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, or 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 variables. Unlike…
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…
What is a Correlation? A correlation is a statistical measure of the relationship between two variables. The measure is best used in variables that demonstrate a linear relationship between each other. The fit of the data can be visually represented in a scatterplot. Using a scatterplot, we can generally assess the relationship between the variables…
What is Confidence Interval? A confidence interval is an estimate of an interval in statistics that may contain a population parameter. The unknown population parameter is found through a sample parameter calculated from the sampled data. For example, the population mean μ is found using the sample mean x̅. The interval is generally defined by…
What is Functional Obsolescence (Real Estate)? In real estate, functional obsolescence refers to the diminishing of the usefulness of an architecture design such that changing it to suit current real estate designs is almost impossible. In the long term, functional obsolescence results in losses to investors due to the fact that real estate investments are…
What is a Direct Offering? A direct offering is sometimes referred to as direct placement. It is a type of offering that allows the issuing company to sell its securities directly to investors without using a middleman, such as an investment bank. When a company decides to use direct offering rather than an initial public…
What is a Multi-Step Income Statement? A multi-step income statement is an income statement that segregates total revenue and expenses into operating and non-operating heads. It offers an in-depth analysis of the business’s financial performance in a specific reporting period. It lists items in different categories to make it convenient for users of the income…
