What is Yield to Maturity? Yield to Maturity (YTM) shows the internal rate of return of a bond in comparison to its current market price. Other names used for YTM are book yield or redemption yield. YTM represents the anticipated return on a bond based on the assumption that the …

What is compounding? Compounding refers to the process of increasing the value of an asset or investment based on the interest earned on its principal amount and its accrued interest. Usually, compounding consists of calculating the interest on the carrying value of the investment for each period. The carrying value …

Cost of capital represents the minimum rate of return that a company or business must earn from its investments to make a profit on it. Usually, the cost of capital of a company consists of its cost of debt and cost of equity. Therefore, the company’s capital structure plays a …

Internal Rate of Return (IRR) is a discount rate at which the Net Present Value (NPV) of a project is zero. In other words, IRR is the discount rate at which the present value of all cash flow from a project equals its initial capital investment. IRR is one of …

Companies and businesses use different tools in their capital budgeting and investment appraisal process. Some of these tools are simpler, while others require complex calculations based on the time value of money concept. One such tool that is most commonly used by businesses is Net Present Value (NPV). What is …

The Capital Asset Pricing Model (CAPM) is a model that investors use to determine the rate of return of an investment. The model describes the relationship between the expected return of an investment and its risks. Furthermore, CAPM is one of the most commonly used models in finance for pricing …

The dividend yield is a financial ratio that represents the annual dividends paid to shareholders against a stock in relation to its current market price. In simpler words, the dividend yield measures a company’s dividends as a percentage of its stocks’ current market price. The dividend yield is a useful …

The Arbitrage Pricing Theory (APT) is a model that describes the relationship between the expected returns from an asset and its risks. Often used as an alternative to the Capital Asset Pricing Model (CAPM), APT is a multi-factor model for investments that explains the risk-return relationship using various independent factors …

The price-to-earnings (P/E) ratio represents the relationship between the market value of the stock of a company and its earnings per share (EPS). It is one of the most commonly used and well-known ratios used by investors in valuing the stocks of a company. Other names for the P/E ratio …

The Dividend Discount Model (DDM) is a model used to predict the value of a company’s stock. The model bases its calculations on the theory that the value of a stock is equal to all its future dividends discounted to their present value. Investors and shareholders use DDM to evaluate …