Category: Financial Terms

Default Risk: Definition, Types, and Measurement Definition Default risk is the likelihood that a borrower—an individual, company, or government—will fail to make required payments on a debt obligation (loan, bond, credit card). Higher default risk typically requires borrowers to pay higher interest rates to compensate lenders or investors. Key takeaways Default risk is the probability…

Default Rate: Definition, How It Works, and Key Criteria What the default rate is The default rate is the share (percentage) of outstanding loans a lender has written off as unpaid after a sustained period of missed payments. The term can also refer to a higher “default” or penalty interest rate charged to borrowers who…

Default: What It Means, Consequences, and How to Avoid It Key takeaways * A default occurs when a borrower fails to make scheduled interest or principal payments under the agreed terms. * Defaults can be on secured debt (backed by collateral) or unsecured debt. Consequences include credit damage, legal action, asset seizure, and difficulty obtaining…

Deep in the Money (Options): What it Means and How It Works Deep in the money describes an option whose strike price is far enough inside the underlying asset’s current market price that most of the option’s value is intrinsic rather than time (extrinsic) value. For calls, the strike is significantly below the market price;…

Deed of Release A deed of release is a legal document that removes a prior claim or lien on an asset and documents that parties are released from certain obligations. It is most commonly used when a mortgage is paid in full—releasing the lender’s claim on a property—but it also appears in employment separations, personal-guarantee…

Deed of Reconveyance What it is A deed of reconveyance is a legal document that transfers clear title of a property from a lender (or trustee under a deed of trust) back to the borrower after the mortgage or trust deed has been paid in full. Recording this document with the county recorder’s office removes…

Understanding Deeds: Definition, Types, and Key Points A deed is a signed legal document that transfers ownership of an asset—most commonly real estate—from one party to another. When properly executed, delivered, and (in most cases) recorded with the local land records office, a deed is the primary instrument used to establish and protect ownership rights….

What is a tax deductible? A tax deductible is an expense that an individual or business can subtract from adjusted gross income (AGI). Subtracting allowable deductions from AGI lowers your taxable income and, in turn, reduces the income tax you owe. Why deductibles exist Governments use deductions to encourage behaviors that promote economic growth, social…

Decreasing Term Insurance Key takeaways Decreasing term insurance provides a death benefit that declines over a predetermined schedule, often to match an amortizing debt (for example, a mortgage). Premiums for these policies are typically lower than for level-term or permanent policies; premiums are often level for the term but some plans may reduce premiums over…

Decoupling Key takeaways Decoupling occurs when two variables or markets that normally move together stop doing so. In finance, it describes a drop in correlation between asset returns; in economics, it can describe economies that no longer move in step. Types: relative decoupling (weaker positive correlation) and absolute decoupling (zero or negative correlation). Decoupling creates…

Declining Balance Method What it is The declining balance method (also called the reducing balance method) is an accelerated depreciation technique that records larger depreciation expenses in an asset’s early years and smaller expenses later. It’s commonly used for assets that lose value quickly or become obsolete—examples include computers, phones, and other technology. How it…

Declaration of Trust: Meaning and Use in Estate Planning A declaration of trust is a legal statement—written or oral depending on jurisdiction—that creates a trust relationship by appointing a trustee to hold and manage assets for the benefit of one or more beneficiaries. It sets out the purpose of the trust, identifies the assets, and…

Decision Support Systems (DSS) Key takeaways A decision support system (DSS) is a computerized application that gathers, analyzes, and synthesizes data to support managerial decision-making. DSSs produce reports, projections, and alternate scenarios to help managers make informed, timely decisions. They differ from basic operational systems by emphasizing analysis and modeling rather than just data collection….

Decision Analysis (DA) Definition Decision analysis (DA) is a systematic, quantitative, and visual approach for evaluating choices and making informed decisions. It applies probability, economic valuation, and structured modeling to compare alternatives, incorporate uncertainty, and reveal trade-offs among objectives. Origins and purpose The term and formal approach to decision analysis were popularized in the 1960s….

Decile: Definition, Calculation, and Uses What is a decile? A decile is a quantile that divides a ranked dataset into 10 equal parts. Each decile point (D1 through D9) corresponds to a value below which a fixed percentage of observations fall: – D1: 10% of observations are below this value – D2: 20% below –…

Decentralized Applications (dApps): What They Are, How They Work, and Why They Matter What is a dApp? A decentralized application (dApp) is software that runs on a distributed network—typically a blockchain or peer-to-peer (P2P) network—rather than on servers controlled by a single organization. dApps are generally open source, use smart contracts to automate logic and…

Debtor-in-Possession (DIP) Financing Debtor-in-possession (DIP) financing is short- to medium-term financing provided to companies that have filed for Chapter 11 bankruptcy protection. It supplies the working capital a distressed company needs to continue operations, pursue a reorganization, and preserve value for creditors while the bankruptcy case proceeds. Key takeaways DIP financing is available only to…

Debtor in Possession (DIP) A debtor in possession (DIP) is a business or individual that has filed for Chapter 11 bankruptcy protection and remains in control of property that creditors have legal claims on (for example, via liens). The DIP can continue to operate and use those assets but must do so under court supervision…

What Is a Debtor? A debtor is an individual or business that owes money to another party. When the obligation comes from a loan, the debtor is often called a borrower; when the obligation arises from issued securities, the debtor may be called an issuer. If a debtor cannot meet obligations, they may pursue options…

