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AA+/Aa1 — credit rating
AA+ — S&P / Fitch Aa1 — Moody’s Major independent rating institutions such as Moody’s, Fitch, and Standard & Poor’s (S&P) can make or break a company or municipality’s ability to issue debt at a competitive yield. They rank companies and debt issues in terms of the risk of default. Ratings in the A range are considered Investment Grade, which is a rating mostly used by institutional investors. The interesting thing is that there are 7 kinds of A ratings, and they are different between the ratings institutions. We will not list them here, but charts that show the system are readily available online. Continue reading...
What is Bond Yield?
Bond yield is a measure of the return on investment for bonds, and there several kinds of yield that can be computed. Yield on a bond is the amount of interest that it pays annually, as a percentage of the amount invested — at least, this is the most common type of yield discussed, which is known as Current Yield. If a bond pays quarterly or monthly income to the investor, these payments are totaled up and divided by the amount invested. Continue reading...
What is the Equity Multiplier?
The Equity Multiplier is a number used to compare companies, arrived at by dividing total assets by owner’s equity, and it gives an idea of what proportion of the company’s assets have been financed through equity vs debt. In general a low Equity Multiplier is a good sign because it means that a higher proportion of equity has been used to acquire assets, as opposed to funding assets with debt. However, the absence of significant debt could mean that the company lacked the credit rating to issue debt or take out loans. Continue reading...
What is the Debt Ratio?
The debt ratio measures a company’s total debt to total assets. It is the simplest calculation available for determining how indebted a company is on a relative basis. The debt ratio is crucial for determining a company’s financial standing, and should be considered by potential investors. To calculate the debt ratio, one only needs to divide total liabilities (i.e. long-term and short-term liabilities) by total assets. Continue reading...
What is a Secondary Offering?
A secondary offering is the sale of a large block of previously-issued, privately-held stock, which actually requires registration with the SEC, but does not raise capital for the company which issued the shares originally. A secondary offering is a non-dilutive sale of existing shares which were previously held by one, or a few, investors. The proceeds of the sale go to the sellers of the shares and not to the company which issued the shares. Continue reading...
What Does Debt Mean?
Debt is money owed from one party or parties to another, plain and simple. Whether it’s money borrowed, loaned, credit, or a good sold for which payment has yet to be received, debt lives on just about every company and government’s balance sheet. Debt has a negative connotation generally, but it is not always a bad thing - in fact, having certain type of debt is good! Especially if the corporation or person borrows money at an attractive interest rate in order to invest in an asset that they expect to generate a higher return. In order to maintain a good credit standing, it is imperative that a borrower make interest payments on time and never default on debt. Continue reading...
What is Credit Debt?
Credit debt or credit card debt is a type of consumer debt that is incurred through a short-term revolving loan facility. The most common of course is a credit card company issuing a card to a client to make purchases, with the client being responsible for minimum payments plus whatever interest rate applicable. Removing credit card debt from one’s balance sheet is often an effective way of improving your financial life. Continue reading...
What are Debt Ratios?
Debt ratios give a relative picture of a company’s ability to repay debts, make interest payments, and meet other financial obligations. They generally compare the level of debt in a company to the level of assets. Debt ratios are key for investors and particularly creditors, to determine the overall level of financial risk faced by a company. Debt ratios that increasingly turn unattractive can serve as “canaries in a coal mine” that a company is in danger of bankruptcy or default. There are several types of debt ratios, such as debt-to-equity, debt-to-capital, cash flow to debt, and so on. Continue reading...
What is Cost of Debt?
The cost of debt is a calculation that determines the actual cost of a company’s debt financing. Since interest payments are generally tax deductible, the cost of debt may not be as simple as just adding up all of the interest paid on a loan. It would have to be adjusted for the tax savings, such that it is total interest paid less the tax savings. Continue reading...
What is Subordinated Debt?
Subordinated Debt is a junior security which will be serviced after the Unsubordinated Debt in the event of a company bankruptcy. Subordinated Debt has been deemed less important than the Unsubordinated Debt that a company has taken on, in terms of what priority it will have for payment in the event of company default. The amount of money and length of term on the loan are considerations when making this distinction. Continue reading...
