Investment Pricing Methods
A Guide for Accounting and Financial Professionals
1. Edition January 2002
XXII, 362 Pages, Hardcover
Handbook/Reference Book
Short Description
This handbook provides accountants and other financial professionals with a practical understanding of the fundamentals of investment pricing methods. It clarifies investment terminology and explains how investment analysts price common financial investment instruments such as commercial mortgages, private placement-bonds, mortgage-backed securities, private and public equities, derivatives, and joint ventures. The book explains pricing concepts in order to understand how investors are compensated for assuming risks and how this impacts pricing. It covers investment pricing models and how changing market conditions impact values.
Practical, expert coverage of investment pricing methods for financial professionals
This book on investment pricing methods offers accounting and financial practitioners and academics a solid understanding of the techniques and methods investment analysts use to price common financial investment instruments, such as commercial mortgages, private placement-bonds, mortgage-backed securities, private and public equities, derivatives, and joint ventures. Clarification of important terminology and an overview of fundamental concepts are provided for less experienced professionals, while in-depth and up-to-date discussion of technical matters offers experienced professionals expert dissection of more complex material. This authoritative and reliable guide features:
* PowerPoint(TM) presentation for teaching purposes available online at www.wiley.com/go/investmentpricing
* In-depth and up-to-date pricing models
* Verbal and formula explanations for all mathematical equations
* Tips on reviewing investment prices for accuracy or flaws
* Investment type characteristics such as contractual provisions, cash flows, and risks for applying Statement 133 hedge effectiveness guidelines
* Basic building blocks of investment pricing methodologies including present value methodologies used for pricing and evaluating common investment types
* Coverage of complex issues including term structure of interest rates, determinants of bond yields and stock risk premiums, estimation of free cash flows for valuing a business entity, and more
Acknowledgments.
1 Pricing Concepts and the Term Structure of Interest Rates.
Introduction.
Present Value Formula.
Duration and Other Fixed-Income Pricing Concepts.
Concluding Remarks.
Notes.
Appendix A: Calculation of U.S. Treasury Bond Yield Curve.
Appendix B: Eurodollar Futures Yields.
2 Fixed-Income Pricing Matrix and Decomposing Yields.
Introduction.
Determining the Discount Rate.
Credit Rating Categories and Determination.
Processes for Decomposing Bond Yields.
Normalized-Yield Pricing Matrix.
Concluding Remarks.
Notes.
3 Public Corporate Bonds, Private-Placement Bonds, and Whole Commercial Mortgages.
Introduction.
Key Terminology.
Publicly Issued Corporate Bonds.
Public Corporate Bond Pricing.
Private-Placement Bonds.
Valuing a Private-Placement Bond.
Pricing Bonds that Have Sinking-Fund Payment Requirements.
Pricing Defaulted Bonds.
Whole Commercial Mortgage Loans.
Valuing a Whole Commercial Mortgage Loan.
Monetary Default Scenarios.
Notes.
Appendix C: Bloomberg-Yield to Call Data.
Appendix D: Selected Portions of BondCalc (r) Brochures.
4 Mortgage-Backed and Asset-Backed Securities.
Introduction.
Evolution of the Mortgage-Backed Securities Market.
Mortgage-Backed Securities.
Collateralized Mortgage Obligations.
Bloomberg Median Prepayments.
Stripped Securities.
Private-Placement Asset-Backed Securities.
Concluding Remarks.
Notes.
5 Privately Held Equity.
Introduction.
Equity Volatility.
Pricing Equity Issues.
Common Equity Pricing Models Used by Investment Analysts.
Price-Multiple Equity Pricing Models.
Discounted Cash Flow Approach Equity Pricing Model.
Basic Framework of Private-Equity Investing.
Accountant's Review of Private-Equity Valuations.
Concluding Remarks.
Notes.
6 Public Equity Pricing.
Introduction.
"Fox Rocks" Valuation Illustration.
Discounted Cash Flow Model.
Concluding Remarks.
Notes.
Appendix E: "Fox Rocks" Valuation Illustration.
7 Derivatives.
Introduction.
Forward Contracts.
Futures Contracts.
Option Contracts.
Swaps.
Credit Derivatives.
Forward Rate Agreements.
Notes.
Appendix F: Using Pricing Concepts of Fixed-Income Investments and Derivatives to Illustrate How to Hedge the Base Rate of Interest.
Appendix G: Fixed Income Option Strategies.
8 Partnerships.
Introduction.
Surfside Condominium Partnership.
Concluding Remarks.
Glossary.
References.
Index.
ROBERT M. TRAFICANTI is Director of Accounting Policy at a major investment bank. He coauthored this book while he was a project manager at the Financial Accounting Standards Board.