An interest rate cap is a derivative instrument that involves an agreement between two parties. In this agreement, one party assumes the responsibility to pay the other if the interest rate on a variable loan exceeds an agreed limit. The initial contract between both parties sets the timeframe, interest rate …

Businesses use many strategies to get customers and defeat their competition. One of these strategies is known as loss leader pricing. It’s the technique of lowering the price of a product to draw in customers with the hopes that they’ll buy other higher-priced items as well. Loss leader pricing can …

Investors invest in a company or business to receive returns in exchange. For companies, these returns come from dividends paid to shareholders. However, other business entities may not use these. For example, sole proprietorships, partnerships, etc., do not pay dividends. Instead, they allow owners to withdraw their profits through a …

In economics, there is a concept known as “inelastic demand.” This term refers to a situation in which consumers are not very likely to change their behavior when it comes to purchasing a particular product. For example, people need food to survive, so the demand for food is considered inelastic. …

A company’s capital structure includes both equity and debt. Usually, each source comes with its own cost to the company. Therefore, companies seek to find an ideal mix between the two to run operations and minimize costs. While most people consider the cost of debt as interest expense, it may …

It’s a well-known fact that managing costs are essential for any business to maintain a healthy profit margin. But that’s not always so clear which specific costs are the most crucial to manage. In other words, what are the cost drivers of a business? Many different factors can contribute to …

Companies usually incorporate two types of finance in their capital structure. These comprise debt and equity. However, companies may also receive funds from hybrid instruments. These may include features of both equity and debt finance. One of the most common types of hybrid finance comes through mezzanine financing. Therefore, it …

In every economy, for every community or group of people, there is always a need for certain basic goods and services that we collectively agree everyone should have access to. These needs are met through the production of public goods. Public goods are those that are non-excludable and non-rivalrous in …

Debts fall into several categories based on a common factor. One such classification comes from the lien associated with the specific debt. Usually, they may include first- and second-lien debts. Creditors use these to decrease the default risk on their loans or funds. Before discussing these, it is crucial to …

Alpha is one of five popular technical investment risk ratios/investment strategies, others are beta, standard deviation, R-squared, and the Sharpe ratio. Active portfolio managers believe adding Alpha to a portfolio can outperform the market and passive investing. They also believe it can reduce the risks and provide higher returns than …