Finance

Binomial Options Pricing Model

Binomial option pricing model is a risk-neutral model used to value path-dependent options such as American options. Under the binomial model, current value of an option equals the present value of the probability-weighted future payoffs from the options.

Hedge Ratio

A hedge ratio is the ratio of exposure to a hedging instrument to the value of the hedged asset. A ratio of 1 or 100% means that the position is fully hedged and a ratio of 0 means it is not hedged at all.

Municipal Bonds

Municipal bonds (also called munis) are bonds issued by state or local governments. Most of municipal bonds are exempt from federal and state taxes. Their tax-equivalent yield equals tax-exempt yield divided by (1 - marginal tax rate).

Putable Bonds

Putable bonds are bonds which entitle the bondholder to return the bond to the issuer on specified dates before its maturity date. Putable bonds have an embedded put option. They allow investors to sell the bonds back to the issuer and reinvest the proceeds in new bonds paying higher yields.

Country Risk Premium

Country risk premium is the incremental required return which results from the increased risk inherent in an investment in a foreign (developing) country. It is added to the requirement rate of return in a developed market to arrive at appropriate required return for an emerging market.

Loan to Value Ratio

Loan to value ratio (abbreviated as LTV ratio) is the ratio of the principal balance of the loan to the market value of the asset used to secure the loan. It is an important factor used by lenders in deciding whether to approve a loan or not.

Mutual Funds

Mutual funds are investment vehicles which pool funds from its unit-holders and invest them according to a specific investment style. Mutual fund types include: open-end vs closed-end, load funds vs no-load funds,

Earnings Yield

Earnings yield is the ratio of earnings per share to current stock price. It measures dollars earned per $100 dollars invested in a company at current stock price. Earnings yield is the reciprocal of the price to earnings (P/E) ratio and it is expressed as a percentage.

Price to Sales Ratio

Price to sales ratio (P/S ratio) is the ratio of a company’s current stock price to its net sales revenue per share. Price to sales ratio is a relative valuation measure which values a company with reference to the sales revenue it generates. There are situations in which P/S ratio is more meaningful than the more popular ratios such as the price to earnings (P/E) ratio, etc., for example when there is net loss or where the net income is manipulated through creative accounting.

Price to Earnings Ratio

P/E ratio (i.e. price to earnings ratio) is the ratio of a company’s current stock price to its earnings per share. By comparing P/E ratios, we can identify undervalued and overvalued stocks. There are two variants: (a) trailing P/E ratio, which is calculated by dividing current stock price by last year EPS and (a) forward P/E ratio, which is calculated by dividing the current stock price with expected next year EPS.