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Interest coverage ratio |
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Definition of Interest coverage ratioInterest coverage ratioThe ratio of the earnings before interest and taxes to the annual interest expense. This
Related Terms:Coverage ratiosratios used to test the adequacy of cash flows generated through earnings for purposes of fractional interest discountthe combined discounts for lack of control and marketability. g the constant growth rate in cash flows or net income used in the ADF, Gordon model, or present value factor. Accrued interestThe accumulated coupon interest earned but not yet paid to the seller of a bond by the Acid-test ratioAlso called the quick ratio, the ratio of current assets minus inventories, accruals, and prepaid Amortizing interest rate swapSwap in which the principal or national amount rises (falls) as interest rates Appraisal ratioThe signal-to-noise ratio of an analyst's forecasts. The ratio of alpha to residual standard Articles of incorporationLegal document establishing a corporation and its structure and purpose. Asset/equity ratioThe ratio of total assets to stockholder equity. Asset activity ratiosratios that measure how effectively the firm is managing its assets. Asset-coverage testA bond indenture restriction that permits additional borrowing on if the ratio of assets to Base interest rateRelated: Benchmark interest rate. Benchmark interest rateAlso called the base interest rate, it is the minimum interest rate investors will Best-interests-of-creditors testThe requirement that a claim holder voting against a plan of reorganization Capital rationingPlacing one or more limits on the amount of new investment undertaken by a firm, either Capitalization ratiosAlso called financial leverage ratios, these ratios compare debt to total capitalization Capitalized interestinterest that is not immediately expensed, but rather is considered as an asset and is then Cash flow after interest and taxesNet income plus depreciation. Cash flow coverage ratioThe number of times that financial obligations (for interest, principal payments, Cash flow from operationsA firm's net cash inflow resulting directly from its regular operations Cash ratioThe proportion of a firm's assets held as cash. Common stock ratiosratios that are designed to measure the relative claims of stockholders to earnings Compound interestinterest paid on previously earned interest as well as on the principal. Concentration accountA single centralized account into which funds collected at regional locations Concentration servicesMovement of cash from different lockbox locations into a single concentration Controlled foreign corporation (CFC)A foreign corporation whose voting stock is more than 50% owned Conversion ratioThe number of shares of common stock that the security holder will receive from CorporationA legal "person" that is separate and distinct from its owners. A corporation is allowed to own Cost-benefit ratioThe net present value of an investment divided by the investment's initial cost. Also called Covered interest arbitrageA portfolio manager invests dollars in an instrument denominated in a foreign Current ratioIndicator of short-term debt paying ability. Determined by dividing current assets by current Customary payout ratiosA range of payout ratios that is typical based on an analysis of comparable firms. Days' sales in inventory ratioThe average number of days' worth of sales that is held in inventory. Debt/equity ratioIndicator of financial leverage. Compares assets provided by creditors to assets provided Debt ratioTotal debt divided by total assets. Debt-service coverage ratioEarnings before interest and income taxes plus one-third rental charges, divided Declaration dateThe date on which a firm's directors meet and announce the date and amount of the next Dividend payout ratioPercentage of earnings paid out as dividends. Dollar durationThe product of modified duration and the initial price. Domestic International Sales Corporation (DISC)A U.S. corporation that receives a tax incentive for DurationA common gauge of the price sensitivity of an asset or portfolio to a change in interest rates. Earnings before interest and taxes (EBIT)A financial measure defined as revenues less cost of goods sold Earnings retention ratioPlowback rate. Edge corporationsSpecialized banking institutions, authorized and chartered by the Federal Reserve Board Effective annual interest rateAn annual measure of the time value of money that fully reflects the effects of Effective durationThe duration calculated using the approximate duration formula for a bond with an Equilibrium rate of interestThe interest rate that clears the market. Also called the market-clearing interest Expense ratioThe percentage of the assets that were spent to run a mutual fund (as of the last annual ExpirationThe time when the option contract ceases to exist (expires). Expiration cycleAn expiration cycle relates to the dates on which options on a particular security expire. A Expiration dateThe last day (in the case of American-style) or the only day (in the case of European-style) Feasible target payout ratiosPayout ratios that are consistent with the availability of excess funds to make Federal Deposit Insurance Corporation (FDIC)A federal institution that insures bank deposits. Financial leverage ratiosRelated: capitalization ratios. Financial ratioThe result of dividing one financial statement item by another. ratios help analysts interpret Fisher's separation theoremThe firm's choice of investments is separate from its owner's attitudes towards Fixed asset turnover ratioThe ratio of sales to fixed assets. Fixed-charge coverage ratioA measure of a firm's ability to meet its fixed-charge obligations: the ratio of Foreign Sales Corporation (FSC)A special type of corporation created by the Tax Reform Act of 1984 that Forward interest rateinterest rate fixed today on a loan to be made at some future date. Freddie Mac (Federal Home Loan Mortgage Corporation)A Congressionally chartered corporation that Funding ratioThe ratio of a pension plan's assets to its liabilities. Funds From Operations (FFO)Used by real estate and other investment trusts to define the cash flow from Gross interestinterest earned before taxes are deducted. Hard capital rationingCapital rationing that under no circumstances can be violated. Hedge ratio (delta)The ratio of volatility of the portfolio to be hedged and the return of the volatility of the Income statement (statement of operations)A statement showing the revenues, expenses, and income (the InterestThe price paid for borrowing money. It is expressed as a percentage rate over a period of time and Interest coverage testA debt limitation that prohibits the issuance of additional long-term debt if the issuer's Interest equalization taxTax on foreign investment by residents of the U.S. which was abolished in 1974. Interest paymentsContractual debt payments based on the coupon rate of interest and the principal amount. Interest on interestinterest earned on reinvestment of each interest payment on money invested. Interest-only strip (IO)A security based solely on the interest payments form a pool of mortgages, Treasury Interest rate agreementAn agreement whereby one party, for an upfront premium, agrees to compensate the Interest rate capAlso called an interest rate ceiling, an interest rate agreement in which payments are made Interest rate ceilingRelated: interest rate cap. Interest rate floorAn interest rate agreement in which payments are made when the reference rate falls Interest rate on debtThe firm's cost of debt capital. Interest rate parity theoreminterest rate differential between two countries is equal to the difference Interest rate riskThe risk that a security's value changes due to a change in interest rates. For example, a Interest rate swapA binding agreement between counterparties to exchange periodic interest payments on Interest subsidyA firm's deduction of the interest payments on its debt from its earnings before it calculates Interest tax shieldThe reduction in income taxes that results from the tax-deductibility of interest payments. Irrational call optionThe implied call imbedded in the MBS. Identified as irrational because the call is Leverage ratiosMeasures of the relative contribution of stockholders and creditors, and of the firm's ability Liquidity ratiosratios that measure a firm's ability to meet its short-term financial obligations on time. Long-term debt ratioThe ratio of long-term debt to total capitalization. Long-term debt to equity ratioA capitalization ratio comparing long-term debt to shareholders' equity. Low price-earnings ratio effectThe tendency of portfolios of stocks with a low price-earnings ratio to Liquidity ratiosratios that measure a firm's ability to meet its short-term financial obligations on time. Macaulay durationThe weighted-average term to maturity of the cash flows from the bond, where the Market value ratiosratios that relate the market price of the firm's common stock to selected financial Market-book ratioMarket price of a share divided by book value per share. Modified durationThe ratio of Macaulay duration to (1 + y), where y = the bond yield. Modified duration is Mortgage durationA modification of standard duration to account for the impact on duration of MBSs of Mortgage-Backed Securities Clearing CorporationA wholly owned subsidiary of the Midwest Stock Multinational corporationA firm that operates in more than one country. Negative durationA situation in which the price of the MBS moves in the same direction as interest rates. Nominal interest rateThe interest rate unadjusted for inflation. Open interestThe total number of derivative contracts traded that not yet been liquidated either by an
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