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Debt service parity approach

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Definition of Debt service parity approach

Debt Service Parity Approach Image 1

Debt service parity approach

An analysis wherein the alternatives under consideration will provide the firm
with the exact same schedule of after-tax debt payments (including both interest and principal).



Related Terms:

Allowance for bad debts

An offset to the accounts receivable balance, against which
bad debts are charged. The presence of this allowance allows one to avoid severe
changes in the period-to-period bad debt expense by expensing a steady amount to
the allowance account in every period, rather than writing off large bad debts to
expense on an infrequent basis.


Bad debt

An account receivable that cannot be collected.


Bad debts

The amount of accounts receivable that is not expected to be collected.


bad debts

Refers to accounts receivable from credit sales to customers
that a business will not be able to collect (or not collect in full). In hindsight,
the business shouldn’t have extended credit to these particular
customers. Since these amounts owed to the business will not be collected,
they are written off. The accounts receivable asset account is
decreased by the estimated amount of uncollectible receivables, and the
bad debts expense account is increased this amount. These write-offs
can be done by the direct write-off method, which means that no
expense is recorded until specific accounts receivable are identified as
uncollectible. Or the allowance method can be used, which is based on
an estimated percent of bad debts from credit sales during the period.
Under this method, a contra asset account is created (called allowance
for bad debts) and the balance of this account is deducted from the
accounts receivable asset account.


Concentration services

Movement of cash from different lockbox locations into a single concentration
account from which disbursements and investments are made.



Conversion parity price

Related:Market conversion price


Cost of Debt

The cost of debt (bonds, loans, etc.) that a company is charged for
borrowing funds. A component of the cost of capital.


Debt Service Parity Approach Image 2

Cross-sectional approach

A statistical methodology applied to a set of firms at a particular point in time.


Debt

Money borrowed.


Debt

Borrowings from financiers.


Debt

Funds owed to another entity.


Debt capacity

Ability to borrow. The amount a firm can borrow up to the point where the firm value no
longer increases.


Debt Capacity

An assessment of ability and willingness to repay a loan from anticipated future cash flow or other sources.


Debt (Credit Insurance)

Money, goods or services that someone is obligated to pay someone else in accordance with an expressed or implied agreement. debt may or may not be secured.


Debt displacement

The amount of borrowing that leasing displaces. Firms that do a lot of leasing will be
forced to cut back on borrowing.


Debt/equity ratio

Indicator of financial leverage. Compares assets provided by creditors to assets provided
by shareholders. Determined by dividing long-term debt by common stockholder equity.


Debt/Equity Ratio

A comparison of debt to equity in a company's capital structure.


Debt Financing

Raising loan capital through the creation of debt by issuing a form of paper evidencing amounts owed and payable on specified dates or on demand.



Debt instrument

An asset requiring fixed dollar payments, such as a government or corporate bond.


Debt Instrument

Any financial asset corresponding to a debt, such as a bond or a treasury bill.


Debt leverage

The amplification of the return earned on equity when an investment or firm is financed
partially with borrowed money.


Debt limitation

A bond covenant that restricts in some way the firm's ability to incur additional indebtedness.


Debt market

The market for trading debt instruments.


Debt ratio

Total debt divided by total assets.


Debt Ratio

The percentage of debt that is used in the total capitalization of a
company. It is calculated by dividing the total book value of the
debt by the book value of all assets.


Debt relief

Reducing the principal and/or interest payments on LDC loans.


Debt securities

IOUs created through loan-type transactions - commercial paper, bank CDs, bills, bonds, and
other instruments.


Debt Security

A security representing a debt relationship with an enterprise, including a government
security, municipal security, corporate bond, convertible debt issue, and commercial
paper.



Debt service

Interest payment plus repayments of principal to creditors, that is, retirement of debt.


Debt-service coverage ratio

Earnings before interest and income taxes plus one-third rental charges, divided
by interest expense plus one-third rental charges plus the quantity of principal repayments divided by one
minus the tax rate.


