What is a Liquidity Premium? A liquidity premium compensates investors for investing in securities with low liquidity. Liquidity refers to how easily an investment can be sold for cash. T-bills and stocks are considered to be highly liquid since they can usually be sold at any time at the prevailing market price. On the other…
What Are Preferred Shares? Preferred shares, also called preferred stock, are a unique class of equity ownership in a company, but with bond-like features such as fixed dividends. Investors buy preferred shares for steady dividend income and potentially higher yields. Preferred shareholders are also paid before common shareholders, but after debt holders, in the event…
What is the Exponential Moving Average (EMA)? The Exponential Moving Average (EMA) is a technical indicator used in trading practices that shows how the price of an asset or security changes over a certain period of time. The EMA is different from a simple moving average in that it places more weight on recent data…
What is Cash Flow? Cash Flow (CF) is the increase or decrease in the amount of money a business, institution, or individual has. In finance, the term is used to describe the amount of cash (currency) that is generated or consumed in a given time period. There are many types of CF, with various important…
What Does Incurred Mean? Incurred is an accounting term that means that all transactions, regardless of their nature, must be recorded when they occur. It means that an accountant must recognize and record the transaction on the date when it occurred rather than on the date when the transaction was actually paid. Incurred Losses Incurred…
What is the Equivalent Annual Annuity? Equivalent Annual Annuity (or EAA) is a method of evaluating projects with different life durations. Traditional project profitability metrics such as NPV, IRR, or payback period provide a very valuable perspective on how financially viable projects are overall. EAA is a metric used to determine how financially efficient projects…
What is Risk-Free Rate? The risk-free rate of return is the interest rate an investor can expect to earn on an investment that carries zero risk. In practice, the risk-free rate is commonly considered to be equal to the interest paid on a 10-year highly rated government Treasury note, generally the safest investment an investor…
What is the Expense Ratio? An expense ratio is a fee charged by an investment company to manage the shareholders’ funds. Investment companies such as mutual funds often incur various operating expenses when managing investors’ funds, and they charge a small percentage of the funds under management to cover the expenses. Some of the expenses…
What is a Default Risk Premium? A default risk premium is effectively the difference between a debt instrument’s interest rate and the risk-free rate. The default risk premium exists to compensate investors for an entity’s likelihood of defaulting on their debt. What determines the default risk premium? Default risk premiums essentially depend on a company…
