 6:293–296 and current rate method, 2:176–177 Morgan Stanley Capital International risk attribution, 6:296–300 translating assets and liabilities with, (MSCI), 4:399. see also indexes strategic portfolio decision-making, 2:146–147 beginning MSCI 6:303 translating financial statements with, Morningstar, 4:73, 90 and arbitrage pricing theory, 2:148 mortgage-backed securities (MBSs) 6:279–285 monetary policy, 1:585–592 collateralized, 1:724 assumptions, 6:279–280 example, 1:588–590 commercial, 5:248; 6:80 calculating expected return to historical relationship, 1:588 defined, 6:80 portfolio, 6:280–281 monetary approach with flexible and quantitative easing, 5:36 Carhart four-factor model, 6:283–285 prices, 1:587–588 residential, 5:248; 6:80 parameters in one-factor APT model, Mundell–Fleming model, 1:585–587 mortgage banks, 2:216 6:281–282 portfolio balance approach, 1:590–591 mortgage lending value, 6:24 portfolio returns for no arbitrage monetizing gains and losses, 5:285–286 mortgage real estate investment trusts, condition, 6:282–284 money 6:82 and definition of factor,6: 277 at-the-money options, 3:244 mortgages, 6:6 fundamental factor models, 6:289–293 in the money expiration, 5:408 mosaic theory defined, 6:285 out-of-the-money options, 3:244 applying, 1:65, 66 factors, 6:292–293 post- and pre-money valuation, and material nonpublic information, macroeconomic factor model vs., 6:148–149, 166–167 1:58–59 6:290–292 time value of, 5:25, 26 moving average return attribution, 6:293–294 money market mutual funds, regulation n-period, 1:470–472 risk attribution, 6:298–300 of, 1:720–721 12-month, 1:470n.32 structure, 6:289–293 moneyness, 5:486 moving average model of order 1 macroeconomic factor models, money supply and inflation (MA[1] model), 1:472–473 6:286–289 coefficient of determination,1: 296–297 moving-average models of time-series defined, 6:285 correlation, 1:283 analysis, 1:469–474 estimating returns from factor covariance and standard deviation, autoregressive, 1:480–481 sensitivities, 6:288–289 1:269–270 autoregressive models vs., 1:469, fundamental factor model vs., fitted regression line,1: 288 472–474 6:290–292

Cumulative_Ind_L2 58 June 14, 2018 9:39 PM Index I-59

portfolio construction, 6:301–302 explaining returns with, 1:337–339 National Association of Certified structure, 6:286–289 explaining valuations of multinational Valuation Analysts, 4:560n.9 and modern portfolio theory, 6:278–279 corporations with, 1:335–337 National Association of Real Estate practice problems, 6:306–311 hypothesis testing with, 1:341–343 Investment Trusts (NAREIT), 6:14 single-factor models vs., 6:277–278 predicting dependent variable, National Association of Securities solutions to problems, 6:312–315 1:339–341 Dealers Automated Quotations statistical factor models, 6:285 predicting multinational corporation’s (NASDAQ), 1:329–333, 365–366, structure, 6:286–293 Tobin’s q with, 1:340 369 fundamental factor model, 6:289–293 multiple peril policies, 2:266 National Banking and Securities macroeconomic factor model, multiple R2. see multiple coefficient of Commission (Comisión Nacional 6:286–289 determination Bancaria y de Valores), 2:218 types of, 6:285–286 multiples, fund performance and, National Bank of Belgium, 2:217 multifactor term structure models, 5:39 6:159–160 national borders, transactions that cross, multi-family properties, direct multistage dividend discount models, 2:130 investment in, 6:11, 21 4:225–240 National Council of Real Estate multi-family real estate investment H-model, 4:230–232 Investment Fiduciaries (NCREIF), trusts, 6:93, 95 for non-dividend-paying companies, 6:59 multi-legged trade, 6:537 4:229–230 National Futures Association (NFA), multinational corporations (MNCs) spreadsheet modeling, 4:237–238 6:208 Tobin’s q of, 1:335–337, 340 three-stage model, 4:232–237 National Income and Product Accounts valuation of, 1:335–337 with declining growth rates, (NIPA), 1:629 multinational operations, 2:129–212 4:233–236 Nationally Recognized Statistical Rating and antitrust regulations, 3:300 with distinct stages, 4:232–233 Organizations, 3:109 disclosures, 2:186–190 two-stage dividend discount model, National Oilwell Varco Inc., 4:14 foreign exchange risk, 2:189–190 4:226–229 natural breakpoint, retail property, 6:20 sales growth, 2:186–189 and P/E model, 4:228–229 natural gas, 6:193 effective tax rate,2: 183–186 valuing stock with, 4:226–228 natural language processing (NLP), foreign currency financial statements, multistage residual income model, 1:249 2:143–183 4:507–512 natural logarithm, converting, 1:332 analytical issues, 2:160–172 multistage time horizons, 6:263 natural resources, economic growth and, balance sheet exposures under Mundell–Fleming model, 1:585–587, 1:639–641 temporal method, 2:163–166 590–591 nature of employment, 1:108–109 companies with multiple translation municipal bonds, tax-exempt, 5:124 Nautica Enterprises, 2:340–342 methods for, 2:176–177 munis. see tax-exempt municipal bonds NAV. see net asset value disclosure of translation methods, mutual banks, 2:216 NAVPS. see net asset value per share 2:177–183 mutual funds NCC. see net noncash charges translation in hyperinflationary money market, 1:720–721 NCREIF. see National Council of Real economy, 2:172–176 open-end, 2:216 Estate Investment Fiduciaries translation methods, 2:148–160 mutually exclusive projects, 3:10, 38–40 NCREIF Property Index, 6:13, 14, 58 translation of concepts, 2:144–148 MV(Debt). see market value of debt negative book value, for equity, 1:528 foreign currency transactions, MV(Equity). see market value of negative earnings, trailing P/E with, 2:131–143 common equity 4:391 analytical issues, 2:135–138 MVA. see market value added negative growth, dividend with, 4:217 disclosures of gains and losses, MVaR. see marginal VaR negative serial correlation, 1:356n.45, 2:138–143 MVCE. see market value of common 357, 358n.48 and foreign exchange risk, 2:132–135 equity neglected company effect,1: 398–399 with intervening balance sheet dates, MVD. see market value of debt negotiation, for share repurchases, 2:133–135 MVIC. see market value of invested 3:162–163, 169 with settlement before balance sheet capital neoclassical model of economic growth, date, 2:132–133 1:659–671 practice problems, 2:194–205 N adjusting, for an open economy, solutions to problems, 2:206–212 NAFTA. see North American Free Trade 1:678–679 and transactions that cross national Agreement comparative statics and transitional borders, 2:130 NAIC. see US National Association of growth, 1:668–670 multiperiod binomial model, 5:377, 401 Insurance Commissioners endogenous growth theory vs., multiperiod forecasts, autoregressive NAIC Insurance Regulatory Information 1:673–674 models for, 1:453–456 System (IRIS), 2:264n.31 extensions of, 1:670–671 multiple coefficient of determination naked call options, 5:459n.18 implications of, 1:666–667 (multiple R2), 1:332 naked default credit swap, 5:287–288 steady state rate of growth, 1:660–666 multiple-element contracts, 2:324–326 naked puts. see cash-secured puts and capital deepening, 1:661 multiple IRR problem, for capital names, fictitious,1: 174 in China, Japan, and Ireland, projects, 3:22–24 Nardelli, Bob, 3:208 1:661–662 multiple linear regression, 1:329, 484 NAREIT. see National Association of as equilibrium, 1:662–665 multiple linear regression model, Real Estate Investment Trusts impact of parameters on, 1:663–665 1:328–363 NASDAQ. see National Association Nestlé S.A. adjusted R2, 1:343–344 of Securities Dealers Automated foreign subsidiaries of, 2:130 assumptions of, 1:334–339 Quotations inflation and input costs,4: 151–153 for bid–ask spread, 1:329–333 NASDAQ Global Select Market long-term equity investment case defined, 1:329 (NASDAQ-GS), 4:56n.5 study, 2:373–402

Cumulative_Ind_L2 59 June 14, 2018 9:39 PM I-60 Index

Net App, 4:444–445 net noncash charges (NCC), 3:307 dividend imputation tax system, 3:151 net asset balance sheet exposure, 2:148 net operating income (NOI) historical equity risk premium, 4:61, 63 net asset value (NAV) and capital expenditures, 6:43 natural resources, 1:640 calculation of, 6:102 capitalization of, 6:99–100 OECD Principles, 3:256n.18 Capitol Shopping Center REIT Inc. defined, 6:28 real GDP per capita, 1:621, 676, 678 case study, 6:120–121 and FFO/AFFO, 6:106 Royal & Sun Alliance Group, 3:143 of equity REITs, 6:88 and functional obsolescence, 6:48 New Zealand dollar, 1:605 observations on, 6:103 in income approach to real estate NextEra Energy, Inc., 4:224–225 in private equity valuation, 6:158–159 valuation, 6:27–33 next twelve month price-to-earnings net asset value approach, 6:98–103 level, 6:36 ratio (NTM P/E), 4:392–393 and accounting for investment stabilized, 6:31–32 NFA. see National Futures Association properties, 6:98–99 net operating profit less adjusted taxes NI. see net income application of NAVPS, 6:101–103 (NOPLAT), 3:306–307; 4:133 Nickles, Craig, 6:161 calculation of NAVPS, 6:99–101 net premiums earned, 2:269 Nigeria net asset value per share (NAVPS) net premiums written, 2:269 claims against Shell Oil Company in, application of, 6:101–103 net present value (NPV), 3:10–11, 17–22 2:352 as benchmark, 6:98 of capital projects with real options, energy markets, 6:198 calculation of, 6:99–101 3:53 natural resources, 1:639, 640 and calculation of NAV, 6:102 defined, 3:10 real GDP per capita, 1:622, 677, 678 Capitol Shopping Center REIT Inc case NPV profile,3: 17–18 toxic waste dumping in, 3:218 study, 6:120–121 ranking conflicts between IRR and, NII. see net interest income premiums on, 6:103 3:18–22 Nijman, Theo E.,6: 214 for publicly traded real estate and stock prices, 3:26–27 Nike, 3:211–212, 214, 215 securities, 6:99–103 net profit margin,2: 343 Nikkei 225 Index, 3:126 as relative valuation tool, 6:102–103 net profit margin spread,2: 384 NIPA. see National Income and Product Netherlands net regulatory burden, 1:718–719 Accounts active return and weights for equities, net rent, 6:92 Nissim, Doron, 2:318 6:500, 503, 504 Netscape, 3:213 N L P. see natural language processing Basel Committee membership, 2:218 Net Stable Funding Ratio (NSFR), no arbitrage exports, 2:130 2:232–233, 259–260 portfolio returns for, 6:282–284 ex post equity risk premium, 6:445 network externalities, ICT capital and, principle of, 5:76–77 GDP growth rate, 4:212 1:648–649 no-arbitrage approach to pricing historical equity risk premium, 4:61, 63 network neutrality, regulation and, 1:721 and valuation. see arbitrage-free natural resources, 1:640 neural networks, 1:245, 386–387 valuation OECD Principles, 3:256n.18 neutral policy rate, 6:407, 409 no-arbitrage forwards, 5:311–321 publicly traded real estate equities, 6:81 new entrants carry arbitrage model without yield spread on government bonds, in beer markets, 4:138, 139 underlying cash flows,5: 311–318 6:424n.25 in cognac industry, 4:171 cash flows for financed position in Netherlands Bank, 2:218 and financial forecasting,4: 137–139 underlying, 5:312–313 net income (NI) in industry structure, 4:12 cash flows for financed position in adjusting, 4:302–306 Newey–West method of adjusting underlying combined with forward in capital budgeting, 3:56 standard errors, 1:358–359 contract, 5:313–314 and FCFE, 4:302–306 new firms, starting,1: 112 cash flows related to carrying and FCFF, 1:280–281, 284–285; new-issue DRPs, 3:128 underlying, 5:311–312 4:289–293, 302–306 New Jersey, ESG risk exposures, 3:260 cash flows with forward market price on foreign currency financial new media, retention of information on, too high, 5:314–315 statements, 2:182–183 1:147 cash flows with forward market price interest, 2:237, 258 Newmont Mining, 4:96, 101 too low, 5:315–316 mistakes in forecasting free cash flow new products and services, cost-benefit value of long forward position, with, 4:316–317 analysis for, 3:7 5:317–318 operating cash flow and,2: 314–318 news, algorithmic trading on, 6:537–538 carry arbitrage model with underlying and other comprehensive income, new space, REITs and, 6:94–95 cash flows,5: 318–321 2:304–305 New York, New York, 1:542, 543 no-arbitrage single-period binomial and two-stage model for free cash New York Mercantile Exchange model, 5:379–384 flows, 4:326–328 (NYMEX), 6:209 BSM vs., 5:406–407 net interest income (NII), 2:237, 258 New York State, ESG risk exposures, for call options, 5:380–383 net interest margin, 2:254–257 3:260 for put options, 5:383–384 net interest revenue, 2:254, 256–257 New York Stock Exchange (NYSE) no-arbitrage two-period binomial net interest spread, 2:254 executive compensation, 3:243 model, 5:387–391 net internal rate of return, 6:160 heteroskedasticity and CAPM for for American-style options, 5:390–391 net leases stocks on, 1:351 for European-style options, 5:387–390 for health care facilities, 6:93 independence requirements, 3:250–251 noblesse oblige, 3:213 for office properties,6: 19, 20 and Regulation National Market nodes for shopping centers, 6:92 System, 1:720 of binomial interest rate trees, 5:85–87 net liability balance sheet exposure, New York Times, 4:168 in binomial option valuation model, 2:148 New Zealand 5:379 net loan charge-offs,2: 249–250 active return and weights for equities, neural network, 1:386 net migration, economic growth and, 6:500, 503–505 no-fault divorce, for private equity 1:644–645 common law, 3:113 funds, 6:156

Cumulative_Ind_L2 60 June 14, 2018 9:39 PM Index I-61

no-growth company, 4:220–221 nonfinancial assets,4: 422 North American Free Trade Agreement no-growth value per share, 4:221 nonfinancial measurements, enterprise (NAFTA), 1:682 NOI. see net operating income value for, 4:446–447 Norway no IRR problem, for capital projects, non-ICT capital, 1:639, 649 active return and weights for equities, 3:24–25 nonlinearity (nonlinear relation) 6:500, 503, 504 noise, in transaction-based real estate of functional form, 1:366–370 historical equity risk premium, 4:61, 63 indexes, 6:61 of variables, 1:270–271 OECD Principles, 3:256n.18 Nokia Corporation nonmonetary assets, 2:145 share repurchases, 3:161 clean surplus violations, 4:518, 519 nonmonetary liabilities, 2:145 no securities laws (NS) countries, foreign exchange risk management, nonoperating assets, 4:337, 563 1:24–25 2:143 non-operating expenses NoSQL database, 1:249 long-term forecasts for, 4:168 modeling of, 4:126–131 notching, 5:213, 238 statement of changes in stockholder on pro forma income statements, notes equity, 4:519 4:176–177 credit-linked, 5:248 nominal cash flows, inflation and, nonoperating gains, 4:528–529 floating-rate, 5:227–234 3:37–38 nonoperating income, reclassifying US Treasury, 5:31–32 nominal coupon-paying bonds, default- components of, 2:99–101 Notes to Financial Statements free, 6:402–425 non-performing loans, 2:250 disclosure of translation methods in, conventional government bonds, nonpublic companies, beta for, 4:77–79 2:178 6:410–413 nonpublic information information about risk in, 2:346–347, influences on short-term default-free acting on, 1:63, 66 350–355 interest rates, 6:409 analyst recommendations as, 1:65–66 of Royal Dutch Shell, 2:351–355 pricing formula, 6:402–403 controlling, 1:64 notification short-term nominal interest rates and defined, 1:58 changes to investment process, business cycles, 6:403 material (see Material Nonpublic 1:142–144 T-bill rates and business cycles, Information [Standard II(A)]) client bonus compensation, 1:116–117 6:404–409 standards for priority of transactions Code and Standards, 1:114 yield curves and business cycles, with, 1:158 of errors, 1:144 6:413–425 non-recurring earnings, 2:310–312 fund mandate changes, 1:142 nominal discount rate, 4:92 nonrecurring items, 4:386–388, 528–529 of inability to timely file,2: 358 nominal GDP, 1:487; 4:212 non-renewable resources, 1:639 known violations, 1:27 nominal interest rates non-residential properties, 6:11 outside compensation, 1:117 and Fisher effect,1: 567–568 non-standard forward dates, points for, of risks/limitations, 1:145–146 and inflation,1: 352–354 1:552 notional amount short-term, 6:403 nonstationarity for CDS, 5:270–271 nominal yield spread, 1:582 in historical equity risk premium for currency options, 5:410 nominating committee, board of estimates, 4:60 in currency swaps, 5:450n.6 directors’, 3:242–243 of time series, 1:376 for Libor spot market, 5:325 non-accrual loans, 2:251 unit root test of, 1:465–469 for swaps, 5:346n.21, 350 noncallable fixed-rate perpetual non-stationary probability distributions, in valuation of interest rate options, preferred stock, 4:216–217 1:529 5:415 noncash charges non-traded assets, 4:76–79 notional value, in interest rate swaps, and FCFF, 4:290, 306–307 NOPLAT. see net operating profit less 5:449 and forecasting free cash flow, adjusted taxes Novartis, 3:143 4:295–301 normal backwardation Novo Nordisk, 4:109–114 noncash consideration, 4:584 and Insurance Theory,6: 213–214 n-period moving average, 1:470–472 non-cash rents, 6:100 and roll return, 6:220 NPV. see net present value noncompete agreements and clauses, normal distribution NPV profile,3: 17–18 1:107; 6:143 BSM model and, 5:402, 405 NS countries. see no securities laws noncontrolling business interests, cumulative probabilities for, 1:735–736 countries 2:43–46 normality assumption, for linear NSFR. see Net Stable Funding Ratio Noncontrolling Interests in Consolidated regression model, 1:291n.25 NTM P/E. see next twelve month price- Financial Statements (SFAS 160), normalized earnings, 4:164, 563–564 to-earnings ratio 2:8 normalized earnings per share (normal null hypothesis, 1:282–283, 285n.14, 341 nonconventional cash flow,3: 9 EPS), 4:388–389 NYMEX. see New York Mercantile non-convergence trap, 1:675 normalized operating income, 4:129 Exchange noncorrection of known errors, 1:48 normalized P/Es, 4:385 NYSE. see New York Stock Exchange non-cyclical equities normalized revenue, 4:164–169 business cycle and earnings for, Nortel Inversora S.A., 2:21–22 O 6:442–444 North America. see also specific OAS. see option-adjusted spread equity premiums for, 6:450–451 countries objectives non-cyclical investments, 6:441 analysis of revenue, 4:109, 110 active managers’, 6:294 non-discretionary accruals, 2:314 CDS products, 5:274 investment non-dividend-paying companies, DDM corporate governance failures, 3:226 changes in, 1:233–234 for, 4:229–230 Gordon growth model, 4:68 establishing, 1:77 non-dividend paying stock, valuing, grain production, 6:201 in IPSs, 1:93, 148 4:229–230 publicly traded real estate equities, return objective, 6:259–261 nonearning assets, 4:441 6:81 risk objective, 6:257–259 non-employee directors, 3:252, 253 regulatory code overhaul, 3:246 investors’, 6:251, 257–261

Cumulative_Ind_L2 61 June 14, 2018 9:39 PM I-62 Index

objectivity. see Independence and on-the-job consumption, 3:208 operations. see also multinational Objectivity [Standard I(B)] “on the run” bonds, 5:14 operations obligations, rights and, 3:218 on-the-run series, 5:275 adjusted funds from obsolescence, 6:47–48 OPB. see other post-employment in Capitol Shopping Center REIT Inc. Occidental Petroleum, 4:25 benefits case study, 6:115 Occupational Safety and Health open economies, 1:678–686 growth in, 6:104 Administration (OSHA), 4:17 China and India, 1:679–680 P/AFFO multiple, 6:104, 109–110 OCF. see operating cash flow convergence, 1:682 cash flow from operations,4: 204n.10 OCI. see other comprehensive income Mundell–Fleming model, 1:585–587 adjusting, 4:301–306, 314–315 OECD. see Organisation for Economic Spain, 1:682–686 FCFE from, 4:301–306 Co-Operation and Development open-end mutual funds, 2:216 FCFF from, 4:293–295, 301–306 off-balance sheet financing,4: 19 open market, share repurchases in, 3:162 and free cash flow,1: 370–372; 4:285 off-balance sheet leverage from open-market DRPs, 3:128 and net income, 1:280–281 operating leases case study, open market rent, 6:37 and price to cash flow,4: 432, 434 2:403–406 operating cash flow (OCF) funds from conclusions and recommendations, in equity valuation, 4:19 in Capitol Shopping Center REIT Inc. 2:406 free, 6:433 case study, 6:115, 118 data analysis, 2:404–406 of Nestlé, 2:398–399 growth in, 6:105 data collection, 2:403 net income and, 2:314–318 in real estate valuation, 6:105–108 data processing, 2:404 overstatement of, 2:300 of life and health insurance companies, follow-up, 2:406 and price-to-cash flow,4: 432 2:273–276 purpose for analysis, 2:403 quality of, 2:333–334 price-to-adjusted funds from off-balance sheet liabilities,4: 419 reclassification of,2: 298 advantages and drawbacks, off-balance sheet obligations,2: 226, operating choices, reporting quality and, 6:109–110 240–241, 343 2:294 in valuation of REIT stocks, 6:104 offer price operating costs, 4:114–126 price-to-funds from and arbitrage constraints on spot operating expenses, in advanced DCF, advantages and drawbacks, 6:109–110 exchange rate quotes, 1:544–548 6:42–43 in valuation of REIT stocks, 6:104 in foreign exchange market, 1:541 operating income of property and casualty insurance office industry cycle,6: 92 net companies, 2:265–266 Office of the Comptroller of the and capital expenditures, 6:43 opinions Currency, 2:218 capitalization of, 6:99–100 about CFA Program or Institute, 1:166 Office of the Superintendent of Financial defined, 6:28 auditor’s, 2:346–350 Institutions, 2:218 and FFO/AFFO, 6:106 of credit rating agency, 1:33–34 office properties,6: 11, 19–20 and functional obsolescence, 6:48 facts in reports vs., 1:140 office real estate investment trusts,6: 91, in income approach to real estate fairness, 4:10 92, 94, 95 valuation, 6:27–33 group research, 1:132 offsetting forward positions,1: 553n.10, level, 6:36 integrity of, 1:35 554 stabilized, 6:31–32 providing, as facts, 1:141 off-the-run series,5: 275 normalized, 4:129 opportunistic exploitation of value chain Ohio, 3:295 overstatement/non-sustainability of, members, 3:213–214 Ohio Art Company, 3:214 2:299 opportunity costs oil prices, moving average for, 1:471–472 reclassifying components of, 2:99–101 of capital projects, 3:57 oil refining,6: 226–227. see also crude oil operating leases and capital rationing, 3:42 OIS. see overnight indexed swaps off-balance sheet leverage from, defined, 3:9; 4:205 OIS rate. see overnight indexed swap 2:403–406 of funds, 3:9 rate conclusions and recommendations, opportunity lists, 4:428 OLS. see ordinary least squares 2:406 optimal capital structure, 3:106 omissions, 1:45 data analysis, 2:404–406 optimal expected active return, 6:492–493 one-factor APT model, 6:281–282 data collection, 2:403 optimal portfolio, risk and return in, one-factor term structure models, 5:39 data processing, 2:404 6:482–487 OneMain Financial, 2:255–256 follow-up, 2:406 option-adjusted spread (OAS), 2:272 one-period binomial model, 5:379–386 purpose for analysis, 2:403 about, 5:145–147 for call options, 5:380–385 as off-balance sheet obligations,2: 343 in history of bond analytics, 5:178 expectations approach in, 5:384–386 operating margin, pre-tax and interest rate volatility, 5:147–149 no-arbitrage approach in, 5:379–384 assumptions about, in simulations, option combinations, strategies using, for put options, 5:383–384, 386 1:525 5:473, 481–483 one price, law of of software companies, 1:521–522 option delta, 5:420–423 and arbitrage-free valuation, 5:77, 308, of US building retailers, 1:524 option-free bonds. see also straight 377 operating profit bonds and method of comparables, 4:380–381 and foreign currency gains/losses, default-free bonds, 5:128–129 and purchasing power parity, 1:564 2:136–137 effective convexity of,5: 159 one-sided durations, 5:155–156 of Nestlé, 2:398 key rate durations of, 5:156–157 one-tailed tests, 1:342n.22 on pro forma income statements, valuation one-time opportunities (private equity 4:175–176 with binomial interest rate trees, class), 6:137 operating results, in Europa Venture 5:94–96 120/20 long–short strategy, 6:501 Partners III case study, 6:162 default-free bonds, 5:128–129 Oniva.com, 3:203 operating risk, 3:261–262 with spot rates, 5:79–80 online payment companies, 2:216 operational risk, 3:226 Z-spread for, 5:146