What is Investment Banking?
Investment banking activity is different than traditional banking. Investment banks often serve as intermediaries that underwrite a new issue of stock and help to distribute it. They also trade in their own accounts, run hedge funds, and generally invest and speculate in ways that most institutions can’t. Investment banks can assist with new issues of stocks and bonds, purchasing large blocks of them to distribute at a premium. Continue reading...
What is Federal Debt?
Federal debt is the money owed by the government. The primary source of this debt is Treasury Bonds (Notes), which constitute debt obligations. About 25% of the current national debt is owed internally between different government agencies, mostly to the Social Security Trust Funds. The Federal Debt is also, and perhaps more commonly, referred to as the National Debt. Currently the debt is approximately $19 Trillion. Continue reading...
What is foreign debt?
Foreign Debt is also called International Debt or External debt. It is the amount of debt that is owed by one country to other countries or entities outside of the borrowing country’s borders. A country may find it easy to raise capital for operations and projects by issuing lots of bonds and taking on lots of debt obligations. If this proves to be unsustainable, or if the sheer amount of debt has investors worried, it can have significant detrimental effects and send an economy spiraling out of control. Continue reading...
What was the Subprime Meltdown?
A high volume of loans issued to those who were unable to repay them, and a high volume of derivative securities traded on top of these loans, contributed to the subprime meltdown of 2007-2009. A large amount of collateralized mortgage obligations (CMOs) and other collateralized debt were owned by large institutions and investors as alternative high yield investments prior to the crash of 2007-2009. Continue reading...
What is a Corporate Bond?
A corporate bond is a debt security issued by a public or private company to raise capital. They are generally issued in multiples of $1,000 or $5,000, and the issuing company must agree to pay a certain interest rate typically determined by their creditworthiness and earning history/potential. Often times the corporation issuing the debt must use their physical assets as collateral, and it is often found that corporations are more likely to issue debt during an environment when interest rates are low, so they can borrow at attractive rates. Corporate debt that matures in less than one year is called ‘commercial paper.’ Continue reading...
Whats is Commercial Paper?
Commercial Paper is an unsecured short-term loan that a highly rated corporation can issue to finance short-term obligations, like accounts receivable or inventory builds. The high quality paper is typically issued in increments of $100,000 and with a duration of no more than 270 days, which actually makes it a safe investment since the solvency/cash flow of a business is predictable over such a short stretch. Continue reading...
What are Asset-Backed Securities?
An Asset-Backed Security, or ABS, are bonds or notes backed by financial assets. It is an example of “securitization.” The assets within the ABS generally tend to consist of different kinds of debt receivables, such as credit cards, auto loans, home equity loans, and so forth. Banks build portfolios of receivables in making loans and issuing credit, and then in many cases package these loans together and sell them to investors (known as “securitization”). Continue reading...
What is Long-Term Debt?
Long-term debt refers to the duration of a liability/amount owed, and to qualify it must be due at least 12 months out. The period is in reference to 12+ months from the date of the balance sheet. A company will typically take on long-term debt in the form of a mortgage for property owned, or as capital for growth raised through bond sales or other debentures. Continue reading...
What is a Debt Settlement Company?
A debt settlement company is a company who specializes in helping people with overwhelming debt settle with their creditors. Debt settlement companies can help individuals with debt issues settle with their creditors for less than they owe. Of course, this will give the individual’s credit score a significant dent that stays on public record for seven years, but at least it gets people out from under their crushing debt. A settlement company will attempt to negotiate a settlement deal on your behalf with one or all of your creditors. Continue reading...
What Does Debt Financing Mean?
Debt financing occurs when a company borrows money or secures financing through loans, with the obligation to repay the money (typically with interest). Generally, a corporation will engage in debt financing by selling bonds in the marketplace or to private investors, or with promissory notes or commercial paper. Generally the terms of the bond or the loan will have the company commit as collateral assets of the business, such as real estate, cash on hand, or fixed assets. Continue reading...