BOOK 4-ALTERNATIVE - gaodun

1 book 4-ALTERNATIVE INVESTMENTS AND FIXED INCOME Readings and Learning Outcome Statements .. 3 Study Session 13-Alternative Investments .. 9 Self-Test-Alternative Investments .. 132 Study Session 14 -Fixed Income: Valuation Concepts .. 136 Study Session 15-Fixed Income: Structured Securities .. 227 Self-Test -Fixed Income .. 307 Formulas .. 310 Index .. 315 SCHWESERNOTES 2013 CFA LEVEL II book 4: ALTERNATNE INVESTMENTS AND FIXED INCOME 20 12 Kaplan, Inc. All rights reserved. Published in 2012 by Kaplan Schweser. Printed in the United States of America. ISBN: 978-1-4277-4249-0 I 1-4277-4249-9 PPN: 3200-2852 If this book does not have the hologram with the Kaplan Schweser logo on the back cover, it was distributed without permission of Kaplan Schweser, a Division of Kaplan, Inc., and is in direct violation of global copyright laws.

2 Your assistance in pursuing potential violators of this law is greatly appreciated. Required CFA Institute disclaimer: "CFA and Chartered Financial Analyst are trademarks owned by CFA Institute. CFA Institute (formerly the Association for Investment Management and Research) does not endorse, promote, review, or warrant the accuracy of the products or services offered by Kaplan Schweser." Certain materials contained within this text are the copyrighted property of CFA Institute. The following is the copyright disclosure for these materials: "Copyright, 2012, CFA Institute. Reproduced and republished from 2013 Learning Outcome Statements, Level I, II, and III questions from CFA Program Materials, CFA Institute Standards of Professional Conduct, and CFA Institute's Global Investment Performance Standards with permission from CFA Institute.

3 All Rights Reserved." These materials may not be copied without written permission from the author. The unauthorized duplication of these notes is a violation of global copyright laws and the CFA Institute Code of Ethics. Your assistance in pursuing potential violarors of this law is greatly appreciated. Disclaimer: The Schweser Notes should be used in conjunction with the original readings as set forth by CFA Institute in their 2013 CFA Level II Study Guide. The information contained in these Notes covers topics contained in the readings referenced by CFA Institute and is believed to be accurate. However, their accuracy cannot be guaranteed nor is any warranty conveyed as to your ultimate exam success. The authors of the referenced readings have not endorsed or sponsored these Notes. READINGS AND LEARNING OUTCOME STATEMENTS READINGS The following material is a review of the Alternative Investments and Fixed Income principles designed to address the Learning outcome statements set forth by CFA Institute.

4 STUDY SESSION 13 Reading Assignments Alternative Investments and Fixed Income, CPA Program Curriculum, Vo lume 5, Level II (CPA Institute, 2012) 38. Private Real Estate Investments 39: Publicly Traded Real Estate Securities 40. Private Equity Valuation 41. Investing in Hedge Funds: A Survey STUDY SESSION 14 Reading Assignments Alternative Investments and Fixed Income, CPA Program Curriculum, Vo lume 5, Level II (CPA Institute, 2012) 42. Fundamentals of Credit Analysis 43. Te rm Structure and Vo latility of Interest Rates 44. Va luing Bonds with Embedded Options STUDY SESSION 15 Reading Assignments Alternative Investments and Fixed Income, CPA Program Curriculum, Vo lume 5, Level II (CPA Institute, 2012) 45. Mortgage-Backed Sector of the Bond Market 46. Asset-Backed Sector of the Bond Market 47.

5 Va luing Mortgage-Backed and Asset-Backed Securities 20 12 Kaplan, Inc. page 9 page 42 page 69 page 117 page 136 page 165 page 192 page 227 page 258 page 283 Page 3 book 4 -Alternative Investments and Fixed Income Readings and Learning Outcome Statements Page 4 LEARNING OUTCOME STATEMENTS (LOS) The CPA Institute Learning Outcome Statements are listed below. These are repeated in each topic review; however, the order may have been changed in order to get a better fit with the flow of the review. STUDY SESSION 13 The topical coverage corresponds with the following CPA Institute assigned reading: 38. Private Real Estate Investments The candidate should be able to: a. classify and describe basic forms of real estate investments. (page 9) b. describe the characteristics, the classification, and basic segments of real estate.