Cumulative_Ind_L2 62 June 14, 2018 9:39 PM Index I-63

option gamma, 5:423–426 orderly liquidation value, 4:8 ownership option pools, in venture capital method, ordinary least squares (OLS), 1:334n.10 of banks, 2:239 6:169 for autoregressive models, 1:449 beneficial, 1:158, 159 option premiums, exercise and time and model specification,1: 363 of completed prior work, 1:111 value in, 5:460 and serial correlation, 1:356 employee stock ownership plans, option pricing models, for capital Oregon, ESG risk exposures, 3:260 3:204; 4:559 projects, 3:53 organic growth, 3:283 of firm’s records,1: 147, 148 options (options contracts). see also Organisation for Economic of real estate, 6:6 bonds with embedded options; Co-Operation and Development stock, 1:151–153 specific types, e.g.: call options (OECD) ownership fraction, for venture capital, consequences of exercising, 5:483 estimates of potential GDP, 1:630 6:167 optimal exercise of, 5:131 labor projections, 1:644 and parametric method of VaR Principles of Corporate Governance, P estimation, 6:327 3:256–260 Packard, David, 3:215 sensitivity risk measures, 6:340–342 productivity studies, 1:625 Pac-Man defense, 3:297 value of callable/putable bonds and organizational culture, 3:215, 220 P/AFFO. see price-to-adjusted funds straight bonds vs., 5:127–128 Osaka Dojima Commodity Exchange, from operations option spreads, 5:473–481 6:207 paid in capital (PIC), 6:160, 163 bear, 5:473, 475–476 OSHA. see Occupational Safety and PaineWebber Short-Term US bull, 5:473–479 Health Administration Government Income Fund, 1:233 calendar, 5:480–481, 492 OTC contracts. see over the counter painting the tape, 6:544 refining, 5:476–479 contracts pairs trading, 4:25; 6:536, 537 risk with, 5:480 OTC market. see over-the-counter pairwise correlations, in options prices market multicollinearity assessment, 1:360 and structural models, 5:217–218 other comprehensive income (OCI) Pakistan and volatility, 5:485–486 accumulated, 4:521 equity REITs, 6:83 options trading, implied volatility in, as dirty surplus item, 4:505n.12 natural resources, 1:640 5:431–433 fair value through, 2:20–22 real GDP per capita, 1:621, 677 options valuation and net income, 2:304–305 Pan Asia Index, 3:142–143 binomial model, 5:378–401 and periodic pension cost, 2:82–83, 98 panel data, regression analysis of, about, 5:378–379 and residual income, 4:521–525 1:286n.15 interest rate options, 5:399–401 other post-employment benefits (OPB), parameters multiperiod model, 5:401 2:78, 79 stability of, 1:311 one-period model, 5:379–386 outcomes (simulation) for statistical distributions, 1:522 two-period model, 5:386–398 quality of, 1:529 parametric method of VaR estimation, Black model, 5:412–419 range of, 1:523 6:324–327 for European options on futures, outliers and extreme events, 6:335 5:412–414 in correlation analysis, 1:271–273 historical simulation method vs., for interest rate options, 5:414–417 and harmonic mean, 4:458 6:329–330 for swaptions, 5:417–419 out-of-date information, 1:52–53 par curve Black–Scholes–Merton model, out-of-sample forecast errors, 1:456 benchmark, 5:81–82 5:401–411 out of sample testing, model in bootstrapping, 5:15 assumptions, 5:377, 402–404 specification and,1: 364 defined, 5:14 binomial model vs., 5:406 out-of-the-money options, 3:244 and swap curve, 5:25 for call options, 5:404–409 output, per capita, 1:635 in valuation of risky bonds, 5:219 with carry benefits,5: 377, 408 output gap, 6:407 parent orders, 6:535 for currency options, 5:410–411 output-to-capital ratio, 1:661, 662, 665, parent’s presentation currency as history, 5:402 666 functional currency method, and normal distribution, 5:405 outright forward contracts, 1:548 2:151–154 for put options, 5:404, 406–409 outside compensation, 1:117 Pareto optimal, 1:705–706 stock and bond components of, outside information, verifying, 1:47 pari passu (term), 5:269 5:405, 407–408 outside organizations, referral parity. see interest rate parity; for stock options, 5:409–410 arrangements with, 1:164 purchasing power parity (PPP) for stocks, 5:404 outside parties, referral arrangements parity value, convertible bond, 5:170 Greeks, 5:420–429 and, 1:162–164 Parmalat, 3:210, 233, 246; 5:216 delta, 5:420–423 outward-oriented development par rates gamma, 5:423–426 strategies, 1:680, 681 defined, 5:128 rho, 5:428–429 overall market multiple, for P/E, and key rate durations, 5:157 theta, 5:426–427 4:405–409 from yield curve, 5:128 vega, 5:427–428 overfitting, 1:245, 380n.70, 383 parsimonious models, 1:364 implied volatility, 5:429–433 overfunding, 6:358 par swaps, 5:25 and BSM model, 5:429–430 overhead costs, 3:56; 4:120 partial durations, 5:156. see also key rate in option trading, 5:431–433 overnight indexed swap (OIS) rate, duration variability in, 5:430 5:32–33, 327n.11 partial elasticity, of dependent variable, and volatility indexes, 5:430–431 overnight indexed swaps (OIS), 5:235 1:367 no-arbitrage approach to valuation, overspending, on capital projects, 3:57 partial equilibrium model, 5:44 5:376–377 over the counter (OTC) contracts, 6:205 partial fills,1: 85 option theta, 5:426–427 over-the-counter (OTC) market, 5:452 partial regression coefficients,1: 333 Oracle Corporation, 3:141–142 overweight (term), 6:474 partial slope coefficients,1: 333

Cumulative_Ind_L2 63 June 14, 2018 9:39 PM I-64 Index

partnerships PEG ratio, 4:403 of portfolio managers, 1:274–275 general vs. limited, 6:152–156 P/E median, 4:409 for portfolios, 6:256 other forms of business vs., 3:229 penalized regression, 1:383–384 performance fees, 6:157 umbrella partnership REITs, 6:84, 88 Penman, Stephen H., 2:318 performance goals, unethical behavior to Pascal’s Triangle, 5:96–97 Pennsylvania meet, 3:215 passing exams in consecutive years, ESG risk exposures, 3:260 performance presentation, 1:99–100 1:173 restrictive takeover laws, 3:295 Performance Presentation [Standard passing rent, 6:37 pension funds III(D)], 1:97–101 passive investments, in financial assets, market risk management, 6:358–359 application of the standard, 1:98–101 2:10 private equity from, 6:155 compliance procedures, 1:98 passive investment strategy, 6:253 risk budgeting, 6:363 guidance, 1:97–98 passive management, 6:300 pension obligations, 2:79–80 text of, 1:17, 97 Pastor–Stambaugh model (PSM), accumulated benefit,2: 79n.5 performance reporting, 1:44–45 4:83–84 for automobile manufacturers, 2:93–94 performance triggers, in asset-backed path-dependent cash flows, securities for individual employees, 2:86–89 securities, 5:250 with, 5:100 measurement of, 2:79–80 periodic pension costs path-dependent options, 5:378 present value of defined benefit, and actuarial gains/losses, 2:83 pathwise valuation, 5:96–100 2:79–80 for DB pension plans, 2:82–85 pay, CEO, 3:208–209. see also projected benefit,2: 79–80 on income statements, 2:98–101 compensation vested benefit,2: 79n.5 in other comprehensive income, payback period, 3:13–15 pension plans 2:82–83, 98 payer swaptions, 5:417, 418 defined-benefit, 2:81–85 total, 2:98 payment method balance sheet presentation, 2:81–82 Permira, 6:136 advanced settle, 5:326, 327, 414 characteristics, 2:79 permissioned networks, 1:255 for M&As, 3:290–291 defined, 2:77–78; 6:249n.2 permissionless networks, 1:255 settled in arrears, 5:326, 327, 414 obligations, 2:79–80, 86–89 perpetual preferred stock, 4:216–217 payments. see also balance of payments periodic pension cost, 2:82–85 perpetuities flows return requirements and risk defined, 4:216 balloon, 6:62 tolerance of, 6:261 residual income model for valuing, discounted lease, 2:404–405 risk measures of, 6:358 4:512–514 online payment companies, 2:216 defined-contribution perpetuity calculations, long-term present value of CDS and stream of, characteristics, 2:79 forecast, 4:168 5:283 defined, 2:77 perquisites, 3:243–244 share-based, 4:10 financial statement reporting for,2: 81 Perry, S., 6:155n.8 structure of, for CDSs, 5:269 return requirements and risk per-share residual income forecasts, upfront, 5:271–272, 281, 283–284 tolerance of, 6:261 4:498–499 payout amount, 5:273–274 disclosure of net pension liabilities/ persistence payout policies, 3:155–161 assets, 2:97 earnings, 2:313–318; 4:386 constant dividend payout ratio policy, obligation for individual employee, income, 4:511 3:157–158 2:86–89 personal actions, 1:55 defined, 3:126 People’s Bank of China, 2:218 personal computer industry, 4:153–163 global trends, 3:177–178 Pepco Holdings, 4:439 personal ethics, 3:215, 219–220 residual dividend policy, 3:159–161 per capita output, capital deepening and, personal incentives, for M&As, 3:285 stable dividend policy, 3:155–157 1:635 personal trading payout ratios percentage leases, for retail properties, and conflict of interest,1: 155 for credit default swaps, 5:273–274 6:20 disclosure of, 1:160, 161 dividend perfect capital markets, 3:95, 135, 147 limitations on, 1:62 constant, 3:155, 157–158 perfect collinearity, 1:335n.14, 359–360 and market manipulation, 1:69–70 defined, 3:129; 4:439 performance priority of transactions for, 1:157 and dividend safety, 3:179–183 corporate personal-use assets, 4:564 and FFO/AFFO, 6:115 and CEO pay, 3:208–209 personnel global trends in, 3:177–178 and stakeholders, 3:202–206 preventing overlap of, 1:62 equity REIT vs. REOC, 6:87 profitability and profit growth, privy to recommendation, 1:84 target, 3:156 3:204–206 reporting requirements for, 1:159–160 Paypal, 2:216 role of stockholders, 3:203–204 Peru pay-to-play scandals, 1:34 stakeholder impact analysis, 3:203 natural resources, 1:641 P/B. see price to book value of private equity funds, 6:159–161, 164 real GDP per capita, 1:622, 677, 678 PBO. see projected benefit obligation of real estate portfolios, 6:23 peso, Mexican PCA. see principal components analysis performance appraisal, 6:256 currency code, 1:605 PCAOB. see Public Company performance attribution, 1:100; 6:290 Mexican peso crisis (1994), 1:588, 594 Accounting Oversight Board performance calculation, 1:98–99 and Swiss franc, 1:542 P/CF. see price to cash flow methodology disclosure, 1:100–101 pet projects, 3:8, 56 P&C insurance companies. see property using selected accounts, 1:100 Petroleo Brasileiro (Petrobras), 4:25, and casualty insurance companies performance evaluation 322–323 P C P. see Professional Conduct Program autoregressive models for time-series petroleum. see crude oil P/D. see price to dividends analysis, 1:456–458 Petropolis, 4:137 P/E. see price to earnings ratio benchmarks for, 1:93 PF CLOs. see project finance pecking order theory, 3:105 in machine learning, 1:380 collateralized loan obligations peer-company multiples, P/E, 4:401–405 objectivity of, 1:33 P/FFO. see price-to-funds from operations

Cumulative_Ind_L2 64 June 14, 2018 9:39 PM Index I-65

Pfizer, 3:208–209 dynamic, 5:377 performance evaluation for, 1:274–275 Philippines expected return to, 6:280–281 risk budgeting, 6:363 natural resources, 1:640 factor, 6:281 portfolio returns, for no arbitrage real GDP per capita, 1:621, 677, 678 measuring performance of, 6:23 condition, 6:282–284 physical capital monitoring, 6:255 Portland General Electric Co., 4:439 and convergence in open economy, multifactor models of (see multifactor Portugal 1:678, 679 models of portfolios) active return and weights for equities, and economic growth, 1:647–649 optimal, 6:482–487 6:500, 503, 504 physical delivery, 6:210–211 performance attribution for, 6:290 commercial property values, 6:456 physical deterioration, 6:46–48 performance evaluation for, 6:256 default-free government bonds, 6:425 physical settlement, 5:273 private real estate investments in, 6:6 OECD Principles, 3:256n.18 PI. see profitability index publicly traded real estate securities in, position delta, 5:468, 470 PIC. see paid in capital 6:79–80 position equivalences (for derivatives), PIMCO Total Return Fund, 6:476–477 pure factor, 6:281 5:454–459 pips, in foreign exchange market, 1:542 rebalancing, 6:255 covered calls, 5:468 placement fees, 6:157 revision of, 6:255 foreign currency options, 5:457–458 plagiarism, 1:49–51 suitability of investment for, 1:94–95 protective puts, 5:468 and misrepresentation, 1:45–46 viewing swaps as, 5:343 synthetic assets with futures/forwards, policies on, 1:47 portfolio balance approach, for exchange 5:456 planning step (portfolio management), rates, 1:590–592 synthetic call options, 5:457 6:251–254 portfolio balance channel, current synthetic long assets, 5:454–455 capital market expectations, 6:254 account, 1:577–578 synthetic put options, 5:456–457 investment policy statements, 6:251, portfolio construction synthetic short assets, 5:455 253–254 with macroeconomic factor model, position limits investor objectives and constraints, 6:301–302 for asset managers, 6:356 6:251 multifactor models for, 6:300–302 for market risk management, 6:363 strategic asset allocation, 6:254 risk and return of optimal portfolio, position size, 6:349 P&L statements. see income statements 6:482–487 positive serial correlation, 1:356–358 PME. see Public Market Equivalent portfolio decision making, strategic, POST. see post-money valuation point estimates, 1:527 6:303 post-auditing, 3:7 points, of forward exchange rate quotes, portfolio duration, 5:154–155 post-employment benefits,2: 76–102 1:551–552 portfolio insurance, 6:364 and DB pension plan obligations, poison pills, 3:254, 294 portfolio investment perspective, 6:250 2:79–80 poison puts, 3:294 portfolio management, 6:247–276 disclosure, 2:92–102 Poland, 3:256n.18 about, 6:248 assumptions, 2:93–97 policy rates active (see active portfolio cash flow information,2: 101–102 and business cycles, 6:405–406 management) classification of periodic pension Taylor rule for, 6:407–409 defined, 6:256–257 costs in P&L, 2:99–101 and yield curve spreads, 6:418–419 dynamics of, 6:264 net pension liabilities/assets, 2:97 political stability, in developing vs. ethical responsibilities of portfolio periodic pension costs in P&L vs. developed countries, 1:624 managers, 6:265 OCI, 2:98 pollution, 1:707–709 execution step, 6:254–255 total periodic pension costs, 2:98 pooled data, model misspecification feedback step, 6:255–256 US health care costs, 2:95–97 with, 1:364, 372 future of, 6:264–265 financial statement reporting, pooled investment vehicles, managers in investment management, 6:248–250 2:81–92 of, 2:216 investment objectives, 6:257–261 assumptions and actuarial gains/ pooling of interests accounting method, return objective, 6:259–261 losses, 2:85–92 2:37, 42n.29 risk objective, 6:257–259 DB pension plans, 2:81–85 poor-quality earnings, 2:319. see also investor constraints, 6:261–264 DC pension plans, 2:81 low-quality earnings legal and regulatory factors, 6:263 types of, 2:77–79 poor-quality reporting. see low-quality liquidity, 6:262 post-money valuation (POST), 6:148– financial reporting tax concerns, 6:263 149, 166–167 population growth, economic and, time horizon, 6:262–263 post-offer defense mechanisms for 1:641–642 unique circumstances, 6:263–264 takeovers, 3:296–298 Porter, Michael E., 4:136 planning step, 6:251–254 crown jewel defense, 3:297 portfolio(s) capital market expectations, 6:254 greenmail, 3:296 arbitrage, 6:283 investment policy statements, 6:251, just say no defense, 3:296 bond 253–254 leveraged recapitalization, 3:297 active management of, 5:20–24 investor objectives and constraints, litigation, 3:296 fundamental law of active 6:251 Pac-Man defense, 3:297 management for, 6:506–512 strategic asset allocation, 6:254 share repurchase, 3:297 independence of investment and portfolio perspective on investing, white knight defense, 3:297–298 decisions with, 6:513–514 6:250 white squire defense, 3:298 interest rate swaps in management practice problems, 6:268–273 Potash Corporation of Saskatchewan, of, 5:449 as process, 6:251 Inc., 3:180–182 covered calls for protection of, solutions to problems, 6:274–276 potential GDP, economic growth and, 5:488–490 portfolio managers 1:620, 628–633 credit analysis of, 5:349 ethical responsibilities of, 6:265 potential output, growth accounting developing, 1:75–76 independence of, 1:31 equation for, 1:638

Cumulative_Ind_L2 65 June 14, 2018 9:39 PM I-66 Index

pound, British takeover, 3:310 guidance, 1:101–102 AUD/GBP currency pair, 1:553 term, 5:39–40 compliance with laws, 1:102 and BMW’s foreign currency exposure, upfront, 5:271–272, 281, 283–284 electronic information and security, 2:189, 190 premiumization, 4:137 1:102 correlation of exchange rate returns premium leg, CDS contract, 5:280, 281 professional conduct investigations for, 1:275–277 pre-money valuation (PRE), 6:148–149, by CFA Institute, 1:102 currency code, 1:605 167 status of clients, 1:102 day count convention for, 1:549n.7 pre-offer defense mechanisms for text of, 1:17, 101 GBP/EUR currency pair, 1:545–546 takeovers, 3:293–296 press, financial,2: 358–359 USD/GBP currency pair, 1:542, fair price amendments, 3:295 press releases, 1:61; 4:16 545–546 golden parachutes, 3:296 Preston Partners (case study), 1:220–224 power centers, 6:92 poison pills, 3:294 case facts, 1:220–221 PP&E. see property, plant, and equipment poison puts, 3:294 fair dealing [Standard III(B)], 1:222–223 PPICEM. see US Producer Price Index restricted voting rights, 3:295 responsibilities of supervisors for Crude Energy Materials restrictive takeover laws, 3:294–295 [Standard IV(C)], 1:223–224 PPL Corp., 4:439 staggered boards of directors, 3:295 suitability [Standard III(C)], 1:221–222 PPP. see purchasing power parity supermajority voting provisions, 3:295 pre-tax interest coverage, 6:433 practice, defined,1: 106 presentation currency pre-tax operating margin PRAT model, 4:244–246 defined, 2:131 assumptions about, in simulations, 1:525 PRE. see pre-money valuation parent’s, 2:151–154 of software companies, 1:521–522 precious metals, 6:195 presentations, 1:99–100. see also at US building retailers, 1:524 average annual sector roll return, Performance Presentation price(s) 6:224, 225 [Standard III(D)] acquisition, 2:40 commodity life cycle, 6:199–200 present value adjusted, 5:334 precision, in ensemble learning, adjusted, 4:286n.2 appreciation of, 6:13 1:386n.78 of annuities, 5:417–418 arbitrage pricing theory, 3:49 preclearance procedures, 1:160 of cash flows,6: 44 ask, 1:541 predicted P/E, 4:397 of CDS spread, 5:283 asset, 1:70–72 prediction error, 1:309 of discounted lease payments, bid, 1:541, 544–548 prediction intervals, for linear regression 2:404–405 breakeven model, 1:308–311 of expected loss, 5:205 for bear spreads, 5:476 predictions of FCFE, 4:287 for bull spreads, 5:474–475 bankruptcy prediction models, of FCFF, 4:286–287 for covered calls, 5:462, 463 2:331–332 and fixed swap rate,5: 347–348 in derivatives strategies, 5:485–487 in data analytics, 1:379 net, 3:10–11, 17–22 for protective puts, 5:467 of gross margins for Intel Corporation, of capital projects with real options, call, 5:123 1:451–453 3:53 capital asset pricing model, 3:49 of spot rates, 1:560–564 defined, 3:10 clean, 5:333 by Survey of Professional Forecasters, NPV profile,3: 17–18 conversion, 5:167, 168, 171–172 1:305 ranking conflicts between IRR and, entry, 4:561 pre-dissemination behavior, guidelines 3:18–22 equilibrium, 6:386, 387 for, 1:85 and stock prices, 3:26–27 excess purchase, 2:28–30 preferred dividends, for private equity of payment stream, 5:283 ex-dividend, 3:136 firms, 6:143 risk neutral, 6:390 exercise, 5:474 preferred habitats, 3:114 swap value based on, 5:349 exit, 4:561 preferred habitat theory, 5:35–36 present value models, 4:199–207 factor, 6:281 preferred stock, 4:216–217, 318–319 as absolute valuation models, fair price amendments, 3:295 premature revenue recognition, 4:23–24 fixed, 3:162 2:320–324 for analysis of financial markets, forward (see forward rates) premise of value (term), 4:560n.8 6:380–382 futures premium(s). see also risk premium(s) and build-up approaches, 4:85 in carry arbitrage model, 5:343 in build-up approaches, 4:85–87 for Coca-Cola Bottling Company and currency futures, 5:338 control, 4:30, 581–582 Hormel Foods, 4:202–204 defined, 5:309; 6:209 on convertible bonds, 5:171–172 definitions of cash flows for,4: 201–207 equity futures, 5:322 defined, 4:58 dividends in, 4:201–204 fixed-income futures,5: 334–337 and discounts in private company free cash flows in,4: 204–205 globalization of, 6:211 valuation, 4:588–589 for future cash flows,4: 199–201 interest rate futures, 5:324–325 forward, 1:550, 561 and geometric mean, 4:64 notation for pricing, 5:309–311 insurance, 2:264, 269 and macroeconomic factors, and spot prices, 6:203, 204 liquidity, 5:34 6:394–395 as government regulatory tool, for long-term equilibrium interest residual income in, 4:205–206 1:708–709 rates, 1:573 present value of growth opportunities growth rate implied by stock, 4:219–220 in net asset value approach, 6:103 (PVGO), 4:220–222 home, 6:21 net premiums earned and written, present value of the defined benefit law of one, 1:564; 4:380–381; 5:77 2:269 obligation (PVDBO), 2:79–80 from LBO model, 6:146 option, 5:460 Preservation of Confidentiality market conversion, 5:171–172 in private equity investments, 6:140 [Standard III(E)], 1:101–105 and market value of property, 6:24 on risky assets, 6:389–392 application of the standard, 1:103–105 offer, 1:541, 544–548 size, 4:570 compliance procedures, 1:103 oil, 1:471–472

Cumulative_Ind_L2 66 June 14, 2018 9:39 PM Index I-67

of options drawbacks to using, 4:432 overall market multiple, 4:405–409 and structural models, 5:217–218 and inverse ratio, 4:392 peer-company multiples, 4:401–405 and volatility, 5:485–486 price to dividends and dividend yield, valuation based on forecasted and personal trading practices, 1:69–70 4:436–439 fundamentals, 4:395–398 quoted, 5:333 calculating dividend yield, 4:437–438 justified P/E,4: 395–397 real estate, 6:10 valuation based on comparables, P/E based on cross-sectional rental price of capital, 1:634 4:438–439 regression, 4:397–398 share repurchase, 3:162 valuation based on forecasted price-to-funds from operations (P/FFO) of shares for venture capital, 6:167 fundamentals, 4:438 advantages and drawbacks, 6:109–110 spot rationale for, 4:432 in valuation of REIT stocks, 6:104 defined, 6:208 valuation based on comparables, 4:436 price to sales (P/S), 4:425–431 and forward prices, 5:8–12 valuation based on forecasted determining sales, 4:426–428 and futures price, 6:203, 204 fundamentals, 4:435–436 and inverse ratio, 4:392 localization of, 6:211 price to dividends (P/D), 4:436–439 and revenue recognition, 4:426–428 stability of, in emerging markets, 1:582 calculating dividend yield, 4:437–438 valuation based on comparables, stock and inverse ratio, 4:392 4:430–431 and dividend reductions, 3:143 valuation based on comparables, valuation based on forecasted and dividend vs. share purchase 4:438–439 fundamentals, 4:429–430 decision, 3:170 valuation based on forecasted PricewaterhouseCoopers LLP, 2:347–349 growth rate implied by, 4:219–220 fundamentals, 4:438 pricing. see also specific pricing models and net present value, 3:26–27 price to earnings ratio (P/E), 4:382–414 bonds target, 5:461–462 alternative definitions,4: 384–385 with binomial interest rate trees, terminal share, 4:210 in analysis of long-term equity 5:86–87 transfer, 2:183 investment, 2:401 with credit premiums, 6:426 and valuation of private equity stake, based on cross-sectional regression, default-free nominal coupon-paying 6:138 4:397–398 bonds, 6:402–403 value vs., 4:6–8 and bootstrap effect,3: 284–285 with Monte Carlo method, 5:100–101 volume and price approach, 4:112 in cross-country comparisons, commercial real estate, 6:453–455 Price, George, 2:335, 336 4:410–412 credit default swaps, 5:277–286 price bubbles, 6:53 defined, 6:445 basic concepts, 5:278–281 price currency, 1:541, 550 and dividend discount model, changes in, 5:284–285 priced risk, 6:278 4:228–229 conventions in, 5:282–284 price elasticity of demand, 4:146, 147 for equities valuation, 6:445–447 credit curve, 5:281–282 price momentum, 4:453–454 forward, 4:381, 392–397; 6:445–446 monetizing gains and losses, price multiples, 4:382–439 and GGM equity risk premium 5:285–286 defined, 4:378 estimate, 4:69 employee stock options, 2:106–107 enterprise multiples vs., 4:447–448 and Gordon growth model, 4:222–224 equities, 6:437 for guideline transactions method, 4:584 harmonic mean, 4:457–459 equity REITs, 6:88 justified, 4:382 historical (trailing), 6:445 forward commitments, 5:307–373 method of comparables for, 4:379–380 and inflation,4: 410–412 about, 5:307 price to book value, 4:414–424 and inverse, 4:392 arbitrage-free principles, 5:308–309 price to cash flow,4: 431–436 and macroeconomic equity risk forward contracts, 5:309–343 price to earnings ratio, 4:382–414 premium estimate, 4:70 futures contracts, 5:322–343 price to sales, 4:425–431 P/B vs., 4:414–415 swap contracts, 5:343–361 from residual income model, 4:515 and present value of opportunities, forward contracts price quotations, spread in, 5:30–33 4:222 cash flows with forward market price price return, 6:219–220 real cyclically adjusted, 6:447 too high, 5:314–315 price risk, 6:216 in relative valuation model, 4:25 cash flows with forward market price price-setting option, 3:52 and stock dividends, 3:131 too low, 5:315–316 price-to-adjusted funds from operations terminal price multiples, 4:412–414 currency forwards, 5:338–341 (P/AFFO) based on comparables, 4:413 equity forwards, 5:322–324 advantages and drawbacks, 6:109–110 based on fundamentals, 4:412 interest rate forwards, 5:328–330 in valuation of REIT stocks, 6:104 in valuation of mature growth phase, notation for pricing, 5:309–311 price to book value (P/B), 4:414–424 4:413–414 forward pricing model, 5:7 adjusting book value, 4:419–422 trailing P/E, 4:385–392 futures contracts determining book value, 4:417–422 and business-cycle influence, currency futures, 5:338 drawbacks to using, 4:415–416 4:388–390 equity futures, 5:322 equity strategists’ use of, 6:446 and comparability with other fixed-income futures,5: 334–337 and inverse ratio, 4:392 companies, 4:390 interest rate futures, 5:324–325 P/E vs., 4:414–415 with negative, zero, or low earnings, notation for pricing, 5:309–311 rationale for, 4:414–415 4:390–392 mispricing, 4:7–8 and residual income, 4:505–506 and nonrecurring items, 4:386–388 real-time, 6:537 valuation based on comparables, and two-stage dividend discount swap contracts 4:423–424 model, 4:228–229 currency swaps, 5:350–354 valuation based on forecasted valuation based on comparables, equity swaps, 5:359–360 fundamentals, 4:422–423 4:399–410 interest rate swaps, 5:27, 346–348 price to cash flow (P/CF),4: 431–436 historical P/E of company as valuation vs., 5:308 accounting methods and cash flow,4: 433 comparable, 4:409–410 principal–agent problem, 3:230 determining cash flow,4: 433–435 industry and sector multiples, 4:405 principal–agent relationships, 3:206–207

