2025

Level 1 - Formula Sheet

M.M148202011.

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Quantitative Methods Effective Annual Rate (EAR)
Other Helpful Keys
Financial Calculator Keys STO = allows you to store values. 𝐸𝐴𝑅 = (1 + 𝑃𝑒𝑟𝑖𝑜𝑑𝑖𝑐 𝑟𝑎𝑡𝑒) − 1
N = Number of Compounding Periods RCL = allows you to recall stored values.
I/Y = Interest Rate per Year 𝑃𝑒𝑟𝑖𝑜𝑑𝑖𝑐 𝑟𝑎𝑡𝑒
*In whole numbers (i.e. 5% is entered as 5) 𝑆𝑡𝑎𝑡𝑒𝑑 𝐴𝑛𝑛𝑢𝑎𝑙 𝑅𝑎𝑡𝑒
FORMAT =
PV = Present Value 2nd + FORMAT allows you to change the number of
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝐶𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑖𝑛𝑔 𝑃𝑒𝑟𝑖𝑜𝑑𝑠 𝑂𝑛𝑒 𝑌𝑒𝑎𝑟
PMT = Payment decimal places displayed on the calculator. 𝑚 = 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝐶𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑖𝑛𝑔 𝑃𝑒𝑟𝑖𝑜𝑑𝑠 𝑂𝑛𝑒 𝑌𝑒𝑎𝑟
FV = Future Value
DATA & STAT EAR with continuous compounding
End-of-period payments Computes multiple values (mean, standard
*Used for regular annuity deviation, etc...) 𝐸𝐴𝑅 = 𝑒 − 1
2nd [BGN]
2nd Enter 2nd + DATA allows you to your input variables. Once
Display END inputted, exit the page, and click 2nd + STAT to find Relative Frequency
Relative Frequency
the computed outputs. Use the down arrow keys 𝐴𝑏𝑠𝑜𝑙𝑢𝑡𝑒 𝑓𝑟𝑒𝑞𝑢𝑒𝑛𝑐𝑦 𝑜𝑓 𝑒𝑎𝑐ℎ 𝑖𝑛𝑡𝑒𝑟𝑣𝑎𝑙
Beginning-of-period payments scroll through the various outputs. =
*Used for annuity due 𝑇𝑜𝑡𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑏𝑠𝑒𝑟𝑣𝑎𝑡𝑖𝑜𝑛𝑠
2nd [BGN]
2nd Enter
Future Value (FV) of a single cash flow Cumulative Relative Frequency
Display BGN Cumulative Relative Frequency
𝐹𝑉 = 𝑃𝑉 × (1 + 𝑟) = 𝐴𝑑𝑑 𝑡ℎ𝑒 𝑟𝑒𝑙𝑎𝑡𝑖𝑣𝑒 𝑓𝑟𝑒𝑞𝑢𝑒𝑛𝑐𝑖𝑒𝑠 𝑤ℎ𝑖𝑙𝑒 𝑝𝑟𝑜𝑐𝑒𝑒𝑑𝑖𝑛𝑔
𝑓𝑟𝑜𝑚 𝑡ℎ𝑒 𝑓𝑖𝑟𝑠𝑡 𝑡𝑜 𝑡ℎ𝑒 𝑙𝑎𝑠𝑡 𝑖𝑛𝑡𝑒𝑟𝑣𝑎𝑙
Cash Flow Worksheet
CFn = cash flow at time period n Present Value (PV) of a single cash flow
Using the arrow keys and the ENTER key to input Arithmetic Mean
cash flow amounts and their frequencies. 𝐹𝑉
𝑃𝑉 =
Solving for net present value: the NPV key will (1 + 𝑟) ∑ 𝑋
x=
prompt you to input a discount rate (I). Then 𝑁
pressing the down key and CPT to find the NPV.
Solving for the internal rate of return: use the IRR
Present Value (PV) of Perpetuity Median
𝐴
key and press CPT. 𝑃𝑉(𝑝𝑒𝑟𝑝𝑒𝑡𝑢𝑖𝑡𝑦) = In an ordered sample of n items:
𝑟
For even number of observations
𝐴 = 𝑃𝑎𝑦𝑚𝑒𝑛𝑡 𝑎𝑚𝑜𝑢𝑛𝑡 𝑛 𝑛+2
ICONV = Mean of values &
Used to calculate effective rates 2 2
Nom = Nominal Rate Future Value (FV) with continuous
M.M148202011. 𝑛+1
C/Y = Compounding Frequency For odd number of observations =
compounding 2
EFF-> CPT = outputs effective rate Mode
𝐹𝑉 = 𝑃𝑉𝑒 the most frequently occurring value in a distribution

QM (1/14) QM (2/14) QM (3/14)

Weighted Average Mean Population Variance Probability of A or B

(𝑥 − 𝜇) 𝑃(𝐴 𝑜𝑟 𝐵) = 𝑃(𝐴) + 𝑃(𝐵) − 𝑃(𝐴𝐵)

X = 𝑤 ×𝑋 𝜎 =
𝑁
Joint Probability of Two Events
Geometric Mean Sample Variance
𝑃(𝐴𝐵) = 𝑃(𝐴|𝐵) × 𝑃(𝐵)
(𝑥 − 𝑥̅ )
G= (1 + 𝑟 )(1 + 𝑟 ) … (1 + 𝑟 ) 𝑠 =
𝑛−1
Conditional Probability of A given B
with 𝑟 ≥ 0 for i = 1,2, … , n
Standard Deviation
Square root of the variance value 𝑃(𝐴𝐵)
Harmonic Mean 𝑃(𝐴|𝐵) =
𝑃(𝐵)
n
HM =
1 Sample Target Semi-Deviation
𝑋 Joint Probability of any number of
with X > 0 for i = 1,2, … , n
independent events
(𝑋 − 𝐵)
𝑠
𝑛−1 𝑃(𝐴𝐵𝐶𝐷𝐸) = 𝑃(𝐴) × 𝑃(𝐵) × 𝑃(𝐶) × 𝑃(𝐷)
Mean Absolute Deviation × 𝑃(𝐸)

MAD =
∑ |𝑥 − 𝑥̅ | where B is the target and n is the total number of
𝑛 sample observations. Total Probability Rule
Percentile Coefficient of Variation 𝑃(𝐴) = 𝑃(𝐴|𝐵 ) × 𝑃(𝐵 ) + 𝑃(𝐴|𝐵 ) × 𝑃(𝐵 )
y
Percentile = Ly = (n + 1) × + 𝑃(𝐴|𝐵 ) × 𝑃(𝐵 )
100
𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝐷𝑒𝑣𝑖𝑎𝑡𝑖𝑜𝑛 𝑜𝑓 𝑥 𝑠 + ⋯ 𝑃(𝐴|𝐵 ) × 𝑃(𝐵 )
𝐶𝑉 = =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑥 𝑥̅
Distribution
Quartile =
4
Skewness
Distribution Positive Skew; Mean > Median > Mode Expected Value of a Random Variable
Quintile =
5 Negative Skew; Mean < Median < Mode
Distribution 𝐸(𝑋) = 𝑃(𝑋 )𝑋 + 𝑃(𝑋 )𝑋 +. . . 𝑃(𝑋 )𝑋 = 𝑃(𝑋 )𝑋
Decile =
10 Probability Stated as Odds
M.M148202011.

𝑃(𝐸)
𝑂𝑑𝑑𝑠 𝑓𝑜𝑟 𝑎𝑛 𝐸𝑣𝑒𝑛𝑡 ′𝐸′ =
Range 1 − 𝑃(𝐸)
Variance of a Random Variable
1 − 𝑃(𝐸)
Range = Maximum value – Minimum value 𝑂𝑑𝑑𝑠 𝑎𝑔𝑎𝑖𝑛𝑠𝑡 𝑎𝑛 𝐸𝑣𝑒𝑛𝑡 ′𝐸′ =
𝑃(𝐸)
𝜎 (𝑋) = 𝑃(𝑋 ) [𝑋 − 𝐸(𝑋)]

QM (4/14) QM (5/14) QM (6/14)

Portfolio Expected Return Permutation Formula Standardizing a Random Normal Variable
# of ways that we can choose r objects from a total of n 𝑋−µ
𝑍=
objects, when order does matter. 𝜎
𝐸 𝑅 = 𝑤 ̇ 𝐸(𝑅 ̇ ) + 𝑤 ̇ 𝐸(𝑅 ̇ ) + 𝑤 𝐸(𝑅 ) … 𝑤 𝐸(𝑅 ̇ )
n!
nPr = approximately…
(n − r)!
Portfolio Variance 50% 𝑜𝑓 𝑎𝑙𝑙 𝑜𝑏𝑠𝑒𝑟𝑣𝑎𝑡𝑖𝑜𝑛𝑠 𝑓𝑎𝑙𝑙 𝑤𝑖𝑡ℎ𝑖𝑛 𝜇 ± (2 ∕ 3)𝜎
68% 𝑜𝑓 𝑎𝑙𝑙 𝑜𝑏𝑠𝑒𝑟𝑣𝑎𝑡𝑖𝑜𝑛𝑠 𝑓𝑎𝑙𝑙 𝑤𝑖𝑡ℎ𝑖𝑛 𝜇 ± 1𝜎
Probabilities for a Random Variable given 95% 𝑜𝑓 𝑎𝑙𝑙 𝑜𝑏𝑠𝑒𝑟𝑣𝑎𝑡𝑖𝑜𝑛𝑠 𝑓𝑎𝑙𝑙 𝑤𝑖𝑡ℎ𝑖𝑛 𝜇 ± 2𝜎
𝑣𝑎𝑟(𝑅 ) = 𝑤 𝜎 (𝑅 ) + 𝑤 𝜎 (𝑅 )
+ 2𝑤 𝑤 𝜎(𝑅 )𝜎(𝑅 )𝜌(𝑅 , 𝑅 )
its Cumulative Distribution Function 99% 𝑜𝑓 𝑎𝑙𝑙 𝑜𝑏𝑠𝑒𝑟𝑣𝑎𝑡𝑖𝑜𝑛𝑠 𝑓𝑎𝑙𝑙 𝑤𝑖𝑡ℎ𝑖𝑛 𝜇 ± 3𝜎
To find F(x), sum up, or cumulate, values of the
Covariance probability function for all outcomes less than or Safety-First Ratio
equal to x.
𝑐𝑜𝑣 𝑅 , 𝑅 = 𝐸 (𝑅 − 𝐸(𝑅 ̇ ) 𝑅 − 𝐸(𝑅 ̇ [𝐸 𝑅 − 𝑅 )]
𝑆𝐹𝑅𝑎𝑡𝑖𝑜 =
𝜎
Probabilities given the Discrete Uniform
Correlation Portfolio with the highest ratio is preferred
Function
𝑐𝑜𝑣 𝑅 , 𝑅 𝐶𝑢𝑚𝑢𝑙𝑎𝑡𝑖𝑣𝑒 𝑑𝑖𝑠𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑓𝑢𝑛𝑐𝑡𝑖𝑜𝑛 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑛𝑡ℎ 𝑜𝑢𝑡𝑐𝑜𝑚𝑒
Continuously Compounded Return
𝜌 𝑅 ,𝑅 =
𝜎(𝑅 )𝜎 𝑅 𝐹(𝑋𝑛) = 𝑛𝑃(𝑋)
from t = 0 to t = 1
𝑆
Bayes’ Formula Probability function for a Binomial 𝑟 , = ln( )
𝑆
Random Variable
𝑃(𝐸𝑣𝑒𝑛𝑡|𝐼𝑛𝑓𝑜𝑟𝑚𝑎𝑡𝑖𝑜𝑛) 𝑃𝑟𝑜𝑏𝑎𝑏𝑖𝑙𝑖𝑡𝑦 𝑜𝑓𝑥 𝑠𝑢𝑐𝑐𝑒𝑠𝑠𝑒𝑠 𝑖𝑛 𝑛 𝑡𝑟𝑖𝑎𝑙𝑠
n! Degrees of Freedom of Student’s
= × 𝑝 (1 − 𝑝)
𝑃(𝐼𝑛𝑓𝑜𝑟𝑚𝑎𝑡𝑖𝑜𝑛|𝐸𝑣𝑒𝑛𝑡) (n − x)! x! T-distribution
= × 𝑃(𝐸𝑣𝑒𝑛𝑡)
𝑃(𝐼𝑛𝑓𝑜𝑟𝑚𝑎𝑡𝑖𝑜𝑛)
Expected Value and Variance of a 𝑑𝑓 = 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠𝑎𝑚𝑝𝑙𝑒 𝑜𝑏𝑠𝑒𝑟𝑣𝑎𝑡𝑖𝑜𝑛𝑠 − 1 = 𝑛 − 1
Binomial Random Variable
Multiplication Rule of Counting Standard Error of the Sample Mean
n! = n(n − 1)(n − 2)(n − 3) … 1 𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑋 = nP (σ known)
𝑉𝑎𝑟𝑖𝑎𝑛𝑐𝑒 𝑜𝑓 𝑋 = nP(1 − p)

