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.

Cash Flow Adequacy Ratio

Cash flow adequacy ratio measures if cash flows generated from operating activities in a period are sufficient to pay off fixed asset purchases, made the payments due on debt and pay dividends. A cash flow of 1 or higher means that the company is able to meets its most pressing cash flow demands.

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,

Altman Z-Score

Altman z-score is a statistic that measures the credit risk of a company. Companies with z-score of less than 1.81 are prone to bankruptcy. Z-score equals 1.2 times the working capital to total assets, 1.4 times retained earnings to total assets, 3.3 times EBIT to total assets, 0.6 times market capitalization to book value of liabilities and 1 time the total asset turnover.

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.