Cumulative_Ind_L2 67 June 14, 2018 9:39 PM I-68 Index

principal components analysis (PCA), risks and costs of, 6:156–157 probabilistic inputs, number of, 1:522 1:389; 5:47–50 value creation for, 6:141–143 probabilistic risk assessment approaches, principal components models, 6:285 private equity funds, 6:152–156 1:519–533 prior coverage, 1:38 corporate governance terms for, about, 1:519 prior employers, 1:99, 110 6:154–156 comparing, 1:530–531 prior fund, in performance presentation, economic terms for, 6:153–154 in electricity, commodities, and 1:99 performance of, 6:159–161, 164 technology markets, 1:532 Priority of Transactions [Standard risks and costs of investing, 6:156–157 function of, 1:533 VI(B)], 1:157–162 structures of, 6:152–156 and risk-adjusted value, 1:531–532 application of the standard, 1:160–162 valuation of, 6:158–159 simulations, 1:520–530 in case studies, 1:228 private equity valuation, 6:135–187 with constraints, 1:527–528 compliance procedures, 1:158–160 about, 6:138–141 decision making based on, 1:526–527 guidance, 1:157–158 in buyout transactions, 6:144–148 Home Depot example, 1:523–526 accounts with beneficial ownership, classification of private equity,6: 137–138 issues with, 1:528–529 1:158 due diligence, 6:158 and risk-adjusted value, 1:529–530 avoiding potential conflicts,1: 157 Europa Venture Partners III case study, steps in, 1:520–523 nonpublic information, 1:158 6:161–164 probabilistic variables, 1:520 personal trading and trading for exit routes for investments, 6:149–151 correlation between, 1:522, 529 clients, 1:157 market data in, 6:143–144 defining probability distributions for, text of, 1:18, 157 net asset value, 6:158–159 1:520–522 prior transactions method (PTM), 4:579, practice problems, 6:178–183 determining, 1:520 586 private equity funds, 6:152–161 with unstable correlations, 1:529 prior work, ownership of, 1:111 and private equity in global economy, probability(-ies) privacy, internet and, 1:715 6:136 cumulative, 1:735–736 private company valuation, 4:555–608 risks and costs of private equity of “in the money” expiration, 5:408 about, 4:556 investments, 6:156–157 risk-neutral, 5:384, 388 approaches, 4:562–596 solutions to problems, 6:184–187 in BSM model, 5:405 asset-based approach, 4:586–588 value creation for private equity, implied, 5:43 build-up method for, 4:85–88 6:141–143 in one-period binomial model, 5:384 cash flow estimation issue,4: 567–569 for venture capital transactions in two-period binomial model, 5:388, discounts, 4:588–595 buyout vs., 6:144–145 389 application of discounts, 4:592–594 issues with valuation, 6:148–149 probability distributions lack of control discounts, 4:590 venture capital method, 6:166–177 defining, 1:520–522 lack of marketability discounts, private market value, 4:26 for expected value, 1:527 4:591–592 private placements, limits on, 1:159 fit of real data to,1: 529 and premiums, 4:588–589 private real estate investments, 6:5–78 non-stationary, 1:529 earnings normalization issue, 4:563–566 about, 6:6–7 and number of required simulations, equity valuation in, 4:10 characteristics of real estate, 6:9–11 1:522 income approach, 4:569–578 commercial real estate probability of default, 5:278–279 capitalized cash flow method, types of, 6:19–22 of asset-backed securities, 5:249 4:575–577 valuation of, 6:22–54 of corporate bonds, 5:224, 240 and discount rate for private debt investments, 6:61–64, 81 and credit ratings, 5:212, 237 company, 4:571–574 due diligence for, 6:54–55 in credit risk modeling, 5:203–204 estimations of required rate of return, equity investments, 6:13–61, 81 credit spreads for bonds with high, 5:247 4:570–574 benefits of,6: 13–15 of floating-rate notes,5: 229, 230 excess earnings method, 4:577–578 international, 6:56–57 in valuation of risky bonds, 5:146 free cash flow method,4: 575 returns from, 6:17–18 of zero-coupon bonds, 5:205, 244–245 market approach, 4:579–586 risk with, 6:15–18 probability of survival, 5:279, 280 guideline public company method, types of commercial real estate, probit models, 1:377 4:580–583 6:19–22 procedural law, 1:705 guideline transactions method, valuation of commercial real estate, Procter & Gamble Company 4:584–586 6:22–54 dividends, 3:143 prior transactions method, 4:586 equity REITs vs., 6:85–86, 88–89 foreign subsidiaries, 2:130 practice problems, 4:599–605 practice problems, 6:67–73 operational cost structure, 4:120, 121 public company valuation vs., 4:556–558 property classifications,6: 11–13 sales growth disclosures, 2:187–189 company-specific factors,4: 557–558 public vs., 6:7–9, 81 procurement process, 1:34 stock-specific factors in,4: 558 real estate indexes, 6:57–61 product(s) reasons for performing, 4:558–560 solutions to problems, 6:74–78 bundling of, 1:716 solutions to problems, 4:606–608 valuation of, 6:22–54 joint, 1:721 standards and practices for, 4:595–596 appraisals in, 6:22–25 of life and health insurance companies, standards of value, 4:560–562 cost approach, 6:46–51 2:273–276 private equity and highest and best use value, marginal product of capital, 1:634 classification of,6: 137 6:26–27 new, 3:7 corporate governance terms, income approach, 6:27–46 of property and casualty insurance 6:154–156 overview of approaches, 6:25–27 companies, 2:265–266 defined, 6:136 reconciliation of, 6:53–54 product differentiation, cross-border economic terms, 6:153–154 sales comparison approach, 6:51–53 M&As for, 3:287 fund structures, 6:152–156 private real estate investment trusts, product group, capital allocation by, in global economy, 6:136 6:82n.2 2:392–395

Cumulative_Ind_L2 68 June 14, 2018 9:39 PM Index I-69

production-flexibility option,3: 52, 53 net operating profit less adjusted taxes, as financial institutions,2: 217 production function, economic growth 3:306–307; 4:133 investment returns, 2:270–271 and, 1:633–635, 639 operating, 2:136–137, 398; 4:175–176 life and health insurance companies productivity protective puts for protection of, vs., 2:264 diminishing marginal, 1:634–635 5:464–466 liquidity, 2:271–273 of labor, 1:634 on short puts, 5:469 products and distributions, 2:265–266 and taxes/regulatory systems of and social responsibility, 3:216–217 property insurance policies, 2:266 developing countries, 1:625 with straddles, 5:482 property management, real estate, 6:8, total factor, 1:633 profitability 10, 12, 16 and capital deepening, 1:635–637 of carry trades, 1:582 property rights, 1:624, 725 in growth accounting equation, and goodwill impairments/provisions, property risk premium, 6:457 1:637–638 2:381–382 proportionate consolidation, by joint and steady state of growth and revenue growth, 3:209 ventures, 2:23–24 equilibrium, 1:664 stakeholders’ view of, 3:204–206 proposals for capital projects, and technology, 1:650–652 profitability index (PI),3: 16–17 evaluating, 3:7 and US economic growth, 1:670–671 profit and loss statements. see income propping, 2:331 product line analysis of revenue, 4:109 statements proprietary trading procedures, 1:63 professional conduct. see Standards of profit growth,3: 204–206 prosecution, for violation of regulations, Professional Conduct profit margin,2: 343 1:710 professional conduct investigations, pro forma balance sheets, 4:181–182 prospective P/E, 4:384 1:102 pro forma cash flow statements, protection leg, CDS contract, 5:280, 281 Professional Conduct Program (PCP), 4:177–182 protective puts, 5:459, 464–468, 473 1:9–10, 23, 54, 102 capital investment forecast, 4:178 and collars, 5:470–473 Professional Conduct Statement, 1:171; depreciation forecast, 4:178 defined, 5:459 4:33; 6:265 and forecasted balance sheet, investment objectives of, 5:464–468 professional designations, order of, 4:181–182 portfolio protection with, 5:489–490 1:174 forecasted cash flow statement, position equivalence for, 5:468 professionalism, 1:54 4:179–181 profit and loss at expiration for, Professionalism [Standard of working capital forecast, 4:178–179 5:466–467 Professional Conduct I], 1:21–56 pro forma income, disclosures of, 2:313 risk with, 5:470 Independence and Objectivity pro forma income statements, “Protocol for Broker Recruiting,” 1:107 [Standard I(B)], 1:30–42 4:172–177 provision(s) application of the standard, 1:36–42 corporate income tax forecast, 4:177 for loan losses, 2:249–252 in case studies, 1:215, 219 cost of goods sold, 4:173 profitability adjusted for,2: 381–382 compliance procedures, 1:35–36 non-operating expenses, 4:176–177 proxy-access rules, 1:719 guidance, 1:30–35 operating profit,4: 175–176 proxy fight,3: 293 text of, 1:16, 30 revenue forecasts, 4:172–173 proxy statement, 3:292 Knowledge of the Law [Standard I(A)], selling, general, and administrative Proxy Statement (SEC Form DEF 14A), 1:21–29 costs, 4:173–175 3:235, 237 application of the standard, 1:27–29 pro forma tables, research report, 4:36 proxy voting, 1:76–78; 3:248 in case studies, 1:214–215 programming languages, 1:248–249 prudence compliance procedures, 1:26–27 projected benefit obligation (PBO), and loyalty/care (see Loyalty, Prudence, guidance, 1:21–25 2:79–80 and Care [Standard III(A)]) text of, 1:16, 21 projected unit credit method, 2:85 and regulation of financial markets, Misconduct [Standard I(D)], 1:53–56 project finance collateralized loan 1:718 application of the standard, 1:54–56 obligations (PF CLOs), 5:248 Prudential Regulation Authority, 2:218 compliance procedures, 1:54 projection risk, 4:571 prudential supervision, 1:708 guidance, 1:53–54 project sequencing, 3:10 Prudential Supervision and Resolution text of, 1:16, 53 promotion (company), 1:69 Authority, 2:218 Misrepresentation [Standard I(C)], promotions (employee), 3:219–220 P/S. see price to sales 1:43–53 property pseudo liabilities, investors’, 6:258 application of the standard, 1:48–53 access to, 6:86 PSM. see Pastor–Stambaugh model compliance procedures, 1:46–47 assessed value of, 6:23 pth-order autoregression (AR[p]), 1:448 guidance, 1:43–46 classifications of,6: 11–13 pth-order autoregressive conditional text of, 1:16, 43 demand and lease terms for, 6:20–21 heteroskedasticity (ARCH[p]), text of, 1:16 effective yield of,6: 41 1:483–484 professional misconduct, 1:55–56 fully let, 6:30 PTM. see prior transactions method profit intellectual, 1:715; 3:210 public capital, in production function, arbitrage, 5:313–315 investment, 6:98–99 1:639 for bull spreads, 5:474 renovation of, 6:31–32 public companies with CDS, 5:285, 286 reversion valuation of, 6:37–39, 43–44 beta estimation for, 4:73–77 with collars, 5:471–472 subject, 6:25 independence and objectivity of, 1:33 economic, 3:62–63; 4:496 property, plant, and equipment (PP&E), valuation of private vs., 4:556–558 at expiration 4:133 Public Company Accounting Oversight for collars, 5:471 property analysis, WorldCom, 2:328–329 Board (PCAOB), 1:704 for covered calls, 5:462–464 property and casualty (P&C) insurance public dissemination, achieving, 1:60 for protective puts, 5:466–467 companies, 2:265–273 public goods, regulation of, 1:706 fair value through, 2:11–13, 20–22 capitalization, 2:273 public infrastructure, economic growth maximum, 5:471 earnings characteristics, 2:266–270 and, 1:653

Cumulative_Ind_L2 69 June 14, 2018 9:39 PM I-70 Index

Publicis Groupe, 2:404–406 interest rate volatility Q publicly traded real estate securities, bonds at zero volatility, 5:130–131 QE. see quantitative easing 6:79–134 bonds with volatility, 5:137–138, qth order moving average model (MA[q] advantages of, 6:85–88 140–145 model), 1:473 disadvantages of, 6:88–90 and value of bonds, 5:132–134 qualifications, board of directors’, equity REITs, 6:82–97 key rate durations for, 5:158 3:238–239 characteristics of, 6:84–90 one-sided duration for, 5:155, 156 qualification summary,1: 47 due diligence, 6:90–91, 95–96 and optimal exercise of options, 5:131 qualified investors,6: 153, 156 economic drivers for, 6:94–96 risky, 5:145–150 qualitative ESG factors, 4:331 market for, 6:82–84 interest rate volatility and option- qualitative variables property subtypes, 6:91–96 adjusted spread, 5:147–149 dependent, 1:376–378 structure of, 6:84 option-adjusted spread, 5:145–147 as dummy variables, 1:344–348 in portfolios, 6:79–80 scenario analysis of bonds with quality practice problems, 6:127–131 options, 5:149–150 asset, 2:223–228, 245–252 private real estate investments vs., and straight bonds/options, 5:127–128 balance sheet, 2:342–346 6:7–9, 81 and valuation of default-/option-free clear presentation, 2:346 real estate operating companies, bonds, 5:128–129 completeness, 2:343 6:96–97 and yield curve, 5:136–137 Sealed Air Corporation, 2:344–346 solutions to problems, 6:132–134 put–call parity unbiased measurement, 2:343 types of, 6:80–82 finding value of put based on,5: 386, cash flow,2: 333–342 valuation, 6:98–125 408, 412 classification shifting,2: 339–342 accounting for investment properties, for futures options, 5:412 evaluating, 2:334–342 6:98–99 and rho, 5:428 indicators of quality, 2:333–334 Capitol Shopping Center REIT Inc in swaption valuation, 5:419 Nautica Enterprises, 2:340–342 case study, 6:113–125 testing bond analytics for, 5:178 Satyam Computer Services, 2:334–338 discounted cash flow approach, and vega of call options, 5:427 Sunbeam, 2:338–339 6:110–113 put options (puts), 5:123 earnings, 2:310–333 net asset value approach, 6:98–103 Black model for, 5:412 analysis of, 4:18–22 relative value approach, 6:104–110 BSM model for, 5:404, 406–409 bankruptcy prediction models, Public Market Equivalent (PME), 6:161 bull spreads with, 5:476n.36 2:331–332 public responsibilities committee, 3:251 cash-secured, 5:468–469 defined, 2:290 pull factors, in economic management, for change-of-control events, 5:169 indicators of quality, 2:310–319 1:593 contingent, 5:163 in long-term equity investment case pump and dump strategy, 1:72 convertible bonds with, 5:169, 173 study, 2:395–396 pump-priming strategy, 1:71 and credit default swaps, 5:269 relationship of financial reporting purchase contracts, 2:343 delta approximation for, 5:421, 422 quality and, 2:291 purchase methods, business delta for, 5:420; 6:341 SEC case examples, 2:319–331 combination, 2:37 delta-plus-gamma approximations for, financial reporting (see financial purchase price, excess, 2:28–30 5:424 reporting quality) purchasing power gain, 2:173 embedded (see putable bonds) of financial reports,2: 292 purchasing power loss, 2:173 estate, 5:125 results, 2:290, 342 purchasing power parity (PPP) exercise values for, 5:379 quantitative easing (QE), 1:588; 5:35–36 and Dornbusch overshooting model, gamma for, 5:424 quantitative ESG factors, 4:331 1:588 interest rate, 5:414, 415 quantitatively oriented financial models, ex ante version of, 1:565, 570, 571 on interest rates, 5:400–401 1:129, 134–135 and exchange rate determination, lower bounds of, 5:427 quantitatively oriented research, 1:564–567 notation for, 5:379 1:128–129 and international Fisher effect, one-period binomial model for, quantitative models of misreporting 1:569–570 5:383–384, 386 likelihood and measuring economic growth with protective, 5:459, 464–468, 473 Beneish model, 2:306–309 GDP, 1:621 and collars, 5:470–473 limitations of, 2:309 and monetary approach, 1:587–588 defined, 5:459 variables for detecting misstatement, pure expectations theory, 5:33 investment objectives of, 5:464–468 2:309 pure factor portfolio, 6:281 position equivalence for, 5:468 quotations, attributing, 1:47 purpose, of financial statement analysis, risk with, 5:470 quoted margin, for floating-rate notes, 2:373, 403 and putable/straight bonds, 5:127–128 5:227 push factors, in economic management, quantifying lack of marketability quoted price, for bonds, 5:333 1:593 discounts with, 4:591 quote stuffing,6: 544 putable bonds, 5:127–150 rho of, 5:428–429 convertible, 5:173 synthetic, 5:455–457 R default-free two-period binomial model for, 5:387, R2. see coefficient of determination bonds at zero interest rate volatility, 389–398 RadioShack Corporation, 5:213–214, 5:130–132 writing, 5:491 216 bonds with interest rate volatility, p-value, 1:299, 333 Raju, Ramalinga, 2:294–295, 337 5:137–138, 140–145 PVDBO. see present value of the defined random forest classifiers,1: 385–386 effective convexity of,5: 159–161 benefit obligation random walks, 1:376, 461–464 effective duration for,5: 153–154 PVGO. see present value of growth ratchet bonds, 5:162–163 embedded options of, 5:124 opportunities ratchet mechanism, for private equity extendible vs., 5:142 Python programming language, 1:248 funds, 6:154

Cumulative_Ind_L2 70 June 14, 2018 9:39 PM Index I-71

rate of return Capitol Shopping Center REIT Inc real interest rate parity, Fisher effect and, average accounting, 3:15–16 case study, 6:113–125 1:567–570 economic, 3:61 discounted cash flow approach, reality, economic, 2:301–305 internal (see internal rate of return 6:110–113 realized alpha, 4:54 [IRR]) net asset value approach, 6:98–103 realized proceeds, 6:160 projected annual, 5:206–207 net asset value per share, 6:99–103 realized return(s) required relative value approach, 6:104–110 on bonds, 5:17–19 defined, 4:53–54 value of, 6:22, 80 expected vs., 4:53 as discount rate, 3:9 real estate operating companies (REOCs) risk and, 6:477, 478 expected return vs., 4:54 advantages of, 6:86–87 realized value added, 6:497–499 from income approach to private defined, 6:80 real option approach to private equity company valuation, 4:570–574 REITs vs., 6:86–87, 96–97 valuation, 6:139 on Microsoft, 4:56–57 valuation, 6:98–125 real options, 3:52–55 rating agencies. see credit rating agencies accounting for investment properties, abandonment option, 3:52–54 rational efficient markets formulation, 6:98–99 flexibility options,3: 52 4:6–7 discounted cash flow approach, fundamental options, 3:52, 55 rationing, capital, 3:10, 40–42 6:110–113 and present value of growth ratios, 2:269–270. see also specific ratios net asset value approach, 6:98–103 commodities, 4:221–222 Rawls, John, 3:218–219 relative value approach, 6:104–110 sizing options, 3:52 raw materials, in production function, real estate valuation timing options, 3:52 1:639 commercial real estate, 6:22–54, 452–457 real per capita GDP Raymond, Lee, 3:208 appraisals in, 6:22–25 and convergence hypothesis, R&D costs. see research and and business cycles, 6:455–457 1:676–678 development costs cost approach, 6:46–51 and economic growth, 1:620–623 R&D expenditures. see research and and highest and best use value, real risk-free rate, GDP and, 6:395 development expenditures 6:26–27 real-time pricing, 6:537 real cash flows, inflation and,3: 37–38 income approach, 6:27–46 real yields, 6:396–401 real cyclically adjusted P/E (CAPE), 6:447 international, 6:56–57 reasonable basis. see also Diligence and real default-free bonds, 6:383–402 market value, 6:23–25 Reasonable Basis [Standard V(A)] default-free interest rates and overview of approaches, 6:25–27 defined, 1:127 economic growth, 6:392–395 pricing formula, 6:453–455 developing, 1:131 determination of real default-free reconciliation of, 6:53–54 rebalance return, 6:222 interest rates, 6:384–392 regular cash flows from real estate, rebalancing discount rate and return from, 6:381 6:452–453 and commodity indexes, 6:228 real default-free interest rates and sales comparison approach, 6:51–53 and commodity index returns, 6:233 business cycles, 6:395–402 cost approach, 6:46–51 and feedback, 6:255 real default-free interest rates advantages and disadvantages, 6:53 recall, in ensemble learning, 1:386n.78 and business cycles, 6:395–402 estimating depreciated replacement receivables determination of, 6:384–392 cost, 6:46–48 as financial assets,2: 12–14 and inter-temporal rate of example, 6:49–51 and revenue at Sunbeam, 2:321–322 substitution, 6:384–388 income and sales comparison and sales at Sunbeam, 2:321–322 and premiums on risky assets, approaches vs., 6:25–27 securitization of, 2:53–55 6:389–392 direct capitalization method, 6:29–33 trade, 5:248 uncertainty and risk premiums in, capitalization rate and discount rate, receive-equity return, pay-another 6:387–389 6:29–30 equity swaps, 5:358–359 real discount rate, 4:92, 320–321 defining capitalization rate,6: 29–31 receive-equity return, pay-fixed swaps, real estate discounted cash flow method vs.,6: 27 5:356, 357 characteristics of, 6:9–11 with gross income multiplier, 6:32–33 receive-equity return, pay-floating in private company valuation, 4:564 with stabilized NOI, 6:31–32 swaps, 5:357 private investments in (see private real income approach, 6:27–46 receive-fixed equity swaps hedged with estate investments) advantages and disadvantages, 6:45 equities and bonds, 5:358 securities based on (see publicly traded cost and sales comparison receive-fixed FRAs real estate securities) approaches vs., 6:25–27 pay-floating, 5:416 real estate indexes, 6:57–61 direct capitalization method, 6:29–33 settlement of, 5:327 appraisal-based, 6:57–61 discounted cash flow method,6: 33–45 valuation of, 5:331 transaction-based, 6:59–61 errors in analysis, 6:45–46 receive-fixed pay-floating swaps,5: 419 real estate investment trusts (REITs). see in Germany, 6:56 pricing of, 5:344–345 also equity real estate investment net operating income in, 6:28–29 valuation of, 5:346–348 trusts real exchange rates, 1:569–570 receive-fixed swaps hedged with bonds characteristics of, 6:10 real GDP cash flows for,5: 346 defined, 6:80 and economic growth, 1:620–623 and equities, 5:358 estimating lack of control discounts in simulations of revenues and valuation of, 5:346–347 with, 4:590 expenses, 1:524–525 receive-floating, pay-fixed swaps, and forms of real estate investment, 6:7 real interest rate(s) 5:343–344, 419 tax benefits,6: 14 default-free, 6:384–392, 395–402 receive-floating FRAs valuation, 6:98–125 differentials in,1: 580–582 in FRA pricing, 5:329–330 accounting for investment properties, in Fisher effect,1: 352–354 pay-fixed, 5:416 6:98–99 and potential GDP, 1:631 settlement of, 5:327 asset-based approach, 4:587 risk-free, 6:395 valuation of, 5:331–333