Debt swap

A set of transactions (also called a debt-equity swap) in which a firm buys a country's dollar bank
debt at a discount and swaps this debt with the central bank for local currency that it can use to acquire local
equity.


debt-to-equity ratio

A widely used financial statement ratio to assess the
overall debt load of a business and its capital structure, it equals total liabilities
divided by total owners’ equity. Both numbers for this ratio are
taken from a business’s latest balance sheet. There is no standard, or
generally agreed on, maximum ratio, such as 1:1 or 2:1. Every industry
is different in this regard. Some businesses, such as financial institutions,
have very high debt-to-equity ratios. In contrast, many businesses
use very little debt relative to their owners’ equity.


Debtor in possession

A firm that is continuing to operate under Chapter 11 bankruptcy process.


Debtor-in-possession financing

New debt obtained by a firm during the Chapter 11 bankruptcy process.


Debtors

Sales to customers who have bought goods or services on credit but who have not yet paid their debt.


Firm's net value of debt

Total firm value minus total firm debt.


Full-service lease

Also called rental lease. Lease in which the lessor promises to maintain and insure the
equipment leased.


Funded debt

debt maturing after more than one year.


funded debt

debt with more than 1 year remaining to maturity.


grade (of product or service)

the addition or removal of product
or service characteristics to satisfy additional needs, especially price


Index Portfolio Rebalancing Service (IPRS)

Index Portfolio Rebalancing service (IPRS) is a comprehensive investment service that can help increase potential returns while reducing volatility. Several portfolios are available, each with its own strategic balance of Index Funds. IPRS maintains your personal asset allocation by monitoring and rebalancing your portfolio semi-annually.


Information services

Organizations that furnish investment and other types of information, such as
information that helps a firm monitor its cash position.


Interest rate on debt

The firm's cost of debt capital.


interest rate parity

Theory that forward premium equals interest rate differential.


Interest Rate Parity

Theory that real interest rates are approximately the same across countries except for a risk premium.


Interest rate parity theorem

Interest rate differential between two countries is equal to the difference
between the forward foreign exchange rate and the spot rate.


Internal Revenue Service

A federal agency empowered by Congress to interpret and enforce tax-related laws.


Junior debt (subordinate debt)

debt whose holders have a claim on the firm's assets only after senior
debtholder's claims have been satisfied. Subordinated debt.


Long-term debt

An obligation having a maturity of more than one year from the date it was issued. Also
called funded debt.


Long-term debt

A debt for which payments will be required for a period of more than
one year into the future.


Long Term Debt

Liability due in a year or more.


Long-term debt/capitalization

Indicator of financial leverage. Shows long-term debt as a proportion of the
capital available. Determined by dividing long-term debt by the sum of long-term debt, preferred stock and
common stockholder equity.


Long-term debt ratio

The ratio of long-term debt to total capitalization.


Long-term debt to equity ratio

A capitalization ratio comparing long-term debt to shareholders' equity.


McNamara-O'Hara Service Contract Act of 1965

A federal Act requiring federal contractors to pay those employees working on a federal contract at
least as much as the wage and benefit levels prevailing locally.


Mezzanine Debt

Refers to non-conventional debt that has a greater element of risk than secured debt but has less risk than equity.


MM's proposition I (debt irrelevance proposition)

The value of a firm is unaffected by its capital structure.


Monetizing the Debt

See printing money.


National Debt

The debt owed by the government as a result of earlier borrowing to finance budget deficits. That part of the debt not held by the central bank is the publically held national debt.


net realizable value approach

a method of accounting for by-products or scrap that requires that the net realizable value of these products be treated as a reduction in the cost of the primary products; primary product cost may be reduced by decreasing either
(1) cost of goods sold when the joint products are sold or
(2) the joint process cost allocated to the joint products


Non-financial services

Include such things as freight, insurance, passenger services, and travel.


Optimization approach to indexing

An approach to indexing which seeks to Optimize some objective, such
as to maximize the portfolio yield, to maximize convexity, or to maximize expected total returns.


Original issue discount debt (OID debt)

debt that is initially offered at a price below par.


Parity value

Related:conversion value


Product/service mix

See sales mix.


Public Debt

See national debt.