Multinomial Formula for Labeling 𝜎 =

σ

Problems Continuous Uniform Distribution √n

n!
n! = 1 M.M148202011. (σ unknown)
n1! n2! … nk! 𝑓(𝑥) = 𝑓𝑜𝑟 𝑎 < 𝑥 < 𝑏 𝑜𝑟 0
𝑏−𝑎
s
Combination Formula 𝑥−𝑎 𝑠 =
# of ways we can choose r objects from a total of n objects, 𝐹(𝑥) = 𝑓𝑜𝑟 𝑎 < 𝑥 < 𝑏 √n
𝑏−𝑎
when order does not matter.
n!
nCr =
(n − r)! r!

QM (7/14) QM (8/14) QM (9/14)

Normally Distributed Population with Test of the Difference in Means Test of a Correlation
Known Variance (Equal Variances)
σ (𝑋 − 𝑋 ) − (𝜇 − 𝜇 )
𝐶𝑜𝑛𝑓𝑖𝑑𝑒𝑛𝑐𝑒 𝑖𝑛𝑡𝑒𝑟𝑣𝑎𝑙𝑠 = 𝑋 ± 𝑧 × 𝑟√𝑛 − 2
/
√n 𝑡= 𝑡=
𝑧 / 𝑠 𝑠 √1 − 𝑟
≅ 1.65 𝑓𝑜𝑟 90% 𝐶𝑜𝑛𝑓𝑖𝑑𝑒𝑛𝑐𝑒 𝐼𝑛𝑡𝑒𝑟𝑣𝑎𝑙, 5% 𝑖𝑛 𝑒𝑎𝑐ℎ 𝑡𝑎𝑖𝑙 +
𝑛 𝑛
𝑧 / Regression Coefficient
= 1.96 𝑓𝑜𝑟 95% 𝐶𝑜𝑛𝑓𝑖𝑑𝑒𝑛𝑐𝑒 𝐼𝑛𝑡𝑒𝑟𝑣𝑎𝑙, 2.5% 𝑖𝑛 𝑒𝑎𝑐ℎ 𝑡𝑎𝑖𝑙
𝑧 / (𝑛 − 1)𝑠 + (𝑛 − 1)𝑠
𝑤ℎ𝑒𝑟𝑒 𝑠 = 𝑌= 𝑏 + 𝑏 𝑋 + 𝜀
≅ 2.58 𝑓𝑜𝑟 99% 𝐶𝑜𝑛𝑓𝑖𝑑𝑒𝑛𝑐𝑒 𝐼𝑛𝑡𝑒𝑟𝑣𝑎𝑙, 0.5% 𝑖𝑛 𝑒𝑎𝑐ℎ 𝑡𝑎𝑖𝑙 𝑛 +𝑛 −2

Large sample, Population Variance Test of the Difference in Means Assumptions of Simple Linear Regression
Linearity: a linear relation exists between the
Unknown (Unequal Variances)
s dependent variable and the independent variable.
𝐶𝑜𝑛𝑓𝑖𝑑𝑒𝑛𝑐𝑒 𝑖𝑛𝑡𝑒𝑟𝑣𝑎𝑙𝑠 = 𝑋 ± 𝑧 / × Homoscedasticity: variance of the error term is the
√n (𝑋 − 𝑋 ) − (𝜇 − 𝜇 )
𝑡= same for all observations.
𝑠 𝑠 Independence: the error term is uncorrelated
Small sample, Population Variance + across observations
𝑛 𝑛
Unknown Normality: the error term is normally distributed
s
𝐶𝑜𝑛𝑓𝑖𝑑𝑒𝑛𝑐𝑒 𝑖𝑛𝑡𝑒𝑟𝑣𝑎𝑙𝑠 = 𝑋 ± 𝑡 / × 𝑠 𝑠
√n + TSS = SSE + RSS
𝑛 𝑛
𝑤ℎ𝑒𝑟𝑒 𝑑𝑓 =
(𝑠 ⁄𝑛 ) (𝑠 ⁄𝑛 )
Type I and II Errors 𝑛
+
𝑛
Type I – Reject H0 when true (𝑌 − 𝑌) = (𝑌 − 𝑌 ) + (𝑌 − 𝑌)
Type II – Accept H0 when false
Test of Mean of Differences
where;
Power of a Test
1 − 𝑃(𝑇𝑦𝑝𝑒 𝐼𝐼 𝑒𝑟𝑟𝑜𝑟) 𝑑̅ − 𝜇 1
𝑡= 𝑤ℎ𝑒𝑟𝑒 𝑑̅ = 𝑑 TSS: total sum of squares (total variance)
𝑠 𝑛
(𝑌 − 𝑌 )
Test of a Single Mean
Test of a Single Variance SSE: sum of the squares errors (unexplained
𝑋−𝜇 𝑋−𝜇 variance)
𝑧= 𝜎 or 𝑡 = 𝑠 (𝑛 − 1)𝑠 2
𝑛 𝜒 = (𝑌𝑖 − 𝑌𝑖 )
√ √𝑛 𝜎 M.M148202011.

Test of the differences in Variances RSS: regression sum of squares (explained

variance)
2
𝑠 (𝑌𝑖 − 𝑌)
𝐹=
𝑠

QM (10/14) QM (11/14) QM (12/14)

Coefficient of Determination Test of the Intercept Coefficient
𝑡 = Breakeven and Shutdown Points
𝑒𝑥𝑝𝑙𝑎𝑖𝑛𝑒𝑑 𝑣𝑎𝑟𝑖𝑎𝑛𝑐𝑒 Breakeven Point: Total Revenue = Total Cost
𝑅 = Shutdown Point (Short-Run): Total Revenue < Total
𝑡𝑜𝑡𝑎𝑙 𝑣𝑎𝑟𝑖𝑎𝑛𝑐𝑒 𝑠 +∑ Variable Cost
( )
𝑇𝑆𝑆 − 𝑆𝑆𝐸 Shutdown Point (Long-Run): Total Revenue < Total
𝑅 = Cost
𝑇𝑆𝑆 Prediction Interval
Firm Structures
Standard Error of Estimate 𝑌±𝑡 ∙𝑠 Perfect Competition: Numerous firms; low barriers
to entry; homogenous products; no pricing power;
Monopolistic Competition: Numerous firms; low
∑ (𝑌 − 𝑌 ) 1 (𝑋 − 𝑋) barriers to entry; differentiated products; some
𝑠 = 𝑠 = 𝑠 1+ +
𝑛−2 𝑛 ∑ (𝑋 − 𝑋 ) pricing power
Oligopoly: Few firms; high barriers to entry;
products can be homogeneous or differentiated;
F-Statistic
Economics significant pricing power
Monopoly: Single firm; high barriers to entry; high
𝑅𝑆𝑆 Price Elasticity of Demand pricing power
𝑘 𝑀𝑆𝑅 %∆𝑄
=
𝑃𝑜
×
∆𝑄
𝐹= = %∆𝑃 𝑄𝑜 ∆𝑃
𝑆𝑆𝐸 𝑀𝑆𝐸 ∆𝑄 Profit Maximization Point (All Firms)
𝑛 − (𝑘 + 1) 𝑖𝑠 𝑡ℎ𝑒 𝑠𝑙𝑜𝑝𝑒 𝑐𝑜𝑒𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑡
∆𝑃 Marginal Revenue = Marginal Cost
Demand Elastic if absolute value > 1
a significant F-statistic implies the Demand Inelastic if absolute value < 1
Gross Domestic Product (GDP)
regression as a whole is significant. GDP (Expenditure Approach) = Consumption +
Income Elasticity of Demand Investment + Government Spending + Net Exports
%∆𝑄 𝐼𝑜 ∆𝑄
where; %∆𝐼
=
𝑄𝑜
×
∆𝐼
K is the number of slope coefficients ∆𝑄 GDP (Income Approach) = Household Income +
𝑖𝑠 𝑡ℎ𝑒 𝑠𝑙𝑜𝑝𝑒 𝑐𝑜𝑒𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑡 Business Income + Government Income
∆𝐼
Normal good if positive
Test of the Slope Coefficient Inferior good if negative GDP (Value-Added Approach): Sum Incremental
Value-Added at each Stage of Production
𝑏 −𝑏 Cross Elasticity of Demand Nominal and Real GDP
𝑡= %∆𝑄 𝑃𝑐 ∆𝑄 M.M148202011. 𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃 = 𝑃 × 𝑄
𝑠 %∆𝑃𝑐
=
𝑄𝑜
×
∆𝑃𝑐 𝑅𝑒𝑎𝑙 𝐺𝐷𝑃 = 𝑃 × 𝑄
𝑆 ∆𝑄 b = base year price
𝑖𝑠 𝑡ℎ𝑒 𝑠𝑙𝑜𝑝𝑒 𝑐𝑜𝑒𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑡
𝑠 ∆𝑃𝑐
𝑃𝑐 = 𝑃𝑟𝑖𝑐𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑟𝑒𝑙𝑎𝑡𝑒𝑑 𝑔𝑜𝑜𝑑
∑ (𝑋 − 𝑋) Substitute good if positive
Complementary good if negative

QM (13/14) QM (14/14) ECON (1/7) ECON (2/7)