Cumulative_Ind_L2 71 June 14, 2018 9:39 PM I-72 Index

receiver swaptions referring to candidacy in CFA regression residual, 1:295 embedded calls and, 5:419 program, 1:171–172 regression sum of squares (RSS), 1:306 valuation of, 5:417, 418 text of, 1:19, 170 regression trees, 1:384–385 recessions, 6:419, 456–457. see also referral arrangements regular cash dividends, 3:127–128 global financial crisis (2007-2009) disclosure of, 1:162–164 regular cash flows, from real estate, Reckitt Benckiser, 4:121 informing firms of,1: 163 6:452–453 reclassifications, balance sheet, interdepartmental, 1:163 regularization, 1:383 2:296–298 Referral fees [Standard VI(C)], regulation(s), 1:701–730. see also recognition 1:162–164 government regulation(s) expense, 2:330–331 application of the standard, 1:162–164 about, 1:701–702 revenue, 2:320–328 compliance procedures, 1:162 antitrust, 3:210, 299–302 timing of, 2:293–296 guidance, 1:162 on banking, 2:215–216 recommendation objectivity, 1:40–41 text of, 1:18, 162 classification of,1: 702–705 recommendations. see also Investment refined (petroleum) products,6: 193 of commerce, 1:713–716 Analysis, Recommendations, and refineries, 6:198 commodity markets, 6:208 Actions [Standard of Professional regimes and competitive forces, 4:139 Conduct V] crawling peg, 1:579 cost–benefit analysis for,1: 718–720 fair dealing in, 1:82–83 multiple, 1:488 economic effects of,1: 720–725 from financial statement analysis, time-series analysis with, 1:458, 459, economic rationale for, 1:705–708 2:401–402, 406 488 environmental, 1:725; 6:193 in investment policy statements, 1:148 regional banks, 2:216 and ethics, 1:13 as material nonpublic information, regional shopping malls, 6:92 for financial institutions,2: 217 1:65–66 regression, cross-sectional, 4:397–398 of financial markets,1: 717–718 number of people privy to, 1:84 regression analysis, 1:328–378. see also as investor constraint, 6:263 reasonable basis for, 1:127 time-series analysis and long-term forecasts, 4:167–168 reconciliation, of commercial real estate analysts use of, 1:328 M&A, 3:299–303 valuations, 6:26, 53–54 dummy variables in, 1:344–348 practice problems, 1:728–731 reconstitution, 5:79 linear regression model, 1:285–311 for private equity investments, 6:157 record keeping analysis of variance, 1:305–308 purpose of, for financial institutions, fintech for,1: 241 assumptions in, 1:289–291 2:214 supervision of, 1:123 coefficient of determination, and pursuit of profit,3: 205 record retention, 1:148 1:295–297 regulatory tools, 1:708–710 Record Retention [Standard V(C)], hypothesis testing with, 1:297–305 securities laws, 3:302–303 1:146–148 limitations, 1:311 self-regulation in securities markets, application of the standard, 1:148 with one independent variable, 1:711–713 compliance procedures, 1:147 1:286–289 solutions to problems, 1:732–733 guidance, 1:146–147 prediction intervals, 1:308–311 and VaR measurement, 6:334 local requirements, 1:147 standard error of estimate, 1:292–295 Regulation FD (SEC), 4:16 new media records, 1:147 model specification,1: 363–376 Regulation National Market System records as firm property,1: 147 of functional form, 1:364–372 (SEC), 1:720 text of, 1:18, 146 principles of, 1:363–364 Regulation Q (SEC), 1:720–721 records of time series, 1:372–376 Regulations for Urban Land Valuation, maintenance of, 1:62 multiple linear regression model, 6:57 as property of firm,1: 147, 148 1:328–344 regulators, classification of,1: 702–705 recovery rate, 5:273; 6:430–431 adjusted R2, 1:343–344 regulatory arbitrage, 1:706–707 bond prices based on, 5:247 assumptions of, 1:334–339 regulatory authorities of corporate bonds, 5:240 for bid–ask spread, 1:329–333 Basel Committee for Banking in credit risk modeling, 5:203 explaining returns with, 1:337–339 Supervision, 2:217–219 and credit spreads, 5:237–238 explaining valuations of multinational and financial institutions,2: 220 of floating-rate notes,5: 232–233 corporations with, 1:335–337 regulatory burden, 1:718–719 of zero-coupon bonds, 5:205 hypothesis testing with, 1:341–343 regulatory capital restrictions, recurring earnings, 2:310–313 predicting dependent variable, simulations with, 1:527–528 Red Book (Royal Institution of Chartered 1:339–341 regulatory capture theory, 1:706 Surveyors), 6:57 predicting multinational corporation’s regulatory competition, 1:706–707 redemption risk, 6:356 Tobin’s q with, 1:340 regulatory compliance, distributed reduced-form models, 5:216–219 penalized regression, 1:383–384 ledger technology for, 1:257 re-engineering of companies, by private with qualitative dependent variables, regulatory factors, in bond yields, equity investors, 6:141 1:376–378 6:423–424 reference entity, 5:269, 271–272 and random walks, 1:461 regulatory information, in equity reference obligation, 5:269 regressions with multiple time series, valuation, 4:16 references, employee, 1:54 1:484–488 regulatory interdependencies, 1:706–708 Reference to CFA Institute, Designation violations of assumptions, 1:348–363 regulatory oversight, algorithmic and Program [Standard VII(B)], heteroskedasticity, 1:349–355 techniques for, 6:542–544 1:170–174 multicollinearity, 1:359–362 regulatory projects, cost-benefit analysis application of the standard, 1:173–174 serial correlation, 1:355–359 for, 3:8 compliance procedures, 1:172 and solutions, 1:362–363 regulatory risk, 3:260–261 guidance, 1:170–172 regression coefficients regulatory systems, of developing vs. CFA designation, 1:171, 172 defined, 1:286, 329 developed countries, 1:625 CFA Institute membership, 1:170–171 instability of, 1:458–460 regulatory tools, 1:708–710

Cumulative_Ind_L2 72 June 14, 2018 9:39 PM Index I-73

reinforcement learning, 1:381 renovation, property undergoing, reputational risk, 3:261 reinsurance companies, 2:217, 265, 268 6:31–32 requested favors, 1:155 reinvestment of cash flow, longer-term rent request for proposal (RFP), 1:112 growth and, 6:111 in arrears, 6:454n.31 required rate of return REITs. see real estate investment trusts changes in, 6:37–40 defined, 4:53–54 REIT stocks, 6:104 net, 6:92 as discount rate, 3:9 related parties, gifts and entertainment non-cash, 6:100 expected return vs., 4:54 from, 1:38–39 open market, 6:37 from income approach to private related-party transactions, 2:252; passing, 6:37 company valuation, 4:570–574 3:247–248 for retail properties, 6:20–21 on Microsoft, 4:56–57 relationships reviews of, 6:56–57 required return(s) agency, 3:206–210, 230–234 straight-line, 6:105 from dividend discount models, director–shareholder conflicts, term, 6:37–38 4:239–240 3:233–234 rental income, 6:452 from Gordon growth model, information asymmetry in, rental price of capital, 1:634 4:224–225 3:207–208 renumeration report, of SABMiller plc, and internal rate of return, 4:57–58 manager–shareholder conflicts, 2:103 required return on equity, 4:71–90 3:231–233 REOCs. see real estate operating build-up method, 4:85–89 principal–agent relationships, companies bond yield plus risk premium, 3:206–207 repackaging, of securities, 5:248 4:88–89 and conflicts of interest,1: 152, 156 repeat sales index, 6:59–60 for private business valuation, and earnings quality, 2:328 replacement capital (private equity 4:85–88 and expense recognition, 2:331 class), 6:137 CAPM model, 4:71–79 fund manager, 1:32, 42 replacement cost, 6:46, 139 beta estimation for nonpublic independent contractor, 1:108–109 replacement projects, 3:7, 34–35 companies, 4:77–79 investment banking, 1:32–33 replacement reserve, 6:43 beta estimation for public companies, and issuer relationship pressure, replicating strategy costs, 5:406 4:73–77 1:37–38 replication, dynamic, 5:387, 388 examples, 4:73–78 relatively undervalued (term), 4:25 report(s) case studies, 4:56–57, 73–75, 81–83 relative movements, in exchange rates, annual, 3:235 and equity risk premium, 4:58–59 1:557 corporate sustainability, 4:17 international issues, 4:89–90 relative risk aversion, 6:388n.8 facts vs. opinions in, 1:140 multifactor models, 4:79–85 relative-strength indicators, 4:453–456 fictitious, 2:294–296 Fama-French model, 4:79–83 relative total return, in FX market, financial macroeconomic, 4:84–85 1:581–582 for equity valuation, 4:14, 16 Pastor–Stambaugh model, 4:83–84 relative valuation models, 4:25–26 fictitious, 2:294–296 statistical, 4:84 relative value for private company valuation, resale value, 6:43–44 in private equity valuation, 6:138 4:559–560 research in publicly-traded real estate security quality spectrum of, 2:292 due diligence in, 1:130 valuation, 6:104–110 flash, 1:85 group, 1:129, 132 Capitol Shopping Center REIT Inc material nonpublic information in, independence of, 1:37–38, 40 case study, 6:119 1:60 issuer-paid, 1:34–35, 48 funds from operations and adjusted presentation of, 1:140 quantitatively oriented, 1:128–129 funds from operations, 6:105–108 quality spectrum of, 2:292 reasonable basis for, 1:131 P/FFO and P/AFFO multiples, research, 4:33–37 and record retention, 1:148 6:109–110 contents, 4:33–35 secondary, 1:127–128 for REIT stocks, 6:104 example, 4:34–35 supervision of, 1:122–123, 125–126 relative VaR, 6:337 format, 4:35–36 third-party, 1:127–128, 132 relative version of PPP, 1:565 material nonpublic information in, research and development (R&D) costs, re-leasing costs, 6:90 1:60 in-process, 2:55–56 relevant information, 2:292n.3 reported amounts, quality of financial research and development (R&D) religious tenets, laws and regulations reports and, 2:293–296 expenditures based on, 1:28–29 reporting capitalization of, 2:304 remeasurement, 2:151 fraudulent, 2:317–318 in endogenous growth model, remeasurement gains, 2:152 incident-reporting procedures, 1:109 1:672–673 remeasurement losses, 2:152 likelihood of misreporting, 2:306–309 and price to book value, 4:415 removal for cause provision, 6:156 of material nonpublic information, 1:62 and residual income, 4:528 Rémy Cointreau Group, 4:170–183 performance, 1:44–45 as share of GDP, 1:649–650 company overview, 4:171–172 of potential unethical actions, 1:29 variability of, 4:120 industry overview, 4:170–171 requirements for investment research reporting, responsibilities for, pro forma balance sheet, 4:181–182 personnel, 1:159–160 4:36–37 pro forma cash flow statements, research, 4:36–37 research reports, 4:33–37 4:177–182 of unethical actions, 1:29 contents, 4:33–35 pro forma income statements, of violations, 1:27 example, 4:34–35 4:172–177 reporting quality, 2:290, 342. see also format, 4:35–36 valuation inputs, 4:182–183 financial reporting quality material nonpublic information in, renewable resources, 1:639 reporting units, 4:559n.6 1:60 renewal, lease, 6:41–42 reproduction cost, 6:46n.13 reserve allowance, 6:28n.5 renminbi, Chinese, 1:579; 2:189, 190 repurchase agreements, 2:224 Reserve Bank of Australia, 2:217

Cumulative_Ind_L2 73 June 14, 2018 9:39 PM I-74 Index

Reserve Bank of India, 2:218 examples, 4:499–504 execution-only, 1:81 reserved matters, for private equity general form, 4:500–505 of portfolio managers, 6:265 firms, 6:143 guidelines for use, 4:515 public responsibilities committee, Reserve Fund, collapse of, 1:721 international considerations, 3:251 residential mortgage-backed securities 4:529–530 for research reporting, 4:36–37 (RMBS), 5:248; 6:80 multistage model, 4:507–512 SEC’s allocation of, 1:703–704 residential real estate investment trusts, other valuation models vs., social, 3:216–217 6:91, 93 4:512–515 restricted lists, creating, 1:36 residential real estate properties, 6:11 per-share residual income forecasts, restricted periods, 1:159 residual autocorrelations, 1:450–452 4:498–499 restricted stock transactions, 4:591 residual capitalization rate, 6:34. see also single-stage model, 4:506–507 restrictions, for private equity funds, terminal capitalization rate strengths and weaknesses of, 6:156 residual dividend policy, 3:155, 159–161 4:514–515 restrictive fiscal policy,1: 586 residual error, in autoregressive models, for valuing a perpetuity, 4:512–514 restrictive monetary policy, 1:586–587 1:436 solutions to problems, 4:543–554 restrictive takeover laws, 3:294–295 residual income, 4:493–497 residual loss, 3:104 restructuring, 3:319–320; 5:272–273 calculation, 4:493–495 residual risk, 6:480 restructuring costs (restructuring for capital budgeting, 3:63–64 residuals, from estimating trends, 1:443 charges) commercial implementations, residual sum of squares, 1:306 and free cash flow to firm,4: 295, 298 4:496–497 residual value to paid in (RVPI), 6:160, IFRS and GAAP on, 2:56 continuing, 4:507 163–164 and quality of financial reports, determinants, 4:505–506 resource curse, 1:639–640 2:303–304 equity valuation with, 4:495–496 resources results in present value models, 4:205–206 central banks’ utilization of, 1:631 overemphasis of, 1:53 returns as, 4:205–206 energy, 1:640–641, 721 quality of, 2:290, 342 (see also earnings residual income model, 4:381n.3, M&As for acquisition of, 3:284 quality) 497–530, 569 natural, 1:639–641 simulated, 1:99–100 as absolute valuation model, 4:24 Responsibilities as a CFA Institute retail currency quotes, 1:543n.4 accounting considerations, 4:516–529 Member or CFA Candidate retail investors, protection of, 1:717–718 about, 4:516–517 [Standard of Professional Conduct retail properties, 6:12, 20–21 aggressive accounting practices, 4:529 VII], 1:165–174 retail real estate investment trusts, balance sheet adjustments for fair Conduct as Participants in CFA 6:91–92, 94, 95 value, 4:525 Institute Programs [Standard retail sales clean surplus violations, 4:517–525 VII(A)], 1:165–169 moving average for, 1:471 intangible assets, 4:526–528 application of the standard, REITs and growth in, 6:94–95 nonrecurring items, 4:528–529 1:167–169 and seasonality in time-series analysis, adjustments in, 4:523–525 eleventh addition revision, 1:8 1:477–480 DDM vs., 4:500–501 guidance, 1:165–167 time-series data for, 1:435 determinants of residual income, text of, 1:19, 165 retained earnings, 2:152–153 4:505–506 Reference to CFA Institute, retention rate, growth rate and, examples, 4:499–504 Designation and Program [Standard 4:243–246 general form, 4:500–505 VII(B)], 1:170–174 Rethinking the Equity Risk Premium guidelines for use, 4:515 application of the standard, (Hammond, Leibowitz, and Siegel), international considerations, 1:173–174 4:71 4:529–530 compliance procedures, 1:172 retired CFA Institute membership multistage model, 4:507–512 guidance, 1:170–172 status, 1:173 other valuation models vs., 4:512–515 text of, 1:19, 170 return(s), 4:51–104. see also entries per-share residual income forecasts, Responsibilities of Supervisors [Standard beginning required return; rate of 4:498–499 IV(C)], 1:118–126 return single-stage model, 4:506–507 application of the standard, 1:122–126 abnormal, 4:7 strengths and weaknesses of, in case studies, 1:223–226 active, 6:294–296 (see also value added 4:514–515 compliance procedures, 1:120–122 [metric]) for valuing a perpetuity, 4:512–514 adequate, 1:120–121 and active risk, 6:296–297 residual income valuation, 4:491–554 and code of ethics, 1:120 calculating, 6:473–475 about, 4:492–493 establishing appropriate incentive decomposition of, 6:294–296 practice problems, 4:534–542 structures, 1:122 decomposition of variance in, 6:498 and residual income, 4:493–497 implementation of compliance defined, 6:294 calculation, 4:493–495 education and training, 1:121 expected, 6:492–493, 499–506 commercial implementations, eleventh edition revision, 1:7–8 and fundamental law of active 4:496–497 guidance, 1:118–120 management, 6:488–492 determinants of residual income, detection as part of supervision, and information ratio, 6:481 4:505–506 1:119–120 in optimal portfolio construction, equity valuation with residual system for supervision, 1:119 6:485 income, 4:495–496 text of, 1:18, 118 scaling forecasts of, 6:491–492 residual income model, 4:497–530 responsibility(-ies) in active portfolio management, accounting considerations, 4:516–529 accepting, 1:124 6:477–487 adjustments in, 4:523–525 of analysts, 4:31–33 all-in, 1:559–560 determinants of residual income, of board of directors, 3:259 for appraisal-based indexes, 6:59 4:505–506 of employers, 1:106 by asset class, 6:13, 14, 82, 85

Cumulative_Ind_L2 74 June 14, 2018 9:39 PM Index I-75

bond case studies, 4:56–57, 73–75, 81–83 mature-phase, 4:238 real estate vs. bonds, 6:17–18 international issues, 4:89–90 and residual income, 4:506–507 realized and expected returns, 5:17–19 multifactor models, 4:79–85 return on invested capital (ROIC) stock vs. bonds, 1:279; 5:173–175; roll, 6:220–225 and balance sheet modeling, 4:133 6:17–18 short-term, in Chinese mergers and company value from, 1:301–303 T-bills vs. bonds, 1:284 acquisitions, 1:347–348 defined, 4:444, 495n.5 on Canadian dollar and Japanese yen, solutions to problems, 4:101–104 and WACC, 1:309–311 1:283–284 S&P 500 Index, 1:271–272, 294 return on investment, in high-quality capital, 6:58 standard deviation of, 6:257 earnings, 2:292–293 carry trade, 1:573, 582 stock return on net operating assets (RNOA), cash-on-cash, 6:62 bond returns vs., 1:279; 5:173–175; 2:318–319 cash operating, 2:391–392 6:17–18 return requirements, investors’, collateral, 6:221–222 month-of-the year effects,1: 345–346 6:259–261 commodity futures, 6:213–225 predictability of, 1:485 Reuters Company Research, 4:400 constant returns to scale, 1:634 real estate returns vs., 6:17–18 revenue(s) covariance in, 6:285 short-term, in Chinese mergers and assessing quality of, 2:326–328 cumulative abnormal, 1:347–348 acquisitions, 1:347–348 assumptions about growth of, 1:525 debt and equity, 1:278–279 stock index returns, 1:277–278 base, 1:525 and discount rate, 4:57, 92 T-bill diversification of,2: 274–276 disproportionate, 4:590 conditional heteroskedasticity of, earnings quality and trends in, 2:327 equity risk premium, 4:58–71 1:353, 355 income statement modeling of, ex ante, 6:472, 477–478 Fisher effect,1: 373–376 4:108–114 in excess of risk-free rate, 6:279 serial correlation of, 1:359 from licensing, 2:325–326 expected total, 6:420–421 net interest, 2:254, 256–257 active, 6:492–493, 499–506 variance in, 6:257, 285, 498 normalized, 4:164–169 on bonds, 5:17–19 and weighted average cost of capital, profitability and growth in,3: 209 and intrinsic value, 4:55–57 4:90–92 on pro forma income statements, to portfolio, 6:280–281 return attribution, 6:293–296 4:172–173 and required rate of return, 4:54 with Carhart four-factor model, as quality of earnings indicators, 4:19 and risk, 6:477–478 6:294–296 and receivables at Sunbeam, 2:321–322 expected holding-period, 4:53 defined, 6:290 segment analysis of, 4:109 ex post, 6:472, 477, 478 with fundamental factor model, simulations for estimating, 1:523–526 from factor sensitivities, 6:288–289 6:293–294 from support services, 2:325–326 Fidelity Select Technology Fund return desire, 6:259–260 of Travelers Companies, Inc., 2:265 and multicollinearity, 1:360–362 return distribution revenue per available room (RevPAR), multiple linear regression, 1:337–339 for collars, 5:473 6:94 and unit roots, 1:487 for covered calls, 5:460 revenue recognition holding period, 4:52–53; 6:58 for protective puts, 5:466 and earnings quality, 2:320–326 importance of, 4:52 return objective, 6:259–261 and multiple-element contracts, income, 6:58–59 return on assets (ROA) 2:324–326 internal rate of return (see internal rate economic measures of performance premature/fraudulent, 2:320–324 of return [IRR]) vs., 3:61 and price to sales, 4:426–428 from intrinsic value estimates, 4:55–57 and financial policies/dividend growth reverse carry arbitrage, 5:316, 336 investment rate, 4:244 reverse engineering, 6:540 life and health insurance companies, as risk measure, 4:403n.25 reverse repurchase agreements, 2:224 2:278–279 and ROE, 4:243 reverse stock split, 3:133 property and casualty insurance return on capital approach, 4:112 reverse stress testing, 6:346 companies, 2:270–271 return on capital employed (ROCE), reverse synergy, 3:320 maximizing, 3:204–205 4:133 reversionary potential, of properties, measures of, 6:259 return on equity (ROE), 2:277, 374n.2, 6:37 month-of-the year effects on,1: 345–346 383. see also required return on reversion valuation of property, 6:37–39, portfolio equity 43–44 expected return to portfolio, average, 4:388 reviewed financial statements,4: 566 6:280–281 for capital projects, 3:56 reviews from factor sensitivities, 6:288–289 and clean surplus violations, 4:516–517 account, 1:77, 86, 94 for no arbitrage condition, 6:282–284 and comprehensive income, 4:521–523 compensation, 3:254 practice problems, 4:96–100 DuPont analysis of compliance procedures, 1:26 price, 6:219–220 and forecasting dividend growth for independence/objectivity, 1:36 real estate, 6:8, 58–61 rates, 4:241, 243 revision, portfolio, 6:255 realized, 4:53; 5:17–19; 6:477, 478 for long-term equity investment, RevPAR. see revenue per available room rebalance, 6:222 2:383 Reynolds American, Inc., 4:473 REIT, 6:88, 111 and residual income valuation, RFP. see request for proposal relative total return in FX market, 4:516–517 rho, 5:428–429 1:581–582 in spreadsheet modeling, 4:238 Rhode Island, ESG risk exposures, 3:260 required, 4:53–54, 56–57 in valuation based on forecasted RICI. see Rogers International required rate of return, 4:570–574 fundamentals, 4:429 Commodity Index required return on equity, 4:71–90 economic rate of return vs., 3:61 RICS. see Royal Institution of Chartered build-up method, 4:85–89 and growth rates, 4:243–246 Surveyors CAPM model, 4:71–79 and intangible assets, 4:526–528 “riding the yield curve” strategy, 5:22–23

Cumulative_Ind_L2 75 June 14, 2018 9:39 PM I-76 Index

rights disclosures about, 2:189–190 RMRF, 4:79, 80; 6:284, 294–296 drag along, 6:156 exposure to, 2:132–135 scenario, 6:343–352 obligations and, 3:218 and hedging, 2:143 security selection, 6:298–299 property, 1:624, 725 in Notes to Financial Statements, sensitivity risk measures, 6:339–343 shareholders’, 3:257 2:353–354 shaping, 5:45–46 stock appreciation, 2:109 future price, 5:456 small minus big, 4:80; 6:284, 294–296 tag-along, 6:156 with FX carry trades, 1:573 sovereign credit, 6:433–436 voting, 3:295 gamma, 5:425–426 with spreads, 5:480 rights theories, 3:218 hedging, 5:422 of stocks and bonds vs. real estate, Rio Tinto, 6:216 high minus low, 4:80; 6:284, 294–296 6:17–18 risk(s) inflation, 4:84; 6:301, 302 of straight/convertible bonds vs. accounting, 3:262 information about, 2:346–359 common stock, 5:173–175 active, 6:296–300 auditor’s opinions, 2:346–350 strategic policy, 3:262 and active manager guidelines, event-specific disclosures,2: 358 strategy, 6:513 6:296–300 financial press,2: 358–359 surplus at risk, 6:359 and active return, 6:296–297 legal proceedings and contingencies, systematic, 3:49; 6:278–279, 284 comparing investments’, 6:299–300 2:351–355 systemic, 1:702, 709; 2:214 decomposing, 6:297–300 Management Discussion and tail, 6:365 defined, 6:296 Analysis, 2:355–357 taxation, 6:157 factor, 6:298 Notes to Financial Statements, time horizon, 4:84; 6:301, 302 for global equity portfolio, 6:499, 505 2:346–347, 350–355 total, 6:297 and information ratio, 6:480–481 interest rate, 5:150–161 tracking, 6:296 optimal, 6:497 banks’ exposure to, 2:236 unsystematic, 3:49 in optimal portfolio construction, duration, 5:151–158 with valuation of stock REITs, 6:104 6:483–485 effective convexity,5: 158–161 value at risk (VaR), 6:257, 319–338 specific, 6:298–299 and forward exchange rates, 1:554 advantages and limitations of, in active portfolio management, for pension funds, 6:358–359 6:333–336 6:477–487 Royal Dutch Shell’s disclosure of, estimating, 6:322–333 agency, 6:157 2:353 extensions of, 6:336–338 allocation of, 6:259 and swaps, 5:276 formal definition,6: 319–321 asset, 3:262 of investment analysis, 1:139–140 market risk monitored with, 2:238, benchmark tracking, 6:480 (see also investor’s ability to take risk, 260–262 active risk) 6:257–259, 262–263 origins, 6:319 business cycle, 4:85; 6:301, 302 investor’s willingness to take risk, and risk budgeting, 6:362 with collars, 5:472–473 6:257–259 and sensitivity risk, 6:348–352 confidence, 4:84; 6:301, 302 legal, 3:261 and sensitivity/scenario risk considered, in bank analysis, 2:242 legislative, 3:260–261 measures, 6:348–352 continuous, 1:531 liability, 3:262 in simulations, 1:527 with convertible bonds, 5:172 liquidity, 6:262, 382 threshold for, 6:320–321 correlation, 6:335 with long straddles, 5:483 and venture capital method of correlation across, 1:531 market, 6:317–375 valuation, 6:171–172 counterparty, 2:226; 5:449 analysis of, 3:49–51 winners minus losers, 6:284, 294–296 country, 6:140 defined, 6:318 yield curve, 5:51–53 country risk rating model, 4:90 with derivatives strategies, 5:484–485 @RISK (software), 3:45; 6:139–140 with covered calls, 5:470 managing, 6:361–366 risk-adjusted value crash, 1:574 measuring, 6:319–361 computing, 1:525–526 credit practice problems, 6:369–373 and decision trees/scenario analysis, analysis of, 5:208–210 for private equity investments, 6:157 1:531–532 with CDS, 5:276 sensitivity to, 2:236–238, 260–263 and simulations, 1:529–532 currency exchange rates and, 1:543, solutions to problems, 6:374–375 risk analysis 554 market timing, 4:85; 6:301, 302 for capital projects, 3:42–51 default risk vs., 5:202 measurement of, 6:257 market risk methods, 3:49–51 measures of, 5:202–204 notification of,1: 145–146 stand-alone methods, 3:42–48 sovereign, 6:433–436 operating, 3:261–262 fintech for,1: 252–253 default, 5:202; 6:382 operational, 3:226 full, 1:530–531 discrete vs. continuous, 1:531 in optimal portfolio, 6:482–487 selective, 1:530 double counting of, 1:529–530, 532, 533 price, 6:216 risk appetite, 6:362 downside, 5:172 priced, 6:278 risk arbitrage, 1:63; 6:280n.4 evaluating price discount for, 6:390–392 of private equity, 6:156–157 risk assessment, probabilistic, 1:519–533 ex ante, 6:472, 477–478 of private real estate investments, about, 1:519 expected, 6:477–478, 499 6:15–17 comparing, 1:530–531 and expected vs. unexpected changes projection, 4:571 in electricity, commodities, and in exchange rates, 1:557 with protective puts, 5:470 technology markets, 1:532 ex post, 6:472, 477, 478 redemption, 6:356 function of, 1:533 financial, 3:262 regulatory, 3:260–261 and risk-adjusted value, 1:531–532 of financial assets,2: 215 reputational, 3:261 simulations, 1:520–530 foreign exchange in research reports, 4:36 risk attribution, 6:296–300 and bid-offer spread,1: 542, 543 residual, 6:480 and active manager guidelines, 6:297 with currency futures, 5:451 reversals of (see collars) active risk, 6:296–300

