Anonymous asked in Business & FinanceInvesting · 7 years ago

what is procyclical leverage?

2 Answers

  • David
    Lv 7
    7 years ago
    Favorite Answer

    Another four-word question without context or specifics or a link or any help about what you want to know or don't understand or background or reason.

    Leverage is defined as the ratio of the asset value to the cash needed to purchase it. The Leverage cycle can be defined as the procyclical expansion and contraction of leverage over the course of the business cycle. The existence of procyclical leverage amplifies the effect on asset prices over the business cycle.

    The key term here is "leverage." Use Investopedia to define finanacial terms

    Definition of 'Leverage'

    1. The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment.

    2. The amount of debt used to finance a firm's assets. A firm with significantly more debt than equity is considered to be highly leveraged.

    Leverage is most commonly used in real estate transactions through the use of mortgages to purchase a home. More:

    Definition of 'Degree Of Operating Leverage - DOL'

    A type of leverage ratio summarizing the effect a particular amount of operating leverage has on a company's earnings before interest and taxes (EBIT). Operating leverage involves using a large proportion of fixed costs to variable costs in the operations of the firm. The higher the degree of operating leverage, the more volatile the EBIT figure will be relative to a given change in sales, all other things remaining the same. The formula is as follows:

    Degree Of Operating Leverage (DOL)

    Investopedia explains 'Degree Of Operating Leverage - DOL'

    This ratio is useful as it helps the user in determining the effects that a given level of operating leverage has on the earnings potential of the firm. This ratio can also be used to help the firm determine the most appropriate level of operating leverage in order to maximize the company's EBIT.

    Definition of 'Leverage Build Up'

    The accumulation of additional debt to enter a position that has the potential for large returns. From the perspective of portfolio management, leverage build up involves partaking in excessive leveraged positions for the opportunity to magnify returns. Leverage build up also occurs in corporate takeovers where a highly leveraged company purchases another leveraged company. Thus, the total debt of the parent increases.

    Investopedia explains 'Leverage Build Up'

    Leverage build up, whether referring to portfolio management or corporate finance, increases the risk exposure of the investment. If the position does not come to fruition, the debt must still be repaid in a timely manner in order to avoid bankruptcy.

  • meraz
    Lv 4
    4 years ago

    Leverage Investopedia

Still have questions? Get your answers by asking now.