Financial Management

Secured bonds come with a pledge of collateral. Unsecured bonds are issued by entities with higher credit ratings and do not offer collateral. Investors can analyze both types of bonds for the perceived risks. Both types of bonds carry a varying degree of default risk. Thus, the return on investment will also be different. Let […]

Free cash flow (FCF) is an important metric to analyze the financial performance of a firm. It is often considered an equally important measure as the net profit of a firm. There are several ways to calculate the free cash flow of the firm. Similarly, there are various versions of the cash flow that are

The EBITDA coverage ratio is one of several ratios that is used to evaluate a company’s financial strength to meet its debt obligations. This ratio is one of the finest metrics to analyze a company’s financial durability. The EBITDA coverage considers the cash flows of a company rather than operating profit. Thus, it offers a

Two parties can agree to predetermine an interest rate obligation for a future payment. The agreement is made on the forward rate, hence the name Forward Rate Agreement (FRA). FRAs are over-the-counter instruments that can be arranged by two parties directly. FRAs can be used in interest rate hedging planning. FRAs are particularly useful in

Interest collars limit the losses due to an adverse movement in interest rate for an underlying asset such as a bond. Collars also restrict the maximum gains due to favorable interest rate movements, though. Interest rate caps are upper limits of an interest rate options contract. In contrast, floors are the minimum interest rate limits

A Swap is a financial derivative that allows two parties to exchange liabilities or revenue streams from two underlying assets with opposing characteristics. Usually, Swaps involve a fixed cash flow stream and a variable cash stream. Swaps are over-the-counter derivates that are arranged directly by two parties. These instruments do not trade like other marketable

Theoretical Ex-Rights Price or TERP is the price of the shares immediately after the rights issue. A rights issue is the offering of shares to existing shareholders. As companies issue new shares, it dilutes the company’s shareholding. Thus, its share prices get affected due to rights issues. Since rights attached to existing shares have value,

Leverage is the use of debt financing in the capital structure of a company. It means the use of borrowed money instead of using equity for funding the company projects. It is also commonly referred to as the ratio of debt to equity. Leveraged finance lowers the cost of capital. It also increases the internal

Futures contracts or simply Futures are derivatives as they derive their prices from an underlying asset. Futures are traded in standardized forms and are regulated by the Commodity Futures Trading Commission (CFTC). Futures can be used for hedging and speculation. Once agreed, Futures become an obligation to exercise the contract on the expiration date. However,