Cumulative_Ind_L2 76 June 14, 2018 9:39 PM Index I-77

defined, 6:290 and required return on equity, 4:58–59 Royal Institution of Chartered Surveyors with fundamental factor model, supply-side estimates, 4:69–71 (RICS), 6:56n.17, 57 6:298–300 factor, 4:79; 6:281 Royal & Sun Alliance Group, 3:143 risk aversion, 6:387–388 for inflation uncertainty,6: 402–403 R programming language, 1:248 risk budgeting, 6:362–363 property, 6:457 RSS. see regression sum of squares risk capital, 3:203–204 on risky assets, 6:389–392 Rule 10b-18 (SEC), 4:202n.8 risk-controlled active investment and uncertainty, 6:387–389 Rule 144 (SEC), 4:591 strategy, 6:253–254 risk profile rule of law, 1:624 risk decomposition, 6:322 investment suitability for, 1:94, 96 rules-based active management, 6:301 risk exposures understanding, 1:91 rules-based indexes, 6:228 with currency futures, 5:450–452 risk reversals. see collars Rules of Procedure. see Bylaws and with currency swaps, 5:450–451 risk tolerance, 6:258, 259, 261 Rules of Procedure for Professional with derivatives strategies, 5:448–454 risk transfer Conduct with equity swaps, 5:452–453 and commodity futures exchanges, rumors, addressing, 1:110–111 ESG, 3:260–262 6:190 Russell 1000 Index, 3:174, 175, 179 foreign exchange, 2:132–135 commodity swaps for, 6:226–227 Russell 2000 Growth Index, 1:275 with interest rate forwards, 5:450 risk-weighted assets (RWAs), 2:221 Russell 2000 Index, 6:478, 479 with interest rate futures, 5:448–450 risky bonds, 5:145–150 Russell 2000 Value Index, 1:275 with interest rate swaps, 5:448–449 interest rate volatility and option- Russia net asset balance sheet, 2:148 adjusted spread, 5:147–149 Basel Committee membership, 2:218 net liability balance sheet, 2:148 option-adjusted spread, 5:145–147 beer market, 4:140–144 with stock index futures, 5:453 scenario analysis of bonds with currency crisis in, 1:596 transaction, 2:132 options, 5:149–150 debt crisis in, 6:434 risk-free rate valuation of, in arbitrage-free population growth, 1:642 defined, 4:54 framework, 5:219–234 sovereign credit risk, 6:433 for historical estimates of equity risk binomial interest tree for, 5:219–221 RVPI. see residual value to paid in premium, 4:60, 64–65 corporate bonds, 5:223–227 RWAs. see risk-weighted assets real, 6:395 floating-rate notes,5: 227–234 Ryanair Holdings PLC, 4:299–301 returns in excess of, 6:279 government bonds, 5:221–222 and rho, 5:428, 429 Rite Aid, 4:115–118 S synthetic, 5:456 rivals. see established rivals SABMiller plc, 2:99–101, 103; 4:140 risk management RMBS. see residential mortgage-backed Safe Drinking Water Act, 3:261 commodity swaps for, 6:226–227 securities safety, dividend, 3:179–183 defined, 6:318 RMRF risk factor safety projects, 3:8 managing foreign exchange risk, 2:143 in Carhart four-factor model, 6:284, salary, as compensation award, managing yield curve risk, 5:51–53 294–296 3:243–244 with trading algorithms, 6:542–543 in Fama-French model, 4:79, 80 sale(s). see also price to sales (P/S) Risk Management Committee, 2:252 RMSE. see root mean squared error cash flow valuation and growth in, risk-neutral default probability, 5:203– RNOA. see return on net operating 4:313, 328–330 205, 237 assets company, 4:147–149 risk neutrality, 5:33 RN probability. see risk-neutral probability and cost of goods sold, 4:118 risk neutral present value, 6:390 ROA. see return on assets days sales outstanding, 2:321–323, 327; risk-neutral (RN) probability robo-advisory services, 1:239, 241, 4:132 in BSM model, 5:405 250–252 days sales receivable index (DSR), implied, 5:43 robust standard errors, 1:354, 358n.49 2:307 in one-period binomial model, 5:384 ROCE. see return on capital employed disclosures from multinationals on, in two-period binomial model, 5:388, ROE. see return on equity 2:186–189 389 Rogers, Jim, 6:233 enterprise value to, 4:447 risk objective, 6:257–259 Rogers International Commodity Index and free cash flow,4: 311–314 risk-off mode, FX market,1: 583 (RICI), 6:230, 231, 233 industry, 4:145–147 risk-on mode, FX market, 1:582–583 ROIC. see return on invested capital of inventory, 2:32–34 risk premium(s) roll, 5:275 linear trend regression for, 1:441–444 bond yield plus, 4:88–89 “rolling down the yield curve” strategy, log-linear trend regression for, credit 5:22–24 1:444–446 bonds with, 6:425–437 roll return, 6:220–225 of Nestlé, 2:387–388, 392–394 and credit spreads, 6:427–431 Rome, ancient, 3:113 and receivables at Sunbeam, 2:321–322 defined, 6:426 Rongde Asset Management Company repeat sales index, 6:59–60 government bonds with, 6:425–426 Limited, 2:26 retail, 1:435, 471, 477–480; 6:94–95 influences on,6: 436–437 root mean squared error (RMSE), 1:457, seasonality of, 1:474–480 for Royal Bank of Scotland, 6:436 458 sales, general, and administrative for default-free bonds, 6:420–423 Ross, Stephen, 6:279 expenses index (SGAI), 2:307 equity, 4:58–71 Royal Ahold, 2:290 sales comparison approach and capital asset pricing model, 4:59 Royal Bank of Canada, 5:124 cost and income approaches vs., demand-side estimates, 4:69n.28 Royal Bank of Scotland, 6:436 6:25–27 in equities valuation, 6:437–438 Royal Dutch Shell for real estate valuation, 6:51–53 ex post, 6:444–445 accounting scandal, 3:210 sales forecasts, FCFE from, 4:314 forward-looking estimates, 4:68–71 Notes to Financial Statements, sales growth index (SGI), 2:307 historical estimates, 4:59–68 2:351–355 sales order backlogs, 2:304 quantifying, 6:444–445 use of disclosures, 2:352–355 sales pressure, 1:38

Cumulative_Ind_L2 77 June 14, 2018 9:39 PM I-78 Index

sales projections, 4:145–150 hypothetical scenarios, 6:346–347 SEE. see standard error of estimate company sales, 4:147–149 and VaR, 6:349–352 seed stage (private equity), 6:137 industry sales, 4:145–147 Scheinkman, José, 5:47 segment analysis and input cost increases, 4:149–150 Schlumberger Ltd., 4:14 in long-term equity investment case sales-to-price ratio (S/P), 4:392 Schneider Electric SA, 3:133 study, 2:386–395 Saluja, Kawaljeet, 2:337 Scholes, Myron, 5:216, 402 of revenue, 4:109 same-strike collars, 5:472 Scholz, Peter, 1:251 segmented markets, 4:72; 5:35 sample period, forecasting quality and, Schroders Asset Management, segment information, 2:241 1:460 1:281–282 selection-based indexes, 6:228 Samsung, 4:168 Scope Ratings AG, 5:248 selection effect, in open economies, sanctions screening, stock, 4:461–463 1:679 by CFA Institute, 1:10, 15 scrip dividend scheme, 3:128 selective disclosure, 1:64, 86, 88 for Mitchell Hutchins Asset Seagate Technology, 4:444–446 selective risk analysis, 1:530 Management, 1:233–234 Sealed Air Corporation, 2:344–346 self-assessment, board of directors’, and regulations, 1:710 search, in data science, 1:247 3:240 SAP AG, 4:518, 520 Sears, Mike, 3:205, 206 self-dealing, 1:107; 3:213 Sarbanes–Oxley Act, 1:702n.2, 717 seasonality, in time-series analysis, self-financing, in two-period binomial SARs. see stock appreciation rights 1:474–480, 490 model, 5:387, 389 SASB. see Sustainable Accounting seasoned equity offering (SEO),3: 231 self-regulating organizations (SROs), Standards Board SEC. see US Securities and Exchange 1:703–704 Satyam Computer Services Limited Commission self-regulation, of securities markets, cash flow quality at,2: 334–338 secondary buyouts, 6:150 1:711–713 fictitious reports by,2: 294–296 secondary market, as private investment “Self-Regulation in Securities Markets” Saudi Arabia exit route, 6:150 (Carson), 1:711–712 Basel Committee membership, 2:218 secondary offerings, of equity REITs, sellers, credit protection, 5:268–269 natural resources, 1:639, 640 6:85 selling, general, and administrative real GDP per capita, 1:621, 677 secondary research, 1:127–128 (SG&A) expenses Saudi Arabian Monetary Agency, 2:218 secondary venture capital transactions, in modeling of operating costs, savings 6:150 4:119–120 and convergence in open economy, second-order autoregression (AR[2]) on pro forma income statements, 1:678, 679 in-sample forecast errors with, 4:173–175 in developing vs. developed countries, 1:456–457 selling expenses, 4:119 1:623 instability in, 1:458–460 selling restrictions, convertible bond, and neoclassical model, 1:667 out-of-sample forecast errors with, 5:173 savings and loan associations, 2:216 1:457–458 sell-side analysts, 4:31–33; 6:250 savings rate serial correlations and forecasting sell-side firms,6: 535 in endogenous growth model, 1:673 quality, 1:456 semiactive investment strategy, in neoclassical model, 1:671 second regional banks, 2:216 6:253–254 and steady state of growth equilibrium, sector rotation strategies, 4:463 semiconductor manufacturing, 4:168 1:663–664 sectors, economic. see economic sectors senior managers scale securities. see also specific types of access to, 3:254 constant returns to, 1:634 securities agency relationships of, 3:206 economies of, 3:280 asset quality of, 2:224 compensation reviews for, 3:254 economies of scale, 4:115 available-for-sale, 2:247–249 Sensex. see S&P BSE Sensex Index project, and IRR vs. NPV, 3:21–22 debt, 2:224 sensitivity analysis scaled earnings surprise, 4:451 description of, 1:141–142 and absolute valuation models, 4:24 scale effect, in open economies,1: 679 held-to-maturity, 2:249 for capital projects, 3:43–44 scaling, of functional form, 1:370–372 with path-dependent cash flows,5: 100 converting forecasts to valuations with, scandals repackaging of, 5:248 4:30 accounting, 3:209–210 value added and selection of, defined, 4:12 pay-to-play, 1:34 6:475–477 of FCFE and FCFF approaches, scatter plots, 1:264–265 as zero-coupon bonds, 5:79 4:321–323 scenario analysis (scenario testing) Securities Act (1933), 1:702n.2 for financial forecasting,4: 135–136 about, 1:533 Securities Exchange Act (1934), 1:702n.2 in venture capital method, 6:168–169 for asset managers, 6:356 securities laws, 3:210, 302–303 sensitivity risk measures, 6:339–343 for banks, 6:354 securities markets advantages and limitations, 6:349–352 of bonds with options, 5:149–150 algorithmic trading and, 6:545–547 for asset managers, 6:356 for capital projects, 3:44 regulation of, 1:711–713, 717–718 equity exposure, 6:339 decision trees vs., 1:530–531 securities offerings,3: 290, 291 fixed-income exposure,6: 339–340 defined, 1:519 securitization, of receivables, 2:53–55 options risk, 6:340–342 and diligence, 1:131 securitized debt, credit analysis for, and VaR, 6:348–352 fintech for,1: 253 5:247–251 sensor data, 1:243, 244 and risk-adjusted value, 1:531 security (of electronic information), SEO. see seasoned equity offering sensitivity analysis vs., 4:135–136 1:102 Separate Financial Statements (IAS 27), simulations vs., 1:520, 530–531 Security Analysis (Graham and Dodd), 2:8–10 scenario limits, 6:363–364 4:382 serial correlation, 1:355–359, 362–363 scenario risk measures, 6:343–347 security market indexes, 6:473 in autoregressive models, 1:437, advantages and limitations, 6:349–352 security market line (SML), 3:49–51 449–452 historical scenarios, 6:344–346 security selection risk, 6:298–299 consequences of, 1:355–356

Cumulative_Ind_L2 78 June 14, 2018 9:39 PM Index I-79

correcting for, 1:358–359 normalized, 4:388–389 financial statement effects,3: 164–167 testing for, 1:356–358 and P/E multiples, 4:379, 383 changes in book value per share, in time-series forecasting, 1:489–490 and share repurchases, 3:164–167, 3:166–167 serial correlation and heteroskedasticity 170 changes in earnings per share, adjusted standard errors, 1:358n.49 and technological cannibalization, 3:164–166 serial-correlation consistent standard 4:157–159, 161–163 methods, 3:162–164 errors, 1:358n.49 trailing, 4:386–387 as post-offer defense mechanism for service(s) ex-dividend, 3:138 takeovers, 3:297 additional, for select clients, 1:88 market, 4:111–112 Russell 1000 companies, 3:175 banking, 2:215–216 market conversion premium per share, US banks, 3:174 debt, 6:62 5:171–172 valuation of cash dividends vs., denial-of-service attacks, 6:546 net asset value per share 3:167–169 disclosing level of, 1:86 application of, 6:101–103 shark repellents, 3:294 new, 3:7 as benchmark, 6:98 Sharpe, William, 6:250, 278, 471 robo-advisory, 1:239, 241, 250–252 calculation of, 6:99–101 Sharpe ratio support, 2:325–326 and calculation of NAV, 6:102 in active portfolio management, service fees, 1:40 Capitol Shopping Center REIT Inc 6:477–480 service period, 2:107 case study, 6:120–121 adjusting risk and return with, service providers, selecting, 1:135–136 premiums on, 6:103 6:479–480 “set in arrears,” 5:161 for publicly traded real estate and ex ante risk and return, 6:477–478 settled in arrears payment convention, securities, 6:99–103 and ex post risk and return, 6:477, 478 5:326, 327, 414 as relative valuation tool, 6:102–103 information ratio vs., 6:481–482 settlement no-growth value per share, 4:221 in optimal portfolio construction, cash, 5:273–274, 453; 6:210 per-share residual income forecasts, 6:482–484, 487 of credit default swaps, 5:273–274 4:498–499 Shell Oil Company (SOC), 2:351–355 distributed ledger technology for, transferability of, 3:229 Shenhua, 6:216 1:256–257 for venture capital investments, 6:167 Sherman, Peter (case study), 1:216–219 of foreign currency transactions, share-based compensation, 2:102–109 additional compensation arrangements 2:132–133 at American Eagle Outfitters, Inc., [Standard IV(B)], 1:219 of forward rate agreements, 5:326–327 2:103–104 case facts, 1:216–217 physical, 5:273 equity valuation for, 4:10 loyalty [Standard IV(A)], 1:217–219 for spot exchange rate quotes, 1:541 as noncash charges, 4:299 Sherman Antitrust Act, 3:299 for stock index futures, 5:453 private company valuation for, 4:559 Shiller, Robert, 6:447 T+1, 1:541n.2 at SABMiller plc, 2:103 Shinkin banks, 2:216 T+2, 1:541 stock appreciation rights, 2:109 shock events, protective puts and, 5:465 settlement date, cash flow at,1: 554 stock grants, 2:105–106 shopping center REITs, 6:91–92 SG&A expenses. see selling, general, and stock options, 2:106–108 short (term), 5:272 administrative expenses Share-Based Payment (ASC 718), short legs, adding, 5:476–478 SGAI. see sales, general, and 4:560n.7 short positions administrative expenses index Share-Based Payment (SFAS 123R), and covered calls/protective puts, SGI. see sales growth index 4:560n.7 5:468 shale oil, 6:192 share-based payments, 4:10 market value of, 5:310 Shanghai A-Share Stock Price Index, share count, 4:132 synthetic, 5:455–456 3:131 shareholder agreements, 4:558 short puts, 5:469 Shanghai Commodities Exchange, shareholders short-run exchange rate movements, 6:205 communication with, 4:10 1:557 shaping risk, 5:45–46 conflicts with directors,3: 233–234 short straddles, 5:481 share(s). see also equities (equity conflicts with managers,3: 231–233 short-term default-free interest rates, securities); stock(s) dividends to shareholder ratio, 2:269 6:409, 417 active, 6:356, 481 equitable treatment of, 3:258 short-term government bills, 4:64–65 bonus issue of, 3:130 (see also stock equity of, 4:414 short-term investors, 4:558 dividends) preference for current income vs. short-term nominal interest rates, 6:403 book value per share, 4:206, 414 capital gains, 3:152 short-term stock return performance, computing, 4:417–418 in private company valuation, 4:557 1:347–348 and fair value accounting, 4:419–422 proxy votes by, 3:248 Shuanghui, 6:195 net asset value per share vs., 6:98 rights of, 3:257 Shumway, Tyler, 2:332 and share repurchases, 3:166–167 share price. see stock price Sibor (Singapore Libor), 5:416 tangible, 4:418–419 share repurchases, 3:161–177 SICAR. see société d’investissement en canceled, 3:161 and dividend discount model, 4:201n.3, capital à risque company limited by shares, 6:152 218–219 Siegel, Laurence B., 4:71 company share-related factors, dividend vs. share repurchase decision, Siemens AG, 3:143, 172–173 6:292–293 3:169–177 SIFIs. see systemically important dividends per share, 3:155 and dilution from employee stock financial institutions earnings per share, 3:155 options, 3:170 sigma (σ). see volatility basic, 4:385 example, 3:175–177 significance tests, of correlation and capital projects, 3:56 financial leverage,3: 170–173 coefficient, 1:282–285 diluted, 4:385 managerial flexibility,3: 170 Silver Wheaton Corporation, 4:498–499 historical average, 4:388 share price, 3:170 similar companies, 6:143–144 for nonrecurring items, 4:386–388 tax advantages, 3:170 Simon, Paul, 6:166

Cumulative_Ind_L2 79 June 14, 2018 9:39 PM I-80 Index

simple linear regression. see linear Singleton, Kenneth, 5:216 financial statements for subsidiaries of regression Singpore Libor. see Sibor foreign companies, 2:144 simple random walks, 1:464 sinking fund bonds, 5:125–126 historical equity risk premium, 4:61, 63 simulated results, 1:99–100 Siri, 1:246 ICT capital and investment in GDP, simulations, 1:520–530 6-K, Form, 4:16 1:647 about, 1:533 size, company, 4:557, 563 natural resources, 1:641 with constraints, 1:527–528 size premiums, 4:570 precious metals, 6:195 decision making based on, 1:526–527 sizing options, for capital projects, 3:52 real GDP per capita, 1:622, 677, 678 decision trees and scenario analysis vs., slope, default-free yield curves, 6:415– South African Reserve Bank, 2:218 1:530–531 417, 423 South America, 6:195. see also specific good, 1:523 slope coefficients,1: 333, 367 countries historical simulation method, 6:327–330 slow markets, 5:484 South Korea Home Depot example, 1:523–526 small-cap stocks algorithmic trading/HFT, 6:541 issues with, 1:528–529 investment strategies involving, average hours worked, 1:646 Monte Carlo 6:449–450 Basel Committee membership, 2:218 and extreme events, 6:335 month-of-the year effects on returns, convergence with advanced countries, market risk evaluation with, 2:260–261 1:345–346 1:682 for private equity investments, small minus big (SMB) risk factor currency crisis in, 1:596 6:139–140 in Carhart four-factor model, 6:284, dividend payout ratios, 3:161 for risk analysis of capital projects, 294–296 economic growth, 1:654 3:45–48 in Fama-French model, 4:80 exports and foreign direct investment for VaR estimation, 6:330–333 smart contracts, 1:254 in, 1:681 and risk-adjusted value, 1:529–532 smart order routing, 6:537 government bond market, 5:25 running, 1:522–523 SME asset-backed securities (ABS), ICT capital and investment in GDP, scenario analysis and decision trees vs., 5:248 1:647, 648 1:520 Smithfield Foods,6: 195 labor and total factor productivity, 1:651 steps in, 1:520–523 SML. see security market line money supply growth and inflation, checking for correlation across smoothing of values, with moving- 1:264, 265, 269, 294, 296 variables, 1:522 average models, 1:470–472 natural resources, 1:639, 641 defining probability distributions for SOC. see Shell Oil Company Novo Nordisk sales, 4:109, 110 variables, 1:520–522 social media, 1:9 OECD Principles, 3:256n.18 determining probabilistic variables, and duties to employer, 1:108 openness of economy, 1:680 1:520 limited disclosures on, 1:89 population growth, 1:642 running simulations, 1:522–523 and material nonpublic information, R&D expenditures, 1:650 simultaneous dissemination, 1:85 1:59 real GDP per capita, 1:621–623, 626, Singapore misrepresentation on, 1:45 627, 677 active return and weights for equities, retention of information on, 1:147 swap market, 5:25 6:500, 503, 504 social responsibility, 3:216–217 yield curve factors for government algorithmic trading/HFT, 6:541 société d’investissement en capital à securities, 5:49–50 Basel Committee membership, 2:218 risque (SICAR), 6:152 yield curve movements, 5:45, 47 commodity exchanges, 6:207 society, benefit of ethics to,1: 12 sovereign credit risk, 6:433–436 common law, 3:113 soft capital rationing, 3:42 sovereign debt, benchmark bonds and, dividend payout ratios, 3:161 soft commissions, 1:76 5:79 equity REITs, 6:83 soft commodities (cash crops), S/P. see sales-to-price ratio Financial Stability Board, 2:219 6:195–196 S&P. see Standard & Poor’s Corporation FX market business hours, 1:542 average annual sector roll return, S&P 500 Composite Index, 4:406 ICT capital and investment in GDP, 6:224, 225 S&P 500 Growth Index, 1:487 1:647 commodity life cycle, 6:202–203 multicollinearity, 1:360–362 natural resources, 1:639, 641 soft dollars, 1:76 multiple linear regression, 1:338–339 openness of economy, 1:680 software, bundling of, 1:716 S&P 500 Index, 4:447 publicly traded real estate equities, software companies, pre-tax operating dividends for companies on, 6:81, 82 margin of, 1:521–522 3:142–143, 179 R&D expenditures, 1:650 sole proprietorships, 3:228–229 and Fed Model, 4:407 real estate operating companies, 6:96 solicitation, of former clients, 1:109–114 futures contract on, 5:453 real GDP per capita, 1:626, 627 Solow, Robert, 1:659 and GDP growth, 1:630 and growth in real GDP per capita, Solow two-factor production model, GGM equity risk premium estimate, 1:677 1:638n.12 4:68–69 and real GDP growth, 1:621–623 “Solvency II regime,” 2:273 and inflation,1: 271–272, 294 self-regulating organizations in, 1:704 Sonia. see Sterling OverNight Index macroeconomic equity risk premium Singapore Deposit Insurance Average estimate, 4:70–71 Corporation Ltd., 2:220 Sonnenfeld, Jeffrey,3: 237 market cap guidelines, 4:463 Singer–Terhaar method, 4:72n.34 Sonoco Products Company, 4:212–213 relative strength indicators, 4:454–456 single-factor models, multifactor vs., “Soul of Dell,” 3:220–221 and returns of asset classes, 6:13, 14, 6:277–278 South Africa 82, 85 single-family houses, 6:11 Basel Committee membership, 2:218 Sharpe ratio, 6:478, 479 single-name CDS, 5:269–270 convergence with advanced countries, as spot index, 5:413 single-stage model 1:682 survivorship bias in, 4:65n.23 for free cash flow valuation,4: 320–321 exports and foreign direct investment total annual compound return with for residual income, 4:506–507 in, 1:681 dividends reinvested, 3:126

