Bank of America 060505FL3 Bond
| NCB Stock | 43.53 0.51 1.16% |
Bank of America's financial leverage is the degree to which the firm utilizes its fixed-income securities and uses equity to finance projects. Companies with high leverage are usually considered to be at financial risk. Bank of America's financial risk is the risk to Bank of America stockholders that is caused by an increase in debt. In other words, with a high degree of financial leverage come high-interest payments, which usually reduce Earnings Per Share (EPS).
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Given the importance of Bank of America's capital structure, the first step in the capital decision process is for the management of Bank of America to decide how much external capital it will need to raise to operate in a sustainable way. Once the amount of financing is determined, management needs to examine the financial markets to determine the terms in which the company can boost capital. This move is crucial to the process because the market environment may reduce the ability of Bank of America to issue bonds at a reasonable cost.
| Popular Name | Bank of America BAC 5875 |
| Equity ISIN Code | US0605051046 |
| Bond Issue ISIN Code | US060505FL38 |
| S&P Rating | Others |
| Maturity Date | Others |
| Issuance Date | Others |
Bank of America Outstanding Bond Obligations
Understaning Bank of America Use of Financial Leverage
Bank of America's financial leverage ratio measures its total debt position, including all of its outstanding liabilities, and compares it to Bank of America's current equity. If creditors own a majority of Bank of America's assets, the company is considered highly leveraged. Understanding the composition and structure of Bank of America's outstanding bonds gives an idea of how risky it is and if it is worth investing in.
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When running Bank of America's price analysis, check to measure Bank of America's market volatility, profitability, liquidity, solvency, efficiency, growth potential, financial leverage, and other vital indicators. We have many different tools that can be utilized to determine how healthy Bank of America is operating at the current time. Most of Bank of America's value examination focuses on studying past and present price action to predict the probability of Bank of America's future price movements. You can analyze the entity against its peers and the financial market as a whole to determine factors that move Bank of America's price. Additionally, you may evaluate how the addition of Bank of America to your portfolios can decrease your overall portfolio volatility.
What is Financial Leverage?
Financial leverage is the use of borrowed money (debt) to finance the purchase of assets with the expectation that the income or capital gain from the new asset will exceed the cost of borrowing. In most cases, the debt provider will limit how much risk it is ready to take and indicate a limit on the extent of the leverage it will allow. In the case of asset-backed lending, the financial provider uses the assets as collateral until the borrower repays the loan. In the case of a cash flow loan, the general creditworthiness of the company is used to back the loan. The concept of leverage is common in the business world. It is mostly used to boost the returns on equity capital of a company, especially when the business is unable to increase its operating efficiency and returns on total investment. Because earnings on borrowing are higher than the interest payable on debt, the company's total earnings will increase, ultimately boosting stockholders' profits.Leverage and Capital Costs
The debt to equity ratio plays a role in the working average cost of capital (WACC). The overall interest on debt represents the break-even point that must be obtained to profitability in a given venture. Thus, WACC is essentially the average interest an organization owes on the capital it has borrowed for leverage. Let's say equity represents 60% of borrowed capital, and debt is 40%. This results in a financial leverage calculation of 40/60, or 0.6667. The organization owes 10% on all equity and 5% on all debt. That means that the weighted average cost of capital is (.4)(5) + (.6)(10) - or 8%. For every $10,000 borrowed, this organization will owe $800 in interest. Profit must be higher than 8% on the project to offset the cost of interest and justify this leverage.Benefits of Financial Leverage
Leverage provides the following benefits for companies:- Leverage is an essential tool a company's management can use to make the best financing and investment decisions.
- It provides a variety of financing sources by which the firm can achieve its target earnings.
- Leverage is also an essential technique in investing as it helps companies set a threshold for the expansion of business operations. For example, it can be used to recommend restrictions on business expansion once the projected return on additional investment is lower than the cost of debt.