6 (page 10) c. explain the role in a portfolio, the major economic value determinants, investment characteristics, and principal risks of private real estate. (page 12) d. describe commercial property types, including their distinctive investment characteristics. (page 14) e. compare the income, cost, and sales comparison approaches to valuing real estate properties. (page 15) f. estimate and interpret the inputs (for example, net operating income, capitalization rate, and discount rate) to the direct capitalization and discounted cash flow valuation methods. (page 17) g. calculate the value of a property using the direct capitalization and discounted cash flow methods. (page 17) h. compare the direct capitalization and discounted cash flow methods. (page 25) 1. calculate the value of a property using the cost and sales comparison approaches.

7 (page 26) J. describe due diligence in private equity real estate investment. (page 31) k. discuss private equity real estate investment indices, including their construction and potential biases. (page 31) 1. explain the role in a po rtfolio, the major economic value determinants, investment characteristics, principal risks, and due diligence of private real estate debt investment. (page 12) m. calculate and interpret financial ratios used to analyze and evaluate private real estate investments. (page 32) The topical coverage corresponds with the following CPA Institute assigned reading: 39. Publicly Traded Real Estate Securities The candidate should be able to: a. describe types of publicly traded real estate securities. (page 42) b. explain advantages and disadvantages of investing in real estate through publicly traded securities.

8 (page 43) c. explain economic value determinants, investment characteristics, principal risks, and due diligence considerations fo r real estate investment trust (REIT) shares. (page 45) d. describe types of REITs. (page 47) e. justify the use of net asset value per share (NAVPS) in REIT valuation and estimate NAVPS based on forecasted cash net operating income. (page 51) 2012 Kaplan, Inc. book 4 -Alternative Investments and Fixed Income Readings and Learning Outcome Statements f. describe the use of fu nds fr om operations (FFO) and adjusted fu nds fr om operations (AFFO) in REIT valuation. (page 53) g. compare the net asset value, relative value (price-to-FFO and price-to-AFFO), and discounted cash flow approaches to REIT valuation. (page 55) h. calculate the value of a REIT share using net asset value, price-to-FFO and price-to-AFFO, and discounted cash flow approaches.

9 (page 55) The topical coverage corresponds with the following CPA Institute assigned reading: 40. Private Equity Valuation The candidate should be able to: a. explain sources of value creation in private equity. (page 70) b. explain how private equity firms align their interests with those of the managers of portfolio companies. (page 71) c. distinguish between the characteristics of buyout and venture capital investments. (page 72) d. describe valuation issues in buyout and venture capital transactions. (page 76) e. explain alternative exit routes in private equity and their impact on value. (page 80) f. explain private equity fund structures, terms, valuation, and due diligence in the context of an analysis of private equity fund returns. (page 81) g. explain risks and costs of investing in private equity.

10 (page 86) h. interpret and compare financial performance of private equity funds fr om the perspective of an investor. (page 88) 1. calculate management fe es, carried interest, net asset value, distributed to paid in (DPI), residual value to paid in (RVPI), and total value to paid in (TVPI) of a private equity fund. (page 91) J calculate pre-money valuation, post-money valuation, ownership fraction, and price per share applying the venture capital method 1) with single and multiple financing rounds and 2) in terms of IRR. (page 93) k. demonstrate alternative methods to account fo r risk in venture capital. (page 98) The topical coverage corresponds with the following CPA Institute assigned reading: 41. Investing in Hedge Funds: A Survey The candidate should be able to: a. distinguish between hedge fu nds and mutual funds in terms of leverage, use of derivatives, disclosure requirements and practices, lockup periods, and fee structures.