Cumulative_Ind_L2 80 June 14, 2018 9:39 PM Index I-81

in value added calculations, 6:476, 486, SPEs. see special purpose entities from interbank markets vs. dealers, 487 SPF. see Survey of Professional 1:541–542 and VIX, 5:430 Forecasters and liquidity, 1:542–543, 554 yield of US Treasury bonds and, 1:286 S&P GSCI, 6:230–232 bond, 5:282–283 S&P 500 Value Index, 1:487 average annual sector roll return, bull, 5:473–479 multicollinearity, 1:360–362 6:224, 225 butterfly, 5:473n.33 multiple linear regression, 1:338–339 historical roll return, 6:223–224 calendar, 5:480–481, 492; 6:209–210 Spain rebalancing costs, 6:233 CDS, 5:271, 283 active return and weights for equities, return components, 6:221–222 and change in CDS value, 5:284 6:500, 503, 504 spillover effect,1: 646–647, 705n.13 country, 4:90; 6:140n.1 average hours worked, 1:646 spin-offs, 3:320; 4:9 credit, 5:234–247, 473; 6:427–432 banking regulations in, 2:215 split-offs, 3:320 for banking and airline sector, 6:432 Basel Committee membership, 2:218 split-rate tax system, 3:151–152 calculation of, 5:206, 224 commercial property values, 6:456 S&P Midcap 400 Index, 4:447, 463 calculation of, for corporate bonds, default-free government bonds, 6:425 sponsored access, 6:543 5:224 economic growth, 1:682–686 spoofing, 6:544 and convertible bond valuation, 5:175 Financial Stability Board, 2:219 spot curve (spot yield curve) for credit default swaps, 5:281–285 historical equity risk premium, 4:61, 63 defined, 5:7, 77 and credit risk premiums, 6:427–431 ICT capital and investment in GDP, and forward prices, 5:19–20 defined, 5:202 1:647, 648 and forward rate model, 5:8–16 interpreting changes in, 5:234–240 labor force participation rate, 1:642, relationship of forward curve and, migration of, 5:215 643 5:11–14 term structure of, 5:240–247 labor input and potential growth, and spot rates, 5:7 and transition matrices, 5:214 1:644–645 zero-coupon bond on, 5:7 debit, 5:473 natural resources, 1:640 spot exchange rates of default-free yield curves, 6:417–419 net migration, 1:644 and arbitrage, 1:544–548 excess, 5:250 OECD Principles, 3:256n.18 in foreign exchange market, 1:541 I-, 5:29n.6, 31 population growth, 1:642 in forward exchange rate quotes, Libor–OIS, 5:32–33 R&D expenditures, 1:650 1:551–552 modified country spread model, real GDP per capita, 1:621, 622, 677 and forward exchange rates/interest 6:140n.1 Spatt, C., 1:725n.31 rates, 1:570–572 net interest, 2:254 S&P BSE 100 Index, 1:473–474 forward rates vs., 1:549–552 net profit margin,2: 384 S&P BSE Sensex Index (Sensex), 4:66–67 predictors of future, 1:560–564 nominal yield, 1:582 SPC. see Standards of Practice Council spot markets, 6:190 option, 5:473–481 S&P Dow Jones US Index Committee, spot prices bear spreads, 5:473, 475–476 4:462 defined, 6:208 bull spreads, 5:473–479 SPDR Barclays Long-Term Treasury, and forward prices, 5:8–12 calendar spreads, 5:480–481, 492 4:454–456 and futures price, 6:203, 204 refining, 5:476–479 SPDR Bloomberg Barclays Long-Term localization of, 6:211 risk with, 5:480 Corporate Bond ETF (LWC) spot rates, 5:6–24 option-adjusted, 2:272 historical VaR estimation, 6:328–329 active bond portfolio management, about, 5:145–147 Monte Carlo VaR estimation, 5:20–24 and interest rate volatility, 5:147–149 6:331–332 for benchmark government bonds, as price quotation convention, 5:30–33 parametric VaR estimation, 6:324–326 5:219–220 in price quotations, 5:30–33 VaR estimation, 6:322–323 from benchmark par curve, 5:82 swap, 5:29–31 SPDR S&P 500 ETF (SPY) currency swap pricing with, 5:352–354 TED, 5:32 historical VaR estimation, 6:328–329 currency swap valuation with, Z-, 5:30–31, 146 Monte Carlo VaR estimation, 5:355–356 spreaders, 6:537 6:331–332 current forward curve and evolution spreadsheet modeling, 4:237–238 parametric VaR estimation, 6:324–326 of, 5:21–22 for cash flow projections,3: 36–37 VaR estimation, 6:322–323 defined, 5:7 for forecasting dividends, 4:246–247 SPDR S&P Emerging Europe ETF, and forward prices/rates, 5:8–12 sustainable growth calculation, 4:238 4:454–456 and spot curve, 5:7 valuing stock with, 4:237–238 SPDR Stoxx Europe 50 Index, 4:454–456 valuation of option-free bonds with, spread trading, 6:536 special dividends, 3:128–130 5:79–80 Sprint, 4:89 special purpose entities (SPEs), 2:51–55 from yield curve, 5:128–129 S&P SmallCap 600 Index, 4:447, 463 in bank analysis, 2:240–241 yield to maturity, 5:16–19 S&P/TSX Canadian Index, 3:142–143 of Digilog, 2:302 spot return, 6:221–222 spurious correlation, 1:273 and effects of securitizing assets, spread(s) S&P US REIT Index, 6:85 2:53–55 bear, 5:473, 475–476 SPY. see SPDR S&P 500 ETF for a leased asset, 2:52–53 bid–ask SQL database, 1:249 other business combinations vs., 2:36 multiple linear regression model for, SQLite database, 1:249 and securitized debt, 5:250 1:329–333 SROs. see self-regulating organizations tax implications of, 4:129 and nonlinearity of functional form, SSE. see sum of squared errors speculators 1:366–370 stabilized net operating income, 6:31–32 and commodity hedging, 6:216 and variable bias, 1:365–366 stable dividend policy, 3:155–161 in commodity markets, 6:206, 207 bid–offer stable funding, 2:219, 232 and Hedging Pressure Hypothesis, defined, 1:541 Staff Accounting Bulletin No. 101, SEC, 6:215 for forward exchange rates, 1:551–554 4:426, 427n.41

Cumulative_Ind_L2 81 June 14, 2018 9:39 PM I-82 Index

Staff Accounting Bulletin No. 104, SEC, Standards of Professional Conduct, knowledge of the law [Standard I(A)], 4:427 1:5–19, 21–204. see also Asset 1:16, 21–29 staggered boards of directors, 3:295 Manager Code of Professional misconduct [Standard I(D)], 1:16, stakeholder impact analysis, 3:203 Conduct (AMC) 53–56 stakeholder payoffs, in LBO model, adoption of, 1:10 misrepresentation [Standard I(C)], 6:147–148 and applicable law, 1:22–23 1:16, 43–53 stakeholders and CFA members’ position of trust, text of, 1:16 corporate governance by, 3:258 4:33; 6:265 research reporting responsibilities in, and corporate performance, 3:202–206 conflicts of interest [Standard VI], 4:36, 37 external, 3:202 1:149–164 responsibilities as a CFA Institute internal, 3:202 disclosure of conflicts [Standard member or CFA candidate stakeholder view of ethics, 3:212–213 VI(A)], 1:18, 149–156 [Standard VII], 1:165–174 stand-alone methods of risk analysis, priority of transactions [Standard conduct as participants in CFA 3:42–48 VI(B)]4, 1:18, 157–162 Institute programs [Standard Monte Carlo simulation, 3:45–48 referral fees [Standard VI(C)], 1:18, VII(A)], 1:8, 19, 165–169 scenario analysis, 3:44 162–164 reference to CFA Institute, sensitivity analysis, 3:43–44 text of, 1:18 designation and Program [Standard standard deviation duties to clients [Standard III], VII(B)], 1:19, 170–174 and correlation coefficient,1: 269–270 1:73–105 text of, 1:18–19 of returns, 6:257 fair dealing [Standard III(B)], 1:17, solutions to problems, 1:193–204 and standard error of estimate, 1:293 82–90, 230 and Standards of Practice Council, standard error of estimate (SEE) loyalty, prudence, and care [Standard 1:10–11 heteroskedastic, 1:349–351 III(A)], 1:17, 73–81, 230 in Standards of Practice Handbook, for hypothesis testing, 1:299 performance presentation [Standard 1:3, 5–9 for linear regression with one variable, III(D)], 1:17, 97–101 text of, 1:16–19 1:292–295 preservation of confidentiality and values of CFA Institute, 1:15 for multiple linear regression, 1:332 [Standard III(E)], 1:17, 101–105 standards of value (term), 4:560–562 standard errors suitability [Standard III(C)], 1:17, Standing Interpretations Committee Hansen’s method of adjusting, 90–97, 233–234 Interpretation 31, 4:426–427 1:358–359 text of, 1:16–17 Starbucks Corporation heteroskedasticity-consistent, duties to employers [Standard IV], linear trend analysis for sales, 1:354n.42 1:105–126 1:441–444 Newey–West method of adjusting, additional compensation log-linear trend analysis for sales, 1:358–359 arrangements [Standard IV(B)], 1:444–446 robust, 1:354, 358n.49 1:17, 116–117 seasonality of sales, 1:475–477 serial correlation of, 1:358–359 loyalty [Standard IV(A)], 1:17, Stark, Edvard (case study), 1:208–212 White-corrected, 1:354n.42 105–115 additional compensation arrangements Standard Europe Contract, 5:270 responsibilities of supervisors [Standard IV(B)], 1:210–211 standardized beta, 6:289 [Standard IV(C)], 1:7–8, 18, case facts, 1:208–209 standardized unexpected earnings 118–126 diligence and reasonable basis (SUE), 4:452–453 text of, 1:17–18 [Standard V(A)], 1:211 standard market model, for interest rate evolution of, 1:6 disclosure of conflicts [Standard options, 5:414–415 and importance of ethics, 1:11–15 VI(A)], 1:211–212 standard normal distribution, on inside information, 4:16 fair dealing [Standard III(B)], 1:209–210 cumulative probabilities for, integrity of capital markets [Standard suitability [Standard III(C)], 1:210 1:735–736 II], 1:56–73 start-up stage (private equity), 6:137 Standard North American Contract, market manipulation [Standard statement of cash flows (cash flow 5:270 II(B)], 1:16, 68–73 statements) Standard & Poor’s Corporation (S&P), material nonpublic information discrepancies of balance sheets and, 2:280; 6:248 [Standard II(A)], 1:16, 56–67 4:314 bond ratings, 3:109, 154 text of, 1:16 FCFF from, 4:293–295 CCC-rated companies, 5:214 investment analysis, recommendations, modeling, 4:134 credit ratings by, 5:212–213; and actions [Standard V], Nestlé, 2:395–399 6:427n.27 1:126–148 noncash charges on, 4:295–301 Dividend Aristocrats, 3:142–143 communication with clients and pro forma, 4:177–182 equity classification system,4: 399 prospective clients [Standard V(B)], capital investment forecast, 4:178 rating of US Treasuries, 6:381 1:8, 18, 137–146, 233–234 depreciation forecast, 4:178 Standard & Poor’s Depositary Receipt diligence and reasonable basis and forecasted balance sheet, (SPDR), 4:454–456. see also specific [Standard V(A)], 1:18, 126–137 4:181–182 funds record retention [Standard V(C)], forecasted cash flow statement, Standard & Poor’s Super 1500 1:18, 146–148 4:179–181 Composite Index, 4:447, 448 text of, 1:18 working capital forecast, 4:178–179 Standards of Practice Council (SPC), notification of,1: 114 reclassifications on,2: 298 1:10–11, 15 practice problems, 1:175–192 Statement of Financial Accounting Standards of Practice Handbook, 1:3, and Professional Conduct Program, Standards 5–9, 11, 14 1:9–10 Business Combinations (SFAS 141R), eleventh edition, 1:7–9 professionalism [Standard I], 1:21–56 4:578 revisions to, 1:6–7 independence and objectivity Fair Value Measurements (SFAS 157), on trade allocation, 1:230 [Standard I(B)], 1:16, 30–42 4:30n.13, 559n.5, 561n.13

Cumulative_Ind_L2 82 June 14, 2018 9:39 PM Index I-83

Goodwill and Other Intangible Assets REIT, 6:104 STOXX Europe 50 Index, 4:454, 456 (SFAS 142), 4:559n.5 restricted, 4:591 straddles, 5:481–483 Noncontrolling Interests in returns on analytics for, 5:486–487 Consolidated Financial Statements bond returns vs., 1:279 applications, 5:491–492 (SFAS 160), 2:8 government debt vs., 4:60–63 defined, 5:473 Share-Based Payment (SFAS 123R), month-of-the year effects, long, 5:126, 483 4:560n.7 1:345–346 short, 5:481 statement of governance policies, predictability of, 1:485 straight bonds 3:245–246 real estate vs., 6:17–18 and callable bonds/call options, statements of account information, 1:77 short-term, in Chinese mergers and 5:127 static trade-off theory,3: 106–108 acquisitions, 1:347–348 capped floaters vs.,5: 161 stationarity tests, 1:376 for stock indexes, 1:277–278 defined, 5:123 Station Holdco LLC, 2:26 screening of, 4:461–463 effective convexity of,5: 159 statistical arbitrage (stat arb), 6:535–536 selection of, 4:9, 462–463 effective duration of,5: 153 statistical distributions, probability small-cap, 1:345–346; 6:449–450 floored floaters vs.,5: 163 distributions based on, 1:522 stock offerings for mergers and and putable bonds/put options, statistical factor models, 6:285, 293 acquisitions, 3:290–291 5:127–128 statistically significant correlation, terminal value of, 4:228 risk–return characteristics of 1:285 treasury, 3:161 convertible bonds and underlying statistical multifactor model, for value, 6:284, 448–450 stock vs., 5:173–175 required return on equity, 4:84 stock appreciation rights (SARs), 2:109 straight-line depreciation, 3:31, 32 status, client, 1:102 stock component, of BSM model, 5:405, straight-line rent, 6:105 statutes, 1:703 407–408 straight value, convertible bond, 5:170 Statutory Account Practices, 2:266 stock dividends, 3:130–132 strategic asset allocation, 6:254–255 statutory merger, 3:280 stock grants, 2:105–106 strategic policy risk, 3:262 statutory tax rate, 4:128–129 stockholders strategic portfolio decision-making, Staunton, Mike, 4:89 agency relationships of, 3:206 6:303 steady state rate of growth, 1:660–666 information asymmetry for, 3:207–208 strategic transactions, 4:581 and capital deepening, 1:660–661 maximizing returns for, 3:204–205 strategy risk, 6:513 in China, Japan, and Ireland, role of, 3:203–204 stress tests, 1:723; 6:343, 354 1:661–662 as stakeholders, 3:202 strictly stationary (term), 1:448n.11 as equilibrium, 1:662–665 stock indexes, 1:277–278; 5:321. see also strike calls, multiple, 5:478 impact of parameters on, 1:663–665 specific indexes strike price (striking price). see exercise steepness, yield curve, 5:47 stock index futures, 5:453 price Sterling OverNight Index Average stock market crash (1929), 3:281 stripping, 5:79 (Sonia), 5:33 stock options structural models, 5:216–219 Stern Stewart & Company, 3:62n.17; BSM model for, 5:409–410 structured bonds. see asset-backed 4:496n.8 as compensation, 2:106–108; 3:243, securities (ABS) stochastic (term), 5:81 244 structured data, 1:242 stochastic default rate models, 5:216 dilution from, 3:170 structured products. see asset-backed stock(s). see also equities (equity pricing models for, 2:106–107 securities (ABS) securities); share(s); share Stock Practice Aid. see Valuation of style analysis correlations, 1:274–275 repurchases Privately-Held Company Equity style factors, 6:293 BSM model for, 5:404 Securities Issued as Compensation sub-advisors, selecting, 1:129, 136 common, 4:83–84; 5:173–175 stock price subject property, in cost approach to real and company size, 6:449–450 and dividend reductions, 3:143 estate valuation, 6:25 and control premiums, 4:581–582 and dividend vs. share purchase submanagers, 1:96, 132–133 economic growth and prices of, decision, 3:170 subordinated debt holders, 6:430–431 1:629–630 growth rate implied by, 4:219–220 subprime mortgage crisis, 6:142 employee stock options and net present value, 3:26–27 subsidiaries, 2:130, 143–144 as compensation, 3:243, 244 stock splits, 3:132–134; 5:168 subsidiary mergers, 3:280 dilution from, 3:170 stock valuation. see also equities subsidies, government regulation and, estimating beta for, 1:299–301 valuation 1:721–723 growth, 6:448–450 with H-model, 4:231–232 substandard working conditions, 3:214 international, 4:320–321 multiple valuation indicators in, substantive law, 1:705 large-cap, 6:449–450 4:459–460 substitutes mid-cap, 6:449–450 for non-dividend paying stock, in beer markets, 4:138, 139 momentum, 6:284 4:229–230 in cognac industry, 4:170 month-of-the year effects on, with spreadsheet modeling, and financial forecasts,4: 137–139 1:345–346 4:237–238 in industry structure, 4:13 noncallable fixed-rate perpetual with two-stage dividend discount substitution, inter-temporal rate of, preferred stock, 4:216–217 model, 4:226–228 6:384–388 non-dividend paying, 4:229–230 stop-loss limits, 6:364 succession events, 5:273 ownership of, 1:151–153 Stora Enso Oyj, 4:426, 447 succession plans, 3:253 perpetual preferred, 4:216–217 storage SUE. see standardized unexpected preferred, 4:216–217, 318–319 commodity valuation and, 6:203 earnings and private company valuation, 4:558 Theory of,6: 216–217 suitability, 1:96–97 purchase of, as form of acquisition, storage real estate investment trusts, for entire portfolio, 1:94–95 3:288–290 6:91, 93, 95 for investor risk profile,1: 94, 96

Cumulative_Ind_L2 83 June 14, 2018 9:39 PM I-84 Index

Suitability [Standard III(C)], 1:90–97 in industry structure, 4:13 interest rate, 5:27, 345–349 application of the standard, 1:94–97 as stakeholders, 3:202–203 cash flows in,5: 345–346 in case studies, 1:210, 221–222, view of profitability by,3: 205 currency swaps vs., 5:450 227–228 supply pricing, 5:346–348 and changes in investment objectives, credit spreads and, 5:242 strategies using, 5:448–449, 492–493 1:233–234 in current account, 1:577 valuation, 5:348–349 compliance procedures, 1:93–94 default-free yield curves and, 6:423 par, 5:25 investment policy statements, 1:93 in due diligence for equity REITs, 6:91 receive-fixed pay-floating,5: 344–345 regular updates, 1:94 of new space, 6:94–95 receive-floating pay-fixed,5: 343–344 suitability test policies, 1:94 supply-side estimates of equity risk total return, 5:452n.9; 6:227–228 guidance, 1:90–93 premiums, 4:69–71 variance, 6:228 addressing unsolicited trading support services, revenue from, volatility, 6:228 requests, 1:92–93 2:325–326 swap contracts. see swap(s) developing investment policies, 1:91 supra-national entities, 2:215 swap dealers, 6:226 managing to indexes or mandates, surplus at risk, 6:359 swap markets 1:93 surpluses, 1:576–579; 2:183 CDS, 5:270, 276–277 need for diversification,1: 92 Surveillance Commission for the liquidity of, 5:25 understanding client’s risk profile, Financial Sector, 2:218 swap rate(s) 1:91 surveillance of markets, algorithmic, defined, 5:24, 449 updating investment policies, 1:92 6:543–544 overnight indexed, 5:32–33 text of, 1:17, 90 Survey of Professional Forecasters (SPF) Treasury rate vs., 5:31–32 suitability test policies, 1:94 bias in predictions by, 1:305 US dollar, and credit spreads, summaries evaluations by, 1:273–274 5:243–244 attributing, 1:47 inflation expectations from,1: 353 valuing bonds with, 5:25–26 research report, 4:36 surveys, equity risk premium from, swap rate curve (swap curve), 5:24–33 Summers, Larry, 1:707n.16 4:71 about, 5:24–25 sum of squared errors (SSE), 1:306 survival, probability of, 5:279, 280 defined, 5:25 sum-of-the-parts valuation, 4:26–29 survivorship bias, 4:65 determination of, 5:27–28 Sunbeam Corporation sustainability reasons for valuing bonds with curve, cash flow quality,2: 338–339 of capital markets, 1:12–13 5:25–26 earnings quality, 2:320–324 of earnings, 2:292–293 spread as price quotation convention, sunk costs, 1:715; 3:9, 57 of income, 2:230 5:30–33 supermajority voting provisions, 3:295 of operating income, 2:299 and swap spread, 5:29–31 supernormal growth, 4:225 sustainability reports, 4:17 in valuation process, 5:26–27 Super Selection Investment Advisors Sustainable Accounting Standards Board SWAPS + notation, 5:29 (case study), 1:224–228 (SASB), 4:17 swap spread, 5:29–31 case facts, 1:224–225 sustainable growth rates, 4:238, 241–242 swap tenor, 5:449 diligence and reasonable basis Sveriges Riksbank (Central Bank of swaptions, 5:269n.4, 417–419 [Standard V(A)], 1:227 Sweden), 2:218 swap values, interest rate option values disclosure of conflicts [Standard swap(s) (swap contracts), 5:343–361; and, 5:416, 417 VI(A)], 1:226 6:226–229 SWB risk factor. see small minus big risk loyalty, prudence, and care [Standard basis, 6:228 factor III(A)], 1:227 benchmarks for, 5:29 sweatshop labor, 3:211–212, 214 priority of transactions [Standard commodity, 6:226–229 Sweden VI(B)], 1:228 credit default, 5:267–302 active return and weights for equities, responsibilities of supervisors applications, 5:286–293 6:500, 503, 504 [Standard IV(C)], 1:225–226 credit derivatives, 5:267–268 average hours worked, 1:646 suitability [Standard III(C)], 1:227–228 credit events, 5:272–273 Basel Committee membership, 2:218 supervised learning defined, 5:268 commercial property values, 6:456 algorithms, 1:383–388 features of, 5:270–272 currency crisis in, 1:596 classification and regression trees, index products, 5:274–275 GDP growth rate, 4:212 1:384–385 markets for, 5:270, 276–277 historical equity risk premium, 4:61, 63 neural networks, 1:386–387 pricing, 5:277–286 index-linked bonds, 6:396 penalized regression, 1:383–384 settlement protocols, 5:273–274 labor force participation rate, 1:643, 645 random forest classifiers,1: 385–386 succession events, 5:273 OECD Principles, 3:256n.18 defined, 1:245–246, 381 types of, 5:269–270 publicly traded real estate equities, 6:81 training in, 1:390–391 valuation of, 5:284–285 real yields, 6:397, 400 supervision currency, 5:349–356 share repurchases, 3:161 detection as part of, 1:119–120 about, 5:349–350 Swedish krona, 1:275–277, 605 inadequate, 1:124–125 pricing, 5:350–354 sweet crude oil, 6:192 of research activities, 1:122–123, strategies using, 5:450–451 Swift (company), 6:195 125–126 valuation, 5:354–356 Swiss Financial Market Supervisory system for, 1:119 defined, 5:343 Authority FINMA, 2:218 of trading activities, 1:123 equity, 5:356–361 Swiss franc supervisors. see Responsibilities of cash flows,5: 356–359 currency code, 1:605 Supervisors [Standard IV(C)] pricing, 5:359–360 and Mexican peso, 1:542 suppliers strategies using, 5:452–453, 490 and required return on equity, 4:89 bargaining power of, 4:137–139, 170 valuation, 5:359–361 and US dollar, 1:434–435 in beer markets, 4:138, 139 excess return, 6:227 Swiss National Bank, 2:218

Cumulative_Ind_L2 84 June 14, 2018 9:39 PM Index I-85

Switzerland just say no defense, 3:296 and private company valuation, 4:558, active return and weights for equities, leveraged recapitalization, 3:297 560 6:499–504 litigation, 3:296 on private real estate equity Basel Committee membership, 2:218 Pac-Man defense, 3:297 investments, 6:14 commercial property values, 6:456 share repurchase, 3:297 and REOCs, 6:86–88, 96–97 ex post equity risk premium, 6:445 white knight defense, 3:297–298 split-rate tax system, 3:151–152 Financial Stability Board, 2:219 white squire defense, 3:298 and value of properties, 6:24 GDP growth rate, 4:212 pre-offer defense mechanisms, and weighted cost of capital, 4:90–92 historical equity risk premium, 4:61–63 3:293–296 tax-exempt municipal bonds (munis), money supply growth and inflation, fair price amendments, 3:295 5:124 1:264, 269, 294, 296 golden parachutes, 3:296 tax law, in IOSCO framework, 1:714 multinational operations in, 2:130 poison pills, 3:294 tax rates OECD Principles, 3:256n.18 poison puts, 3:294 cash, 4:128–131 publicly traded real estate equities, restricted voting rights, 3:295 effective, 4:128–131 6:81 restrictive takeover laws, 3:294–295 statutory, 4:128–129 Sydney, Australia, 1:542–543 staggered boards of directors, 3:295 Taylor, John, 6:407 Synchrony Bank, 5:250 supermajority voting provisions, Taylor rule, 6:407–409 Synchrony Credit Card Master Note 3:295 T-bills. see US Treasury bills Trust $750,000,000 Series 2016-1 takeover premium, 3:310 T-bonds. see US Treasury bonds Asset Backed Notes, 5:249, 250 Talisman Energy, Inc., 4:256–257 TC. see transfer coefficient Synchrony Financial, 5:250 tangible book value per share, 4:418–419 TD Ameritrade Holding Corp., 4:424 synergy(-ies) target capital structure, 3:107–108 TD Bank Group, 4:417–418 failure to capture, 3:319 target company (target) technical indicators, 4:451 from mergers and acquisitions, 3:283 defined, 3:280 technological developments, 4:153–163 price multiples and, 4:584 M&A analysis, 3:303–314 base case scenarios, 4:161, 162 Syngenta AG, 4:295–298 comparable company analysis, bull and bear case scenarios, synthetic assets, 5:454–456 3:309–312 4:161–163 synthetic call options, 5:457 comparable transaction analysis, impact of cannibalization, 4:159–163 synthetic cash, 5:456 3:312–314 potential for cannibalization, synthetic CDOs, 5:293 discounted cash flow analysis, 4:153–159 synthetic floating-rate bonds,5: 344–345 3:303–309 technological knowledge, in production synthetic long positions, 5:455 target fund, private equity, 6:154 function, 1:639 synthetic put options, 5:456–457 target payout adjustment model, technology synthetic risk-free rate, 5:456 3:156–157 in classical model, 1:659 synthetic short positions, 5:455–456 target payout ratio, 3:156 cross-border M&A for transfer of, Sysco Company, 4:149 target price, realization of, 5:461–462 3:287 systematic account reviews, 1:86 target variables, 1:381 and economic growth, 1:635–637, systematic risk target weights, WACC, 4:91 649–653 in CAPM, 3:49 TA R P. see Troubled Asset Relief financial (see fintech) in Carhart four-factor model, 6:284 Program in growth accounting equation, defined, 6:278 task, in machine learning, 1:380 1:637–638 in multifactor models, 6:278–279 Tata Chemicals Ltd., 4:253 and long-term forecasts, 4:167–168 systemically important financial tax argument for company value and in neoclassical model, 1:667, 671 institutions (SIFIs), 2:239 dividend policy, 3:136–137 and oil, 6:192 systemic importance, of financial taxation risk, with private equity and total factor productivity, 1:633 institutions, 2:214–215 investments, 6:157 transfer of, 1:676 systemic risk, 1:702, 709; 2:214 taxes technology bubble (2000), 6:159, 407, after-tax cost of debt, 3:101–102 434, 448, 449 T after-tax cost of equity, 3:102 technology companies, probabilistic risk T+1 settlement, 1:541n.2 in capital structure decisions, 3:98–103 assessment for, 1:532 T+2 settlement, 1:541 deferred, 4:298–299; 6:105 TED spread, 5:32 table format of cash flow projections, in developing vs. developed countries, TeliaSonera, 3:129–130 3:27–29 1:625 template errors, with capital projects, table of contents, research report, 4:36 dividend imputation tax system, 3:151 3:56 tablet computer industry, 4:153–163 and dividend policy, 3:149–152 Templeton World fund, 6:479, 482 tactical asset allocation, 6:255 and dividend reinvestment plans, 3:128 temporal method tag-along rights, for private equity and dividend vs. share purchase analytical issues with, 2:160–167 funds, 6:156 decision, 3:170 balance sheet exposures with, 2:163–166 tag clouds, 1:248 double taxation system, 3:150–151 and currency exchange rate movement, tag variables, 1:381 EBIT, 3:145 2:172 tail risk, 6:365 EBITDA, 3:145 and current rate method, 2:176–177 Taiwan, real GDP per capita, 1:621–623, and equity REITs, 6:84, 86–88, 96–97 translating assets and liabilities with, 677 and government regulation, 1:721–723 2:148–149 takeover(s), 3:280, 293–299 as investor constraint, 6:263 translating financial statements with, Engelhard Corporation, 3:298–299 and mergers and acquisitions, 3:286 2:148–149 post-offer defense mechanisms, modeling of, 4:127–131 10b-18 rule, 3:161, 178n.59 3:296–298 for multinationals, 2:184–186 10-K, Form, 2:355; 3:235; 4:16, 427–428 crown jewel defense, 3:297 NOPLAT, 3:306–307 10-Q, Form, 4:16 greenmail, 3:296 pre-tax interest coverage, 6:433 tenant concentration, 6:91

