The most comprehensive educational resources for finance

Common Equity Shares – Meaning and Features

Equity refers to the ownership interest or residual claim in the assets of a firm after all the liabilities of the firm have been paid. While referring to a firm’s balance sheet, equity refers to the capital contributed by the owners (also known as shareholders) plus any retained earnings or losses. A firm can issue

Arbitrage-free Valuation Approach for Bonds

The simplest way to calculate the value of a bond is to take the cash flows of the bond till its maturity and then discount them by a single discount rate. The method is quick but not very accurate because the yield curve is not flat and the interest rates are different for different maturities.

Calculate the Value of a Zero-coupon Bond

Suppose you have a pure discount bond that will pay $1,000 five years from today. The bond discount rate is 12%. What is the appropriate price for this bond?  Since there are no interim coupon payments, the value of the bond will simply be the present value of single payment at maturity.  

Calculate the Value of a Coupon Paying Bond

The value of a coupon paying bond is calculated by discounting the future payments (coupon and principal) by an appropriate discount rate. Suppose you have a bond with a $1,000 face value that matures 1 year from today. The coupon rate is 12% and the bond makes semi-annual coupon payments of $60. The bond yield

Operating Return on Assets (ROA)

Operating Return on Assets (ROA) is one of the important profitability ratios. Operating ROA is calculated just like Return on Assets but uses Earnings Before Interest and Taxes (EBIT) instead on Net Income. Operating return on assets indicates the company’s operating income generated per dollar invested in total assets. A higher operating RoA is preferred

Impact of Stock Dividends and Stock Splits on Earnings Per Share (EPS)

Stock dividends are payment of additional shares of stock to common shareholders. For example, assume a company announces a 5% stock dividend to all shareholders of record.  For each 100 shares held, shareholders receive another 5 shares. In case of stock splits, the firm increases the number of shares outstanding and reduces the price of

How to Calculate Basic Earnings Per Share (EPS)

Earnings per share (EPS) is considered to be one of the best measures to summarize the performance of a company. The EPS for a company is reported only for common stock. A company can have simple capital structure or complex capital structure. A company with a simple capital structure can only have common stock, nonconvertible

Hedge Fund Fee Structure, High Water Mark and Hurdle Rate

In a hedge fund, the investors pay two types of fee to the hedge fund managers, namely management fee and incentive fee (also called performance fees). They typically charge a management fee of 1-2% of fund’s net asset value. This is paid irrespective of how the fund performs. The hedge fund managers also charge an

Overview of Structured Notes

Structured securities are hybrid securities that integrate the features of a debt instruments and a derivative. The motive behind creating a structured security is to lower the borrowing costs as well as to appeal to an audience such as institutional investors who would otherwise have some restrictions on what kind of securities they can invest

What are Medium-term Notes

Medium term notes are another type of corporate debt security. One of their unique characteristic is that the notes are not sold all at once. Instead they are offered continuously to investors by an agent of the issuer. The notes are registered with the SEC under Rule 415 (the shelf registration rule), which gives a