What is the Theory of Liquidity Preference? The Theory of Liquidity Preference states that agents in financial markets demonstrate a preference for liquidity. Formally, if U(Asset A) > U(Asset B) and rA = rB, then L(Asset A) > L(Asset B), where: U(Asset A) is an investor’s utility from holding asset A U(Asset B) is an investor’s…
What are Capital Markets? Capital markets are the exchange system platform that transfers capital from investors who want to employ their excess capital to businesses that require the capital to finance various projects or investments. Types of Capital Markets Capital markets primarily feature two types of securities: equity securities and debt securities. Both are forms…
What is the Stochastic Oscillator? The Stochastic Oscillator is an indicator that compares the most recent closing price of a security to the highest and lowest prices during a specified period of time. It gives readings that move (oscillate) between zero and 100 to provide an indication of the security’s momentum. The stochastic readings are…
Capital Investment Model Template This capital investment model template will help you calculate key valuation metrics of a capital investment including the cash flows, net present value (NPV), internal rate of return (IRR), and payback period. Below is a preview of the template: Download the Free Template Download CFI’s Excel template to advance your finance…
What are Pivot Points? Pivot points refer to technical indicators used by day traders to identify potential support and resistance price levels in a securities market. They are based on the previous day’s high, low, and closing prices. Traders use pivot points and the support and resistance levels they provide to determine potential entry, exit,…
What is the Chaikin Money Flow (CMF)? The Chaikin Money Flow (CMF) is an indicator created by Marc Chaikin in the 1980s to monitor the accumulation and distribution of a stock over a specified period. The default CMF period is 21 days. The indicator readings range between +1 and -1. Any crosses above or below…
What is a Protective Put? A protective put is a risk management and options strategy that involves holding a long position in the underlying asset (e.g., stock) and purchasing a put option with a strike price equal or close to the current price of the underlying asset. A protective put strategy is also known as…
What is Securitization? Securitization is a risk management tool used to reduce the idiosyncratic risk associated with the default of individual assets. Banks and other financial institutions use securitization to lower their risk exposure and reduce the size of their overall balance sheet. The Securitization Process Securitization can be best described as a two-step process:…
What is a Development Impact Bond? A development impact bond is a type of financial security that is used to finance development programs in low-resource countries by attracting private investors. Development impact bonds are considered a sub-type of social impact bonds. Similar to other social impact bonds, development impact bonds are new financial instruments that…