Cumulative_Ind_L2 85 June 14, 2018 9:39 PM I-86 Index

tenant improvements (TIs), 6:42 environmental, social, and governance solutions to problems, 1:510–517 tender offer,3: 293, 302–303 factors, 4:332–336 trend models, 1:437–447 Tennessee Valley Authority (TVA), for free cash flow valuation,4: 330–331 linear, 1:437–440 5:162–163 three-step method for testing error log-linear, 1:440–446 tenor (term), 5:7, 449 autocorrelations, 1:450–452 and testing for correlated errors, terminal amount, for Libor spot market, Tibor. see Tokyo Interbank Offered Rate 1:446–447 5:325 TIC. see total invested capital uncertainty in forecasts from, 1:488 terminal capitalization rate, 6:30 tick database, 6:542 unit root test of nonstationarity, and discounted cash flow method for Tier 1 Capital, 2:262–263 1:465–469 real estate valuation, 6:34–36 Tier 2 Capital, 2:244–245 time series approach to modeling and resale value, 6:43–44 timberland, 6:12 revenue, 4:112 terminal price multiples, 4:412–414 time decay, option theta and, 5:426 time-series dependence, 6:514 based on comparables, 4:413 time frame time step (binomial interest rate tree), defined, 4:412 for comparable-based valuation, 4:407 5:83 multiple based on fundamentals, 4:412 of decision and dissemination, 1:84–85 time to exercise, key rate durations and, in valuation of mature growth phase, and performance calculation, 1:98–99 5:157 4:413–414 time horizon(s) time to maturity, key rate durations and, terminal share price, 4:210 and effect of uncovered interest rate 5:157 terminal value parity, 1:560, 561 time value company, 6:144, 171 for financial forecasting,4: 163 in calendar spreads, 5:480 in long-term forecasts, 4:165–167 inflation and exchange rates for,1: 567 of money, 5:25, 26 of M&A target, 3:304, 308–309 as investor constraint, 6:262–263 in option premium, 5:460 of stock, 4:228 for securitized debt, 5:248 of options, 5:379 terminal year incremental after-tax non- time horizon risk, 4:84; 6:301, 302 Time Warner Corporation, 4:584 operating cash flow,3: 35 time of day, size of bid–offer spread and, timing termination date, 3:30 1:542–543 of capital projects, 3:52 termination policies, employee, 1:109 time points, in interest rate forward of default on bonds, 5:207 term premium, 5:39–40 transactions, 5:325–326 of private equity exit, 6:150–151 term rent, 6:37–38 time series of recognition, 2:293–296 term sheet, 6:143 autocorrelations of, 1:449–450 TIPS. see US Treasury Inflation- term structure defined, 1:434 Protected Securities of credit spreads, 5:240–247 forecasts of, 1:472–474 TIs. see tenant improvements of interest rates, 5:33–45 ordering of, 1:446n.9 Titanium Metals Corporation, 3:214 arbitrage-free models, 5:42–45 regression analysis of, 1:286, 335, T-notes. see US Treasury notes calibrating binomial interest rate 372–376 tobacco companies, 3:213 trees to match, 5:92–94 time-series analysis, 1:433–517 Tobin’s q, 1:335–337, 340; 4:506 equilibrium models, 5:38–42 about, 1:434–436 tokenization, 1:256 liquidity preference theory, 5:34 autoregressive models, 1:447–460 Tokyo, Japan, 1:542, 543 local expectations theory, 5:33–34 comparing forecast model Tokyo Commodity Exchange, 6:207 modern models, 5:38–45 performance, 1:456–458 Tokyo Interbank Offered Rate (Tibor), preferred habitat theory, 5:35–36 with conditional heteroskedasticity, 5:25 segmented markets theory, 5:35 1:481–484 Tootsie Roll Industries, 3:131–132 in tests of bond analytics, 5:178 covariance-stationary series, 1:448–449 top-down approach traditional theories, 5:33–38 instability of regression coefficients, forecasting, 4:22–23 of volatility, 5:430 1:458–460 investing, 4:22n.7 TerraNova Energy, 4:96, 101 mean reversion, 1:452–453 modeling operating costs, 4:114 Tertilt, Michael, 1:251 moving-average, 1:480–481 modeling revenue, 4:111–112 Tesco PLC, 4:146, 473 multiperiod forecasts and chain rule working capital projections, 4:132–133 Texas Pacific Group,6: 136, 141 of forecasting, 1:453–456 top-down clustering, 1:388 text analytics, 1:249, 388 serially correlated errors in, 1:449–452 Toronto-Dominion Bank, 4:96, 417 TFP. see total factor productivity challenges with, 1:436–437 tort laws, 3:210 Thai Beverage,3: 143 forecasting with total capital ratio, 2:262–263 Thailand, 1:594; 3:127 moving-average models, 1:472–474 total debt/total capital ratio, 6:433 Thatcher, Margaret,6: 419 multiperiod forecasts and chain rule total factor productivity (TFP), 1:633 Theory of Storage,6: 216–217 of forecasting, 1:453–456 and capital deepening, 1:635–637 theta, 5:426–427. see also carry costs steps, 1:489–490 in growth accounting equation, third-party custodians, 1:32 uncertainty in, 1:488 1:637–638 third-party research, 1:127–128, 132 moving-average models, 1:469–474 and steady state of growth equilibrium, Thomson First Call,4: 384, 393 autoregressive, 1:480–481 1:664 Thomson Reuters/CoreCommodity CRB forecasting time series with, and technology, 1:650–652 Index (TR/CC CRB), 6:191, 230, 1:472–474 and US economic growth, 1:670–671 231, 233 smoothing past values with, total invested capital (TIC), 4:444 3M, 4:164–166 1:470–472 total periodic pension costs, 2:98 three-stage models with multiple regimes, 1:488 total return, 6:420–421 dividend discount, 4:232–237 practice problems, 1:494–509 total return swaps, 5:452n.9; 6:227–228 with declining growth rates, 4:233–236 random walks, 1:461–464 total risk, 6:297 with distinct stages, 4:232–233 regressions with multiple time series, Total SA, 3:143; 4:75–76 future dividend growth pattern for, 1:484–488 Total Tier 1 Capital, 2:222, 243–244 4:209 seasonality in, 1:474–480 Total Tier 2 Capital, 2:222, 244–245

Cumulative_Ind_L2 86 June 14, 2018 9:39 PM Index I-87

total value added, 6:475–476 risk-arbitrage, 1:63 for global equity portfolio, 6:502–505 total value to paid in (TVPI), 6:160, spread, 6:536 and optimal active risk, 6:497 163–164 supervising trading activities, 1:123 transfer prices, 2:183 total variation, in ANOVA, 1:306 unsolicited requests for, 1:92–93 transformation, of regression variables toxic waste, dumping of, 3:218 wash, 6:544 first-differencing, 1:462–464 Toyota Motor Corporation trading and credit portfolio VaR, and model specification,1: 364, dividend policy, 3:154, 179 2:261–262 366–370 forward P/E, 4:396–397 trading volume, 1:70 transformational technologies, 1:649n.16 intrinsic value and expected return, 4:55 traditional term structure theories, transitional growth, in neoclassical value creation, 6:141 5:33–38 model, 1:668–670 TP Analytics, 2:184n.5 trailing dividend yield, 4:437 transition growth phase, 4:226 tracking error, 6:296–298 trailing earnings per share, 4:386–387 transition matrixes, 5:214 ex ante, 6:337, 356–357 trailing P/E, 4:385–392, 409–410; 6:445 translation of foreign currency financial ex post, 6:356–357 and business-cycle influence, statements, 2:148–160 tracking risk, 6:296 4:388–390 Canadaco case study, 2:157–171 trade, free, 1:625–626, 715–716 calculating, 4:385–392 companies with multiple methods, trade allocation procedures, 1:85–86, and comparability with other 2:176–177 229–231 companies, 4:390 disclosure of, 2:177–183 trade balance, 1:577, 678 defined, 4:384 for Chevron Corporation, 2:181–183 trader collusion, 6:544 equity strategists’ use of, 6:445 for Exxon Mobil Corporation, trade receivables, 5:248 justified, 4:222–224 2:181–183 traders, commodity market, 6:207 with negative, zero, or low earnings, and net income, 2:182–183 trades 4:390–392 at Yahoo! Inc., 2:178–181 carry, 1:572–575 and nonrecurring items, 4:386–388 foreign currency as functional defined, 1:572–573 trailing price to cash flow,4: 434 currency method, 2:150–151 example, 1:574–575 training functional currency determination, risks and rewards on, 1:573 compliance, 1:121 2:149 types of, 5:23n.4 in supervised machine learning, in highly inflationary economies, with US dollar and Turkish lira, 1:390–391 2:154–157 1:581–582 training sample, for machine learning, parent’s presentation currency as yen, 1:579–580 1:391 functional currency method, CDS, 5:288–290 tranche CDS, 5:270 2:151–154 fat finger,6: 543 transaction-based manipulation, 1:69 for retained earnings, 2:152–153 multi-legged, 6:537 transaction-based real estate indexes, transparency, in corporate governance, trading 6:59–61 3:246–247, 258–259 algorithmic and high-frequency, 1:253; transaction characteristics of M&As, transportation, commodity valuation 6:533–551 3:288–293 and, 6:203 algorithmic techniques as safety net, form of acquisition, 3:288–289 TransUnion, 5:210 6:542–544 method of payment, 3:290–291 Travelers Companies, Inc., 2:265, real-time market monitoring/ mind-set of management, 3:291–293 267–272 surveillance, 6:543–544 transaction costs, 6:10, 157, 255 travel expenses, 1:36–37, 39–40 risk management, 6:542–543 transaction date, 4:584 travel funding, 1:35 algorithm life cycle, 6:539–540 transaction exposure, 2:132 TR/CC CRB. see Thomson Reuters/ evolution of, 6:540–542 transaction fees, 6:153 CoreCommodity CRB Index execution algorithms, 6:534–535 transactions Treasuries. see US Treasury securities high-frequency trading algorithms, across national borders, 2:130 Treasury rate, 5:31–32 6:535–540 adding, to ledgers, 1:255 Treasury scare of 2000, 6:423 impact on securities markets, allocation of, 1:87–88 treasury shares (treasury stock). see US 6:545–547 with associates, 2:31–34 Treasury securities (US Treasuries) latency minimization, 6:538–539 bid–offer spread and size of,1: 543 Treasury swap spread, 5:29 platforms and technologies, 6:542 foreign currency, 2:131–143 A Treatise on Money (Keynes), 6:213 automated, 1:240 analytical issues, 2:135–138 trend analysis, 2:327, 330 basis, 5:291–293 disclosures of gains and losses, TREND formula, 4:164 basket, 6:536 2:138–143 trending, 6:335, 364 cross-border, 6:542 and foreign exchange risk, 2:132–135 trend models Darwinian, 6:538 with intervening balance sheet dates, linear, 1:437–440 delta neutral trading strategies, 6:536 2:133–135 log-linear, 1:440–446 excessive, 1:80, 89 with settlement before balance sheet and testing for correlated errors, insider, 1:709, 710; 6:543–544 date, 2:132–133 1:446–447 off-balance-sheet, 2:226 related-party, 2:252 time-series analysis, 1:437–447 options, 5:431–433 TransCanada Corporation, 5:242–243 trends pairs, 4:25; 6:536, 537 transfer, in data science, 1:247 linear, 1:437 personal, 1:70 transferability, of shares, 3:229 payout policy, 3:177–178 and conflict of interest,1: 155 transfer coefficient (TC) residuals from estimating, 1:443 disclosure of, 1:160, 161 and active return variance, 6:498 Treynor, Jack, 6:250, 471 limitations on, 1:62 defined, 6:489 triangular approach, for private equity and market manipulation, 1:69–70 for fixed-income strategies,6: 512 investments, 6:140 priority of transactions for, 1:157 and full fundamental law of active triangular arbitrage, among currencies, proprietary trading procedures, 1:63 management, 6:494–495 1:544–546

Cumulative_Ind_L2 87 June 14, 2018 9:39 PM I-88 Index

trinomial choice models, 1:344n.28 umbrella partnership REITs (UPREITs), unexpected earnings, 4:451–453 Troubled Asset Relief Program (TARP), 6:84, 88 unfair competition, regulation against, 2:238 unassociated gas, 6:193 1:715 T.Rowe Price Small Cap fund, 6:479, 482 UNASUR. see Union of South American UNFCCC. see United Nations trust, 3:207–208 Nations Framework Convention on Climate trust banks, 2:216 unbiased expectations theory, 5:33 Change trustees, bond, 5:126n.1 unbiased measurement, 2:343 Uniform Standards of Professional trusts, real estate investment. see real uncertainty Appraisal Practice (USPAP), 4:595 estate investment trusts [REITs] about future cash flows,6: 381, 382 Unilever Group, 4:486 t-tests in forecasts from time-series analysis, company costs, 4:151 of autocorrelation, 1:449 1:488 ethics at, 3:220, 223 Dickey–Fuller test, 1:465 and predicting dependent variable with input and product prices for, distribution table, 1:737 regression analysis, 1:340–341 4:146–147 for Fisher effect,1: 353–355 and risk premiums, 6:387–389 modeling of operating costs for, formula for, 1:282–283 unconditional heteroskedasticity, 1:351 4:122–126 and F-test, 1:306 uncovered interest rate parity Unilever N.V., 4:473, 486 hypothesis testing with, 1:297–298 and carry trades, 1:572 Unilever PLC, 3:133; 4:473, 486 and multicollinearity, 1:360 in exchange rate determination, unintended costs, of regulation, 1:719 in multiple linear regression, 1:341 1:558–560 unintentional errors, correction of, 1:48 tunneling, 2:331 and international parity conditions, Union of South American Nations Turkey 1:570, 571 (UNASUR), 1:704 average hours worked, 1:646 in prediction of spot rates, 1:560–564 unions, 3:202, 203 Basel Committee membership, 2:218 underfunding, 6:358 unique circumstances, as investor foreign currency translation, underlying (in general) constraint, 6:263–264 2:155–157 for credit default swaps, 5:268, 278 United Arab Emirates, 2:219; 6:83 labor force participation rate, 1:643 and derivatives trading, 5:286 United Kingdom natural resources, 1:641 underlying (underlying asset) active return and weights for equities, OECD Principles, 3:256n.18 arbitrageur strategy of purchasing, 6:499–504 real GDP per capita, 1:621, 677 5:312–315 average hours worked, 1:646 Turkish lira, 1:581–582; 2:155–157 cash flows for financed position in, Basel Committee membership, 2:218 Turnbull, Stuart, 5:216 5:312–314, 319–320 beer market, 4:138–139 turnover, inventory, 4:132 cash flows related to carrying, benchmark for swaps, 5:29 TVA. see Tennessee Valley Authority 5:311–312 bond spread, total returns and GDP TVPI. see total value to paid in for forward rate agreement, 5:325 growth, 6:420, 421 12-month moving average, 1:470n.32 and objective for derivatives strategy, break-even inflation rates,6: 410–412 20-F, Form, 4:16 5:483 business cycle and policy rates, 6:405, two-fund separation, 6:479 options prices and volatility in, 406 two-period binomial model, 5:386–398 5:485–486 commercial property valuation, for American-style options, 5:390–398, underlying (underlying instrument) 6:30–31 394–398 in binomial model, 5:379–380 commercial real estate, 6:455–457 for European-style options, 5:387–391, in BSM model, 5:402, 406 currency crisis in, 1:596 394–398 for currency options, 5:410 disclosures of risk information, 2:358 expectations approach, 5:389–390 for interest rate options, 5:399, 414, 416 dividend imputation tax system, 3:151 no-arbitrage approach, 5:387–389 in no-arbitrage approach to options dividend payouts, 3:159, 178 replicating option payoffs in,5: 377 valuation, 5:376 dividend policy, 4:201, 202 two-period default-free bonds, replicating call option with, 5:382–383 earnings growth, 6:439–440, 442, 444 6:389–390 replicating put option with, 5:383–384 equity REITs, 6:83 two-stage models and value of call options, 5:380–381 ex post equity risk premium, 6:445 dividend discount, 4:226–229 without dividends, 5:393 food inflation,4: 147–148 combining P/E model and, 4:228–229 underlying cash flows GDP growth rate, 4:212 future dividend growth pattern for, carry arbitrage model with, 5:318–321 Gordon growth model, 4:68 4:209 carry arbitrage model without, government bond risk premiums, valuing stock with, 4:226–228 5:311–318 6:422–423 free cash flow,4: 323–330 underlying common stock, convertible/ historical equity risk premium, with declining growth rates, straight bonds vs., 5:173–175 4:61–63 4:325–330 underlying earnings, 4:386 ICT capital and investment in GDP, with declining net income, 4:326–328 underlying real estate, valuation of stock 1:647, 648 with declining sales growth, REITs and, 6:104 index-linked bonds, 6:396, 398–399, 4:328–330 underspending, on capital projects, 3:57 401 with fixed growth rates,4: 324–325 undervalued (term), 4:25, 89 inflation and T-bill rates,6: 404, 405 TXU Corporation, 6:150 underweight (term), 6:474 inflation target,6: 409n.21 Tyco, 3:210, 213, 231, 232, 246; 5:216 underwriting activities, 2:266 labor force participation rate, 1:643, Type I errors, 1:343, 356; 2:308 underwriting expense ratio, 2:269 645 Type II errors, 2:308 unequal lives, mutually exclusive layer method, 6:39–40 projects with, 3:38–40 leases for office properties,6: 19, 20 U unethical actions, reporting, 1:29 money supply growth and inflation, UBS, 3:179 unethical behavior, causes of, 3:215–216 1:264, 269, 294, 296 UER. see civilian unemployment rate unexpected changes, in exchange rates, natural resources, 1:640 Ukraine, 1:594 1:557 net migration, 1:644

Cumulative_Ind_L2 88 June 14, 2018 9:39 PM Index I-89

OECD Principles, 3:256n.18 equity risk premium, 4:60 online payment companies, 2:216 population growth, 1:642 ESG risk exposures, 3:260, 261 population growth, 1:642 portfolio weights, 6:475 event-specific disclosures of risk pre-tax operating margin for building private real estate valuation, 6:56n.17, information, 2:358 retailers in, 1:524 57 exchange rates, 1:578–579 price-to-earnings ratio, 6:446–447 publicly traded real estate equities, executive compensation, 3:243 private equity investments, 6:137, 154 6:81 exports and foreign direct investment private real estate investments, 6:14, R&D expenditures, 1:650 in, 1:681 57, 101 real equity returns, 6:439 ex post equity risk premium, 6:445 publicly traded real estate equities, real estate equities market, 6:82 FFM model for equities market, 4:80 6:81, 101 real GDP per capita, 1:621, 677 financial statements of US subsidiaries quantitative easing, 1:588 real yields, 6:396–401 of foreign companies, 2:143–144 R&D expenditures, 1:650 regulation of portfolio management, firms with negative book value for real cyclically adjusted P/E ratio, 6:263 equity, 1:528 6:447 reversion valuations, 6:37–39 GDP real default-free interest rates, 6:393 robo-advisory services, 1:250 bond spread, total returns and GDP real equity returns, 6:438, 439 Royal & Sun Alliance Group, 3:143 growth, 6:420–421 real yields, 6:396, 397, 400–401 self-regulating organizations in, 1:704 and consumption, 6:441 regulation share repurchases, 3:161, 178 GDP growth rate, 4:212 commodity and futures regulation, Taylor rule for policy rates, 6:407, 409 ICT capital and investment in GDP, 6:208 valuers, 6:54n.16 1:647, 648 cost–benefit analysis of,1: 719–720 UK gilt curve real GDP, 1:524–525 disclosure regulations, 1:717n.19 and break-even inflation rate, real GDP per capita, 1:621–623, and government subsidies, 1:722–723 6:413–415 676–678 of portfolio management, 6:263 regulatory factors in determining GGM equity risk premium estimate, regulatory requirements, 4:16 shape of, 6:423–424 4:68–69 regulatory response to global slope, level, and curvature of, 6:416 government bond market, 5:25 financial crisis,1: 707 spread of, 6:417–419 government bond risk premiums, self-regulating organizations, United Nations Framework Convention 6:422 1:703–704 on Climate Change (UNFCCC), growth accounting equation, REITs, 6:84, 109, 111 3:260 1:637–638 REOCs, 6:97 United Parcel Service, 4:536 health care costs, 2:95–97 reporting requirements for insurance United States historical equity risk premium, companies in, 2:264 active return and weights for equities, 4:61–63 restructuring, 5:273 6:500, 501, 503, 504 history of merger activity in, returns by asset class, 6:13–14 automotive industry, 4:17 3:281–282 reversion, 6:37n.11 average hours worked, 1:646 impairment of capital rule, 3:153 robo-advisory services, 1:250 banking regulations in, 2:215 index-linked bonds, 6:396, 398 savings and loan crisis (1980s-1990s), banking supervision, 1:723 inflation 4:595 Basel Committee membership, 2:218 break-even inflation rates, sector ROEs, 4:509–510 beer market, 4:145, 146 6:410–411 share repurchases, 3:161, 178; 4:218 benchmarks for bond valuation, 5:25 and Federal Reserve policy, 1:458, taxation, 3:150–151 book value, 4:415 459 tax deductible interest, 4:290 business cycle and policy rates, 6:405, and money supply growth, 1:264, Taylor rule for policy rates, 6:407, 408 406 269, 294–296 yield curve movements, 5:45, 46 callable bonds, 5:124 and S&P 500 returns, 1:271–272 US Air Force, 3:205–206 commercial property values, 6:456 and T-bill rates, 6:404, 405 US Circuit Court of Appeals, 1:719 commodity exchanges, 6:207 insurance companies in, 2:266 US Congress, 1:704; 3:299; 6:83 common law, 3:113 insurance company capitalization, US Consumer Price Index (CPI) corporate default, loss, and recovery 2:273 and inflation rates, 6:428–431 international trade, 2:130 company analysis, 4:145 corporate governance evaluation, investment management, 6:248 correlated error testing, 1:447 3:235 Kyoto Protocol, 3:260 Durbin–Watson statistic for, 1:447 credit default swaps, 5:270 labor and total factor productivity, in-sample forecast comparisons, credit spreads and business cycle, 1:651–652 1:456–457 6:431–432 labor force participation rate, 1:643, instability in time-series models, diversified REITs,6: 94 645 1:459–460 dividends labor supply and economic growth, linear trend models for, 1:438–440 cash dividends paid, 3:127 1:641 multiperiod forecast, 1:454–456 decline in, 3:179 leases, 6:20, 21 out-of-sample forecast comparisons, dividend policy, 4:201–202 livestock investment in, 6:201 1:457–458 payouts from, 3:159, 178 moving average for retail sales, 1:471 testing for ARCH(1), 1:482–483 earnings growth, 6:439–440, 442, 443 and MSCI ACWI, 6:499 and REIT returns, 6:82 economic growth, 1:654 multiple defaults by companies, US Consumer Price Index for All Urban education spending, 1:624 5:278n.18 Consumers (CPI-U), 6:14 effective tax rate for multinational natural resources, 1:640 US Consumer Price Index for Energy companies, 2:184 neoclassical model for, 1:670–671 (CPIENG), 1:317–319, 325 equity investment styles, 6:448 net migration, 1:644 US Department of Justice, 3:213, 299, equity premiums, 6:450–451 OECD Principles, 3:256n.18 300, 302

