What is the One-Period Dividend Discount Model (DDM)? The one-period dividend discount model is a variation of the dividend discount model. The one-period dividend discount variation is used to determine the intrinsic value of a stock that is planned to be held for one period only (usually one year). Similar to the general dividend discount…
What is Direct Security? Direct security is typically collateral that can be used to secure a loan. Securities can be broadly divided into two distinct types: asset securities and collateral securities. Asset security represents ownership interest held by shareholders in an enterprise, realized in the form of shares of capital stock. Holders of equity securities…
What is Duration Drift? Duration drift represents the change in duration as a result of the passage of time. It is a problem in asset-liability management, which makes it necessary to regularly monitor and recalculate the duration of a financial instrument. To better understand duration drift and its effects, you need to first understand what…
What is a General Security Agreement (GSA)? A General Security Agreement (GSA) grants a security interest over personal property or assets, the collateral pledged for many types of financing. The contract is executed by a debtor (borrower) in favor of a creditor (lender). A GSA can support various lender obligations, including personal and commercial loans….
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…