GDP Deflator Growth Accounting Equation Monetary Policy
𝐺𝐷𝑃 𝐷𝑒𝑓𝑙𝑎𝑡𝑜𝑟 𝐺𝑟𝑜𝑤𝑡ℎ 𝑖𝑛 𝑃𝑜𝑡𝑒𝑛𝑡𝑖𝑎𝑙 𝐺𝐷𝑃 Monetary Policy: central bank activities that
Value of current year output at current year prices = 𝐺𝑟𝑜𝑤𝑡ℎ 𝑖𝑛 𝑡𝑒𝑐ℎ𝑛𝑜𝑙𝑜𝑔𝑦 influence the supply of money and credit;
=
Value of current year output at base year prices + 𝑤 (𝐺𝑟𝑜𝑤𝑡ℎ 𝑖𝑛 𝑙𝑎𝑏𝑜𝑟)
expansionary when policy rate < neutral interest
× 100 + 𝑤 (𝐺𝑟𝑜𝑤𝑡ℎ 𝑖𝑛 𝑐𝑎𝑝𝑖𝑡𝑎𝑙)
rate; contractionary when policy rate > neutral
interest rate
National income, Personal income & Business Cycle Phases
Personal disposable Income Trough (Lowest Point); Expansion; Peak (Highest
Central Bank Objectives: Full Employment and Price
National income Stability
Point); Contraction 1
= 𝐶𝑜𝑚𝑝𝑒𝑛𝑠𝑎𝑡𝑖𝑜𝑛 𝑜𝑓 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒𝑠
𝑀𝑜𝑛𝑒𝑦 𝑀𝑢𝑙𝑡𝑖𝑝𝑙𝑖𝑒𝑟 =
+ 𝐶𝑜𝑟𝑝𝑜𝑟𝑎𝑡𝑒 𝑎𝑛𝑑 𝑔𝑜𝑣𝑒𝑟𝑛𝑚𝑒𝑛𝑡 𝑒𝑛𝑡𝑒𝑟𝑝𝑟𝑖𝑠𝑒 𝑝𝑟𝑜𝑓𝑖𝑡𝑠 𝑏𝑒𝑓𝑜𝑟𝑒 𝑡𝑎𝑥𝑒𝑠 Reserve Requirement
+ 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 Economic Indicators
+ 𝑢𝑛𝑖𝑛𝑐𝑜𝑟𝑝𝑜𝑟𝑎𝑡𝑒𝑑 𝑏𝑢𝑠𝑖𝑛𝑒𝑠𝑠 𝑛𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 + 𝑟𝑒𝑛𝑡 Leading: Turn ahead of peaks and troughs of
+ 𝑖𝑛𝑑𝑖𝑟𝑒𝑐𝑡 𝑏𝑢𝑠𝑖𝑛𝑒𝑠𝑠 𝑡𝑎𝑥𝑒𝑠 𝑙𝑒𝑠𝑠 𝑠𝑢𝑏𝑠𝑖𝑑𝑖𝑒𝑠
business cycle (S&P500, manufacturing new orders, Fiscal Policy
Personal Income building permits) Fiscal Policy: government decisions about taxation
= 𝑁𝑎𝑡𝑖𝑜𝑛𝑎𝑙 𝐼𝑛𝑐𝑜𝑚𝑒 − 𝐼𝑛𝑑𝑖𝑟𝑒𝑐𝑡 𝑏𝑢𝑠𝑖𝑛𝑒𝑠𝑠 𝑡𝑎𝑥𝑒𝑠 Coincidental: Turns coincide with phase of business and spending; expansionary when government
− 𝐶𝑜𝑟𝑝𝑜𝑟𝑎𝑡𝑒 𝑖𝑛𝑐𝑜𝑚𝑒 𝑡𝑎𝑥𝑒𝑠 cycle (Employee Payrolls, Manufacturing Sales, budget balance decreasing; contractionary when
− 𝑈𝑛𝑑𝑖𝑠𝑡𝑟𝑖𝑏𝑢𝑡𝑒𝑑 𝑐𝑜𝑟𝑝𝑜𝑟𝑎𝑡𝑒 𝑝𝑟𝑜𝑓𝑖𝑡 Personal Income) government budget balance increasing
+ 𝑇𝑟𝑎𝑛𝑠𝑓𝑒𝑟 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠 Lagging: Turns after the business cycle movements 1
𝐹𝑖𝑠𝑐𝑎𝑙 𝑀𝑢𝑙𝑡𝑖𝑝𝑙𝑖𝑒𝑟 =
(Average Prime Rate, Inventory-Sales Ratio, 1 − MPC(1 − t)
𝑃𝑒𝑟𝑠𝑜𝑛𝑎𝑙 𝑑𝑖𝑠𝑝𝑜𝑠𝑎𝑏𝑙𝑒 𝑖𝑛𝑐𝑜𝑚𝑒 = 𝑝𝑒𝑟𝑠𝑜𝑛𝑎𝑙 𝑖𝑛𝑐𝑜𝑚𝑒 − Duration of Unemployment)
𝑝𝑒𝑟𝑠𝑜𝑛𝑎𝑙 𝑡𝑎𝑥𝑒𝑠 Equation of Exchange
Types of Unemployment MxV=PxY
Aggregate Demand Frictional: Unemployment from time lag to find new
Shifts due to changes in household wealth, job Gross Domestic Product vs Gross National
consumer and business expectations, capacity Cyclical: Unemployment due to business cycle
utilization, monetary policy, fiscal policy, exchange fluctuations
Product
Structural: Unemployment due to lack of skills for GDP: Final value of goods and services produced
rates and foreign GDP
job openings or distance factors within a country/economy
GNP: Final value of goods and services produced by
Aggregate Supply citizens of a country/economy
Short-Run Shifts: changes in changes in potential Consumer Price Index (CPI)
GDP, nominal wages, input prices, future price Cost of basket at current prices
𝐶𝑃𝐼 = × 100
expectations, business taxes and subsidies and Cost of basket at base period prices
exchange rate
M.M148202011.

Long-Run Shifts: changes in labor supply, supply of

physical and human capital and productivity and
technology

ECON (3/7) ECON (4/7) ECON (5/7)

Regional Trading Agreements (RTA) Change in Real Exchange Rate Financial Statement
Free trade areas (FTA): Trade barriers removed 𝑑
among members; Countries still have own policies
∆𝑅𝑒𝑎𝑙 𝑒𝑥𝑐ℎ𝑎𝑛𝑔𝑒 𝑟𝑎𝑡𝑒
𝑓
ΔP
Analysis
against non-members ΔS 1+ Accounting Equation (Balance Sheet)
P
Customs Union: FTA with common policy against = 1+ ×⎛ ⎞−1
Assets = Liabilities + Owners’ Equity
S ΔP
non-members 1+
P ⎠ Assets = Liabilities + Contributed Capital + Ending
⎝
Common Market: Customs union with free Retained Earnings
movement of factors of production among Assets = Liabilities + Contributed Capital + Beginning
members Retained Earnings + Revenues – Expenses -
Economic Union: All aspects of common market Dividends
with common economic institutions and economic Forward Discount/Premium Income Statement Equation
policy 𝐹𝑜𝑟𝑤𝑎𝑟𝑑 𝑃𝑟𝑒𝑚𝑖𝑢𝑚 𝑜𝑟 𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡
Revenues + Other Income – Expenses = Net Income
Monetary Union: If members of economic union 𝐹𝑜𝑟𝑤𝑎𝑟𝑑 𝑟𝑎𝑡𝑒
𝑑
adopt a common currency 𝑓
= −1
𝑆𝑝𝑜𝑡 𝑟𝑎𝑡𝑒
𝑑 Financial Statement Analysis Framework
𝑓
1) Articulate the purpose and context of the
Balance of Payments analysis.
Current Account: measures flow of goods and No-Arbitrage Forward Exchange Rate 2) Collect input data.
services (Merchandise Trade, Services, Income 𝑑 3) Process data.
Receipts, Unilateral Transfers) 𝐹𝑜𝑟𝑤𝑎𝑟𝑑 𝑅𝑎𝑡𝑒 ( )
𝑓 4) Analyze/interpret the processed data
Capital Account: measures transfers of capital 𝑑
5) Develop and communicate conclusions and
= 𝑆𝑝𝑜𝑡 𝑟𝑎𝑡𝑒
(Capital Transfers, Sales and Purchases of Non- 𝑓 recommendations
Produced, Non-Financial Assets) 𝐴𝑐𝑡𝑢𝑎𝑙
(1 + 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒 𝑑𝑜𝑚𝑒𝑠𝑡𝑖𝑐 ×
360
) 6) Follow-Up
Financial Account: records investment flows ×
𝐴𝑐𝑡𝑢𝑎𝑙
(Financial Assets Abroad, Foreign-Owned Financial (1 + 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒 𝑓𝑜𝑟𝑒𝑖𝑔𝑛 × )
360
Assets) Revenue Recognition Principles
Requirements: 1) Risk and reward of ownership is
transferred 2) Collectability is probable
Real Exchange Rate Exchange Rate Regimes
𝑑 Monetary Union: Members adopt common
𝑅𝑒𝑎𝑙 𝑒𝑥𝑐ℎ𝑎𝑛𝑔𝑒 𝑟𝑎𝑡𝑒 Five-Step Revenue Recognition Model
𝑓 currency
d 𝐶𝑃𝐼 𝑓𝑜𝑟𝑒𝑖𝑔𝑛 1. Identify the contract(s) with a customer
= Spot rate × Dollarization: Members adopt foreign currency 2. Identify the separate or distinct performance
f 𝐶𝑃𝐼 𝑑𝑜𝑚𝑒𝑠𝑡𝑖𝑐
Fixed Parity: ±1 percent around the parity level obligations in the contract
Target Zone: up to ±2 percent around the parity 3. Determine and allocate the transaction price to
Change in Nominal Exchange Rate level the performance obligations in the contract
𝑑 Crawling Peg: PeggedM.M148202011.
exchange rate periodically
∆𝑒𝑥𝑐ℎ𝑎𝑛𝑔𝑒 𝑟𝑎𝑡𝑒 4. Recognize revenue when (or as) the entity
𝑓 adjusted
d satisfies a performance obligation
Spot rate
f
at the end of the period Managed Float: Central Bank acts to influence
= −1
d exchange rate without a specific target Expense Recognition Principles
Spot rate at the beginning of the period
f Independent Float: Exchange rate freely
Matching principle – match expenses with the
determinedly by the market
revenues they help generate

ECON (6/7) ECON (7/7) FSA (1/10)

