An asset is a resource that is owned or controlled by a business that can result in future economic inflows for it. For example, for a company, assets may be machinery, building, property, inventory, cash, etc. Companies present these assets on the Balance Sheet. Additionally, based on how long they …

Investors face several types of risk when keeping a portfolio of investments. Therefore, to manage these risks, they can use a concept known as portfolio diversification. The concept of diversification isn’t unique or modern. It has existed ever since the beginning of time. The idea behind portfolio diversification is best …

The Time Value of Money (TVM) is a concept often used in various investment appraisal tools. Time value of money represents the concept that the cash flows received from an investment aren’t the only thing that matters when making decisions about it. The timing of these cash flows also matters. …

A tool often used by investors when making decisions about bonds is convexity. Bond convexity shows the relationship between the price of a bond and its yields due to changes in interest rates. It is a tool often used along and confused with bond duration. While bond duration assumes the …

A bond is a debt instrument issued by an entity, the borrower, to an investor, the lender. The bond gives the holder a right to receive a fixed income at regular intervals of time based on a predetermined rate. Similarly, it provides the lender with the right to receive a …

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 …