Debt-to-Income Ratio (DTI) What is DTI? Debt-to-income (DTI) ratio compares your recurring monthly debt payments to your gross monthly income and is expressed as a percentage. Lenders use DTI to judge your ability to repay new credit: lower ratios are generally more favorable. Why DTI matters Influences approval for mortgages, auto loans, personal loans and…

Debt-to-GDP Ratio The debt-to-GDP ratio compares a country’s public debt with its gross domestic product (GDP). Expressed as a percentage, it indicates how large a nation’s debt is relative to the size of its economy and helps assess its ability to repay obligations. Formula and calculation Debt-to-GDP = Total public debt / Total GDP Explore…

Debt-to-Equity Ratio (D/E) Key takeaways * The debt-to-equity (D/E) ratio measures how much of a company’s financing comes from debt versus shareholder equity. * D/E = Total liabilities ÷ Shareholders’ equity. Values vary widely by industry. * A higher D/E among comparable firms usually implies greater financial risk; a very low D/E may indicate underused…

Debt-to-Capital Ratio The debt-to-capital ratio measures a company’s financial leverage by showing the portion of its capital structure funded by interest‑bearing debt versus equity. Framing debt as a percentage of total capital helps compare leverage and risk across companies and industries. Formula Debt-to-Capital Ratio = Debt / (Debt + Shareholders’ Equity) Explore More Resources ›…

Debt-Service Coverage Ratio (DSCR) What is DSCR? The debt-service coverage ratio (DSCR) measures a company’s ability to cover its debt payments from operating income. Lenders, investors, and managers use DSCR to assess whether a business generates sufficient cash flow to meet principal and interest obligations. A DSCR of: – 1.00 means operating income exactly covers…

What Is Debt Service? Debt service is the cash required to cover the principal and interest payments on a loan or other debt over a specific period (usually a year). It applies to individuals (mortgages, student loans), businesses (commercial loans, bonds), and governments. To “service” debt simply means making the scheduled payments. Debt-Service Coverage Ratio…

Debt Securities: Types, How They Work, Risks, and Investment Strategies Key takeaways * Debt securities (fixed-income instruments) pay interest and require repayment of principal at maturity. * Common types: government bonds, corporate bonds, municipal bonds, certificates of deposit (CDs), preferred stock, mortgage-backed and other collateralized securities. * Main risks: issuer default (credit risk), interest-rate risk,…

Debt Restructuring Debt restructuring is the process by which a borrower — an individual, business, or sovereign government — renegotiates the terms of existing debt with creditors. The goal is to reduce the risk of default and provide a more manageable path to repayment than bankruptcy or liquidation. How it works Restructuring typically involves one…

Debt Ratio: Definition and Purpose The debt ratio measures a company’s financial leverage by comparing its debt to its assets. It shows the portion of a company’s assets financed with borrowing and helps assess the risk that a firm may default on obligations if conditions worsen. Formula: Debt ratio = Total debt ÷ Total assets…

Debt Overhang What it is Debt overhang occurs when an entity—company or country—carries so much debt that it cannot raise additional financing to pursue new projects. Earnings from prospective investments would be claimed by existing creditors, leaving little incentive for owners or investors to support growth. The result is reduced investment, slower growth, and a…

Debt Issue: Definition, Process, and Costs A debt issue is a financial instrument through which an entity—corporate or government—raises capital by promising to repay lenders according to specified terms. Common debt instruments include bonds, debentures, notes, certificates, mortgages, and leases. Investors who purchase these instruments receive periodic interest payments and repayment of principal at maturity….

Debt Instrument Key takeaways A debt instrument is a contractual obligation to repay borrowed funds, often with interest, according to a specified schedule. Debt instruments range from simple credit products (credit cards, mortgages) to marketable debt securities (Treasury, municipal, and corporate bonds). Debt securities enable borrowers to raise capital from multiple investors through organized markets;…

Debt Fund A debt fund is a pooled investment vehicle—such as a mutual fund or ETF—that primarily holds fixed‑income securities, including government and corporate bonds, securitized products, money‑market instruments, and floating‑rate debt. Investors commonly use debt funds to preserve capital, generate income, and diversify a broader portfolio with lower‑risk exposure than equities. Key takeaways Debt…

Debt Financing Key takeaways Debt financing is raising capital by borrowing—typically through loans, bonds, or other fixed‑income instruments—that must be repaid with interest. It preserves ownership but creates mandatory repayment obligations and often includes covenants. Interest is usually tax‑deductible, which lowers the effective cost of borrowing; however, excessive debt increases risk and can limit flexibility….

Debt/Equity Swap A debt/equity swap is a restructuring transaction in which a company’s debt is exchanged for equity, typically by converting bonds or loans into shares. This strategy reduces debt obligations, improves the balance sheet, and can allow a distressed company to continue operating rather than liquidating. Key points A debt/equity swap converts creditors’ claims…

Debt-to-EBITDA Ratio: Definition and Significance The debt-to-EBITDA ratio measures how many years it would take a company to pay off its debt using earnings before interest, taxes, depreciation, and amortization (EBITDA). It’s widely used by investors, lenders, and analysts to gauge leverage, financial risk, and the company’s ability to service debt from operating earnings. Formula…