What is the Quality of Equipment? Evaluating the quality of equipment as collateral for a loan plays an important role in the credit analysis process, as it determines the potential amount of money to be paid for an asset pledged as collateral. In the event a borrower goes bankrupt, a lender can repossess the collateral…
What are the Types of Security? There are four main types of security: debt securities, equity securities, derivative securities, and hybrid securities, which are a combination of debt and equity. Let’s first define security. Security relates to a financial instrument or financial asset that can be traded in the open market, e.g., a stock, bond,…
What is the Volcker Rule? The Volcker Rule refers to Sec 619 of the Dodd-Frank Act, which prohibits banks from engaging in proprietary trading, or from using their depositors’ funds to invest in risky investment instruments. The rule also prohibits banks from owning or investing in hedge funds or private equity funds. Before the 2008 financial…
What is Real Estate? Real estate is real property that consists of land and improvements, which include buildings, fixtures, roads, structures, and utility systems. Property rights give a title of ownership to the land, improvements, and natural resources such as minerals, plants, animals, water, etc. Types of Real Estate There are several types of real…
What is a Debenture? A debenture is a long-term debt instrument issued by corporations and governments to secure fresh funds or capital. There is no collateral or physical assets required to back up the debt, as the overall creditworthiness and reputation of the issuer suffice. Coupons or interest rates are offered as compensation to the…
Contribution Margin Ratio Formula The contribution margin ratio (CM ratio) of a business is equal to its revenue less all variable costs, divided by its revenue. It represents the marginal benefit of producing one more unit. Here is the formula for contribution margin ratio (CM ratio): See an example in Excel here. Example Calculation of Contribution…
What is a Chinese Wall? In finance, a Chinese Wall (or a Wall of China) is a virtual information barrier erected between those who have material, non-public information, and those who don’t, to prevent conflicts of interest. Below is an example of how a bank uses a Chinese Wall policy to comply with securities regulations….
What is Dividend Per Share (DPS)? Dividend Per Share (DPS) is the total amount of dividends attributed to each individual share outstanding of a company. Calculating the dividend per share allows an investor to determine how much income from the company he or she will receive on a per-share basis. Dividends are usually a cash payment…
What are Profitability Ratios? Profitability ratios are financial metrics used by analysts and investors to measure and evaluate the ability of a company to generate income (profit) relative to revenue, balance sheet assets, operating costs, and shareholders’ equity during a specific period of time. They show how well a company utilizes its assets to produce…
What is Continuously Compounded Return? Continuously compounded return is what happens when the interest earned on an investment is calculated and reinvested back into the account for an infinite number of periods. The interest is calculated on the principal amount and the interest accumulated over the given periods and reinvested back into the cash balance….
