What is a Lender of Last Resort? A lender of last resort is the provider of liquidity to financial institutions that are experiencing financial difficulties. In most developing and developed countries, the lender of last resort is the country’s central bank. The responsibility of the central bank is to prevent bank runs or panics from…
What is Senior and Subordinated Debt? Senior and subordinated debt refers to their rank in a company’s capital stack. In the event of a liquidation, senior debt is paid out first, while subordinated debt is only paid out if funds remain after paying off senior debt. To compensate an investor for the risk, subordinated debt…
What is a Commercial Bank? A commercial bank is a financial intermediary that serves businesses by providing essential liquidity functions within an economy via various products and services. The institution accepts and manages deposits to earn fee income and as a low-cost source of funds. Funds can generate interest income via credit creation and offering…
What is a Credit Default Swap (CDS)? A credit default swap (CDS) is a type of credit derivative that provides the buyer with protection against default and other risks. The buyer of a CDS makes periodic payments to the seller until the credit maturity date. In the agreement, the seller commits that, if the debt…
What is the Bandwagon Effect? The bandwagon effect is the tendency of people to take certain actions or arrive at a conclusion primarily because other people are doing so. The phenomenon is observed in various fields, such as economics, politics, and psychology. Financial markets are no different. The bandwagon effect works through a self-reinforcing mechanism….
What is a Backstop? A backstop is a financial arrangement that creates a secondary source of funds in case the primary source is not enough to meet current needs. It can also be thought of as an insurance policy that covers the inadequacy of a source of funds. The backstop can take various forms in…
What are Non-Cash Expenses? Non-cash expenses appear on an income statement because accounting principles require them to be recorded despite not actually being paid for with cash. The most common example of a non-cash expense is depreciation, where the cost of an asset is spread out over time even though the cash expense occurred all…
What is an Angel Investor? An angel investor is a person or company that provides capital for start-up businesses in exchange for ownership equity or convertible debt. They may provide a one-time investment or an ongoing capital injection to help the business move through the difficult early stages. Unlike banking institutions that invest in already…
What is Debt Capacity? Debt capacity refers to the total amount of debt a business can incur and repay according to the terms of a debt agreement. A business takes on debt for several reasons – such as boosting production or marketing, expanding capacity, or acquiring new businesses. However, incurring too much debt or taking…
What is Market Capitalization? Market Capitalization (Market Cap) is the most recent market value of a company’s outstanding shares. The Market Cap is equal to the current share price multiplied by the number of shares outstanding. The investing community often uses market capitalization value to rank companies and compare their relative sizes in a particular industry…