Cumulative_Ind_L2 89 June 14, 2018 9:39 PM I-90 Index

US dollar joint ventures, 2:23 cost capitalization, 2:328–329 BMW’s foreign currency exposure, LIFO inventory accounting, 4:390 MicroStrategy, Inc., 2:324–326 2:189, 190 multinational operations, 2:130 revenue recognition, 2:320–326 CAD/USD currency pair, 1:541n.2, 543 accounting for dirty-surplus items, Sunbeam Corporation, 2:320–324 and capital flows,1: 580 2:183 WorldCom Corp., 2:328–329 correlation of exchange rate returns accounting for foreign currency enforcement action for Digilog, Inc., for, 1:275–277 transactions, 2:133, 135 2:302 currency code, 1:605 financial statements in highly ESG risk filings,3: 261 currency translation, 2:155–157 inflationary economies,2: 154–155 formalized revenue recognition and current account deficit,1: 578–579 foreign currency transactions, 2:142 practices, 4:426–427 and demand for financial assets,1: 580 preparation of foreign financial Groupon registration statement with, DEM/USD currency pair, 1:580–581 statements, 2:144, 172–174, 4:428 exchange rate with Swiss franc, 176–178 and guideline transactions method, 1:434–435 rules for translation of foreign 4:584 international risk premium estimation, currency financial statements, overturning of rules by, 1:719 4:89 2:153–154 reconciliation with GAAP as JPY/USD currency pair translation methods for financial requirement, 4:449, 450 bid–offer spread for,1: 542 statements, 2:144, 149, 151–154, Regulation FD, 4:16 equity market trends and exchange 163, 172–174, 176–178 Regulation National Market System, rates, 1:582 NAV calculation for real assets, 6:102 1:720 exchange rate as random walk, non-controlling interests, 2:43 Regulation Q, 1:720–721 1:462–464 nonfinancial assets,4: 422 required filings with,4: 16 forward points for, 1:552n.9 operating cash flow,4: 432 robo-adviser regulation by, 1:250 triangular arbitrage with, 1:544–545 post-employment benefits Rule 10b-18, 3:161, 178n.59; for real GDP per capita, 1:621–622 convergence with IFRS, 2:77 4:202n.8 real interest rate differentials and value disclosure of benefits,2: 92, 94, 97–99 Rule 144, 4:591 of, 1:580–581 financial statement reporting of rulemaking process, 1:702n.2 and Turkish lira, 1:581–582 benefits, 2:81–86, 91 sanctioning of Mitchell Hutchins Asset USD/EUR currency pair measuring pension obligations, Management, 1:233–234 arbitrage constraints for exchange 2:79–80 on trade allocation issues, 1:229–231 rate quotes, 1:544–545 R&D expenditures, 4:415, 528 VaR acceptance by, 6:334 exchange rate quotes for, 1:541, 542 reconciliation requirement of, US Supreme Court, 3:281 liquidity in, 1:542 4:449–450 US Treasury, 2:238 spot and forward rate quotes, remeasurement gains and losses, US Treasury bills (T-bills) 1:551–552 2:152 and bonds, 1:284 USD/GBP currency pair, 1:542, residual income, 4:505 business cycles and rates for, 545–546 share-based compensation, 4:299 6:404–409 US dollar swap rates, 5:243–244 US Internal Revenue Code, 3:296 and commodity indexes, 6:221 US Equal Employment Opportunity US L&H sector, 2:277 and inflation Commission (EEOC), 4:17 US National Association of Insurance conditional heteroskedasticity of, US Federal Deposit Insurance Commissioners (NAIC), 2:220, 1:353, 355 Corporation (FDIC), 2:218, 220–222 264n.31, 273 Fisher effect,1: 373–376, 484 US Federal Reserve. see Federal Reserve US Producer Price Index for Crude serial correlation of, 1:359 US GAAP Energy Materials (PPICEM), investment horizon of, 6:410 on accounting for derivatives, 2:258 1:317–319 in quantitative easing, 5:36 on asset classification,2: 245 US Securities and Exchange returns of asset classes, 6:14 available-for-sale investments, 4:517 Commission (SEC) short-term nominal interest rates on, on available-for-sale securities, 2:248 accruals modeling, 2:314 6:403 book value of equity, 4:504–505, 515 agency problems and filings with, and stocks, 1:279 business combinations, 2:35, 36, 49–56 3:207 and TED spread, 5:32 classification shifting,2: 339 allocation of regulatory responsibilities US Treasury bonds (T-bonds) compensation, 2:76, 103, 105, 106 from, 1:703–704 active management for portfolios of, depreciation of real investments, 6:105 Amendments to the Rules Governing 6:508–510 equity investments, 2:224 the Investment Company Act of and Fed model, 4:407 extraordinary items, 2:307n.9 1940, 3:236 GDP growth and yield spreads/total fair value, 2:229; 4:561, 595 on board chairmen, 3:237–238 returns on, 6:420–421 goodwill impairment tests, 4:560 classification shifting evidence, rate distribution for, 1:520–521 and IFRS, 2:55–56; 4:449–450 2:312–313 REIT yields vs., 6:85 impairments, 2:47–48 corporate disclosure filings,3: 235 yield of S&P 500 Index and, 1:286 income statements, 4:108 and credit rating agencies, 3:109 US Treasury curve intangible assets, 4:556 Diebold settlement with, 4:428 and break-even inflation rate, intercorporate investments, 2:8–10 discounts for lack of control, 4:590 6:413–415 interest Division of Corporation Finance, 2:355 and risk premium on US Treasuries, classification, 4:434 earnings quality case examples, 6:421 and dividends, 4:293–294 2:319–331 slope, level, and curvature of, 6:416 investment property, 6:99 assessing quality of expense spread of, 6:417–419 investments recognition, 2:330–331 supply and demand factors in, 6:423 in associates, 2:23, 27, 31, 34 assessing quality of revenues, US Treasury Inflation-Protected in financial assets,2: 10–12, 14–15, 17 2:326–328 Securities (TIPS), 6:396, 401

Cumulative_Ind_L2 90 June 14, 2018 9:39 PM Index I-91

US Treasury notes (T-notes), 5:31–32 USPAP. see Uniform Standards of equity risk premiums in, 6:437–438 US Treasury securities (US Treasuries) Professional Appraisal Practice with H-model, 4:231–232 Asian central banks’ purchases of, US Style Indices Methodology (S&P), multiple valuation indicators in, 6:423 4:462 4:459–460 certainty of future cash flows from, utilitarian approach to ethics, 3:217 for non-dividend paying stock, 6:381 utilities, as operating expenses, 6:42–43 4:229–230 and country premium, 4:90 utility providers, 4:167–168 pricing formula, 6:437 and credit spread for corporate bonds, quantifying equity risk premiums, 6:427 V 6:444–445 government bonds in emerging vacant sites, highest and best use of, with spreadsheet modeling, markets vs., 6:433–434 6:26–27 4:237–238 in quantitative easing, 5:36 vacant space, real estate valuation of, with two-stage dividend discount risk premium on, 6:421 6:43 model, 4:226–228 share repurchases of, 3:161 Vadlamani, Srinivas, 2:335–337 valuation multiples for, 6:445–447 spot and forward curves for, 5:13 Vale (company), 6:216 equity, 4:5–49 stripping and reconstitution of, 5:79 validation sample, in machine learning, about, 4:5–6 term structure of volatility, 5:50–51 1:391 absolute valuation models, 4:23–25 yield curve factors, 5:47–49 valuation, 4:6, 36, 556n.1 accounting information for, United Technologies, 3:222 absolute models, 4:23–25 4:18–22 uniting of interests accounting method, arbitrage-free (see arbitrage-free applications, 4:9–11 2:37 valuation) for asset-based valuation, 4:24–25 unit roots asset business context for, 4:12–22 cointegrated, 1:485–488 economic factors in, 6:379–469 and market expectations, 4:10–11 defined, 1:465 and equity, 4:24–25 models for, 4:23–30 Dickey–Fuller test, 1:465–469, 484, expectations of future cash flows in, practice problems, 4:41–46 486, 488 6:383 relative valuation models, 4:25–26 Engle–Granger test, 1:486 for financial assets,5: 76 research reports, 4:33–37 and Fisher effect,1: 484 present value model of, 6:380–382 with residual income, 4:495–496 modeling, 1:466–469 for private companies, 4:562, solutions to problems, 4:47–49 and predictability of stock market 586–588 sum-of-the-parts valuation, 4:26–29 returns, 1:485 binomial method, 5:81–85 types of value, 4:6–9 and regressions with multiple time bond (see bond valuation) valuation process, 4:11–33 series, 1:484–488 claims, 3:64–65 FCFE model, 4:24 single vs. multiple, 1:486n.45 commodities, 6:191, 203–205 FCFF model, 4:24 testing for, 1:465, 484 comparables-based of financial assets,5: 76 unit root test of nonstationarity, enterprise value to EBITDA, first-in, first-out method,2: 152; 4:390, 1:465–469 4:444–446 419 unit value, real estate, 6:10 for markets, 4:379–381 forecasted fundamentals-based universal banks, 2:216 P/E, 4:398–410 enterprise value to EBITDA, 4:444 Universal Standards of Professional price to book value, 4:423–424 forward P/E, 4:395–398 Appraisal Practice (USPAP), 6:57 price to cash flow,4: 436 justified P/E,4: 395–397 university endowments, 6:303 price to dividends, 4:438–439 of markets, 4:381–382 University of Pennsylvania, 3:263 price to sales, 4:430–431 price to book value, 4:422–423 unleveraged IRR, 6:64 for private equity, 6:143–144, price to cash flow,4: 435–436 unlimited funds, 3:10 158–159 price to dividends, 4:438 unquoted investments, private equity, for real estate, 6:25–26, 51–52 price to earnings, 4:395–398 6:156 in relative valuation models, 4:25, 26 price to sales, 4:429–430 unrealized losses, gross, 2:248–249 with terminal price multiples, 4:413 forward commitments, 5:307–373 unrealized proceeds, 6:160 and corporate governance, 3:262–263 about, 5:307 unsolicited trading requests, 1:92–93 discounted cash flow method arbitrage-free principles, 5:308–309 unstructured data, 1:242, 281–282 of developing terminal value, 4:167 forward contracts, 5:309–343 unsupervised learning expectations approach vs., 5:384–385 futures contracts, 5:322–343 algorithms, 1:388–390 perpetuity calculations in, 4:168 swap contracts, 5:343–361 defined, 1:246, 381 for private companies, 4:569–570, forwards, 5:7 unsystematic risk, 3:49 575 currency forwards, 5:341–342 unusual charges, 4:132 for private equity, 6:138, 144 equity forwards, 5:322–324 updates, 1:94, 131–132 for private real estate investments, fixed-income forwards,5: 337–338 up factor, 5:380, 387 6:33–45 interest rate forwards, 5:331–333 upfront payment (upfront premium) for publicly traded real estate long forward position, 5:317–318, and credit quality, 5:271–272 securities, 6:111–113 320–321 determining, 5:281, 283–284 valuation inputs for, 4:182–183 notation for pricing, 5:309–311 UPREITs. see umbrella partnership discounted dividend (see discounted free cash flow (see free cash flow REITs dividend valuation) valuation) upside potential, of convertible bonds, equities/stock, 6:437–451 futures 5:172 business cycles and, 6:452 currency futures, 5:338 upstream transactions, 2:31–33 earnings growth and economic equity futures, 5:322 upward only restrictions, 6:452 cycles, 6:439–444 fixed-income futures,5: 337 US Bancorp, 4:416 for equities with bad consumption interest rate futures, 5:324–325 uses-of-free-cash-flow-basis, 4:308–310 hedging properties, 6:438–439 notation for valuation, 5:309–311

Cumulative_Ind_L2 91 June 14, 2018 9:39 PM I-92 Index

valuation (Continued) residual income (see residual income origins, 6:319 income approach valuation) and risk budgeting, 6:362 to private company valuation, 4:562, share repurchases and cash dividends, and sensitivity risk, 6:348–352 569–578 3:167–169 and sensitivity/scenario risk measures, to private equity valuation, 6:138 sum-of-the-parts, 4:26–29 6:348–352 to real estate valuation, 6:27–46 swap contracts in simulations, 1:527 income models, 4:23n.8 currency swaps, 5:354–356 threshold for, 6:320–321 last-in, first-out method equity swaps, 5:359–361 value chain members, opportunistic balance sheet adjustments for, interest rate swaps, 5:348–349 exploitation of, 3:213–214 4:525 target company, 3:303–314 value creation comparisons of companies using comparable company analysis, and LBO model, 6:146–148 FIFO and, 4:390, 419 3:309–312 for private equity, 6:141–143 on foreign currency financial comparable transaction analysis, value in use, 6:24 statements, 2:152 3:312–314 Value Line, 4:73, 405, 409, 434n.47 long forward positions, 5:317–318 discounted cash flow analysis, value of growth (term), 4:220–222 market-based, 4:377–489 3:303–309 valuer, 6:54n.16 about, 4:378–379 venture capital method, 6:166–177 values, CFA Institute, 1:15 enterprise value multiples, 4:440–448 basic method, 6:166–171 value stocks, 6:284, 448–450 alternative denominators in, buyout vs., 6:144–145 Vanguard, 2:252 4:446–447 determining investment amounts, Vanguard Windsor fund enterprise value to EBITDA, 6:172–176 expected value added, 6:486, 487 4:440–446 estimating terminal value for, 6:171 information ratio, 6:481, 482 enterprise value to sales, 4:447 issues with valuation, 6:148–149 Sharpe ratio, 6:479 price multiples vs., 4:447–448 and risk, 6:171–172 VaR. see value at risk harmonic mean, 4:457–459 Z-spread in, 5:30–31 variable bias, 1:365–366 international considerations, valuation date, 4:584 variable costs, 4:114, 156–157 4:449–450 valuation inputs, company model, variable interest entities (VIEs), 2:36, 52, issues with, 4:457–463 4:182–183 240–241, 302 method based on forecasted valuation multiples, for equities, variable operating expenses, 6:42 fundamentals, 4:381–382 6:445–447 variables, 1:286, 328–329. see also method of comparables, 4:379–381 The Valuation of Customer-Related specific types momentum indicators, 4:451–456 Assets (Appraisal Foundation), composite, 1:389 multiple indicators in, 4:459–463 4:596 linear association of, 1:265–266 practice problems, 4:468–480 Valuation of Intangible Assets (IVSC in machine learning, 1:381 price multiples, 4:382–439 Guidance Note), 4:596 nonlinear relations of, 1:270–271 solutions to problems, 4:481–489 Valuation of Privately-Held Company probabilistic multinational corporations, 1:335–337 Equity Securities Issued as checking for correlation between, options (see options valuation) Compensation (Stock Practice Aid), 1:522 pathwise, 5:96–100 4:573n.24, 596 defining probability distributions for, post-money, 6:148–149, 166–167 value. see also specific types 1:520–522 pre-money, 6:148–149, 167 appreciation of, 4:217–218 determining, 1:520 pricing vs., 5:308 of employee compensation, 2:76 with unstable correlations, 1:529 of private companies (see private and nonoperating assets, 4:337 tag/target, 1:381 company valuation) standards/definitions of,4: 560–562 transformation of, 1:364, 366–370 private equity types of, 4:6–9 variance about, 6:138–141 value added (metric), 6:472–477. see also in active returns, 6:498 in buyout transactions, 6:144–148 active returns analysis of, 1:305–308 classification of private equity, benchmarks for, 6:472–473 in autoregressive model, 1:437 6:137–138 calculations of, 6:473–475 linear regression model, 1:305–308 due diligence, 6:158 for country equity markets, 6:475 of prediction error, 1:309 Europa Venture Partners III case decomposition of, 6:475–477 return, 6:257, 285, 498 study, 6:161–164 defined, 6:472 and volatility estimation, 5:85 exit routes for investments, expected, 6:486–487 variance–covariance method of 6:149–151 realized, 6:497–499 VaR estimation, 6:324. see also market data in, 6:143–144 total, 6:475–476 parametric method of VaR net asset value, 6:158–159 value additivity, 5:77 estimation practice problems, 6:178–183 value at risk (VaR), 6:257, 319–338 variance swap, 6:228 private equity funds, 6:152–161 advantages and limitations of, variety, of Big Data, 1:241, 242 and private equity in global economy, 6:333–336 VaR threshold, 6:320–321, 324 6:136 estimating, 6:322–333 Vasicek model, 5:41–42 risks and costs of private equity historical simulation method, VBO. see vested benefit obligation investments, 6:156–157 6:327–330 vega, 5:427–428, 430; 6:342 solutions to problems, 6:184–187 Monte Carlo simulation method, veil of ignorance, 3:218, 219 value creation for private equity, 6:330–333 Veld, Chris, 6:214 6:141–143 parametric method, 6:324–327 velocity, of Big Data, 1:241, 242 for venture capital transactions, extensions of, 6:336–338 Venezuela 6:144–145, 148–149, 166–177 formal definition,6: 319–321 economic growth, 1:626–628 real estate (see real estate valuation) market risk monitored with, 2:238, exchange rate management in, relative models, 4:25–26 260–262 1:594–595

Cumulative_Ind_L2 92 June 14, 2018 9:39 PM Index I-93

inflation, 1:588; 2:155 of future earnings, expected, W natural resources, 1:639, 640 3:148–149, 154 WACC. see weighted average cost of openness of economy, 1:680 implied, 5:429–433, 486 capital real GDP per capita, 1:622, 677 about, 5:377 WAL. see weighted average life Venture Capital and Private Equity and BSM model, 5:429–430 Walgreens, 4:115–117 Valuation Principles, 6:159 and options prices, 5:486 Wallison, P., 1:725n.31 venture capital investors, 4:559 in option trading, 5:431–433 Wal-Mart, 3:143, 204; 4:145 venture capital method of valuation, variability in, 5:430 warehouse properties, 6:11–12, 20 6:166–177 and volatility indexes, 5:430–431 Washington State, ESG risk exposures, basic method, 6:166–171 of income from equity REITs, 6:85 3:260 buyout vs., 6:144–145 interest rate wash trading, 6:544 determining investment amounts, about, 5:132–134 Waste Management Utility PLC, 2:313; 6:172–176 and binomial interest rate trees, 5:83, 5:167–172 estimating terminal value for, 6:171 221 waterfall, 6:155 issues with valuation, 6:148–149 callable bonds with, 5:137–140, Watson, 1:246 and risk, 6:171–172 142–145 weak stationary (term), 1:448n.11 venture capital transactions callable bonds without, 5:129–132 weather buyout vs., 6:148–149 estimating volatility with binomial and grains, 6:194 defined, 6:136 interest rate trees, 5:85 and livestock, 6:195 secondary, 6:150 and option-adjusted spread, and soft commodities, 6:195–196 stages of, 6:137 5:147–149 Weatherford International Ltd., 4:14 Verizon Communications, Inc., putable bonds with, 5:137–138, webpages, maintaining, 1:47 4:401–404, 458, 459 140–145 weighted average cost of capital Verizon Wireless, 3:133 putable bonds without, 5:130–131 (WACC) Vermont, ESG risk exposures, 3:260 in tests of bond analytics, 5:178 and company valuation, 1:301–303 vertical mergers, 3:280–281, 283–284 and value of bonds with embedded defined, 3:94 vested benefit obligation (VBO), options, 5:132–134 discounting free cash flows with,3: 307, 2:79n.5 and yield curve volatility, 5:50 308 vesting, for stock options, 2:108 and lack of marketability discounts, and present value of FCFF, 4:287 vesting date, 2:107 4:591–592 and required rate of return for private Viallet, Claude, 4:133n.4, 133n.5 measuring, 5:85 company, 4:571 VIEs. see variable interest entities and objective for strategies with as required return, 3:51 Vietnam options, 5:484 and returns, 4:90–92 coffee harvesting,6: 202 and options prices, 5:485–486 return to invested capital and, exchange rate management, 1:594 of real estate returns, 6:60–61 1:309–311 natural resources, 1:641 and real yields, 6:397 weighted average life (WAL), 5:37 real GDP per capita, 1:621, 677 refining spreads based on,5: 478–479 weighted harmonic mean, 4:457–458 Vinci SA, 4:231–232 and sensitivity risk measures, 6:349 Weil, Jonathan, 2:358 vintage year, private equity fund, and size of bid–offer spread,1: 543 welfare economics, fundamental 6:154 and straddles, 5:481, 482 theorem of, 1:705–706 violations of ethical standards in swaption valuation, 5:417 Wells Fargo & Company, 4:416 and changes in investment objectives, term structure of, 5:430 Wendy’s, 6:216 1:233–234 and VaR limitations, 6:335 WertR, 6:57 detection of, 1:119–120 and vega, 5:427 WertV, 6:57 dissociating from, 1:27–28 yield curve, 5:50–51 Western Digital Corporation, 4:435–436, lists of, 1:54 volatility indexes, 5:430–431 441–446 notification of known,1: 27 volatility regimes, 6:335 Western Europe, 1:624; 6:393. see also by others, participation or association volatility swaps, 6:228 specific countries with, 1:23 volatility term (equilibrium model), 5:40, Westport Innovations Inc., 1:299–301 reporting, 1:27 41 West Texas Intermediate (WTI) crude sanctions, 1:15 Volcker, Paul, 6:419 oil, 6:198, 209 supervisor’s response to, 1:121 Volkswagen AG, 4:452–453 Weyerhaeuser, 4:25 and trade allocation, 1:229–231 volume Wharf Holdings, 3:143 visibility, 4:210 of Big Data, 1:241, 242 whistleblowing, 1:108, 113 Viskanta, Tadas, 4:90n.53 trading (see trading volume) white box, 6:539 VIX. see Chicago Board Options volume and price approach, 4:112 White-corrected standard errors, Volatility Index volume-weighted average price (VWAP) 1:354n.42 Vodafone AirTouch, 3:280 algorithms, 6:534 white knight defense, 3:297–298 Vodafone Group PLC, 3:133 volunteers, compromising of CFA white squire defense, 3:298 volatility (σ) Institute integrity, 1:169 Whole Foods Market, 3:133 asset price, 1:70–72; 6:393 Volvo Group wholesale currency quotes, 1:544n.5 and assumptions of APT, 6:279–280 financial assets,2: 13–14 Williams, John Burr, 4:198, 209 in Black model, 5:412, 414 pension obligation estimates, 2:93, 94 Williams Amendment to the Securities in BSM model, 5:402, 404, 407 voting, proxy, 1:76–78; 3:248 Exchange Act (1934), 3:302–303 changes in, 5:226–227 voting provisions, supermajority, Wilson, Charles, 3:208 in construction of binomial interest 3:295 Windstream Corp., 4:402, 404, 458, 459 rate trees, 5:91–92 voting rights, 3:295 winner’s curse, 3:298, 318 with currency options, 5:410 VWAP algorithms. see volume-weighted winners minus losers (WML) risk factor, of exchange rate movements, 1:562 average price algorithms 6:284, 294–296

Cumulative_Ind_L2 93 June 14, 2018 9:39 PM I-94 Index

WM/Reuters FX rate, 6:544 forward points for, 1:552n.9 forward curve and movement in, won, Korean, 1:605 triangular arbitrage with, 1:544–545 5:19–20 work, misrepresentation of, 1:46 and monetary policy, 1:588 inflation and slope of,5: 15–16 working capital yen carry trades, 1:579–580 maturity structure of volatilities in, and FCFF, 4:291 yield(s) 5:50–51 and free cash flow,3: 307; 4:299–301 all risks, 6:30–31, 37 par, spot, and forward rates from, on pro forma cash flow statements, in BYPRP method, 4:88–89 5:128–129 4:178–179 cash flow,4: 392 and putable bonds, 5:136–137 projections of, 4:132–133 convenience, 6:216 “riding” or “rolling down,” 5:22–24 working capital accounts, 2:386 dividend for risky bonds, 5:145–146 working capital ratios, 2:386 calculation of, 4:436–439 in segmented markets theory, 5:35 working conditions, substandard, and comparables, 4:439 shape of, 5:47–50 3:214 continuous, 5:321 yield curve factor models, 5:45–54 World Bank, 2:215, 295 continuously compounded, 5:408 bonds’ exposure to yield curve WorldCom Corp., 5:216 and forecasted fundamentals, movement, 5:45–47 accounting scandal, 3:210 4:438–439 defined, 5:47 earnings quality, 2:328–329; 6:444 forward, 4:218 managing yield curve risks, 5:51–53 lack of transparency at, 3:246 in fundamental factor models, maturity structure of yield curve net income and operating cash flow, 6:289–290 volatilities, 5:50–51 2:317–318 and price-to-dividends, 4:392 shape of yield curve, 5:47–50 WPP Group PLC, 4:385 and stock splits, 3:132 yield curve risks, 5:51–53 W.R. Berkley Corp., 2:270 earnings, 4:391, 392 yield duration, 5:151 write-downs, 4:387n.12 effective, 6:41 yield rate, 6:33n.9 writing, after exam period, 1:168 of equity REITs vs. REOCs, 6:87 yield spread, nominal, 1:582 writing options, 5:384 equivalent, 6:40–41 yield to maturity (YTM) written material, brought into exam government bond, 6:413–415 in BYPRP method, 4:88 room, 1:167 real, 6:396–401 of corporate bonds, 5:224 WTI crude oil. see West Texas regulatory factors and, 6:423–424 and expected/realized return on bonds, Intermediate (WTI) crude oil of US Treasury bonds and S&P 500 5:17–19 Index, 1:286 and long-term government bonds, 4:65 X of zero-coupon bonds, 5:206 and par curve, 5:14 XMI Corporation, 4:41–42, 48 yield capitalization method of real estate and spot rates, 5:16–19 valuation, 6:33n.9 YPF Sociedad Anonima, 4:321 Y yield curve. see also spot curve (spot YTM. see yield to maturity Yahoo!, Inc., 2:142, 178–181 yield curve) yuan, Chinese, 1:579; 2:189, 190 Yahoo! Finance, 4:400 and arbitrage-free valuation, 5:76 Yang, Y., 4:449n.57 bonds’ exposure to movement in, Z Yardeni model, 4:408 5:45–47 zero-coupon bonds (zeros) Yasuda, Ayako, 6:145n.a and business cycles, 6:413–425 break-even inflation rates for,6: 410 years purchase, 6:30n.6 and callable bonds, 5:134–136 calculating forward rates on, 5:9–10 yen, Japanese default-free credit valuation adjustment for, correlation of exchange rate returns and break-even inflation rates, 5:204–208 for, 1:275–277 6:413–415 current forward curve and spot rates correlation of returns on Canadian and business cycles, 6:413–425 for, 5:21–22 dollar and, 1:283–284 and interest rates, 6:419–420 negative key rate durations for, 5:157 currency code, 1:605 investor expectations and slope of, pathwise valuation of, 5:98 and current account surplus, 1:579 6:417 and spot curve, 5:7 exchange rate with US dollar as in Japan, 6:424–425 swap curve in valuation of, 5:26–27 random walk, 1:462–464 level, slope, and curvature of, viewing securities as, 5:79 JPY/USD currency pair 6:415–417 zero-coupon yield curve, 5:15 bid–offer spread for,1: 542 and risk premium for default-free zero earnings, trailing P/E with, 4:390 equity market trends and exchange bonds, 6:420–423 Zeta (Z-score) analysis, 1:377 rates, 1:582 spread of, 6:417–419 Z-score, Altman bankruptcy prediction exchange rate as random walk, supply and demand factors model, 2:331–332 1:462–464 influencing, 6:423 Z-spread (zero spread), 5:30–31, 146

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