What are Financial Statement Footnotes? Financial statement footnotes are used as additional information by individuals reading financial statements. Otherwise known as explanatory notes or notes to the financial statements, the footnotes help add supplementary information to help further explain the related information in the financial statements without clouding the primary information that the statements are…
What is the Direct Capitalization Method? The direct capitalization method is obtained by taking the income recorded over time and dividing it by the respective capitalization rates taken over the same period. The cap rate is obtained by dividing the net operating income by the value of the assets. The direct capitalization method is not…
What are Industrial REITs? Industrial REITs are companies that own and manage real estate properties that are used for manufacturing, production, storage, and distribution of goods. The structure under which industrial REITs operate requires them to pay at least 90% of their net revenues as dividends to shareholders. Interested investors can become shareholders in industrial…
What is Duration? Duration is one of the fundamental characteristics of a fixed income security (e.g., a bond), alongside maturity, yield, coupon, and call features. It is the most commonly used tool in the bond markets as an assessment of the interest rate sensitivity of a fixed income security. Since the interest rate is one of the…
What is Covariance? In mathematics and statistics, covariance is a measure of the relationship between two random variables. The metric evaluates how much – to what extent – the variables change together. In other words, it is essentially a measure of the variance between two variables. However, the metric does not assess the dependency between…
What is Interest Rate Risk? Interest rate risk is the probability of a decline in the value of an asset resulting from unexpected fluctuations in interest rates. Interest rate risk is mostly associated with fixed-income assets (e.g., bonds) rather than with equity investments. The interest rate is one of the primary drivers of a bond’s…
What is Portfolio Variance? Portfolio variance is a statistical value that assesses the degree of dispersion of the returns of a portfolio. It is an important concept in modern investment theory. Although the statistical measure by itself may not provide significant insights, we can calculate the standard deviation of the portfolio using portfolio variance. The…
What is a Liability? A liability is an obligation of a company that results in the company’s future sacrifices of economic benefits to other entities or businesses. A liability, like debt, can be an alternative to equity as a source of a company’s financing. Moreover, some liabilities, such as accounts payable or income taxes payable, are essential…
