Non-mortgage Asset-backed Securities
Many non-mortgage assets could be used as collateral in securitization such as auto loans, credit card receivables, personal loans, and commercial loans. Asset-backed securities (ABS) that are not guaranteed by a government or quasi-government entity are subject to higher credit…
Collateralized Debt Obligations (CDO)
Collateralized Debt Obligation (CDO) is a generic term used for a security backed by a diversified pool of one or more debt obligations. CDOs backed by corporate bonds and emerging market bonds are called Collateralized Bond Obligations (CBOs), whereas CDOs…
Spot Rates and Forward Rates
A forward rate is the interest rate on a loan beginning at some time in the future. A spot rate, on the other hand, is the interest rate on a loan beginning immediately. Therefore, the forward market rate is for…
Measures of Return
Financial market assets generate two different streams of return: income through cash dividends or interest payments and capital growth through asset price appreciation. Headline stock market indices typically report on price appreciation only. They do not include the dividend income…
Asset Class Characteristics
All asset classes have risk and return characteristics. Historical returns are neither forward-looking nor expected returns. Nevertheless, it is noteworthy that by examining the performance of the historical returns, we can understand the likely characteristics of a particular asset class….
Business, Sales, Operating Risk, and Financial Risks
Risk can be defined in several ways. However, one fairly simple definition is, “risk refers to the uncertainty of a return and the potential for financial loss.” Risk can arise from both financing and operating activities and can be classified…
DOL, DFL and DTL
The Degree of Operating Leverage, Degree of Financial Leverage, and Degree of Total Leverage are three important ratios that help us to quantify a company’s exposure to operational risk, financial risk, and a combination of the two, respectively. Degree of…
Effect of Financial Leverage on Net Income and ROE
Financial leverage refers to the extent to which a company finances its operations using fixed-cost financial obligations such as debt and preferred equity. The more a company uses debt financing, the higher its financial leverage and exposure to financial risk….
Breakeven Quantity of Sales
“Breakeven point” or “breakeven quantity of sales” refers to the number of units of a company’s product that is produced and sold at which point the company’s net income becomes zero. Computing Breakeven Quantity of Sales At the point where…
Operating Breakeven Quantity of Sales
The breakeven quantity of sales or just simply breakeven point indicates the number of units of a company’s product that is produced and sold at which point the company’s net income becomes zero. Similarly, we can specify the breakeven point…
