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Glossary of Important Financial Terms

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Term Definition
Leverage

The use borrowings to fund business expansions, sometimes by pledging existing assets. Has the effect of boosting a company’s Return on Equity.

Leveraged Buy-Out (LBO)

Refers to the buy-out of a company existing shareholders by a private equity (PE) firm, via a high level of bank loans. The target company would then be saddled with the loans, which are to be repaid using surplus funds generated from operating cash flows. When a substantial portion of the debt has been repaid, the PE firm may exit the investment, for example via an Initial Public Offering (IPO).

Loan-to-Value (LTV)

Refers to the ratio of the loan outstanding to the appraised value of the underlying asset. For example, an individual borrowed $120,000 to borrow a house worth only $100,000 now. LTV is thus 120%. An LTV covenant is often used by banks to protect themselves against falling asset values (and thus the risk of default). If LTV exceeds a predetermined value, the borrower would have to top-up his loan to bring down the LTV.

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