What is the Fundamental Law of Active Management? Developed by Richard Grinold and Ronald Kahn, the Fundamental Law of Active Management states that an active manager’s productivity depends on the quality of his/her skills and, consequently, the frequency in which the skills are applied at work. The law can also be expressed in an equation….
What is Debit Credit Analysis? Accountants perform debit credit analysis at all times as part of their responsibilities. Business transactions occur daily, and it is the accountant’s role to record the transactions appropriately to determine their impact on the business. The transactions are recorded in both the debit and credit sides of an account, where…
What is Credit? Credit is created when one party (a creditor) provides resources to another party (a debtor) where no immediate payment is made; rather, the resources are provided with a promise of future payment. The resources provided by the creditor may be financial resources, like actual cash, a credit card limit, or a mortgage…
What is Inflation Hedge? Inflation hedge is an investment that is made for the purpose of protecting the investor against decreased purchasing power of money due to the rising prices of goods and services. The ideal investments for hedging against inflation include those that maintain their value during inflation or that increase in value over…
What is Municipal Bond Credit Analysis? Municipal bond credit analysis involves evaluating a municipal bond to determine its viability as an investment opportunity. A municipal bond is a type of investment security that is designed to extend credit to the government or its entities. It acts as an opportunity for the government to raise funds to…
What is an Inverted Yield Curve? An inverted yield curve often indicates the lead-up to a recession or economic slowdown. The yield curve is a graphical representation of the relationship between the interest rate paid by an asset (usually government bonds) and the time to maturity. The interest rate is measured on the vertical axis and time…
What is the Degree of Total Leverage? The degree of total leverage is a ratio that compares the rate of change a company experiences in earnings per share (EPS) to the rate of change it experiences in revenue from sales. The degree of total leverage can also be referred to as the “degree of combined…
What is the Annual Percentage Yield? The annual percentage yield (APY) is a normalized interest rate based on the compounding period of one year. The APY provides a standardized representation of the underlying interest rates of financial products. The primary advantage of the annual percentage yield is the consideration of the compounding effect. Recall that…
What is Solvency? Solvency is the ability of a company to meet its long-term financial obligations. When analysts wish to know more about the solvency of a company, they look at the total value of its assets compared to the total liabilities held. An organization is considered solvent when its current assets exceed current liabilities….
What is the Financial Modelers’ Manifesto? The Financial Modelers’ Manifesto is a proposal calling for greater fiscal and risk-management responsibilities in the wake of the housing market collapse and the subsequent financial crisis of 2008-2009. It was created by two financial engineers – Paul Wilmott and Emanuel Derman. In the past, both Derman and Wilmott…
