Asset coverage has to do with the ratio between the tangible assets that are in

hand and the amount of money that is owed in the way of loans, and other debts
to vendor partners, preferred stock holders, and others. When discussing the
current level of asset coverage, the point is to determine how much of the net
assets of the company would be necessary to cover the current outstanding
indebtedness of the business.

The process for calculating asset coverage is very simple. First, determine the sum of the
equity in the business and the non-current liabilities that are held by the company. Divide this
figure by the value of non-current assets. The answer will be the current rate of asset
coverage, as calculated into a percentage. In some instances, the value of inventories may
also be bundled in with the value of the non-current assets as part of the final calculation.

Keeping a close watch on asset coverage is a smart move for businesses of all sizes. While it
is virtually impossible to run a company without some sort of debt incurred, the goal is to
make the best use of all resources at hand. Keeping a watch on the ratio between assets and
liabilities using the asset coverage formula is one way of making sure this wise use of
resources is occurring. A good asset coverage ratio also means that any debt obligations that
are incurred as part of the operations of the company can and will be repaid in a timely
manner.

Along with providing valuable insight into the financial health of the business, the process of
determining asset coverage also requires that financial records be current and accurate. It is
impossible, for example, to determine the current status of debt obligation unless the
Accounts Payable information is complete and up to date. In like manner, it is important to
account for each net asset of the business in order for the asset coverage formula to produce a
correct and helpful snapshot of the finances of the company. Thus, a byproduct of asset
coverage calculation is that all the financial records must be maintained in order for the data
to have any constructive meaning.

Asset coverage calculations are a process that every company should engage in on a regular
basis throughout the fiscal year. Taking the necessary data and determining the percentage of
debt compared to assets is a great way to ensure that the company is moving forward, as well
as to alert the owner to a need to make some changes in order to maintain the profitability of
the business.
Interest spread is the difference between the average lending rate and the average borrowing
rate for a bank or other financial institution. It is:

(interest income ÷interest earning assets) - (interest expense ÷interest

bearing liabilities)

This is very similar to interest margin. If a bank's lending was exactly equal to its borrowings
(i.e. deposits plus other borrowing) the two numbers would be identical. In reality, bank also
has its shareholder's funds available to lend, but at the same time its lending is constrained by
reserve requirements.

Changes in the spread are an indicator of profitability as the spread is where a bank makes its
money.

Net interest spread refers to the difference in borrowing and lending rates of financial
institutions (such as banks) in nominal terms. It is considered analogous to the gross margin
of non-financial companies.

Net interest spread is expressed as interest yield on earning assets (any asset, such as a loan,
that generates interest income) minus interest rates paid on borrowed funds.

Net interest spread is similar to net interest margin; net interest spread expresses the nominal
average difference between borrowing and lending rates, without compensating for the fact
that the amount of earning assets and borrowed funds may be different.

Contents
[hide]

• 1 Calculation
• 2 Example
• 3 References
• 4 Net Interest Spread Software

• 5 See also

[edit] Calculation
Interest yield and interest paid on borrowed funds are calculated as a percentage of average
earning assets or interest bearing liabilities. For example, a bank has average loans to
customers of $100, and earns gross interest income of $6. The interest yield is 6/100 = 6%.
[edit] Example
A bank takes deposits from customers and pays 1% to those customers. The bank lends its
customers money at 6%. The bank's net interest spread is 5%.

[edit] References

Extent to which interest earning capacity of an entity exceeds or falls short of its interest cost
obligations. Formula: (Interest earned ÷ Interest-earning assets) - (Interest paid ÷ Interest-
costing liabilities).

Rate:
A risk premium is the minimum difference a person requires to be willing to take an
uncertain bet, between the expected value of the bet and the certain value that he is
indifferent to.

The certainty equivalent is the guaranteed payoff at which a person is "indifferent" between
accepting the guaranteed payoff and a higher but uncertain payoff. (It is the amount of the
higher payout minus the risk premium.)

Contents
[hide]

• 1 Example
• 2 Finance
• 3 See also

• 4 External links

[edit] Example
Suppose a game show participant may choose one of two doors, one that hides $1,000 and
one that hides $0. Further suppose that the host also allows the contestant to take $500
instead of choosing a door. The two options (choosing between door 1 or door 2, or take
$500) have the same expected value of $500, so there is no risk premium for choosing the
doors over the guaranteed $500.

A contestant unconcerned about risk is indifferent to these choices. However, a risk averse
contestant may be more likely to choose no door and accept the guaranteed $500.

If too many contestants are risk averse, the game show may encourage selection of the riskier
choices (door 1 or door 2) by creating a risk premium. If the game show offers $2,000 behind
the good door, increasing to $1,000 the expected value of choosing doors 1 or 2, the risk
premium becomes $500 (i.e., $1,000 expected value − $500 guaranteed amount). Contestants
with a minimum acceptable rate of return of $500 or more will likely choose a door instead of
accepting the guaranteed $500.

[edit] Finance
In finance, the risk premium can be the expected rate of return above the risk-free interest
rate. When measuring risk, a common sense approach is to compare the risk-free return on T-
bills and the very risky return on other investments. The difference between these two returns
can be interpreted as a measure of the excess return on the average risky asset. This excess
return is known as the risk premium.

• Equity: In the equity market it is the expected returns of a company stock, a group of
company stock, or all stock market company stock, minus the risk-free rate. The
return from equity is the dividend yield and capital gains. The risk premium for
equities is also called the equity premium. Note that this is an unobservable quantity
 since no one knows for sure what the expected rate of return on equities is.
Nonetheless, most people believe that there is a risk premium built into equities, and
this is what encourages investors to place at least some of their money in equities.
• Debt: In terms of bonds, the term "risk premium" is often used imprecisely to refer to
the credit spread (the difference between the bond interest rate and the risk-free rate).
To see why this is inconsistent with the given definition, imagine that the risk free rate
is 3% and XYZ corporate bonds are yielding 10%. Does that mean that the expected
return in excess of the risk free rate is 7%? Almost certainly not; after all, there is
surely a positive probability of a default. In reality, the risk premium (as defined
above) could very well be zero or negative.

The white paper Equity Risk Premium: Expectations Great and Small notes that “it is
dangerous to engage in simplistic analyses of historical ERPs to generate ex ante forecasts
that differ from the realized mean.” Standard & Poor’s states “the most correct method is to
use an arithmetic average of historical returns.”

If a return represents several periods of growth, use the geometric mean of the periods.

What Does Risk Premium Mean?

The return in excess of the risk-free rate of return that an investment is expected to yield. An
asset's risk premium is a form of compensation for investors who tolerate the extra risk -
compared to that of a risk-free asset - in a given investment.

Investopedia explains Risk Premium

Think of a risk premium as a form of hazard pay for your investments. Just as employees who
work relatively dangerous jobs receive hazard pay as compensation for the risks they
undertake, risky investments must provide an investor with the potential for larger returns to
warrant the risks of the investment.

For example, high-quality corporate bonds issued by established corporations earning large
profits have very little risk of default. Therefore, such bonds will pay a lower interest rate (or
yield) than bonds issued by less-established companies with uncertain profitability and
relatively higher default risk.