What Are Tranches?

The word “tranche” comes from the French word for slice. Tranches are pieces of a pooled collection of securities, usually debt instruments, that are split up by risk or other characteristics in order to be marketable to different investors. Each portion, or tranche, is one of several related securities offered at the same time but with varying risks, rewards and maturities to appeal to a diverse range of investors. Examples of financial products that can be divided into tranches include bonds, loans, insurance policies, mortgages, and other debts.

Investors who desire to have long-term steady cash flow will invest in tranches with a longer time to maturity. Investors who need a more immediate but a more lucrative income stream will invest in tranches with less time to maturity.

Tranches can also be miscategorized by credit rating agencies. If they are given a higher rating than deserved, it can cause investors to be exposed to riskier assets than they intended to be. Such mislabeling played a part in the mortgage meltdown of 2007 and subsequent financial crisis

What Is a Perpetual Bond?

A perpetual bond, also known as a “consol bond” or “prep,” is a fixed income security with no maturity date. This type of bond is often considered a type of equity, rather than debt. One major drawback to these types of bonds is that they are not redeemable. However, the major benefit of them is that they pay a steady stream of interest payments forever.

Perpetual bonds exist within a small niche of the bond market. This is mainly due to the fact that there are very few entities that are safe enough for investors to invest in a bond where the principal will never be repaid.

Example of a Perpetual Bond

Since perpetual bond payments are similar to stock dividend payments, as they both offer some sort of return for an indefinite period of time, it is logical that they would be priced the same way.

The price of a perpetual bond is, therefore, the fixed interest payment, or coupon amount, divided by some constant discount rate, which represents the speed at which money loses value over time (partly due to inflation).

Formula for the Present Value of a Perpetual Bond

Present value = D / r

Where:

D = periodic coupon payment of the bond

r = discount rate applied to the bond

For example, if a perpetual bond pays $10,000 per year in perpetuity and the discount rate is assumed to be 4%, the present value would be:

Present value = $10,000 / 0.04 = $250,000

What Is a Leverage Ratio?

A leverage ratio is any one of several financial measurements that look at how much capital comes in the form of debt (loans) or assesses the ability of a company to meet its financial obligations. The leverage ratio category is important because companies rely on a mixture of equity and debt to finance their operations, and knowing the amount of debt held by a company is useful in evaluating whether it can pay off its debts as they come due.

A leverage ratio may also be used to measure a company’s mix of operating expenses to get an idea of how changes in output will affect operating income.

Common leverage ratios include the debt-equity ratio, equity multiplier, degree of financial leverage, and consumer leverage ratio.

What is a Derivative?

A derivative is a financial security with a value that is reliant upon or derived from, an underlying asset or group of assets—a benchmark. The derivative itself is a contract between two or more parties, and the derivative derives its price from fluctuations in the underlying asset.

The most common underlying assets for derivatives are stocks, bonds, commodities, currencies, interest rates, and market indexes. These assets are commonly purchased through brokerages.

Most derivatives are not traded on exchanges and are used by institutions to hedge risk or speculate on price changes in the underlying asset.

The most common forms of derivative are- Futures, Options, Forwards, Swaps.

What Is Guerrilla Marketing?

Guerrilla marketing is a marketing tactic in which a company uses surprise and/or unconventional interactions in order to promote a product or service. Guerrilla marketing is different than traditional marketing in that it often relies on personal interaction, has a smaller budget, and focuses on smaller groups of promoters that are responsible for getting the word out in a particular location rather than through widespread media campaigns.

Guerrilla marketing takes place in public places that offer as big an audience as possible, such as streets, concerts, public parks, sporting events, festivals, beaches, and shopping centers. One key element of guerrilla marketing is choosing the right time and place to conduct a campaign so as to avoid potential legal issues.

What Is Compound Annual Growth Rate – CAGR?

Compound annual growth rate (CAGR) is the rate of return that would be required for an investment to grow from its beginning balance to its ending balance, assuming the profits were reinvested at the end of each year of the investment’s lifespan.

Investors can compare the CAGR of two alternatives in order to evaluate how well one stock performed against other stocks in a peer group or against a market index. CAGR does not reflect investment risk.

It isn’t a true return rate, but rather a representational figure. It is essentially a number that describes the rate at which an investment would have grown if it had grown the same rate every year and the profits were reinvested at the end of each year. CAGR can be used to smooth returns so that they may be more easily understood when compared to alternative investments.

What is a Credit Default Swap (CDS)?

A credit default swap (CDS) is a financial derivative or contract that allows an investor to “swap” or offset his or her credit risk with that of another investor.

For example, if a lender is worried that a borrower is going to default on a loan, the lender could use a CDS to offset or swap that risk. To swap the risk of default, the lender buys a CDS from another investor who agrees to reimburse the lender in the case the borrower defaults. Most CDS will require an ongoing premium payment to maintain the contract, which is like an insurance policy.

A credit default swap is the most common form of credit derivative and may involve municipal bonds, emerging market bonds, mortgage-backed securities or corporate bonds.

What Is the Economic Cycle?

The economic cycle is the fluctuation of the economy between periods of expansion and contraction. Factors such as gross domestic product, interest rates, total employment, and consumer spending, can help to determine the current stage of the economic cycle.

The four stages of the economic cycle are also referred to as the business cycle. These four stages are expansion, peak, contraction, and trough.

-During the expansion phase, the economy experiences relatively rapid growth, interest rates tend to be low, production increases, and inflationary pressures build.

-The peak of a cycle is reached when growth hits its maximum rate. Peak growth typically creates some imbalances in the economy that need to be corrected.

-This correction occurs through a period of contraction when growth slows, employment falls, and prices stagnate.

-The trough of the cycle is reached when the economy hits a low point and growth begins to recover.

What is a Safe Haven?

A safe haven is an investment that is expected to retain or increase in value during times of market turbulence. Safe havens are sought by investors to limit their exposure to losses in the event of market downturns. However, what appears to be a safe investment in one down market could be a disastrous investment in another down market, and so the evaluation of safe haven investments varies. A safe haven investment diversifies an investor’s portfolio and is beneficial in times of market volatility.

What Is a Jitney?

Jitney is a broker that is able to perform stock exchange trade on behalf of another person who is not able to. The concept also refers to a stock trading that is fraudulently done to increase stock volume.

As such, the fraudulent trading may involve only 2 brokers that are trading stocks back and forth in order to earn more commission thereby increasing their volumes of trade.