Interest Coverage Ratio – Meaning, Formula, Uses, Types and Examples | Financial Management

Interest Coverage Ratio

Interest Coverage Ratio

An Interest Coverage Ratio (ICR) is a financial ratio that evaluates a company’s ability to repay its outstanding debt. ICRs are used by both lenders and investors to evaluate a company’s credit risk. An interest coverage ratio is also known as a “times interest earned” ratio.

Interest coverage ratios determine the risk associated with lending funds to a company, based on the ability of the company to pay the interest on its existing debt.  A high ratio indicates that a company can cover its interest expense several times over, while a low ratio indicates a company may have trouble repaying its loans. An interest coverage ratio trend line is useful for spotting situations where a company’s results or debt burden are contributing to a downward trend in the ratio.

Read more

Money Market – Types of Money Market Instruments | Financial Management

Money Market

Money Market

Money market refers to the market where trading is done for short term securities. Money market involves trading of debt instruments with original maturities of one year or less. Its securities are issued by high quality economic units such as governments, financial institutions and other corporate organizations of sound financial standing that require short-term funds.
A money market is a financial market in which short-term financial assets with liquidity of one year or less are traded on stock exchanges. Generally, the securities are highly liquid. Furthermore, they facilitate the participant’s short-term borrowing needs through the trading of bills. Banks, large institutional investors, and individuals usually participate in this financial market.

The money market trades a variety of instruments, including Treasury bills, certificates of deposit, commercial paper, federal funds, bills of exchange, and short-term mortgage-backed securities and asset-backed securities. Companies with short-term cash flow needs can borrow from the market directly through their dealer, while small companies with excess cash can borrow from money market mutual funds.

Read more