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 (APY)? 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…
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…
What is Equity Crowdfunding? Equity crowdfunding (also known as crowd-investing or investment crowdfunding) is a method of raising capital used by startups and early-stage companies. Essentially, equity crowdfunding offers the company’s securities to a number of potential investors in exchange for financing. Each investor is entitled to a stake in the company proportional to their…
What is Asymmetric Information? Asymmetric information is, just as the term suggests, unequal, disproportionate, or lopsided information. It is typically used in reference to some type of business deal or financial arrangement where one party possesses more, or more detailed, information than the other. The issue with asymmetric information starts before any transaction takes place….
What is Liquidity? In financial markets, liquidity refers to how quickly an investment can be sold without negatively impacting its price. The more liquid an investment is, the more quickly it can be sold (and vice versa), and the easier it is to sell it for fair value or current market value. All else being…
What is Equity? In finance, equity is the market value of the assets owned by shareholders after all debts have been paid off. In accounting, equity refers to the book value of stockholders’ equity on the balance sheet, which is equal to assets minus liabilities. The term, “equity”, in finance and accounting comes with the…
What is a Discount Rate? In corporate finance, a discount rate is the rate of return used to discount future cash flows back to their present value. This rate is often a company’s Weighted Average Cost of Capital (WACC), required rate of return, or the hurdle rate that investors expect to earn relative to the…
