Disclaimer: This post contains affiliate links. Financestu does not provide investment or tax advice. I went through 20+ personal finance blogs authored by doctors, signed up for dozens of their newsletters, listened 6 hours of podcasts featuring doctors who are…
If you’re looking for a career path in technology, you may have come across Edureka. But now you may be wondering… Are the classes worth the money? Will they help me grow my career faster? Are the courses good quality?…
LDI funds leverage themselves by getting into derivatives contracts. The goal is to cover the interest rate risk of the liabilities of their investors (defined-benefit pension funds). Even though pension funds invest only a small portion of their assets, the…
You want to climb the corporate ladder as fast as possible so you can earn more, right? So you figure you should invest in your education and improve your skills. That’s great. An important step in the right direction. But…
You want to progress in your finance career as fast as possible. And to do so? You figure you should invest in your education and improve your skills. That’s great. But which program should you choose? I watched over 2…
A repo usually involves the sale of bonds in exchange for cash. The borrower is obliged to repurchase the bonds later. The bonds work as collateral for the lender. Securities lending is very similar, but usually involves the transfer of stocks…
A clearing house stands between two clearing firms, typically big banks, in a trade. Clearing firms must follow a strict set of rules and regulations in order to engage in transactions and have the clearing house as the intermediary. The…
Potential Future Exposure estimates the most you can win in a trade within a given timeframe and with a given confidence level. By extension, it tells you the most your counterparty can end up owing you, exposing you to the…
In Europe, investment funds are typically structured under the UCITS directive (Undertakings for Collective Investment in Transferable Securities) or as an Alternative Investment Fund (AIF) under the Alternative Investment Fund Manager Directive (AIFMD). Funds that follow the UCITS directive can…
The Financestu team writes about stuff we think you’ll like. We have affiliate partnerships so we may get a share of the revenue from your purchase. But don’t worry, it won’t cost you anything extra, and we promise not to…
AuM is the total market value of the assets an asset manager oversees on behalf of its investors. It includes stocks, bonds, and cash within the funds the asset manager manages. AuM doesn’t subtract unpaid expenses. NAV on the other…
Delivery risk (also called settlement risk) is when the settlement process of a trade involves one party paying out cash or securities before it receives the countervalue from its counterparty. The risk is that the counterparty may default in the…
The Financestu team writes about stuff we think you’ll like. We have affiliate partnerships so we may get a share of the revenue from your purchase. But don’t worry, it won’t cost you anything extra, and we promise not to…
A SICAV is an investment company, while an FCP is a fund. Both are common legal fund structures offered in Europe. A SICAV has its own legal identity and is usually an umbrella structure, meaning it has many sub-funds under…
In derivatives trading, initial margin is collateral exchanged at the beginning of the contract to protect a party from the possibility of default of its counterparty. Variation margin is another type of collateral, paid every day throughout the life of…
To calculate the exposure of a UCITS fund, the commitment approach estimates the leverage caused by all the derivatives in the portfolio. In contrast, the VaR approach measures the maximum potential loss within a specified time period due to market…
Both credit risk and counterparty credit risk refer to the same thing—that the firm on the other side of a transaction defaults and is no longer able to repay its obligations. Credit risk usually refers to the potential loss that…
A negative sum of discounted FCFF is rare. Usually, forecasts are positive and on top of that, there’s the terminal value. A negative forecasted cash flow in some years of your projection window shouldn’t stop you from using the DCF…
The second derivative of a utility function is negative to reflect risk aversion and decreasing marginal utility. A negative second derivative implies a concave function, which illustrates that the more money you have, the less satisfaction you get from additional…
This post contains affiliate links. Not sure if becoming a certified Financial Modeling & Valuation Analyst is for you? You’ve come to the right place. I went through over 2 hours of videos reviewing and ranking different certificates for business…
Equity beta is the overall business risk of the company, including both operational and financial risk. Asset beta on the other hand, excludes the effects of leverage on the capital structure, thus assuming the business is funded by equity only.…
You’re calculating the unlevered beta of a company and need the debt beta, but don’t know how to find it? Then this is for you. You can extract the implied debt beta from the CAPM formula by equating the formula…
Asset-intensive industries are industries that require big investments in fixed assets such as property, plant, and equipment (PP&E) to produce the goods or services they sell. Companies will have a high assets-to-sales ratio. Depreciation has a big impact on the…
The present value index tells you how promising an investment project is. You calculate it by dividing the present value of a project’s future expected cash flows by its initial investment cost. The higher the result the better. Financial analysts…
The difference is MOIC takes into account the value of both realized and unrealized gains and compares it to the invested capital. Thus, it is a gross measure of return that doesn’t take into account fund fees. Meanwhile, DPI compares…