Basic Earnings Per Share Financial Asset Measurement Activity Ratios
Held-for-trading: measured at fair value on B/S, Receivables Turnover =
Revenue
𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 − 𝑃𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 Dividends/Interest and Unrealized/Realized PnL on Average receivables
Basic EPS =
𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 I/S
Number of days in period
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝐶𝑜𝑚𝑚𝑜𝑛 𝑆ℎ𝑎𝑟𝑒𝑠 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 Available-for-sale: measured at fair value on B/S; Days of sales outstanding =
Receivables turnover
realized PnL I/S; unrealized PnL OCI
Diluted Earnings Per Share Held-to-maturity: Amortized cost on B/S; Cost of sales or cost of goods sold
Inventory turnover =
Coupons/Dividends through I/S; realized Pnl I/S Average inventory
𝐷𝑖𝑙𝑢𝑡𝑒𝑑 𝐸𝑃𝑆 Number of days in period
=
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 IFRS vs US GAAP Days of inventory on hand =
Inventory turnover
𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 IFRS
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝐶𝑜𝑚𝑚𝑜𝑛 𝑆ℎ𝑎𝑟𝑒𝑠 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔
Interest Received: Operating or Investing Purchases
+ 𝑁𝑒𝑤 𝐶𝑜𝑚𝑚𝑜𝑛 𝑆ℎ𝑎𝑟𝑒𝑠 𝐼𝑠𝑠𝑢𝑒𝑑 𝑎𝑡 𝐶𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 Payables turnover =
Interest Paid: Operating or Financing Average trade payables
*if-converted method Dividends Received: Operating or Investing
Dividends Paid: Operating or Financing Number of days in period
Number of days of payables =
Payables turnover
𝐷𝑖𝑙𝑢𝑡𝑒𝑑 𝐸𝑃𝑆 US GAAP Revenue
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 + 𝐶𝑜𝑛𝑣𝑒𝑟𝑡𝑖𝑏𝑙𝑒 𝐷𝑒𝑏𝑡 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 (1 − 𝑡) Interest Received: Operating Fixed asset turnover =
Average net fixed assets
=
−𝑃𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 Interest Paid: Operating
𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝐶𝑜𝑚𝑚𝑜𝑛 𝑆ℎ𝑎𝑟𝑒𝑠 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 Dividends Received: Operating Revenue
+𝐴𝑑𝑑𝑖𝑡𝑖𝑜𝑛𝑎𝑙 𝐶𝑜𝑚𝑚𝑜𝑛 𝑆ℎ𝑎𝑟𝑒𝑠 𝑡ℎ𝑎𝑡 𝑤𝑜𝑢𝑙𝑑 Total asset turnover =
Dividends Paid: Financing Average total assets
ℎ𝑎𝑣𝑒 𝑏𝑒𝑒𝑛 𝑖𝑠𝑠𝑢𝑒𝑑 𝑎𝑡 𝐶𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛

*if-converted method with convertible debt Direct Method vs Indirect Method

Direct Method: disclose cash inflows by source and Liquidity Ratios
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠
𝐷𝑖𝑙𝑢𝑡𝑒𝑑 𝐸𝑃𝑆 cash outflows by use 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑟𝑎𝑡𝑖𝑜 =
(𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 − 𝑃𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠) 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
=
𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝐶𝑜𝑚𝑚𝑜𝑛 𝑆ℎ𝑎𝑟𝑒𝑠 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 Indirect Method: reconcile change in cash from net
⎡ + ⎤ income with non-cash items and net changes in
⎢ ⎥ 𝑄𝑢𝑖𝑐𝑘 𝑟𝑎𝑡𝑖𝑜
⎢ 𝑁𝑒𝑤 𝑠ℎ𝑎𝑟𝑒𝑠 𝑡ℎ𝑎𝑡 𝑤𝑜𝑢𝑙𝑑 𝑏𝑒 𝑖𝑠𝑠𝑢𝑒𝑑 𝑓𝑟𝑜𝑚 𝑂𝑝𝑡𝑖𝑜𝑛 𝐸𝑥𝑒𝑟𝑐𝑖𝑠𝑒 − ⎥ working capital 𝐶𝑎𝑠ℎ + 𝑆ℎ𝑜𝑟𝑡 𝑡𝑒𝑟𝑚 𝑀𝑎𝑟𝑘𝑒𝑡𝑎𝑏𝑙𝑒 𝑠𝑒𝑐𝑢𝑟𝑖𝑡𝑖𝑒𝑠 + 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠
⎢ 𝑆ℎ𝑎𝑟𝑒𝑠 𝑡ℎ𝑎𝑡 𝑐𝑜𝑢𝑙𝑑 𝑏𝑒 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑑 𝑤𝑖𝑡ℎ 𝑐𝑎𝑠ℎ 𝑝𝑟𝑜𝑐𝑒𝑒𝑑𝑠 𝑓𝑟𝑜𝑚 𝑒𝑥𝑒𝑟𝑐𝑖𝑠𝑒 ⎥ =
⎣ × (𝑃𝑟𝑜𝑝𝑜𝑟𝑡𝑖𝑜𝑛 𝑜𝑓 𝑌𝑒𝑎𝑟 𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝐼𝑛𝑠𝑡𝑟𝑢𝑚𝑒𝑛𝑡𝑠 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔) ⎦ 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
Free Cash Flow to the Firm (FCFF)
*Treasury stock method 𝐹𝐶𝐹𝐹 𝐶𝑎𝑠ℎ 𝑟𝑎𝑡𝑖𝑜
= NI + NCC + Int(1 – Tax rate)– FCInv – WCInv 𝐶𝑎𝑠ℎ + 𝑆ℎ𝑜𝑟𝑡 𝑡𝑒𝑟𝑚 𝑀𝑎𝑟𝑘𝑒𝑡𝑎𝑏𝑙𝑒 𝑠𝑒𝑐𝑢𝑟𝑖𝑡𝑖𝑒𝑠
=
Comprehensive Income 𝐹𝐶𝐹𝐹 = CFO + Int(1 – Tax rate)– FCInv 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
Comprehensive Income = Net Income + Other M.M148202011.
Defensive interval ratio
Comprehensive Income Free Cash Flow to Equity (FCFE) 𝐶𝑎𝑠ℎ + 𝑆ℎ𝑜𝑟𝑡 𝑡𝑒𝑟𝑚 𝑀𝑎𝑟𝑘𝑒𝑡𝑎𝑏𝑙𝑒 𝑠𝑒𝑐𝑢𝑟𝑖𝑡𝑖𝑒𝑠 + 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠
𝐹𝐶𝐹𝐸 = 𝐶𝐹𝑂 – 𝐹𝐶𝐼𝑛𝑣 + 𝑁𝑒𝑡 𝑏𝑜𝑟𝑟𝑜𝑤𝑖𝑛𝑔 =
Daily cash expenditures
𝐹𝐶𝐹𝐸 = 𝑁𝐼 + 𝑁𝐶𝐶 – 𝐶𝑎𝑝𝐸𝑥 – 𝛥𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝐶𝑎𝑝𝑖𝑡𝑎𝑙
+ 𝑁𝑒𝑡 𝐵𝑜𝑟𝑟𝑜𝑤𝑖𝑛𝑔 𝐶𝑎𝑠ℎ 𝑐𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑐𝑦𝑐𝑙𝑒
= Days of Inventory on hand
+ Day Sales Outstanding – Number of days of payables

FSA (2/10) FSA (3/10) FSA (4/10)

Solvency Ratios Du Pont Analysis LIFO to FIFO Conversion
𝑇𝑜𝑡𝑎𝑙 𝑑𝑒𝑏𝑡 ROE = ROA × Leverage 𝐹𝐼𝐹𝑂 𝐶𝑂𝐺𝑆 = 𝐿𝐼𝐹𝑂 𝐶𝑂𝐺𝑆 − (𝐸𝑛𝑑𝑖𝑛𝑔 𝐿𝐼𝐹𝑂 𝑟𝑒𝑠𝑒𝑟𝑣𝑒
𝐷𝑒𝑏𝑡 𝑡𝑜 𝐴𝑠𝑠𝑒𝑡𝑠 =
𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 − 𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝐿𝐼𝐹𝑂 𝑟𝑒𝑠𝑒𝑟𝑣𝑒)
Traditional Dupont
ROE = Net profit margin × Total asset turnover 𝐹𝐼𝐹𝑂 𝐸𝑛𝑑𝑖𝑛𝑔 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
𝑇𝑜𝑡𝑎𝑙 𝑑𝑒𝑏𝑡 × Leverage = 𝐿𝐼𝐹𝑂 𝐸𝑛𝑑𝑖𝑛𝑔 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
𝐷𝑒𝑏𝑡 𝑡𝑜 𝑒𝑞𝑢𝑖𝑡𝑦 =
𝑇𝑜𝑡𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦 + 𝐿𝐼𝐹𝑂 𝑟𝑒𝑠𝑒𝑟𝑣𝑒
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 𝑆𝑎𝑙𝑒𝑠 𝐴𝑠𝑠𝑒𝑡𝑠
ROE = × ×
𝑆𝑎𝑙𝑒𝑠 𝐴𝑠𝑠𝑒𝑡𝑠 𝐸𝑞𝑢𝑖𝑡𝑦 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒(𝐹𝐼𝐹𝑂) = 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒(𝐿𝐼𝐹𝑂)
𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠
𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝑙𝑒𝑣𝑒𝑟𝑎𝑔𝑒 = + (𝐸𝑛𝑑𝑖𝑛𝑔 𝐿𝐼𝐹𝑂 𝑟𝑒𝑠𝑒𝑟𝑣𝑒
𝑇𝑜𝑡𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦 Extended Dupont − 𝐵𝑒𝑔𝑖𝑛𝑖𝑛𝑔 𝐿𝐼𝐹𝑂 𝑟𝑒𝑠𝑒𝑟𝑣𝑒) × (1
ROE = Tax burden × Interest burden × EBIT margin − 𝑡𝑎𝑥 𝑟𝑎𝑡𝑒)
Coverage Ratios × Total asset turnover × Leverage
𝐸𝐵𝐼𝑇
Interest coverage = 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 𝐸𝐵𝑇 𝐸𝐵𝐼𝑇 LIFO liquidation occurs when older LIFO inventory is
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠 ROE = × ×
𝐸𝐵𝑇 𝐸𝐵𝐼𝑇 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 sold (Ending LIFO reserve < Beginning LIFO reserve)
𝑅𝑒𝑣𝑒𝑛𝑢𝑒 𝐴𝑠𝑠𝑒𝑡𝑠
× ×
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 𝐸𝑞𝑢𝑖𝑡𝑦
Fixed charge coverage
𝐸𝐵𝐼𝑇 + 𝐿𝑒𝑎𝑠𝑒 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠
LIFO vs FIFO
= LIFO is only allowed under US GAAP
Interest payments + Lease payments Dividend Related Ratios Under a period of rising prices and stable or
Dividends payout ratio
Common share dividends increasing inventory:
=
Net income attributable to common shares LIFO leads to:
Profitability Ratios Higher COGS
Retention rate Lower Gross Profit
Net income attributable to common shares Lower Ending Inventory
𝐺𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡 – Common share dividends
𝐺𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡 𝑚𝑎𝑟𝑔𝑖𝑛 = = Higher CFO from tax savings
𝑅𝑒𝑣𝑒𝑛𝑢𝑒 Net income attributable to common shares
𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 FIFO leads to:
𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 𝑚𝑎𝑟𝑔𝑖𝑛 =
𝑅𝑒𝑣𝑒𝑛𝑢𝑒 Sustainable growth rate (g) = 𝑏 × ROE
Lower COGS
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑖𝑛𝑐𝑜𝑚𝑒 Higher Gross Profit
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑝𝑟𝑜𝑓𝑖𝑡 𝑚𝑎𝑟𝑔𝑖𝑛 =
𝑅𝑒𝑣𝑒𝑛𝑢𝑒 Weighted Average Cost per Unit Higher Ending Inventory
𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 Lower CFO higher relative taxes
𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑎𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑓𝑜𝑟 𝑠𝑎𝑙𝑒
ROA = =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑢𝑛𝑖𝑡𝑠 𝑎𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑓𝑜𝑟 𝑠𝑎𝑙𝑒
Inventory Measure
𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 𝐶𝑂𝐺𝑆 𝑢𝑠𝑖𝑛𝑔 𝑤𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑐𝑜𝑠𝑡
M.M148202011.
IFRS: Lower of Cost and Net Realisable Value (NRV)
ROE =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦 = 𝑈𝑛𝑖𝑡𝑠 𝑠𝑜𝑙𝑑 × 𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡

