Plain-English definitions of the valuation terms for CFA Level II study. Simplified for learning; CFA Institute’s curriculum is authoritative.
| Term | Definition |
|---|---|
| Vignette (item set) | A short case followed by linked multiple-choice questions. |
| Dividend discount model (DDM) | Values equity as the present value of expected dividends. |
| Gordon growth model | A DDM with constant growth: value = D₁ ÷ (r − g). |
| FCFF | Free cash flow to the firm, used to value the whole firm. |
| FCFE | Free cash flow to equity, used to value the equity. |
| Residual income | Earnings above the required return on capital. |
| Multiples | Relative valuation using ratios such as P/E or EV/EBITDA. |
| EV/EBITDA | Enterprise value to earnings before interest, tax, depreciation and amortisation. |
| Embedded option | An option built into a bond, such as a call or put. |
| Convexity | How a bond’s price sensitivity changes as yields change. |
| Credit spread | Extra yield over a risk-free bond for credit risk. |
| Regression | A statistical method relating a variable to one or more others. |
| R-squared | The share of variation a regression model explains. |
| Swap | An agreement to exchange cash flows, such as fixed for floating. |
| Forward contract | An agreement to trade an asset later at a set price. |
| Hedge | A position taken to offset a specific risk. |
| Strategic asset allocation | The long-term target mix of asset classes. |
| Code and Standards | CFA Institute’s ethics rules for members and candidates. |