Finance

Debt Swaps (Finance)

Debt swap is a generic term for an exchange of debt with some other asset. Examples of debt swaps include the convertible bond, in which a debt-equity swap is initiated by the bondholder, and the debt-equity swap pioneered by Salomon Brothers in the USA in the early 1980s, when corporations replaced over US$10 billion of […]

Cost of Capital (Finance)

The cost of capital is the rate of return that investors in the market require in order to participate in the financing of an investment. The cost of capital is the rate used by managers of value-maximizing firms to discount the expected cash flows in capital budgeting. The investment projects which offer expected returns greater […]

Disinvestment Decisions (Finance)

Disinvestment represents a subset of the universe of restructuring strategies available to firms. Restructuring encompasses a range of initiatives, some of which include changes in the ownership and financing structure. The term disinvestment as used here is restricted to decisions which involve only changes in asset structure. From a balance-sheet perspective, we restrict the term […]

Discounted Cash Flow Models (Finance)

Discounted cash flow (DCF) models are used t o determine the present value (PV) of an asset by discounting all future incremental cash flows, C,, pertaining to the asset at the appropriate discount rate r,: Present value analysis (originating from Irving Fisher (1930) using DCF models is widely used in the process of deciding how […]

Deposit Insurance (Finance)

The essential functions of a bank are to loan funds and serve as a riskless depository, paying interest on deposits. A riskless environment is particularly important to small investors, given their greater information and surveillance costs. Diamond and Dybvig (1983) show that the contract between the depository institutions and depositors is very delicate, using a […]

Dividend Policy (Finance)

Dividends are the reward to shareholders for supplying capital to the firm. Without the payment of dividends, shares would have no value. Only the promise of future dividends gives value to shares, and therefore under conventional valuation arguments (Williams, 1938) fluctuations in the value of a share are brought about by changes in investors’ expectations […]

Dividend Growth Model (Finance)

One of the simplest stock valuation models is the dividend growth model, often attributed to Gordon (1962). For instance, suppose that a firm pays dividends once a year and that after one year, when that dividend is paid, the stockholder plans to sell the investment. The value of the stock, P0, at the beginning of […]

Ethics in Finance

Ethics in finance is concerned with the issue of how criteria reflecting the general good and in excess of formal legal or contractual obligations are incorporated into corporate financial decisions. Key areas of application are in remuneration and conduct of agents, informational asymmetry and disclosure and the degree to which ethical considerations are priced in […]

Embedded Inflation (Finance)

A theory of the relationship between interest rates and expected inflation is contained in the well-known hypothesis expounded by Irwin Fisher in 1930. According to the Fisher hypothesis the nominal interest rate determined by the market is made up of the expected real rate and a premium for the expected inflation rate. Furthermore, changes in […]

Electronic Payments Systems (Finance)

An electronic payments system is one in which financial transactions are conducted via computer and electronic communications devices, without the need to transfer any physical token. It is the lack of a physical representation of money, such as coins or paper or some other physical commodity, which characterizes electronic payments systems. Instead, money is represented […]