Interest rate swaps are a primary type of hedging methods used by participants to mitigate their risks. With these swap contracts, participants can exchange their interest payments with another party to receive favourable terms in the future. There are several types of interest rate swaps that participants can use for …

Investors have many options when it comes to investing in bonds. Usually, investors can get bonds directly from the issuer. These issuers may include municipalities, government agencies, or companies. On the other hand, investors can also invest in funds that offer convertible bond investments. Among these investments, investors can choose …

What is the Bird in Hand Theory? The bird-in-hand theory suggests that investors would prefer dividends from stock investments over capital gains. This theory believes that investors are likely to favour returns that are certain rather than uncertain. Because of the uncertainty involved around capital gains, the bird-in-hand theory assumes …

Hedge funds represent alternative investments where investors pool funds and employ different strategies. The goal with hedge funds, as with any other investment, is to earn active returns. Hedge fund managers gather funds from investors and invest them according to a promised strategy. However, hedge funds are mostly available to …

Default risk is a type of risk that accompanies all debt obligations. Default risk represents the uncertainty associated with repayments from borrowers. In case these risks realize, lenders can suffer a substantial amount of losses. Therefore, they need to protect against such occurrences. Usually, lenders check the borrower’s creditworthiness to …

What is an Expected Credit Loss? The term expected credit loss represents the amount of loss the companies estimate to have on their credits. It is a term used in accounting under the IFRS 9. Before the expected credit losses, companies recognized bad debts or credit losses only when they …

Default risk represents the chance that a borrower does not repay their debt obligation. Almost every loan or debt obligation comes with default risk. The higher the default risk is, the more unlikely it is for lenders to recover their loaned amount. Default risks can be crucial for lenders when …

What is Net Operating Profit After Tax? Net Operating Profit After Tax (NOPAT) is a term that shows a company’s income from operations without considering interests. Since the interest payments for different companies depend on their capital structure, comparisons between them can be challenging. However, NOPAT removes the effects of …

Credit risk refers to the uncertainty associated with repayments from borrowers. When a lender provides a loan to a borrower, they expect future interest and principal repayments. However, borrowers may not fulfill their end of the bargain. For every debt transaction, credit risk will exist. Therefore, lenders always have to …

What is the Law of One Price? The Law of One Price (LOOP) is an economic theory that suggests that after accounting for the difference in currency exchange rates, the prices of identical goods in various markets will be the same. This law applies to financial markets and the securities …