What is the Federal Funds Rate? In the United States, the federal funds rate refers to the interest rate that depository institutions (such as banks and credit unions) charge other depository institutions for overnight lending of capital from their reserve balances on an uncollateralized basis. Types of Rates There are two types of federal funds…
What is a Leveraged Loan? A leveraged loan is a loan that is extended to businesses that (1) already hold short or long-term debt on their books or (2) with a poor credit rating/history. Leveraged loans are significantly riskier than traditional loans, and, as such, lenders typically demand a higher interest rate to reflect the…
What is Capital Employed? Capital employed refers to the amount of capital investment a business uses to operate and provides an indication of how a company is investing its money. Although capital employed can be defined in different contexts, it generally refers to the capital utilized by the company to generate profits. The figure is…
What is a Reserve Fund? A reserve fund refers to a savings account or highly liquid assets set aside to meet unexpected costs or financial obligations. Businesses, individuals, and condominium homeowners’ associations are common users of reserve funds. Understanding Reserve Funds Reserve funds are established to meet unexpected future costs or financial obligations that may…
What is the Reserve Ratio? The reserve ratio – also known as bank reserve ratio, bank reserve requirement, or cash reserve ratio – is the percentage of deposits a financial institution must hold in reserve as cash. The central bank is the institution that determines the required amount of reserve ratio. A bank’s reserve usually…
What is a Credit Memorandum? A credit memorandum – often shortened to credit memo – is given to a customer by a seller that provides goods and/or services. The memo is issued as a way to reduce the amount owed by the customer. The deduction is taken from an invoice that was previously issued, which…
What are Credit Analysis Ratios? Credit analysis ratios are tools that assist the credit analysis process. These ratios help analysts and investors determine whether individuals or corporations can meet their financial obligations. Credit analysis involves both qualitative and quantitative aspects. Ratios cover the quantitative part of the analysis. Key ratios can be roughly separated into…
What is Credit Analysis? Credit analysis is a process undertaken by lenders to understand the creditworthiness of a prospective borrower, meaning how capable (and how likely) they are of repaying principal and interest obligations. The borrower, also known as the debtor, could be an individual or a business entity; the former is referred to as…
What are Flash Crashes? Flash crashes refer to a scenario where the price of bonds, stocks, or commodities suddenly plunges but then quickly recovers. It is called a flash, as the market will crash suddenly but then prices will almost immediately rebound. At the end of the day, the net result appears almost as though…
What is a Direct Listing? A direct listing is a process by which a company can go public by selling existing shares instead of offering new ones. Companies that choose to go public using the direct listing method usually have different goals than those that use an initial public offering (IPO). Direct Listing vs. Initial…