Cost of Goods Sold (FIFO/LIFO) US GAAP: Lower of Cost, Market Value or Net
𝐶𝑂𝐺𝑆 = 𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 + 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠 Realisable Value (NRV)
− 𝐸𝑛𝑑𝑖𝑛𝑔 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦

FSA (5/10) FSA (6/10) FSA (7/10)

𝑁𝑅𝑉 = 𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑠𝑎𝑙𝑒𝑠 𝑝𝑟𝑖𝑐𝑒 Deferred Tax Asset (DTA) Leasing vs Purchasing
− 𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑠𝑒𝑙𝑙𝑖𝑛𝑔 𝑐𝑜𝑠𝑡𝑠
− 𝐶𝑜𝑚𝑝𝑙𝑒𝑡𝑖𝑜𝑛 𝑐𝑜𝑠𝑡𝑠
Arise when excess amount paid for income taxes Tax incentives (if lessee is in a low tax bracket and
(taxable income > pre-tax income) lessor in a high tax bracket)
Depreciation Methods 𝐷𝑇𝐴 = (𝑇𝑎𝑥 𝐵𝑎𝑠𝑒 − 𝐶𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝐴𝑚𝑜𝑢𝑛𝑡) × 𝑇𝑎𝑥 𝑅𝑎𝑡𝑒 Usually less costly for lessee
Straight-Line
Lessor better able to bear risk associated with
𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑒𝑥𝑝𝑒𝑛𝑠𝑒
𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑐𝑜𝑠𝑡 − 𝑆𝑎𝑙𝑣𝑎𝑔𝑒 𝑣𝑎𝑙𝑢𝑒 Deferred Tax Liabilities (DTL) ownership
=
𝑈𝑠𝑒𝑓𝑢𝑙 𝐿𝑖𝑓𝑒 Appear when a deficit amount exists for income tax Economies of scale for lessor
payment (taxable income < pre-tax income)
Double Declining Balance 𝐷𝑇𝐿 = (𝐶𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝐴𝑚𝑜𝑢𝑛𝑡 − 𝑇𝑎𝑥 𝐵𝑎𝑠𝑒) × 𝑇𝑎𝑥 𝑅𝑎𝑡𝑒 Finance Lease vs Operating Lease
𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑒𝑥𝑝𝑒𝑛𝑠𝑒 Operating Lease; more similar to renting an asset,
2
= Permanent Differences leasee records lease payable and a “right-of-use”
𝑈𝑠𝑒𝑓𝑢𝑙 𝐿𝑖𝑓𝑒
× 𝑁𝑒𝑡 𝐵𝑜𝑜𝑘 𝑉𝑎𝑙𝑢𝑒 𝑎𝑡 𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑜𝑓 𝑌𝑒𝑎𝑟 𝑋 Permanent Differences asset on B/S, all risks and ownership remain with
Units of Production Method Income or expense items not allowed by tax lessor.
𝐴𝑚𝑚𝑜𝑟𝑡𝑖𝑧𝑎𝑡𝑖𝑜𝑛 legislation
𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑐𝑜𝑠𝑡 − 𝑆𝑎𝑙𝑣𝑎𝑔𝑒 𝑣𝑎𝑙𝑢𝑒 Tax credits for some expenditures that directly Finance Lease; more similar to owning an asset,
=
𝑇𝑜𝑡𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑢𝑡𝑝𝑢𝑡 𝑢𝑛𝑖𝑡𝑠 reduce taxes leasee records lease payable and a “right-of-use”
× 𝑂𝑢𝑡𝑝𝑢𝑡 𝑢𝑛𝑖𝑡𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑 𝑖𝑛 𝑡ℎ𝑒 𝑝𝑒𝑟𝑖𝑜𝑑 asset on B/S, risks of ownership are transferred to
the leasee.
Temporary Differences
Revaluation of Long-Lived Assets
Asset; Carrying Amount > Tax Base; DTL
US GAAP: Revaluation Prohibited Pension Plans
Asset; Carrying Amount < Tax Base; DTA
IFRS: Revaluation recognized in net income to the Defined Contribution Plan: Amount of contribution
Liability; Carrying Amount > Tax Base; DTA
point it reverses previous impairment losses; is expensed.
Liability; Carrying Amount < Tax Base; DTL
additional gains go into revaluation surplus Defined Benefit Plan: Contributions also expensed.
Underfunded/Overfunded status appears on B/S as
Interest Expense an A or L.
Capitalizing vs. Expensing 𝑇𝑜𝑡𝑎𝑙 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒 𝑜𝑓 𝑎 𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑏𝑜𝑢𝑛𝑑
Capitalizing: smooths net income impact; higher = 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑝𝑎𝑦𝑚𝑒𝑛𝑡
ROE and ROA initially; lower ROE and ROA later on; + 𝐴𝑚𝑜𝑟𝑡𝑖𝑧𝑎𝑡𝑖𝑜𝑛 𝑜𝑓 𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡 Corporate Issuers
Expensing: short-term net income decline; lower Net Present Value (NPV)
𝑇𝑜𝑡𝑎𝑙 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒 𝑜𝑓 𝑎 𝑝𝑟𝑒𝑚𝑖𝑢𝑚 𝑏𝑜𝑢𝑛𝑑
ROE and ROA initially; higher ROE and ROA later on; 𝑁𝑃𝑉 = 𝑃𝑉 𝑜𝑓 𝑐𝑎𝑠ℎ𝑓𝑙𝑜𝑤𝑠 − 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑜𝑢𝑡𝑙𝑎𝑦
= 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑝𝑎𝑦𝑚𝑒𝑛𝑡
− 𝐴𝑚𝑜𝑟𝑡𝑖𝑧𝑎𝑡𝑖𝑜𝑛 𝑜𝑓 𝑝𝑟𝑒𝑚𝑖𝑢𝑚
CFt
Income Tax Expense Effective Interest Method =
(1 + r)
𝐼𝑛𝑐𝑜𝑚𝑒 𝑇𝑎𝑥 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒
= 𝑇𝑎𝑥𝑒𝑠 𝑝𝑎𝑦𝑎𝑏𝑙𝑒 + ∆𝐷𝑇𝐿 − ∆𝐷𝑇𝐴 = 𝐶𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑏𝑜𝑛𝑑 𝑎𝑡 𝑡ℎ𝑒 𝑏𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑜𝑓 𝑡ℎ𝑒 𝑝𝑒𝑟𝑖𝑜𝑑 𝐶𝐹𝑡 = 𝑡ℎ𝑒 𝑒𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥 𝑐𝑎𝑠ℎ 𝑓𝑙𝑜𝑤 𝑎𝑡 𝑡𝑖𝑚𝑒 𝑡
× 𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒
M.M148202011.
𝑁 = 𝑡ℎ𝑒 𝑝𝑟𝑜𝑗𝑒𝑐𝑡’𝑠 𝑒𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑙𝑖𝑓𝑒
Effective Tax Rate 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑃𝑎𝑦𝑚𝑒𝑛𝑡 = 𝐹𝑎𝑐𝑒 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑏𝑜𝑛𝑑 𝑟 = 𝑡ℎ𝑒 𝑟𝑒𝑞𝑢𝑖𝑟𝑒𝑑 𝑟𝑎𝑡𝑒 𝑜𝑓 𝑟𝑒𝑡𝑢𝑟𝑛 𝑓𝑜𝑟 𝑝𝑟𝑜𝑗𝑒𝑐𝑡 𝑜𝑟
𝐼𝑛𝑐𝑜𝑚𝑒 𝑇𝑎𝑥 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 × 𝐶𝑜𝑢𝑝𝑜𝑛 𝑅𝑎𝑡𝑒 𝑜𝑝𝑝𝑜𝑟𝑡𝑢𝑛𝑖𝑡𝑦 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑐𝑎𝑝𝑖𝑡𝑎𝑙
𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝑇𝑎𝑥 𝑅𝑎𝑡𝑒 =
𝑃𝑟𝑒𝑡𝑎𝑥 𝐼𝑛𝑐𝑜𝑚𝑒 *Refer to Cash Flow Worksheet under TVM section
𝐴𝑚𝑜𝑟𝑡𝑖𝑧𝑎𝑡𝑖𝑜𝑛 𝑜𝑓 𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡(𝑃𝑟𝑒𝑚𝑖𝑢𝑚)
= 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒
− 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑝𝑎𝑦𝑚𝑒𝑛𝑡

FSA (8/10) FSA (9/10) FSA (10/10) CORP (1/3)

Internal Rate of Return (IRR) Equity Price and Total Return of an Index
𝐼𝑛𝑑𝑒𝑥 𝑉𝑎𝑙𝑢𝑒 − 𝐼𝑛𝑑𝑒𝑥 𝑉𝑎𝑙𝑢𝑒
CFt
=0
Margin Call Price 𝑃𝑟𝑖𝑐𝑒 𝑅𝑒𝑡𝑢𝑟𝑛 =
𝐼𝑛𝑑𝑒𝑥 𝑉𝑎𝑙𝑢𝑒
(1 + IRR) 1 − 𝑖𝑛𝑖𝑡𝑖𝑎𝑙 𝑚𝑎𝑟𝑔𝑖𝑛
𝑀𝑎𝑟𝑔𝑖𝑛 𝑐𝑎𝑙𝑙 𝑝𝑟𝑖𝑐𝑒 = 𝑃 ×
1 − 𝑚𝑎𝑖𝑛𝑡𝑒𝑛𝑎𝑛𝑐𝑒 𝑚𝑎𝑟𝑔𝑖𝑛
𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑡𝑢𝑟𝑛
IRR is the discount rate that sets NPV to zero Leverage 𝐼𝑛𝑑𝑒𝑥 𝑉𝑎𝑙𝑢𝑒 − 𝐼𝑛𝑑𝑒𝑥 𝑉𝑎𝑙𝑢𝑒 + 𝐼𝑛𝑐𝑜𝑚𝑒
1 =
*Refer to Cash Flow Worksheet under TVM section 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦 % = 𝐼𝑛𝑑𝑒𝑥 𝑉𝑎𝑙𝑢𝑒
𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒 𝑟𝑎𝑡𝑖𝑜