RVPI in private equity compares the estimated remaining fair value of the fund’s investments that have not yet been exited, to all the capital the fund has received from investors. It gives you perspective on the performance of the fund’s…
This post contains affiliate links. Not sure if the Investment Management Specialization from the University of Geneva is for you? Over 80,000 students have enrolled and it is filled with positive reviews. But do the courses deliver on the promise…
Both TVPI and DPI are widely used in private equity to evaluate fund performance. TVPI compares the total value of a private equity fund (realized and unrealized gains and losses) to the capital the fund has received from its investors.…
The key difference between MOIC and ROIC is in the purpose of each metric. MOIC is mostly used in private equity to assess fund performance. In contrast, analysts use ROIC to evaluate how well a company allocates money from its…
To calculate the WACC you need the cost of equity, cost of debt, the proportions of equity and debt in the total value of the company, and the corporate tax rate. But what if you’re given the debt-to-equity ratio only,…
Working capital items such as accounts receivable, inventory, and accounts payable don’t go directly to the cash flow statement. However, the variation in the value of these items from the previous year to the current one is indeed included in…
Both paid-in capital and invested capital are used in private equity. Paid-in capital is the cumulative amount of committed capital that has been drawn down. In other words, the money that limited partners have actually transferred to the fund. On…
The cost of equity is the return equity investors demand in order to be willing to risk their money in the company. The Return on Equity is the profitability of that money. When the cost of equity is lower than…
A quadratic utility function is a type of utility function used in economics and finance to describe a person’s preferences over different outcomes. In other words, how people make choices under uncertainty. The quadratic utility has special importance in finance…
It depends. If you want to evaluate the company’s ability to meet short-term obligations, you calculate working capital as the difference between total current assets and current liabilities. Current assets include cash and cash equivalents. If you want to compute…
Excess cash is cash balance beyond what a business requires to fulfill its daily operational money needs. Usually, analysts consider 2% of the revenues of a company as the cash it really needs to function properly. Thus, the remaining cash…
The geometric average monthly return tells you the average monthly return of an investment, assuming you reinvest the profits every month. Meaning, it takes into account the compounding effect. You calculate it by multiplying all the month’s growth factors together…
If you, as a shareholder, choose to do nothing or not subscribe to a rights issue, the company sells them in the market, and you receive the net proceeds. Your existing shareholdings will be worth less money (at least in…
Working cash is the cash balance a company has on hand to cover its day-to-day expenses and cash needs. In contrast, excess cash and marketable securities are non-operating assets the company does not employ in its business (having or not…
Yes. Private companies pay dividends either from net income, retained earnings, or newly issued debt, just like public companies do. The only significant difference is more regulation in public companies. That’s the gist of it. For a more comprehensive look…
This post is a brief and somewhat incomplete look at Arrow-Debreu pricing theory, based on my lecture notes. Hope it helps! What is an Arrow-Debreu Security Arrow-Debreu securities (or state-contingent claims, or simply state claims) are financial instruments that pay…
The certainty equivalent of a lottery is the amount you would accept to receive to pass on the possibility of playing said lottery. In other words, it’s the maximum amount a person is willing to pay for a gamble. You…
Both TVPI and MOIC measure fund performance using the total value (realized plus unrealized) of private equity investments. The difference is in the denominator. MOIC divides the total value of the investment or fund by the total invested capital, whereas…
When a company goes public, its existing shareholders will see their shares lose controlling power in the company. However, this equity dilution only happens when the company issues new shares to raise capital. If the shares sold to the public…
If a SPAC fails to merge with a target company within the specified time frame (typically 2 years), it is liquidated and the funds raised in its IPO are returned. This means investors get their money back—minus any fees or…
Real options increase the expected returns of an investment opportunity by allowing adjustments to the investment strategy in response to changing market conditions or new information. In other words, having more flexibility in investment and disinvestment increases the value of…
Depreciation should not exceed capital expenditures in the terminal year of a DCF model unless you want to assume the value of the company’s assets will go to zero. When estimating the Enterprise Value of a firm through a DCF…
If maintenance/repair costs are capitalized into a fixed asset, inflation results in an increase in depreciation. Still confused? Keep reading for a more comprehensive answer: Depreciation is the non-cash expense that accounts for the decline in value of an asset…
The Financestu team writes about stuff we think you’ll like. We have affiliate partnerships so we may get a share of the revenue from your purchase. But don’t worry, it won’t cost you anything extra, and we promise not to…
Return on Invested Capital. Return on Investment. Wondering how the hell are these two things different? Then this is for you. The ROIC measures how efficiently a company employs the capital it received from its investors (both equity and debt…