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An interest rate is a percentage of the principal amount of money that a debtor (the one who borrowed) owes to a lender/creditor (the one who distributed the sum through a loan or a similar credit disbursement). There are five principal components of interest rate determination, and each affects the interest rate in its own […]

WACC stands for the weighted average cost of capital. WACC (commonly pronounced “whack”) is the average of the costs of all capital, including equity and debt, that a company has raised to finance its operations. WACC is used to discount a company’s future cash flows back to present value, in order to determine whether or […]

What Is Return on Invested Capital (ROIC)? Return on invested capital (ROIC) is a financial ratio that measures the profitability and efficiency of a company’s use of capital. It is commonly used to assess whether a company is using its resources in an efficient manner, and it is considered to be a good indicator of […]

Diversification has long been considered a crucial component of successful investing and trading, helping to reduce risk by spreading your trades and investments across a variety of assets, asset classes, countries, and currencies. However, in today’s world, achieving diversification has become more challenging. Inflation, geopolitical risks, and the need for inflation protection all present significant […]

A hedge fund and private equity firm both serve a similar purpose in that they both seek to generate returns on investment. However, there are key differences between the two. Hedge funds typically use more aggressive strategies involving liquid investments relative to private equity firms, which focus on illiquid investments. Hedge funds are typically open-ended […]

Spread trading is a trading strategy that involves buying and selling two related financial instruments in order to profit from the difference between their prices. This difference is known as the “spread.” Spread traders aim to make money by betting on the direction in which the spread between two instruments will move (e.g., convergence, divergence), […]

What Is the Interest Coverage Ratio? The interest coverage ratio is a financial metric that measures a company’s ability to make interest payments on its debt. The interest coverage ratio is calculated by dividing a company’s earnings before interest and taxes (EBIT) by its interest expenses. A high interest coverage ratio indicates that a company […]

The cost of debt is the rate of interest that a company pays on its outstanding debt. The cost of debt is used in weighted average cost of capital (WACC) calculations for valuation purposes, which makes it important in everyday finance and market contexts.   How the Cost of Debt Works The cost of debt […]

Covariance measures the directional relationship between two variables. Covariance is used in portfolio theory and modern portfolio theory. Covariance is a statistical measure that calculates the degree to which two variables vary together. Covariance can be positive or negative, and it is typically represented by a covariance matrix. Covariance is used in finance to measure […]

Heteroskedasticity is a condition in which the variance of a statistical variable is non-constant across values of that variable. In other words, heteroskedasticity occurs when the size of the error term varies with the values of the independent variables.   Heteroskedasticity – Key Takeaways Heteroskedasticity is a type of statistical error that results in inconsistent […]