Credit Risk Flashcards
- What is financial risk?
It is risk to loosing money on an investment.
Risk could be a business venture or financial asset.
Types: 1. Borrowers risk/credit risk
2. Economic risk
- Specific risk
- Operational risk
Why is risk management important?
Risk management is important to identify potential risks, analyze them and provide solutions and trim down the losses.
- What are options and financial instruments?
- Financial instruments are assets that can be traded, typically classified into three broad categories: equity-based, debt-based, and derivative instruments.
Types: 1. EQUITY-BASED INSTRUMENTS (stocks, preffered shares)
2. DEBT BASED INSTRUMENTS (bonds, notes, debentures, - Certificates of deposit, - Commercial paper)
3. DERIVATE INSTRUMENTS (Options, futures, swaps, forwards)
4. HYBRID INSTRUMENTS
(Convertible bonds, warrants)
5. other financial instruments (hedge funds, money market instruments, mutual funds, exchange traded funds, real estate traded funds)
What is an interest rate?
- It is the cost you pay to the lender for borrowing money to finance your loan, on top of the loan amount or your principal. The higher the interest rate, the more you’ll pay over the life of your loan.
- An interest rate is stated in percentages (%)
- And it tells you how high the cost of borrowing is, or how high the rewards are for saving.
What is a return on investment? ROI
The return is the profit you make as a result of your investments.
CALCULATION: Current value of investment - Cost of investment = Cost of Investment
The result is expressed as a percentage or a ratio.
What is Return on Equity? (ROE)
ROE is a gauge of a corporation’s profitability and how efficiently it generates those profits. The higher the ROE, the better a company is at converting its equity financing into profits.
Calculation: Net income/Shareholders Equity
What is Arbitrage?
Arbitrage means simultaneously purchasing and selling assets in multiple markets to take advantage of price differences and generate profit.
Tell me about financial statements.
4 types of financial statements:
balance sheet, the income statement, cash flow statement, Statements of shareholders’ equity
Balance sheet
a financial statement that reports a company’s assets, liabilities, and shareholder equity at a specific point in time.
Equity + Liabilities = Assets
Cashflow statement
It summarizes the amount of cash and cash equivalents entering and leaving a company
Thanks to this statement we can tell how well the company manages and generates cash.
Income statement
It reports a company’s financial performance over a specific accounting period.
It can be quarterly or yearly.
Statements of shareholders’ equity
is a section of a business’s balance sheet that lists the difference between total assets and total liabilities.
Excel - VBA
Visual Basic for Applications,
is a programming language that empowers users to automate tasks and create personalized solutions within Microsoft Excel.
Programming languages
- Python
- JAVA
- Ruby
- C++
ROI ?
Most common profitability calculation used to determine the efficiency of investments. The ratio looks at the gain or loss of an investment as a percentage of the cost.
A positive ROI indicates that the investment is good. The higher the number, the better.
Calculation: (Net Profit/Cost of Investment) x 100
NPV?
Net present value (NPV) is a popular tool to gauge a potential investment because it takes the time value of money into account. It calculates the value of projected cash flows, discounted to the present.
IRR ?
Internal rate of return (IRR) is used in conjunction with NPV, though it involves different variables. It calculates the percentage rate of return at which those expected cash flows — which we considered with NPV — will result in a net present value of zero.
Unlike NPV, which looks for the dollar amounts a given project will earn, IRR focuses on the breakeven cash flow of a project.
The faster you get to break even, the better the project is for the company.
ROE ?
Return on equity (ROE) measures the profitability of a corporation in relation to its total amount of shareholder equity. Essentially, the ratio gauges how good the company is at generating returns on the investment it received from its shareholders
Calculation: Net Income / Shareholders Equity
“Shareholder’s equity” should be a company’s assets minus its debt
Over 15% is a good ROE. A high ROE indicates that a company is proficient at turning equity investments into profits.
ROA ?
Return on assets, or ROA, is a profitability ratio that determines a company’s profitability relative to its assets. The percentage it provides illustrates how much profit a company generated for each dollar of assets invested in the business.
It is particularly helpful for internal use by managers to measure efficiency, particularly in asset-heavy sectors like manufacturing.
Calculation: Net Income / Total Assets
ROIC ?
Return on invested capital, or ROIC, aims to measure the percentage return that a company earns on invested capital. The ratio gives a sense of how well a company is using its money to generate returns. Boiling it even further down, it’s measuring how efficient a company is in generating cash flow from the areas in which it has invested its capital.
ROIC: NOPAT / Invested Capital
A ROIC greater than the cost of capital means the return of a company’s projects exceeded the cost to fund those projects, meaning the company is creating value.
