What is Prepayment Risk? Prepayment risk refers to the risk that the principal amount (or a portion of the principal amount) outstanding on a loan is prematurely paid back. In other words, prepayment risk is the risk of early repayment of a loan by a borrower. Understanding Prepayment Risk Prepayment risk may sound counter-intuitive in…
What is the Delinquency Rate? The delinquency rate refers to the percentage of loans that are past due. It indicates the quality of a lending company’s or a bank’s loan portfolio. Understanding the Delinquency Rate The delinquency rate is commonly used by analysts to determine the quality of the loan portfolio of lending companies or…
What is the Debt-to-Income Ratio? The debt-to-income (DTI) ratio is a metric used by creditors to determine the ability of a borrower to pay their debts and make interest payments. The DTI ratio compares an individual’s monthly debt payments to his or her monthly gross income. It is a key indicator that lenders use to measure…
What is a Debt Settlement? A debt settlement refers to an agreement reached between a creditor and a borrower in which a reduced payment from the borrower is regarded as full payment. In other words, a debt settlement is a debt reduction agreement reached between a creditor and borrower. Understanding a Debt Settlement A debt…
What are Growth Stocks? Growth stocks are stocks that offer a substantially higher growth rate as opposed to the mean growth rate prevailing in the market. It means that a growth stock grows at a faster rate than the average stock in the market and consequently, generates earnings more rapidly. Characteristics of Growth Stocks 1….
What is Debt Refinancing? Debt refinancing is the replacement of an existing debt by means of another debt with terms and/or conditions that are more favorable. In other words, debt refinancing refers to the replacement of existing debt with new debt. How It Works Debt refinancing is commonly used to take advantage of new financing…
What are Pooled Funds? Pooled funds is a term used to collectively refer to a set of money from individual investors combined, i.e., “pooled” together for investment purposes. The funds are combined with the intention of benefiting from economies of scale through cost minimization. Some examples of pooled funds include, but are not limited to,…
What is the Credit-Market Debt to Disposable Income Ratio? The credit-market debt to disposable income ratio is a financial metric used to measure financial conditions in households. The ratio compares the total amount of debt held by households to the disposable income (after-tax income) of the households. The credit-market debt to disposable income ratio is…
What is Capital Preservation? Capital preservation is an investment strategy that promotes saving, i.e., preserving capital and avoiding loss of value. The strategy adopts a conservative approach towards investing specifically in “safe” short-term instruments such as savings accounts, FDIC-insured checking accounts, Treasury bills, and certificates of deposits (CDs). Key Factors in Capital Preservation 1. Levels…
What are Financial Covenants? Financial covenants are the promises or agreements entered into by a borrowing party that are financial in nature. An example of a financial covenant is when a borrowing company agrees to maintain (staying above or below) an agreed ratio, typically financial ratios such as the interest coverage ratio, total assets to…