Weighted Average Cost of Capital (WACC) 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑝𝑜𝑠𝑖𝑡𝑖𝑜𝑛 Forms of Market Efficiency
𝑊𝐴𝐶𝐶 = 𝑤 𝑟 (1 – 𝑡) + 𝑤 𝑟 + 𝑤 𝑟
𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒 𝑟𝑎𝑡𝑖𝑜 =
𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑒𝑞𝑢𝑖𝑡𝑦 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 Weak Form; security prices fully reflect all past
market data; past trading data is already reflected in
prices; technical analysis won’t lead to superior risk-
Cost of Equity using CAPM Rate of Return on Margin Transaction adjusted performance
𝐸(𝑅 ) = 𝑅 + 𝛽 [𝐸(𝑅 ) − 𝑅 ] 𝑅𝑒𝑚𝑎𝑖𝑛𝑖𝑛𝑔 𝐸𝑞𝑢𝑖𝑡𝑦 − 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑂𝑢𝑡𝑙𝑎𝑦 Semi-Strong Form; prices reflect all publicly known
𝑅𝑎𝑡𝑒 𝑜𝑓 𝑟𝑒𝑡𝑢𝑟𝑛 =
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑂𝑢𝑡𝑙𝑎𝑦 and available information; new information is
Cost of Debt Capital rapidly reflected in prices; fundamental and
After tax cost of debt = r (1 – t) technical analysis can’t achieve excess returns
Cost of Preferred Stock Price Weighted Index Strong Form; security prices fully reflect both public
D
𝑉𝑎𝑙𝑢𝑒 =
∑ 𝑛𝑃 and private information; technical analysis,
𝑟 =
P 𝐷𝑖𝑣𝑖𝑠𝑜𝑟 fundamental analysis and private information can’t
𝑃
Cost of Equity using DDM Approach 𝑤 = be used to achieve excess returns
∑ 𝑃
𝐷
𝑟 =
𝑃
+𝑔
Market-Value Weighted Index Porter’s Five Forces and Competitive
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑡𝑜𝑡𝑎𝑙 𝑚𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 Strategies
Sustainable Growth Rate 𝑉𝑎𝑙𝑢𝑒 =
𝐵𝑎𝑠𝑒 𝑦𝑒𝑎𝑟 𝑡𝑜𝑡𝑎𝑙 𝑚𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 Threat of Entry
𝑔 = 1−
𝐷
× 𝑅𝑂𝐸 × 𝐵𝑎𝑠𝑒 𝑦𝑒𝑎𝑟 𝑖𝑛𝑑𝑒𝑥 𝑣𝑎𝑙𝑢𝑒 Power of Suppliers
𝐸𝑃𝑆 𝑄𝑃 Power of Buyers
𝑤𝑖 =
𝑄𝑃 Threat of Substitutes
Operating & Cash Conversion Cycle Rivalry among existing Competitors
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑐𝑦𝑐𝑙𝑒
= 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑎𝑦𝑠 𝑜𝑓 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 Equal Weighted Index Two Competitive Strategies: Product Differentiation
+ 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑎𝑦𝑠 𝑜𝑓 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 and Cost Leadership
𝑉𝑎𝑙𝑢𝑒 = 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑖𝑛𝑑𝑒𝑥 𝑣𝑎𝑙𝑢𝑒
× (1 + % 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝐼𝑛𝑑𝑒𝑥 𝑉𝑎𝑙𝑢𝑒)
𝐶𝑎𝑠ℎ 𝑐𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝑐𝑦𝑐𝑙𝑒 1
= 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑎𝑦𝑠 𝑜𝑓 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑤 =
𝑁
Value of Common Stock
M.M148202011.
+ 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑎𝑦𝑠 𝑜𝑓 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠
− 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑎𝑦𝑠 𝑜𝑓 𝑝𝑎𝑦𝑎𝑏𝑙𝑒𝑠
Dividend Discount Model
𝐷 × (1 + 𝑔 ) 𝑉
Accounts Payable Management 𝑉𝑜 = +
(1 + 𝑟) (1 + 𝑟)
%
Cost of trade credit = 1 + −1
%

EQ
CORP
(2/4)
(2/3) CORP
EQ (3/3)
(3/4) EQ (1/4) EQ (4/4)
(2/4) PM (1/4)
Gordon Growth Model
Portfolio Management Covariance (Asset Returns)
𝐷 × (1 + 𝑔) 𝒏
𝑉 = (𝑅 − 𝐸(𝑅 ̇ ) 𝑅 − 𝐸(𝑅 ̇
𝑟−𝑔 Return Measures 𝑐𝑜𝑣 𝑅 , 𝑅 = 𝒕 𝟏

𝑆𝑢𝑠𝑡𝑎𝑖𝑛𝑎𝑏𝑙𝑒 𝑔𝑟𝑜𝑤𝑡ℎ = (1 − 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑝𝑎𝑦𝑜𝑢𝑡 𝑟𝑎𝑡𝑖𝑜) 𝑛−1

× 𝑅𝑂𝐸 Holding Period Return
𝑔 = 𝑏 × 𝑅𝑂𝐸 𝑃 − 𝑃 + 𝐷 Correlation (Asset Returns)
HPR = 𝑐𝑜𝑣 𝑅 , 𝑅
𝑃 𝜌 𝑅 ,𝑅 =
Value of Preferred Stock Arithmetic Return 𝜎(𝑅 )𝜎 𝑅
𝐷 𝑅 + 𝑅 + 𝑅 + 𝑅 + ⋯ 𝑅𝑛
𝑉 = 𝐴𝑟𝑖𝑡ℎ𝑚𝑒𝑡𝑖𝑐 𝑟𝑒𝑡𝑢𝑟𝑛 =
𝑟 𝑛
Investment Utility
1
𝐷 𝑃𝑎𝑟 𝑉𝑎𝑙𝑢𝑒 𝑈𝑡𝑖𝑙𝑖𝑡𝑦 = 𝐸(𝑟) − 𝐴𝜎
2
𝑉𝑜 = + 𝐴 = 𝑚𝑒𝑎𝑠𝑢𝑟𝑒 𝑜𝑓 𝑟𝑖𝑠𝑘 𝑎𝑣𝑒𝑟𝑠𝑖𝑜𝑛
(1 + 𝑟) (1 + 𝑟)
Geometric Mean Return
𝐺𝑒𝑜𝑚𝑒𝑡𝑟𝑖𝑐 𝑚𝑒𝑎𝑛 𝑟𝑒𝑡𝑢𝑟𝑛
= [(1 + R ) × (1 + R ) × … Portfolio Return
Price Multiples 𝑅 = 𝑤 ̇ (𝑅 ̇ ) + 𝑤 ̇ (𝑅 ̇ ) + 𝑤 (𝑅 ) … 𝑤 (𝑅 ̇ )
𝐷 × (1 + R )] − 1
𝐸 𝑝𝑎𝑦𝑜𝑢𝑡 𝑟𝑎𝑡𝑖𝑜
𝐽𝑢𝑠𝑡𝑖𝑓𝑖𝑒𝑑 𝑃/𝐸 = = Money Weighted Rate of Return
𝑟−𝑔 𝑟−𝑔
CFt Portfolio Standard Deviation
𝑃𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 =0
𝑃/𝐸 = (1 + MWRR)
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 𝜎 = (𝑤 ̇ 𝜎 ̇ + 𝑤 ̇ 𝜎 ̇ + 2𝑤 ̇ 𝑤 ̇ 𝜌 , 𝜎 𝜎 )
*Use IRR function on calculator to solve this
𝑃𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 𝜎 = (𝑤 ̇ 𝜎 ̇ + 𝑤 ̇ 𝜎 ̇ + 2𝑤 ̇ 𝑤 ̇ 𝐶𝑜𝑣(𝑅 , 𝑅 ))
𝑃/𝐶𝐹 =
𝐶𝑎𝑠ℎ 𝑓𝑙𝑜𝑤 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
Time Weighted Rate of Return

𝑃/𝑆 =
𝑃𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 𝑟 = [(1 + r ) × (1 + r ) × … × (1 + r )] − 1 Capital Allocation Line (CAL)
𝑆𝑎𝑙𝑒𝑠 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 Portfolio Expected Return and Standard Deviation
Nominal Return Plot of combinations Risk-Free and Risky Asset
𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝑟𝑒𝑡𝑢𝑟𝑛 (𝑟) = (1 + r ) × (1 + π) − 1 𝐸(𝑟 ) − 𝑟
𝑃𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 𝐸(𝑟 ) = 𝑟 + 𝜎
𝑃/𝐵 = 𝜎
𝐵𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
Variance (Asset Returns)
Enterprise Value Multiples (𝑅 − 𝜇) Capital Market Line (CML)
𝜎 = Tangency point of efficient frontier on Capital
𝐸𝑉 𝐸𝑛𝑡𝑒𝑟𝑝𝑟𝑖𝑠𝑒 𝑣𝑎𝑙𝑢𝑒 𝑇
𝐸𝐵𝐼𝑇𝐷𝐴
=
𝐸𝐵𝐼𝑇𝐷𝐴 Allocation Line. The risky portfolio becomes the
(𝑅 − 𝑅 ) market portfolio.
M.M148202011.
𝑠 =
Asset Based Model 𝑇−1
𝐸𝑞𝑢𝑖𝑡𝑦 𝑣𝑎𝑙𝑢𝑒 Beta
= 𝑀𝑎𝑟𝑘𝑒𝑡 𝑜𝑟 𝑓𝑎𝑖𝑟 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑐𝑜𝑚𝑝𝑎𝑛𝑦 𝑠 𝑎𝑠𝑠𝑒𝑡𝑠 Standard Deviation 𝐶𝑜𝑣(𝑅 , 𝑅 ) 𝜌 , 𝜎
𝛽 = =
− 𝑀𝑎𝑟𝑘𝑒𝑡 𝑜𝑟 𝑓𝑎𝑖𝑟 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑐𝑜𝑚𝑝𝑎𝑛𝑦 𝑠 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 Square root of variance 𝜎 𝜎

EQ (3/4) EQ (4/4) PM (1/3) PM (2/3)

