Topics in Investment Analysis

Topics in Investment Analysis - Rationale CFA CBOK Filler 2 – Credit Completion course

Topics in Investment Analysis - The 40,000 Foot View Macroeconomics Fixed Income Derivatives Alternative Investments Real Estate Commodities Hedge Funds Private Equity

Macroeconomics Aggregate Supply and Demand Classical, Monetarist, and Keynesian Views The Fed and Money Creation Inflation, Unemployment, and Business Cycles Fiscal Policy –Spending –Taxes Stabilizing the Business Cycle

The Fixed Income Zoo Corporate, Treasury, Muni, Sovereign, Foreign Short-Term, Long-Term Rating Fixed, Variable, Inflation-protected, more exotic Asset-backed menagerie Swaps

Fixed Income Risks Interest Rate Reinvestment Call and Prepayment Yield Curve Credit Liquidity Exchange Rate Volatility Inflation Event Sovereign

Fixed Income – Term Structure Constructing a yield curve Theories of the yield curve –Expectations –Liquidity Preference –Preferred Habitat, or Market Segmentation

Fixed Income Valuation Basic Bond Valuation –Using YTM –Using period-specific “zero” rates Duration and interest rate risk Valuation with Embedded Options –Convertibles, Callables, Puttables, etc. –Models Option models Simulations

Fixed Income – Securitization Mortgages, Home equity loans, Auto loans, Consumer loans, Credit cards, Commercial assets, etc. Manner of securitization: –Pass-through pools –CMOs and tranches Credit enhancements Credit default swaps

Fixed Income – Miscellaneous Commercial paper market Special Purpose Vehicles (Off-balance- sheet entities) Structured notes (adding sweeteners) Inverse floaters

Derivatives Option-like derivatives –Will be covered only to get a handle on the embedded options in fixed instruments CMOs, structured notes, etc. –We may go into valuation approaches for these

Alternative Investments Real Estate Commodities Hedge Funds Private Equity

Our Current Financial Mess Bubbles (e.g. in housing prices) World liquidity Breakdown of discipline and due diligence. –Originators –Securitizers –Rating Agencies –Ultimate Investors Role of Credit default swaps and other chained liabilities Role of Mark-to-Market

The Road Out? Fed Actions –Monetary –Purchase of bad assets –Intervention with players in crises Treasury Actions –TARP, TALF, PPIP, etc. –Mortgage relief Fiscal enlargement and borrowing Reregulation –Dodd “Too Big to Fail” bill What to do with Fan and Fred?