What is Expected Default Frequency (EDF)? Expected Default Frequency (EDF) is a credit measure that was developed by Moody’s Analytics as part of the KMV model. EDF measures the probability that a company will default on payments within a given period by failing to honor the interest and principal payments, usually within a period of…
What is an Installment Loan? An installment loan refers to both commercial and personal loans that are extended to borrowers and that require regular payments. Each of the regular payments for the loan includes a portion of the principal amount, as well as a portion of the interest on the debt. The amount of each…
What is Altman’s Z-Score Model? Altman’s Z-Score model is a numerical measurement that is used to predict the chances of a business going bankrupt in the next two years. The model was developed by American finance professor Edward Altman in 1968 as a measure of the financial stability of companies. Altman’s Z-score model is considered…
What is a Simple Capital Structure? A simple capital structure is a capital structure that contains no potentially dilutive securities. In other words, a simple capital structure consists only of common stock, nonconvertible debt, and nonconvertible preferred stock. Types of Capital Structure Simple capital structure Complex capital structure As outlined above, a simple capital structure…
What are Online Payment Companies? Online payment companies are responsible for handling online or internet-based methods of payment. The online payment systems allow the seller to accept payments and the buyer to send payments over the internet. Examples of online payment companies include PayPal, Alipay, WeChat Pay, Paytm, Google Pay, and Apple Pay. Online Payment…
What is Participative Budgeting? Participative budgeting is a budgeting process in which the people who are in the lower levels of management are involved in the budget preparation process. Unlike the imposed budgeting process, participative budgeting shares the responsibility with lower-level managers to give them a sense of ownership in the business. Participative budgeting also…
What is a Back Charge? A back charge is a bill sent for an expense that occurred at a previous time. Some of the reasons why such a charge may occur include collecting payment on a good/service that wasn’t paid before or correction of a bill that included an incorrect expense. Back charges should be…
What is the Financial Stability Board (FSB)? The Financial Stability Board (FSB) is a global organization that regulates and makes recommendations regarding the global financial system. The FSB’s creation came after the G20 Summit in London in April 2009. Headquartered in Basel, Switzerland, the board includes all G20 major economies. Germany’s Dietrich Domanski is the…
Lehman Brothers – A Fall from Grace Lehman Brothers’ stock was selling at $86 a share in February 2007, giving the company a market capitalization of nearly $60 billion. For the year, the company reported a new record high in net income, over $4 billion. In January 2008, Lehman Brothers was the fourth-largest investment bank…
What is Funding Liquidity Risk? Funding liquidity risk refers to the risk that a company will not be able to meet its short-term financial obligations when due. In other words, funding liquidity risk is the risk that a company will not be able to settle its current outstanding bills. Understanding Liquidity Liquidity is defined as…
