cfa alternative assets

Module 42.5 LOS 42.m: Financial ratios used to analyze private real estate investments

Lenders often use the debt service coverage ratio (DSCR) and the loan-to-value (LTV) ratio to determine the maximum loan amount on a specific property. The maximum loan amount is based on the measure that results in the lowest debt. DSCR = First year NOI/debt service LTV = loan amount/appraisal value Debt service (loan payment) includes interest and principal. Equity … Read more

cfa alternative assets

Module 42.4 LOS 42.i: Valuing Real Estate Using the Cost and Sales Comparison Approach

Cost Comparison Approach Estimate the market value of the land. The value of the land is estimated separately, often using the sales comparison approach. Estimate the building’s replacement cost. Replacement cost is based on current construction costs and standards and should include any builder/developer’s profit. Deduct depreciation including physical deterioration, functional obsolescence, locational obsolescence, and economic obsolescence. … Read more

cfa alternative assets

Module 42.2 LOS 42.g: Direct Capitalization Approach

In the direct capitalization approach to property valuation, we discount or “capitalize” first year NOI by the capitalization rate. NOI is the amount of income remaining after subtracting vacancy and collection losses, and operating expenses (e.g., insurance, property taxes, utilities, maintenance, and repairs) from potential gross income. NOI = full occupancy rental income + other … Read more

CFA Fixed Income

Module 40.6: The Black Scholes Merton Model

The BSM model allows us to value options continuously in real time, as long as the no-arbitrage condition holds. The no-arbitrage option price guarantees that the hedge portfolio will yield the risk free rate. There are six underlying assumptions of the BSM Model: The underlying asset price follows a geometric Brownian motion process. The return … Read more

CFA Fixed Income

Module 37.1 LOS 37.a: Explain expected exposure, the loss given default, the probability of default, and the credit valuation adjustment

Expected exposure is the amount a investor stands to lose on risky bond before recovery amounts are taken into consideration. Recovery rate, the percent recovered in event of default, is the opposite of loss severity. (1-recovery rate = loss severity). Loss given default is equal to loss severity multiplied by exposure. Probability of default measure … Read more

CFA Equity

Module 30.5 LOS 30.f, 30.g, 30.i, 30.j 30.l: Firm valuation with FCFF and FCFE

In free cash flow valuation models, we have a control perspective that assumers value recognition will be immediate. DDM models take a minority perspective which means that value may not be reflective of the DDM value until dividend policy correctly reflects long-run profitability. Note that share repurchases, share issues and changes in leverage have little … Read more