What is a Floating Interest Rate? A floating interest rate refers to a variable interest rate that changes over the duration of the debt obligation. It is the opposite of a fixed interest rate, where the interest rate remains constant throughout the life of the debt. Loans, such as residential mortgages, can be acquired at both…
What is an Interest Rate Swap? An interest rate swap (IRS) is a type of derivative contract through which two counterparties agree to exchange one stream of future interest payments for another, based on a specified principal amount. In most cases, interest rate swaps include the exchange of a fixed interest rate for a floating…
What is a Dutch Auction? A Dutch auction is a price discovery process in which the auctioneer starts with the highest asking price and lowers it until it reaches a price level where the bids received will cover the entire offer quantity. Alternatively, a Dutch auction is known as a descending price auction or a uniform…
What are Agency Costs? Agency costs are internal costs incurred due to the competing interests of shareholders (principals) and the management team (agents). Expenses that are associated with resolving this disagreement and managing the relationship are referred to as agency costs. The key takeaway point is that these costs arise from the separation of ownership…
What is Return on Investment (ROI)? Return on Investment (ROI) is a performance measure used to evaluate the returns of an investment or to compare the relative efficiency of different investments. ROI measures the return on an investment relative to the cost of the investment. The Return on Investment (ROI) formula: Where “Gain from Investment”…
What is Cost Structure? Cost structure refers to the various types of expenses a business incurs and is typically composed of fixed and variable costs. Costs may also be divided into direct and indirect costs. Fixed costs are costs that remain unchanged regardless of the amount of output a company produces, while variable costs change with production…
What is a Stakeholder? In business, a stakeholder is any individual, group, or party that has an interest in an organization and the outcomes of its actions. Common examples of stakeholders include employees, customers, shareholders, suppliers, communities, and governments. Different stakeholders have different interests, and companies often face trade-offs in trying to please all of…
What is Value Added? Value added is the extra value created over and above the original value of something. It can apply to products, services, companies, management, and other areas of business. In other words, it is an enhancement made by a company/individual to a product or service before offering it for sale to the…
What is Perpetuity? Perpetuity in the financial system is a situation where a stream of cash flow payments continues indefinitely or is an annuity that has no end. In valuation analysis, perpetuities are used to find the present value of a company’s future projected cash flow stream and the company’s terminal value. Essentially, a perpetuity…
What is Yield Gap? The Yield Gap is the difference between the yields of government-issued securities and the average dividend yield on stock shares. In other words, the yield gap, or the yield gap ratio, is the ratio of the dividend yield on equity compared to the yield on long-term government bonds. The yield gap…