Expected Return (CAPM) Fixed Income Semi-Annual Bond
𝐸(𝑅 ) = 𝑅 + 𝛽 [𝐸(𝑅 ) − 𝑅 ] 𝑃𝑉
Basic Features of Fixed-Income Securities =
𝐶𝑜𝑢𝑝𝑜𝑛
+
𝐶𝑜𝑢𝑝𝑜𝑛
Coupon Rate: Interest rate issuer agrees to pay 𝑌𝑇𝑀
Security Market Line (1 +
2
) 1+
𝑌𝑇𝑀
2
Expected Return and Beta Plot with CAPM used to Maturity: Time until principal paid 𝐶𝑜𝑢𝑝𝑜𝑛 𝐶𝑜𝑢𝑝𝑜𝑛 + 𝑃𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙
form the SML. Stocks above the line are Par Value: Bond’s Principal/Face Value + +. . +
𝑌𝑇𝑀 𝑌𝑇𝑀 ×
undervalued. Stocks below the line are overvalued. Issuer: Sovereign Governments, Corporate Issuers 1+
2
1+
2
Sinking Fund Provision: Periodic payments to retire
bonds early Pricing with Spot Rates
Sharpe Ratio 𝑁𝑜 𝑎𝑟𝑏𝑖𝑡𝑟𝑎𝑔𝑒 𝑝𝑟𝑖𝑐𝑒
𝑅 −𝑅
𝑆ℎ𝑎𝑟𝑝𝑒 𝑅𝑎𝑡𝑖𝑜 = Types of Bonds =
𝐶𝑜𝑢𝑝𝑜𝑛
+
𝐶𝑜𝑢𝑝𝑜𝑛
𝜎 (1 + 𝑆 ) (1 + 𝑆 )
Callable Bonds: Issuer can force investors to sell
Treynor Ratio their bonds. Increases yield and lowers duration. +
𝐶𝑜𝑢𝑝𝑜𝑛
+. . +
𝐶𝑜𝑢𝑝𝑜𝑛 + 𝑃𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙
𝑅 −𝑅 (1 + 𝑆 ) (1 + 𝑆 )
𝑇𝑟𝑒𝑦𝑛𝑜𝑟 𝑚𝑒𝑎𝑠𝑢𝑟𝑒 = Putable Bonds: Investor can sell bond back to
𝛽
issuer. Lowers yield and duration. Pricing with Forward Rates
M-Squared Convertible Bonds: Bondholders can convert bonds 𝐵𝑜𝑛𝑑 𝑣𝑎𝑙𝑢𝑒
𝜎
𝑀 = 𝑅 −𝑅 − 𝑅 −𝑅 to common shares 𝐶𝑜𝑢𝑝𝑜𝑛 𝐶𝑜𝑢𝑝𝑜𝑛
𝜎 = +
Eurobond: international bond denominated in 1+𝑆 (1 + 𝑆 ) × (1 + 1𝑦1𝑦)
Jensen’s Alpha currency not native to country where it is issued. +
𝐶𝑜𝑢𝑝𝑜𝑛
𝛼 = 𝑅 − [𝑅 + 𝛽 (𝐸(𝑅 ) − 𝑅 )] (1 + 𝑆 ) × (1 + 1𝑦1𝑦) × (1 + 2𝑦1𝑦)
Total Risk 𝐸𝑚𝑏𝑒𝑑𝑑𝑒𝑑 𝑂𝑝𝑡𝑖𝑜𝑛 𝑉𝑎𝑙𝑢𝑒
Total Risk = Systematic Risk + Non-Systematic Risk = 𝐵𝑜𝑛𝑑 𝑉𝑎𝑙𝑢𝑒 𝑤𝑖𝑡ℎ 𝑂𝑝𝑡𝑖𝑜𝑛
− 𝐵𝑜𝑛𝑑 𝑉𝑎𝑙𝑢𝑒 𝑤𝑖𝑡ℎ𝑜𝑢𝑡 𝑂𝑝𝑡𝑖𝑜𝑛 Forward rate and Spot rate calculation
Structured Financial Instruments
Investment Policy Statement (IPS) Collateralized Debt Obligations (CDO): securities (1 + 𝑆 ) = (1 + 𝑆 ) × (1 + 1𝑦1𝑦)
Introduction backed by pool of debt obligations
Statement of Purpose Capital Protected Instruments: Zero coupon bond + Flat Price
Statement of Duties and Responsibilities Option Payoff 𝐹𝑙𝑎𝑡 𝑝𝑟𝑖𝑐𝑒 = 𝐷𝑖𝑟𝑡𝑦 𝑝𝑟𝑖𝑐𝑒(𝐹𝑢𝑙𝑙 𝑝𝑟𝑖𝑐𝑒)
Procedures Yield Enhancement Instruments: Credit Linked Note
− 𝑎𝑐𝑐𝑟𝑢𝑒𝑑 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡
Investment Objectives (Risk and Return Objectives) Accrued Interest
Participation Instruments: Floating Rate Bonds 𝐴𝑐𝑐𝑟𝑢𝑒𝑑 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡
Investment Constraints (Liquidity, Time Horizon, Leveraged Instruments: Inverse Floater = 𝐶𝑜𝑢𝑝𝑜𝑛 𝑝𝑎𝑦𝑚𝑒𝑛𝑡
Regulatory Requirements, Tax Status) (𝐷𝑎𝑦𝑠 𝑏𝑒𝑡𝑤𝑒𝑒𝑛 𝑡ℎ𝑒 𝑙𝑎𝑠𝑡 𝑐𝑜𝑢𝑝𝑜𝑛 𝑑𝑎𝑡𝑒 𝑎𝑛𝑑 𝑠𝑒𝑡𝑡𝑙𝑒𝑚𝑒𝑛𝑡 𝑑𝑎𝑡𝑒)
Investment Guidelines ×
Evaluation and Review Bond Pricing (𝐷𝑎𝑦𝑠 𝑏𝑒𝑡𝑤𝑒𝑒𝑛 𝑡ℎ𝑒 𝑡𝑤𝑜 𝑐𝑜𝑢𝑝𝑜𝑛 𝑑𝑎𝑡𝑒𝑠)
Annual Bond
𝑃𝑉 Full Price
M.M148202011. /
𝐶𝑜𝑢𝑝𝑜𝑛 𝐶𝑜𝑢𝑝𝑜𝑛 𝑃𝑉 = 𝑃𝑉(1 + 𝑟) = 𝑃𝑉 + 𝐴𝑐𝑐𝑟𝑢𝑒𝑑 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡
= +
(1 + 𝑌𝑇𝑀) (1 + 𝑌𝑇𝑀)
𝐶𝑜𝑢𝑝𝑜𝑛 𝐶𝑜𝑢𝑝𝑜𝑛 + 𝑃𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙
+ +. . +
(1 + 𝑌𝑇𝑀) (1 + 𝑌𝑇𝑀) Option-Adjusted Price
Value of non-callable bond
= 𝐹𝑙𝑎𝑡 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑐𝑎𝑙𝑙𝑎𝑏𝑙𝑒 𝑏𝑜𝑛𝑑
+ 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑒𝑚𝑏𝑒𝑑𝑑𝑒𝑑 𝑐𝑎𝑙𝑙 𝑜𝑝𝑡𝑖𝑜𝑛

PM (3/3) FI (1/6) FI (2/6)

Yield Measures Option-Adjusted-Spread Modified Duration
Current Yield 𝑂𝐴𝑆 = 𝑍 𝑠𝑝𝑟𝑒𝑎𝑑 − 𝑂𝑝𝑡𝑖𝑜𝑛 𝑣𝑎𝑙𝑢𝑒 (bps per year) 𝑀𝑎𝑐𝐷𝑢𝑟
𝑀𝑜𝑑𝐷𝑢𝑟 =
𝑎𝑛𝑛𝑢𝑎𝑙 𝑐𝑎𝑠ℎ 𝑐𝑜𝑢𝑝𝑜𝑛 𝑝𝑎𝑦𝑚𝑒𝑛𝑡 1 + 𝑌𝑇𝑀
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑌𝑖𝑒𝑙𝑑 = 𝑉 −𝑉
𝑏𝑜𝑛𝑑 𝑝𝑟𝑖𝑐𝑒 Securitization Parties 𝐴𝑝𝑝𝑟𝑜𝑥𝑖𝑚𝑎𝑡𝑒 𝑀𝑜𝑑𝐷𝑢𝑟 =
(2 × 𝑉 × ∆𝑌𝑇𝑀)
Seller of the Collateral (Pool of Loans)
Effective Annual Yield Loan Servicer Effective Duration
𝐸𝐴𝑌 = (1 + 𝑃𝑒𝑟𝑖𝑜𝑑𝑖𝑐 𝑟𝑎𝑡𝑒) − 1
Special Purpose Entity (SPE) 𝑉 −𝑉
𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝑑𝑢𝑟𝑎𝑡𝑖𝑜𝑛 =
(2 × 𝑉 × ∆𝐶𝑢𝑟𝑣𝑒)
𝑚 = 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝐶𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑖𝑛𝑔 𝑃𝑒𝑟𝑖𝑜𝑑𝑠 𝑂𝑛𝑒 𝑌𝑒𝑎𝑟
Asset-Backed Securities
Portfolio Duration
Conversion for Periodicity Collateralized Debt Obligations (CDOs): MBS,
𝑃𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜 𝑑𝑢𝑟𝑎𝑡𝑖𝑜𝑛 = 𝑤 ̇ (𝐷 ̇ ) + 𝑤 ̇ (𝐷 ̇ )
𝐴𝑃𝑅𝑚 𝐴𝑃𝑅𝑛 Automotive Loans, Credit Card Loans + 𝑤 (𝐷 ) … 𝑤 (𝐷 ̇ )
1+ = 1+
𝑚 𝑛 *can be tranched by credit risk and prepayment risk Money Duration
Prepayment Risk: Contraction and Extension Risk 𝑀𝑜𝑛𝑒𝑦 𝐷𝑢𝑟𝑎𝑡𝑖𝑜𝑛 = 𝐴𝑛𝑛𝑢𝑎𝑙 𝑀𝑜𝑑𝑖𝑓𝑖𝑒𝑑 𝐷𝑢𝑟𝑎𝑡𝑖𝑜𝑛
Money Market Instruments 𝑃𝑎𝑠𝑠 𝑡ℎ𝑟𝑜𝑢𝑔ℎ 𝑟𝑎𝑡𝑒 × 𝑃𝑉
𝑀𝑜𝑛𝑒𝑦 𝑚𝑎𝑟𝑘𝑒𝑡 𝑦𝑖𝑒𝑙𝑑 = 𝑀𝑜𝑟𝑡𝑔𝑎𝑔𝑒 𝑟𝑎𝑡𝑒 𝑜𝑛 𝑡ℎ𝑒 𝑢𝑛𝑑𝑒𝑟𝑙𝑖𝑛𝑔 𝑝𝑜𝑜𝑙 𝑜𝑓 𝑚𝑜𝑟𝑡𝑔𝑎𝑔𝑒𝑠
𝐹𝑎𝑐𝑒 𝑣𝑎𝑙𝑢𝑒 − 𝑃𝑟𝑖𝑐𝑒 − 𝑆𝑒𝑟𝑣𝑖𝑐𝑖𝑛𝑔 𝑓𝑒𝑒 − 𝑂𝑡ℎ𝑒𝑟 𝑓𝑒𝑒 ∆𝑃𝑉 = −𝑀𝑜𝑛𝑒𝑦 𝐷𝑢𝑟𝑎𝑡𝑖𝑜𝑛 × ∆𝑌𝑖𝑒𝑙𝑑
=( )
𝑃𝑟𝑖𝑐𝑒
360 𝑆𝑖𝑛𝑔𝑙𝑒 𝑀𝑜𝑛𝑡ℎ 𝑀𝑜𝑟𝑡𝑎𝑙𝑖𝑡𝑦 𝑅𝑎𝑡𝑒 (𝑆𝑀𝑀) 𝐷𝑢𝑟𝑎𝑡𝑖𝑜𝑛 𝑔𝑎𝑝 = 𝑀𝑎𝑐𝑎𝑢𝑙𝑎𝑦 𝑑𝑢𝑟𝑎𝑡𝑖𝑜𝑛
×( ) 𝑃𝑟𝑒𝑝𝑎𝑦𝑚𝑒𝑛𝑡 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑚𝑜𝑛𝑡ℎ
𝐷𝑎𝑦𝑠 𝑡𝑜 𝑚𝑎𝑡𝑢𝑟𝑖𝑡𝑦 = − 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 ℎ𝑜𝑟𝑖𝑧𝑜𝑛
𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑀𝑜𝑛𝑡ℎ𝑙𝑦 𝑃𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙 −
𝑆𝑐ℎ𝑒𝑑𝑢𝑙𝑒𝑑 𝑃𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙 𝑅𝑒𝑝𝑎𝑦𝑚𝑒𝑛𝑡