Publicly Held National Debt

See national debt.


Purchasing power parity

The notion that the ratio between domestic and foreign price levels should equal
the equilibrium exchange rate between domestic and foreign currencies.


Purchasing Power Parity

Theory that says that over the long run exchange rate changes offset any difference between foreign and domestic inflation. This result assumes that the real exchange rate remains constant, something that is not true even in the long run.


purchasing power parity (PPP)

Theory that the cost of living in different countries is equal, and exchange rates adjust to offset inflation differentials across countries.


Put-call parity relationship

The relationship between the price of a put and the price of a call on the same
underlying security with the same expiration date, which prevents arbitrage opportunities. Holding the stock
and buying a put will deliver the exact payoff as buying one call and investing the present value (PV) of the
exercise price. The call value equals C=S+P-PV(k).


RATIO OF DEBT TO STOCKHOLDERS’ EQUITY

A ratio that shows which group—creditors or stockholders—has the biggest stake in or the most control of a company:
(Total liabilities) / (Stockholders’ equity)


realized value approach

a method of accounting for byproducts or scrap that does not recognize any value for these products until they are sold; the value recognized
upon sale can be treated as other revenue or other income


Relative purchasing power parity (RPPP)

Idea that the rate of change in the price level of commodities in
one country relative to the price level in another determines the rate of change of the exchange rate between
the two countries' currencies.


Residual dividend approach

An approach that suggests that a firm pay dividends if and only if acceptable
investment opportunities for those funds are currently unavailable.


Risk premium approach

The most common approach for tactical asset allocation to determine the relative
valuation of asset classes based on expected returns.


Secured debt

debt that, in the event of default, has first claim on specified assets.


secured debt

debt that has first claim on specified collateral in the event of default.


Senior debt

debt that, in the event of bankruptcy, must be repaid before subordinated debt receives any payment.


Senior Debt

Are debt instruments that provide financing, take primary security against either specific or all assets of the borrower, have fixed terms of repayment and charge fixed or floating interest rates.


service company

an individual or firm engaged in a high or moderate degree of conversion that results in service output


service department

an organizational unit that provides one or more specific functional tasks for other internal units


Service Revenue

Revenue recognized from the provision of services as opposed to the sale of
products.


service time

the actual time consumed performing the functions
necessary to provide a service


Short-term investment services

services that assist firms in making short-term investments.


Signaling approach

approach to the determination of the optimal capital structure asserting that insiders in a
firm have information that the market does not have; therefore, the choice of capital structure by insiders can
signal information to outsiders and change the value of the firm. This theory is also called the asymmetric
information approach.


Spot futures parity theorem

Describes the theoretically correct relationship between spot and futures prices.
Violation of the parity relationship gives rise to arbitrage opportunities.


Stratified sampling approach to indexing

An approach in which the index is divided into cells, each
representing a different characteristic of the index, such as duration or maturity.


Structured debt

debt that has been customized for the buyer, often by incorporating unusual options.


Subordinated debt

debt over which senior debt takes priority. In the event of bankruptcy, subordinated
debtholders receive payment only after senior debt claims are paid in full.


subordinated debt

debt that may be repaid in bankruptcy only after senior debt is paid.


Subordinated Debt

debt instruments that provide financing for acquisitions, expansion and restructuring, take secondary security against assets, have fixed or flexible terms of repayment and charge fixed or floating interest rates.


Total debt to equity ratio

A capitalization ratio comparing current liabilities plus long-term debt to
shareholders' equity.


Total Debt to Total Assets Ratio

See debt ratio


Trade debt

Accounts payable.


Unfunded debt

debt maturing within one year (short-term debt). See: funded debt.


Uniformed Services Employment and Reemployment Rights Act of 1994

A federal act that minimizes the impact on people serving in the Armed Forces
when they return to civilian employment by avoiding discrimination and increasing
their employment opportunities.


Unsecured debt

debt that does not identify specific assets that can be taken over by the debtholder in case of default.


Variance minimization approach to tracking

An approach to bond indexing that uses historical data to
estimate the variance of the tracking error.



 

 

 

 

 

 

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