𝐵𝑜𝑛𝑑 𝑒𝑞𝑢𝑖𝑣𝑎𝑙𝑒𝑛𝑡 𝑦𝑖𝑒𝑙𝑑 Credit Risk Ratios

𝐹𝑎𝑐𝑒 𝑣𝑎𝑙𝑢𝑒 − 𝑃𝑟𝑖𝑐𝑒
= Debt-Service-Coverage Ratio (DSCR) Price Value of a Basis Point
𝑃𝑟𝑖𝑐𝑒 𝑁𝑒𝑡 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑖𝑛𝑐𝑜𝑚𝑒
365 =
× 𝐷𝑒𝑏𝑡 𝑠𝑒𝑟𝑣𝑖𝑐𝑒 𝑉 −𝑉
𝐷𝑎𝑦𝑠 𝑡𝑜 𝑚𝑎𝑡𝑢𝑟𝑖𝑡𝑦 𝑃𝑉𝐵𝑃 =
Loan-to-Value ratio (LTV) 2
𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑏𝑎𝑠𝑖𝑠 𝑦𝑖𝑒𝑙𝑑 = ( )× 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑚𝑜𝑟𝑡𝑔𝑎𝑔𝑒 𝑎𝑚𝑜𝑢𝑛𝑡 Convexity
= 𝑉 +𝑉 −2×𝑉
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑝𝑝𝑟𝑎𝑖𝑠𝑒𝑑 𝑣𝑎𝑙𝑢𝑒 𝐴𝑝𝑝𝑟𝑜𝑥𝑖𝑚𝑎𝑡𝑒 𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝐶𝑜𝑛𝑣𝑒𝑥𝑖𝑡𝑦 =
( ) (∆𝑌𝑇𝑀) × 𝑉

Bond Return 𝑉 +𝑉 −2×𝑉

Yield Spreads 𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑡𝑢𝑟𝑛 𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝐶𝑜𝑛𝑣𝑒𝑥𝑖𝑡𝑦 =
(∆𝑐𝑢𝑟𝑣𝑒) × 𝑉
G-Spread 𝐶𝑜𝑢𝑝𝑜𝑛 & 𝑅𝑒𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 + 𝑃
𝐺 𝑠𝑝𝑟𝑒𝑎𝑑 = 𝑌𝑇𝑀 − 𝑌𝑇𝑀 = −1
𝑃 Price Change Estimate
I-Spread
M.M148202011.
∆𝑃𝑟𝑖𝑐𝑒 = −𝑎𝑛𝑛𝑢𝑎𝑙 𝑀𝑜𝑑𝐷𝑢𝑟 × (∆𝑌𝑖𝑒𝑙𝑑)
𝐼 𝑠𝑝𝑟𝑒𝑎𝑑 = 𝑌𝑇𝑀 − 𝑆𝑤𝑎𝑝 𝑟𝑎𝑡𝑒 Duration 1
+ × 𝑎𝑛𝑛𝑢𝑎𝑙 𝑐𝑜𝑛𝑣𝑒𝑥𝑖𝑡𝑦
Macaulay Duration 2
× (∆𝑌𝑖𝑒𝑙𝑑)
Z-Spread 1+𝑟 1 + 𝑟 + [𝑁 × (𝑐 − 𝑟)] 𝑡
𝑃𝑀𝑇 𝑃𝑀𝑇 𝑃𝑀𝑇 + 𝐹𝑉
𝑀𝑎𝑐𝐷𝑢𝑟 =
𝑟
−
(𝑐 × [(1 + 𝑟) − 1] + 𝑟}
−( )
𝑇
Expected Loss
𝑃𝑉 = + + ..+ 𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑙𝑜𝑠𝑠 = 𝐷𝑒𝑓𝑎𝑢𝑙𝑡 𝑝𝑟𝑜𝑏𝑎𝑏𝑖𝑙𝑖𝑡𝑦 × (1
(1 + 𝑧 + 𝑍) (1 + 𝑧 + 𝑍) (1 + 𝑧 + 𝑍) − 𝑟𝑒𝑐𝑜𝑣𝑒𝑟𝑦 𝑟𝑎𝑡𝑒)

FI (3/6) FI (4/6) FI (5/6)

Loss Given Default (LGD) Put Option Value of Forward
𝐿𝑜𝑠𝑠 𝐺𝑖𝑣𝑒𝑛 𝐷𝑒𝑓𝑎𝑢𝑙𝑡(𝐿𝐺𝐷) = (1 − 𝑟𝑒𝑐𝑜𝑣𝑒𝑟𝑦 𝑟𝑎𝑡𝑒) Expiration Value (Long) 𝑉 (T) = 𝑆 − 𝐹 (T)(1 + 𝑟) ( )
𝑝 = 𝑀𝑎𝑥(0, 𝑋 − 𝑆 )
Four C’s of Credit Profit (Long)
𝑉 (T) = (𝑆 − 𝐼 + 𝐶) − 𝐹 (𝑇)(1 + 𝑟) ( )

Capacity
Π= 𝑝 − 𝑝 𝐹0 (𝑇)
Collateral 𝑉 (T) = 𝑆 + 𝐶 − 𝐼 −
Covenants (1 + 𝑅𝐹 )𝑇−𝑡
Character Expiration Value (Short)
−𝑝 = −𝑀𝑎𝑥(0, 𝑋 − 𝑆 ) Option Value Factors
Option Value = Time Value + Intrinsic Value
Derivatives Profit (Short)
Π = −𝑝 + 𝑝
Exchange Traded vs OTC Derivatives Increase in:
Exchange Traded Stock Price: (C ↑); (P ↓)
Public European Option: Only exercisable at maturity Exercise Price: (C ↓); (P ↑)
Standardized American Option: Can be exercised at any time; Time to Expiration: (C ↑); (P ↑)
Regulated Can’t be priced less than European options Volatility: (C ↑); (P ↑)
No counterparty risk Risk-Free-Rate: (C ↑); (P ↓)
OTC Derivatives Future/Forward Payoff
Private 𝐿𝑜𝑛𝑔 𝑃𝑎𝑦𝑜𝑓𝑓 = 𝑆 – 𝐹 (T) Put-Call Parity
Customizable 𝑋
Lower regulation 𝑆ℎ𝑜𝑟𝑡 𝑃𝑎𝑦𝑜𝑓𝑓 = 𝐹 (T)− 𝑆 𝑆 +𝑝 = 𝑐 +
(1 + 𝑟)
Counterparty Risk *can be rearranged
Option Payoff Interest Rate Swaps
Call Option Can be viewed as series of Forward Rate
Expiration Value (Long)
Options Strategies
Agreements to lend/borrow at a future date. Protective Put: Long Underlying, Long Put
𝑐 = 𝑀𝑎𝑥(0, 𝑆 – 𝑋) Helpful for transforming the nature of debt. Covered Call: Long Underlying, Short Call
Profit (Long) Fiduciary Call: Long Call, Long Risk-Free Bond
Π= 𝑐 − 𝑐 Forward Price Binomial Option Model
𝐹 (T) = 𝑆 (1 + 𝑟) π𝑐 + (1 − π)𝑐
𝐹 (T) = (𝑆 − 𝐼 + 𝐶)(1 + 𝑟) 𝑐 =
Expiration Value (Short) 1+𝑟
−𝑐 = −𝑀𝑎𝑥(0, 𝑆 – 𝑋) 𝐹 (T) = 𝑆 (1 + 𝑟) − (𝐼 − 𝐶)(1 + 𝑟)
𝐼 = present value of benefits 1+ 𝑟−𝑑
𝐶 = present value of costs π=
Profit (Short) 𝑢−𝑑
M.M148202011.
Π = −𝑐 + 𝑐
Hedge Ratio
𝑐 − 𝑐
𝑛 =
𝑆 − 𝑆

FI (6/6) DER (1/3) DER (2/3) DER (3/3)

Alternative Investments Commodities
Precious Metals
Hedge Funds Base Metals
Equity Hedge: Market Neutral, Fundamental Energy Products
Growth, Fundamental Value, Quantitative Agricultural Products
Directional, Short Bias, Sector Specific
Event-Driven: Merger Arbitrage, Managed Futures: actively managed investment
Distressed/Restructuring, Activist, Special Situations funds
Relative Value: FI Convertible Arbitrage, FI Asset Futures price ≈ Spot price (1 + r) + Storage costs –
Backed, FI General, Volatility, Multi-Strategy Convenience yield
Macro Return Sources: Roll Yield, Collateral Yield, Changes
Fee Structure: Typically, 2 and 20; 2% of AUM and in Spot Price
20% of Profits

Infrastructure
Private Equity Long lived and capital intensive. These assets are
Leveraged Buyouts (LBOs): substantial use of intended for public use, as they provide essential
leverage to take companies private services.
LBO Target Characteristics: Strong and Sustainable
Cash Flows; Depressed Prices; Inefficient Companies
Fee Calculations
Venture Capital: Characterized by stage of company 𝑀𝑎𝑛𝑎𝑔𝑒𝑚𝑒𝑛𝑡 𝐹𝑒𝑒 = 𝐴𝑠𝑠𝑒𝑡𝑠 𝑢𝑛𝑑𝑒𝑟 𝑚𝑎𝑛𝑎𝑔𝑒𝑚𝑒𝑛𝑡
× % 𝑀𝑎𝑛𝑎𝑔𝑒𝑚𝑒𝑛𝑡 𝑓𝑒𝑒
of interest 𝐼𝑛𝑐𝑒𝑛𝑡𝑖𝑣𝑒 𝐹𝑒𝑒 = 𝐺𝑎𝑖𝑛𝑠 𝑛𝑒𝑡 𝑜𝑓 𝑚𝑎𝑛𝑎𝑔𝑒𝑚𝑒𝑛𝑡 𝑓𝑒𝑒
1. Formative-stage financing: a) Angel Investing b) × % 𝐼𝑛𝑐𝑒𝑛𝑡𝑖𝑣𝑒 𝑓𝑒𝑒
Seed-Stage c) Early-Stage
2. Later-stage financing Hurdle Rate: Rate above which incentive fees are
3. Mezzanine-stage financing paid. Hard hurdle rate: fess only apply to returns
Exit Strategies: Trade Sale, IPO, Recapitalization, that exceed the hurdle rate. Soft hurdle rate: fees
Secondary Sales, Write-Off/Liquidation apply to the entire return.
Valuation Methods: market or comparables, High Water Mark: Highest cumulative return used
discounted cash flow (DCF) and asset-based to calculate incentive fees

Real Estate
Private Debt (Mortgages, Construction Lending)
Public Debt (MBS, CMOs)
Private Equity (Direct/Indirect Ownership) M.M148202011.

Public Equity (REITs, Real Estate Development

Companies)
Valuation Approaches: Comparable Sales, Income,
Cost

ALT (1/2) ALT (2/2)